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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 1995
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 0-14380
AMERICAN HEALTH SERVICES CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1278857
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4440 VON KARMAN, SUITE 320
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 476-0733
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.03
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports 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. X
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 13, 1996 (based upon the closing price reported on the
OTC Bulletin Board for March 13, 1996) was $1,915,762.
The number of shares outstanding of the Registrant's Common Stock as of
March 13, 1996 was 9,713,647.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
Introduction. American Health Services Corp. (the "Company" or the
"Registrant"), a Delaware corporation which was organized in November 1982, is
engaged in the establishment and operation with healthcare providers of
outpatient diagnostic and treatment centers utilizing magnetic resonance imaging
("MRI") systems, computerized tomography ("CT") systems, multi-modality
radiologic imaging systems, medical linear accelerators and Leksell Stereotactic
Gamma Units ("Gamma Knife").
As of December 31, 1995, the Company operated 17 diagnostic imaging
centers, of which ten are in California, three are in Illinois, and one is in
each of Indiana, Utah, New Jersey and Washington; two Gamma Knife treatment
centers, one in each of Florida and Washington; and one radiation oncology
center in Indiana. The Company also operates a radiation oncology center as part
of one of the Company's imaging centers in Indiana.
The Company's primary business objective is to provide diagnostic and
treatment services using MRI, CT, Gamma Knife and other high capital cost
equipment to hospitals, physicians and their patients. The Company's outpatient
centers provide diagnostic services in the areas of MRI, CT, general radiology,
cardiology, ultrasound, mammography, nuclear medicine and neurosciences. The
Company does not engage in the practice of medicine.
Subject to its ability to obtain financing, the Company plans to expand
its network of imaging and treatment centers by acquiring existing profitable
centers on an ongoing basis over the coming years in markets in which the
Company believes there are opportunities for continued revenue enhancement. See
"Financing of Diagnostic Imaging and Gamma Knife Systems." In limited circum-
stances, it may develop an imaging or treatment center in cooperation with
established healthcare providers (hospitals and radiologists) in the local area.
In connection with such development opportunities, the Company's principal
target market is the healthcare provider network associated with the 200 to 500
bed community hospital population. The Company believes these hospitals have
sufficient need and medical resources to warrant the availability of an MRI, CT
or other imaging systems on or near the hospital premises but may not desire, or
be able, to commit the funds necessary to own and operate their own on-site
imaging system. The Company also targets communities where a consortium of
hospitals may cooperate to support a single center. The Company's objective with
respect to the development of its two Gamma Knife centers was to establish
centers in regional locations in association with a major medical center or
group of prominent neurosurgeons who are experienced in and dedicated to the
Gamma Knife technology. In addition, the Company is seeking opportunities to
expand its business operations through non-capital intensive activities such as
billing and collection and outpatient management.
Imaging and Treatment Center Profile. The terms of the Company's
participation in each of its diagnostic imaging and treatment centers are
individually tailored to fit the requirements of the Company and the Company's
healthcare provider partners who, in some cases, include the diagnostic
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radiologists who will perform the imaging procedures at the center. However,
each of the Company's centers is based upon one of two types of ventures:
cooperative venture or fixed monthly rental.
At the centers operated as cooperative ventures, the Company generally
will be responsible for managing the design and construction of the center,
acquiring and installing the equipment and providing all technical and
administrative services on an ongoing basis. The Company's co-venturers will
generally provide the physical premises or the land required for the center. The
Company and its co-venturers split the net proceeds from the operation of the
center in accordance with an agreed upon formula pursuant to contractual
arrangements between the Company and its co-venturers.
At the centers operated pursuant to a fixed monthly rental program, the
Company provides the equipment and the building or trailer housing the
equipment, and services the equipment on an ongoing basis. The healthcare
provider partner is responsible for all utilities, supplies and personnel
requirements for the center. At such centers, the Company receives a monthly
rental payment regardless of whether the equipment is used or the number of
procedures performed at the center.
The average MRI system utilized by the Company's diagnostic imaging
centers has the capacity to image up to approximately 18 patients per day. Each
CT system utilized by the Company also has the capacity to image up to
approximately 18 patients per day. The Company's diagnostic imaging and
treatment centers are generally operational five or six days per week. The
Company's MRI and CT systems currently operate on average at approximately 64%
and 66% of total capacity, respectively. However, the Company's MRI systems,
depending on individual location, operate at between 27% and 100% of total
capacity.
The total patient charge for an MRI imaging procedure at the Company's
cooperative venture centers at the present time is in the range of $650 to
$1,200 with an average charge of $900, depending upon the geographic location
and other circumstances. The total patient charge for a CT imaging procedure at
the Company's cooperative venture centers is in the range of $400 to $700 with
an average charge of $500, also depending upon location and circumstances. The
total patient charge for an imaging procedure utilizing an imaging system other
than MRI or CT at the Company's cooperative venture centers is in the range of
$75 to $350, depending upon the imaging system used and other circumstances.
Each Gamma Knife system has the capacity to perform up to two procedures per day
and the total patient charge for a Gamma Knife procedure is approximately
$25,000, although a significant portion, as high as approximately 45%,
represents professional fees which will not be retained by the Gamma Knife
centers. Total patient charges are reduced by professional fees and contractual
discounts to arrive at net revenues. From these net revenues, each cooperative
venture diagnostic imaging or Gamma Knife center must pay its operating costs,
principally rent, supplies, compensation of technical and administrative
personnel, as well as the payments required in connection with the lease or
acquisition financing of the MRI, CT or other imaging or treatment system and
the equipment maintenance costs. The Company has received commitments of at
least five years in connection with the establishment of its cooperative venture
centers.
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At the Company's cooperative venture diagnostic imaging centers, the
Company has contracted with radiologists to perform professional services at the
center. The fees due to such physicians, which are generally 20% of the net
revenues of the center, are paid from revenues generated by the center. At the
Company's other centers, the Company's healthcare provider partners are
responsible for obtaining radiologists for the center.
The contracts governing each of the Company's fixed monthly rental
centers generally provide for rental terms ranging from six to seven years. In
the past, the Company has leased the diagnostic imaging equipment utilized at
these centers for usual and customary terms from five to seven years and,
accordingly, must either renew the original fixed monthly rental contract or
relocate the diagnostic imaging equipment shortly following the termination of
the original contract in order to maintain its profit margin. As a result of the
increased availability of diagnostic imaging equipment throughout the country,
it has become and will continue to be difficult for the Company to keep the
equipment currently utilized at fixed monthly rental centers fully utilized.
Currently, the Company does not have any idle equipment.
Imaging procedures utilizing MRI accounted for approximately 73% of the
Company's revenues in 1995. Revenues from Gamma Knife procedures account for
approximately 9% of the Company's total revenues. MRI is expected to remain the
Company's primary imaging modality for the foreseeable future.
No single source accounts for more than 10% of the revenues of the
Company. The Company has six individual contracts with the County of Los Angeles
covering six separate sites. In the aggregate, these sites represent
approximately 24% of the annual revenue of the Company. From time to time, the
County has experienced financial difficulties. In the event that such
difficulties should cause the County to curtail or possibly even terminate the
services of the Company, it may cause a material adverse effect on the business,
results of operations, liquidity and financial condition of the Company.
Centers in Operation. At December 31, 1995, the Company had 20 centers
in operation, including one radiation therapy center and two Gamma Knife
centers. The Company's first center was established in July 1985 and the
Company's most recent center was established in January 1995. Sixteen of the
Company's centers are organized as cooperative ventures and four are organized
as fixed monthly rental centers. Eighteen of the Company's centers are based on
a fixed site MRI, CT or Gamma Knife system, and two are based on MRI systems
housed in mobile coaches. One of the Company's centers which is organized
pursuant to various agreements will expire in accordance with its terms during
1996, and one will expire in 1997. The loss of the center in 1996 will not have
a material adverse effect on the Company's operations.
In 1996, subject to its ability to obtain financing (see "Financing of
Diagnostic Imaging and Gamma Knife Systems"), the Company intends to continue to
develop additional diagnostic imaging centers, primarily through the acquisition
of diagnostic imaging centers already established and currently in operation,
either on a center by center basis or by the acquisition of the equity interests
or assets associated with a group of centers, as such opportunities materialize.
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Diagnostic Imaging Technology. During approximately the last twenty
years, there has been a major effort undertaken by the medical and scientific
communities to develop cost-effective diagnostic imaging technologies and to
minimize the risks associated with the application of such technologies.
The major categories of diagnostic imaging systems currently offered in
the medical marketplace are conventional x-ray, CT scanners, digital ultrasound
systems, computer-based nuclear gamma cameras, radiography/fluoroscopy systems
and MRI systems, each of which (other than conventional x-ray) represents the
marriage of computer technology and various medical imaging modalities. Patients
exposed to x-rays and to gamma rays employed in nuclear medicine receive
potentially harmful ionizing radiation. Much of the thrust of product
development during the period has been to reduce the hazards associated with
conventional x-ray and nuclear medicine techniques and to develop new, virtually
harmless imaging technologies such as ultrasound and MRI.
X-Ray. X-ray is the most common energy source used in imaging the body
and is now employed in the three following imaging modalities:
(i) Conventional x-ray systems, the oldest method of imaging, are
typically used to image bones, teeth and contrast-enhanced vasculature
and organs and constitute the largest number of installed systems;
(ii) CT scanners utilize computers to produce cross-sectional images of
particular organs or areas of the body; and
(iii) Digital x-ray systems add computer image processing capability to
conventional x-ray systems.
Ultrasound. Ultrasound systems emit, detect and process high frequency
sound waves to generate images of soft tissues and internal body organs. The
sound waves used in ultrasound do not involve ionizing radiation and are not
known to cause any harmful effects to the patient.
Nuclear Medicine. Nuclear medicine gamma cameras, which are based upon
the detection of gamma radiation generated by radioactive pharmaceuticals
injected or inhaled into the body, are used to provide information about organ
function as opposed to anatomical size and shape.
MRI Technology. The Company believes that the introduction of MRI
technology into the healthcare marketplace marked a significant advance in
diagnostic medicine. MRI systems expose patients to a static magnetic field and
to energy in the radio frequency ("RF") range produced by a radio antenna coil
which surrounds the body part to be imaged. Nuclei in the portion of the body to
be scanned are stimulated from their state of equilibrium by the RF energy. When
the radio signal is switched off, the nuclei "relax" and return to their
original state, releasing energy that is directly related to their quantity and
environment. The energy given off by the nuclei is recorded, measured and
converted into a visual display by a digital computer. The nuclei of different
chemical elements composing human tissue, for example, hydrogen, sodium and
phosphorus, within the same magnetic field respond to different RFs and will
respond only if exposed to the RF energy of that specific frequency. The digital
data are then reconstructed by a computer system into a two dimensional cross-
sectional image of the particular plane of the anatomy of interest similar to
the
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computer image reconstruction process utilized in CT scanning. A typical MRI
examination takes from 30 to 90 minutes. MRI systems are typically priced in the
range of $900,000 to $2,000,000 each, depending upon the system configuration,
magnet design and field strength.
There are no known hazards to the general population from magnetic and
RF fields of the intensity to which a patient is exposed in a clinical MRI
system. Equipment literature nonetheless recommends that, until further
information is available, pregnant women and young children should be scanned
only under limited circumstances. Furthermore, MRI magnets may disrupt the
operation of cardiac pacemakers and may react with ferrous clips utilized in
various surgical procedures, so that individuals with such devices may be
excluded from examination with MRI systems, and access to the area surrounding
the MRI facility may also be controlled to avoid these possible hazards.
Additionally, some MRI examinations require injection of a paramagnetic contrast
material. Although it is extremely unusual, some patients may develop a
significant adverse reaction to this contrast material; however, chances of
fatalities as a result of such reaction are remote.
Because the signals used to produce magnetic resonance images contain
both chemical and structural information, the Company believes this technique
has greater potential for many important diagnostic applications than any other
imaging technology currently in use. While existing MRI systems demonstrate
excellent portrayals of anatomical structures within the human body, of even
greater significance is the fact that MRI is also sensitive to subtle
differences between tissues. Thus, MRI offers not only the opportunity for
highly effective classical diagnosis, but also the potential for future
monitoring of chemical processes within the body.
CT Technology. Computerized tomography technology consists of a
doughnut-shaped gantry structure into which a patient, resting on a remotely
controlled couch assembly, is positioned to scan the anatomical region of
interest. The scanning process is performed by the rotation of a high output
x-ray tube around the patient. The x-ray tube emits a thin fan-shaped beam of
x-rays that passes through the patient and is absorbed by an array of x-ray
detectors located on the opposite side of the patient from the x-ray tube. The
detected x-rays are then converted into digital measurements of x-ray intensity
directly proportional to the density of the portion of the patient through which
the beam passes. These digital measurements of x-ray intensity are then
processed by a specialized image reconstruction computer system into a
cross-sectional image of the anatomical region of interest. The patient is then
indexed on the couch and another scan performed and then another, creating a
"stack" of cross-sectional images constituting the complete diagnostic imaging
procedure.
Typical scanning times for a single cross-sectional image are in the
one second to six second range. A complete CT examination takes from 15 minutes
to 45 minutes, depending on the complexity of the examination and number of
individual cross-sectional images required. The current selling prices of CT
systems fall in the range of $350,000 to $1,500,000 depending upon the specific
performance characteristics of the systems. Based on the fact that CT systems
have been commercially marketed for approximately twenty years, the Company
believes that CT is a relatively mature technology and, therefore, not subject
to significant risk of obsolescence.
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Certain CT examinations require the injection of an iodine-based
contrast material, allowing for better visualization of the anatomy. Although it
is very unusual, some patients may develop a significant adverse reaction to
this contrast material. Fatalities as a result of such reaction have occurred
but are rare. In an effort to scan only appropriate patients, all patients are
required to answer a questionnaire which helps to identify those patients who
may suffer an adverse reaction to this contrast material.
Gamma Knife Technology. The Leksell Stereotactic Gamma Unit is a
state-of-the-art radiosurgical device used to treat intracranial neoplasma and
vascular anomalies which are inaccessible or unsuitable for conventional
invasive surgery. The Gamma Knife was designed to provide neurosurgeons and
radiation therapists with the ability to perform radiosurgery, using high energy
gamma rays, instead of conventional invasive techniques, thereby generally
eliminating the risk of infection and intracerebral bleeding.
The Gamma Knife delivers a single high dose of ionizing radiation
emanating from 201 Cobalt 60 sources positioned about a hemispherical, precision
machined cavity. Each individual beam is focused on a common target producing an
intense concentration of radiation at the target site, destroying the lesion
while spreading the entry radiation dose uniformly and harmlessly over the
patient's skull. The mechanical precision of the Gamma Knife at the target site
is 1/10 of one millimeter (0.1 mm), making the Gamma Knife an ideal treatment
device for treating small or medium-sized lesions in critical locations within
the brain. However, based upon the type, size and/or location of such lesions,
not all patients are candidates for radiosurgery. The mechanical precision of
the Gamma Knife is coupled with an extremely sharp fall-off in the radiation
intensity surrounding the target, resulting in a highly localized treatment
effect, sparing surrounding tissue.
The Gamma Knife treatment requires no open surgical intervention, no
lengthy hospital stay and no risk of post-surgical bleeding or infection. When
compared to the average length of stay and costs associated with conventional
surgery, the Gamma Knife greatly reduces the cost of neurosurgical treatment.
Typical treatment time is approximately 10 to 15 minutes per area of interest
("isocenter"). A key feature of the Gamma Knife is its ability to perform
treatments that require multiple isocenters. In addition, other applications for
the Gamma Knife are currently being developed. Investigative work is being
conducted to treat patients for chronic pain and motion disorders such as
Parkinson's disease, epilepsy and trigeminal neuralgia. These new applications
represent a significant new market for the Gamma Knife upon clinical acceptance.
The current selling price of a Gamma Knife system is approximately $3,000,000.
Government Regulation. The health care industry is highly regulated and
changes in laws and regulations can be significant. Changes in the law or new
interpretation of existing laws can have a material effect on permissible
activities of the Company, the relative costs associated with doing business and
the amount of reimbursement by government and other third-party payors. The
federal government and all states in which the Company currently operates
regulate various aspects of the Company's business. Failure of the Company to
comply with these laws could adversely affect the Company's ability to provide
or receive reimbursement for its services and subject the Company and its
officers to penalties.
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Some states require hospitals and certain other healthcare facilities
to obtain a Certificate of Need ("CON") prior to the acquisition of major
medical equipment such as an MRI or Gamma Knife system. The Company believes
that it will not be required to obtain CONs in most of the states in which it
intends to operate since most states no longer require non-hospital providers to
obtain CONs and those states that do, offer exemptions for which the Company may
qualify; however, in those states where a CON is required the Company has or
will comply with such requirements.
Beginning in late 1983, prospective payment regulations became
effective under the federal Medicare program. The Medicare program provides
hospitalization, physician, diagnostic and certain other services to eligible
persons 65 years of age and over and others considered disabled. Providers of
service are paid by the federal government in accordance with regulations
promulgated by the United States Department of Health and Human Services and
accept said payment, with nominal co-insurance amounts required to the service
recipient, as payment in full. In general, these regulations provide for a
specific overall fee which hospitals may charge for inpatient treatment services
based upon the diagnosis of the patient. Because the Company's diagnostic
imaging centers mainly provide diagnostic services to patients on an outpatient
basis, the prospective payment regulations do not materially affect the
Company's business. Although outpatient services are presently exempt from
prospective payment reimbursement, Congress has instructed the Prospective
Payment Assessment Commission to study alternative methods for reimbursing
hospitals for outpatient services, including prospective payment methods and the
Medicare program adopted fee scales for some diagnostic services. However, such
congressional activity reflects industry-wide cost containment pressures which
the Company believes will affect all healthcare providers for the foreseeable
future.
Private health insurance programs generally have authorized the payment
for diagnostic imaging and Gamma Knife procedures on satisfactory terms and the
Health Care Financing Administration has authorized reimbursement under the
federal Medicare program for all diagnostic imaging and Gamma Knife services
currently being provided by the Company. Approximately 15% of the Company's
revenue is derived from the Medicare program. However, if Medicare reimbursement
is reduced, the Company believes that private health insurance programs will
also reduce reimbursement in response to reductions in government reimbursement
which could have an adverse impact on the Company's business.
The Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and reimbursement
methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program. Approximately 7% of the Company's revenue
is derived from the Medicaid program. Accordingly, changes in Medicaid program
reimbursement are not expected to have a material adverse impact on the
Company's business.
The Company is subject to state and federal laws prohibiting payments
for patient referrals and regulating reimbursement procedures and practices
under Medicare, Medicaid and other state healthcare programs. The Medicare and
Medicaid Patient and Program Protection Act of 1987 (the "1987 Act") prohibits
financial arrangements designed to induce patient referrals to providers of
services which are paid for by Medicare or Medicaid. Courts have, to date,
interpreted these laws to apply to a broad range of financial relationships.
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Several states also have statutes prohibiting arrangements with healthcare
providers which, while similar in many respects to the 1987 Act, vary from state
to state, are often vague and have infrequently been interpreted by courts or
regulatory agencies. Due to the potentially broad proscriptions contained in
these federal and state laws, there can be no assurance that all of the
Company's business practices would be construed to comply with these laws in all
respects. However, in the situations where the Company contracts with healthcare
providers who may be in a position to refer patients to the Company's centers,
the Company has always exercised care in an effort to structure its activities
and arrangements to comply with applicable federal and state laws. The Company
maintains an internal regulatory compliance review program and retains special
counsel, as necessary, to monitor compliance with such laws and regulations.
The Omnibus Budget Reconciliation Act of 1993 included new federal
legislation which prohibits, after December 31, 1994, physician referrals to
diagnostic imaging centers in which the physician has a financial interest. In
1994, the Company purchased or dissolved all the physician limited partnership
interests in its cooperative ventures. The Company believes its operations are
in full compliance with this legislation.
The Food and Drug Administration ("FDA") has issued the requisite pre-
market approval for all of the MRI, CT and Gamma Knife systems utilized in the
Company's diagnostic imaging and treatment centers. The Company does not believe
that any further FDA approval is required in connection with the Company's
diagnostic imaging and treatment centers currently in operation or proposed to
be operated.
The radiologists with whom the Company may enter into agreements to
provide professional services at its diagnostic imaging centers are subject to
licensing and related regulations by the states. As a result, the Company
requires its radiologists to have and maintain appropriate licensure. The
Company does not believe that such laws and regulations will either prohibit or
require licensure approval of the Company's business operations.
Managed Care. Health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs") attempt to control the cost of healthcare
services. The Company believes that the development and expansion of HMOs, PPOs
and other managed care organizations may have a negative impact on utilization
of the Company's centers in certain markets and/or affect the revenue per
procedure which the Company can collect, since they will exert greater control
over patients' access to diagnostic imaging services, the selection of the
provider of such services and the reimbursement therefor. The Company also
expects that the excess capacity of diagnostic imaging equipment in the United
States may negatively impact the Company's centers because of the competition
among providers of diagnostic imaging services for contracts with all types of
managed care organizations. As a result of such competition, the length of term
of any contracts which the Company may obtain and the payment to the Company for
such services may also be negatively impacted. However, the Company believes
that as long as the Company is able to negotiate provider agreements with the
managed care companies and other payors to provide productive and cost-efficient
services with measurable outcomes, the Company's business should not be
negatively impacted. See "Management's Discussion and Analysis of Financial
Condition and Operations - Liquidity and Capital Resources."
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Liability Insurance. The Company does not provide medical services,
although it has obtained professional medical liability insurance as well as
general liability insurance. In addition, the radiologists or other healthcare
professionals with whom the Company contracts are required by such contracts to
carry adequate medical malpractice insurance. The Company believes that its
insurance is adequate for its business of providing diagnostic and treatment
facilities and non-medical services.
Competition. The healthcare industry in general, and the market for
diagnostic imaging services in particular, are highly competitive. The Company's
centers must compete with groups of radiologists, established hospitals and
certain other independent organizations, including equipment manufacturers and
leasing companies, that own and operate imaging equipment. The Company also has
and will continue to encounter substantial competition from hospitals and
independent organizations in connection with the establishment of imaging and
treatment centers. Certain hospitals, particularly the larger hospitals, may be
expected to directly acquire and operate imaging and treatment systems on-site
as part of their overall inpatient servicing capability. In the past, however,
the reluctance of hospitals to purchase imaging or treatment systems encouraged
the entry of start-up ventures and more established business operations into the
diagnostic and treatment services business. As a result, there is significant
excess capacity in the diagnostic imaging business in the United States which
negatively affects utilization and reimbursement at some of the Company's
centers. Many of these competitors have substantially greater resources than the
Company; however the Company competes on the basis of its reputation for
productive and cost-effective services.
Supply of Diagnostic Imaging and Gamma Knife Systems. Several
substantial companies are presently engaged in the manufacture of MRI, CT and
other diagnostic imaging systems, including GE Medical Systems, Hitachi Medical
Systems, Picker International, Philips Medical Systems, Siemens Medical Systems,
Inc. and Toshiba Medical Systems. The Company has maintained and intends to
continue to maintain good working relationships with many of the major
manufacturers to better insure an adequacy of supply as well as access to those
types of diagnostic imaging systems which appear most appropriate for the
specific diagnostic or treatment center to be established. Currently only one
company, Elekta Instruments, Inc., a subsidiary of AB Elekta headquartered in
Stockholm, Sweden ("Elekta"), is engaged in the business of manufacturing of
Gamma Knife systems.
Financing of Diagnostic Imaging and Gamma Knife Systems. The Company's
development of new centers for diagnostic imaging and Gamma Knife systems, as
well as upgrading existing equipment and systems, is dependent on the Company's
ability to obtain financing through third parties. Such financing must be
approved by the Company's primary lender.
Pursuant to the terms of an April 12, 1994 agreement between the
Company and its primary lender, GE Capital Corporation and GE Medical Systems
("GE"), the maturity of a balloon principal payment of approximately $9,600,000,
which was due in May 1994, was extended until January 1, 1996, and the principal
payment was reduced from $9,600,000 to $8,000,000. As a result, the Company is
required to make certain balloon principal payments pursuant to its loan
agreements with GE as follows: $10,500,000 in June 1996 and $1,500,000 in August
1996. Further, the Company is required to maintain, under the terms of its loan
agreements with
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GE, certain financial covenants and ratios. The Company is in technical
violation of several of these covenants and ratios, but upon consummation of the
restructuring described below, GE will agree to eliminate these covenants and
ratios. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
In May 1992, the Company entered into a definitive loan and security
agreement with GE Medical Systems which, among other things, provided the
Company with a non-revolving line of credit to finance corporate growth in
connection with the acquisition, development and improvement of the Company's
imaging business and for other healthcare related acquisitions. The Company's
ability to borrow under this line of credit terminated on March 31, 1995. The
Company currently has borrowings under this line in the approximate amount of
$1,359,000. Historically, the Company has been able to finance its development
activities and to obtain the necessary approvals from its primary lender. The
Company's future expansion is entirely dependent upon its continuing ability to
do so.
The total cost of establishing one of the Company's cooperative venture
centers is equal to the cost of the diagnostic imaging equipment or the Gamma
Knife plus approximately $300,000 to $1,000,000 for the construction of the
facility (excluding the cost of the land), approximately $150,000 for furniture,
furnishings and ancillary equipment and approximately $200,000 to $500,000 for
working capital. The Company expects that it will finance most of these costs
along with financing the lease or purchase of the equipment for the center. The
Company's co-venturers generally are responsible for the land costs, although
the relative responsibilities for these costs may vary from center to center.
The cost of establishing a cooperative venture center utilizing more than one
imaging and/or treatment modality will vary depending upon the number and types
of imaging and treatment systems utilized.
At present, each MRI or CT system that the Company may utilize can cost
up to approximately $2,000,000 and $1,500,000, respectively, and the cost of
each Gamma Knife is approximately $3,000,000. The Company either purchases or
leases the MRI or other imaging systems utilized at any of the Company's
centers; however, the Company has purchased each of the Gamma Knife systems. An
MRI or CT lease has an average term of five to seven years. The Company has
purchased, or assumed existing leases of, certain imaging systems, including
most of the Company's CT imaging systems, in connection with the acquisition of
previously established operating centers. Each Gamma Knife loan has an average
term of five to seven years. Subject to its ability to obtain financing, the
Company intends to lease MRI, CT and other diagnostic imaging systems for the
centers it may develop in 1996, assuming the lease terms remain attractive
relative to other financing that may be available for the acquisition of such
systems. The Company has no current plans to develop any further Gamma Knife
centers.
New Technology and Possible Obsolescence. MRI and CT systems, as well
as Gamma Knife systems, may be subject to technological change, in which case
the Company may be required, from time to time, to upgrade or replace equipment,
which will require additional financing. See "Financing of Diagnostic Imaging
and Gamma Knife Systems."
10
<PAGE> 12
Employees. As of March 13, 1996, the Company had 272 employees, of whom
five were corporate officers. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes relations with its
employees are good.
ITEM 2. PROPERTIES
The Company's executive offices are located at 4440 Von Karman Avenue,
Suite 320, Newport Beach, California. The Company occupies approximately 10,400
square feet pursuant to a five-year lease ending in June 1996. The Company is
negotiating an extension of this lease, or in the alternative, will lease
comparably available space in the Newport Beach, California area. The monthly
rental is approximately $16,000, and the Company is responsible for insurance
and maintenance.
The Company also leases facilities for several of its operating imaging
centers for terms ranging from five to twenty years, with annual rentals
aggregating approximately $1,200,000, including provisions for additional rent
based upon certain centers' operating profits.
In October 1995, the Company acquired the building housing, the Berwyn
Magnetic Resonance Center, located in Berwyn, Illinois. In January 1995, the
Company acquired the land and building housing the Northern Indiana Oncology
Center, located in Valparaiso, Indiana. In 1994, the Company acquired the
building housing Garfield Imaging Center, located in Monterey Park, California.
The center is located on land leased at an annual rent of $59,592.
The Company completed construction in 1989 of an 8,500 square foot
building which houses the LAC/USC Imaging Science Center, located in Los
Angeles, California. The center is located on land leased from the County of Los
Angeles at a nominal fee. In 1988, the Company also acquired the building
housing the Diagnostic Outpatient Center, located in Hobart, Indiana. The center
is located on land leased at an annual rent of $13,925. In 1987, the Company
acquired the building housing the Harbor/UCLA Diagnostic Imaging Center, located
in Torrance, California. The center is also located on land leased from the
County of Los Angeles at a nominal fee.
ITEM 3. LEGAL PROCEEDINGS
San Juan Health Centre. In September 1992, a complaint was filed in the
United States District Court for the District of Puerto Rico by PRF, Inc. d/b/a
San Juan Health Centre, Inc., Drs. Pablo Rodriguez Millan and Rafael Rodriguez
Sepulveda and their spouses against Philips Credit Corporation ("Philips"), the
Company, Clarke J. Underwood, Margaret van Gilse d/b/a Berkshire Consulting
Group, et al (Case No. 92-2266). The complaint alleged against all defendants
violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
mail fraud, wire fraud, misrepresentation and fraud, infliction of emotional
distress and tortious misconduct upon Drs. Millan and Sepulveda and their
spouses, and loss of consortium by Dr. Millan. The complaint alleged against the
Company breach of management agreement, breach of voting trust agreement and
breach of fiduciary duty, tortious interference with contractual relations, and
breach of fiduciary duty to Drs. Millan and Sepulveda and their spouses. The
complaint sought compensatory damages in excess of $400,000,000, punitive
damages, costs, injunctive relief and attorneys' fees. Mr. Underwood and Ms. van
Gilse are former officers/employees of the Company.
11
<PAGE> 13
San Juan Health Centre ("SJHC"), a freestanding health care clinic, was
created by Drs. Millan and Sepulveda and Mr. Amezquita, who are the three
shareholders of PRF, Inc., the surviving entity of a merger of PRF, Inc. and San
Juan Health Centre, Inc. ("SJ Inc."). Prior to the Company's involvement with
SJHC, Philips was a large creditor of PRF, Inc., having made sizeable loans for
medical equipment purchases and operations. Philips was at the time and, until
February 1993, continued to be the Company's primary lender. In January 1990, in
connection with Philips making another large loan to PRF, Inc. and SJ Inc.,
Philips requested the Company to manage SJHC, which it agreed to do. In
connection with the loan, PRF, Inc. and SJ Inc. entered into a management
agreement with the Company on January 12, 1990, with a two-year term, pursuant
to which the Company was to provide SJHC with general management services.
In October 1991, PRF, Inc. notified the Company that it would not be extending
the management agreement beyond the initial two-year term. As of January 1992,
the Company was no longer the manager of SJHC. Berkshire Consulting Group became
the manager of SJHC. Also, in connection with the loan, on January 13, 1990,
Drs. Millan and Sepulveda placed their PRF, Inc. and SJ Inc. stock into a voting
trust. In the voting trust agreement, the Company was named the trustee of the
voting trust with broad powers with respect to the stock. The Company resigned
as trustee on June 24, 1992.
In July 1993, one of the plaintiffs, PRF, Inc., filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court, District of Puerto Rico (Case No. 93-03880 SEK). In the context of this
proceeding, all of the claims of PRF, Inc. have been resolved. The defendants
subsequently moved to dismiss the individual and conjugal partnership claims on
the basis that they were derivative of the resolved claims of PRF, Inc. On March
11, 1996, the District Court issued an Opinion and Order and Partial Judgment
dismissing with prejudice all claims brought by the individual plaintiffs and
conjugal partnership plaintiffs based on alleged violations of the RICO statute,
mail fraud, wire fraud, misrepresentation and fraud, intentional infliction of
emotional distress, tortious misconduct, and loss of consortium. As a result of
the entry of the Partial Judgment and issuance of the Opinion and Order, only
three counts remain -- a claim against the Company for alleged breach of a
voting trust agreement, and breach of fiduciary duty claims brought, as separate
claims by the conjugal partnerships and the husband and wife who make up each
conjugal partnership. The Company has recently been advised by its counsel that
it believes a settlement of these remaining claims has been reached which will
require the Company to make a payment of approximately $50,000.
In addition to the foregoing matters, the Company is engaged in the
defense of lawsuits arising out of the ordinary course and conduct of its
business and has insurance policies covering such potential insurable losses
where such coverage is cost-effective. The Company believes that the outcome of
any such lawsuits will not have a material adverse impact on the Company's
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SEISMOGRAPHERS
The Company held its 1995 annual meeting of stockholders on December
12, 1995. At the 1995 annual meeting, E. Larry Atkins and Philip D. Green were
elected as directors of the Company to serve a three-year term or until their
successors are duly elected and qualified. The terms of three of the other
directors, Thomas V. Croal, Lloyd G. Glazer and Charles Spear, continued after
the meeting. Immediately after the meeting Roz Kovens and Frank E. Egger were
reelected for an annual term by the private holders of the Series B Preferred
12
<PAGE> 14
Stock, voting as a separate class. 6,151,132 shares of Common Stock were cast in
favor of the election of Mr. Atkins as a director and only 49,000 shares of
Common Stock were withheld. 6,151,632 shares of Common Stock were cast in favor
of the election of Mr. Green as a director and only 48,500 shares of Common
Stock were withheld.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded on the national over-the-counter
market and quoted on the NASDAQ National Market System under the symbol AHTS
until July 16, 1993, when the Company's Common Stock was delisted for the
Company's failure to meet the capital and surplus requirements set forth in the
NASD By-Laws; however, the Company's Common Stock is still traded on the OTC
Bulletin Board under the symbol AHTS.
The following table sets forth the range of high and low bids as quoted
on the NASDAQ National Market System and OTC Bulletin Board for the Company's
Common Stock for the fiscal quarters indicated:
<TABLE>
<CAPTION>
Common Stock
------------
Quarter Ended Low Bid High Bid
------------- ------- --------
<S> <C> <C>
March 31, 1994 5/32 9/16
June 30, 1994 3/16 3/8
September 30, 1994 1/8 7/16
December 31, 1994 3/32 1/2
March 31, 1995 5/32 3/8
June 30, 1995 1/8 11/32
September 30, 1995 1/8 5/8
December 31, 1995 3/16 1/2
</TABLE>
The prices (rounded to the nearest 1/8 or nearest 1/32 where
applicable) represent quotations between dealers without adjustment for mark-up,
markdown or commission, and may not necessarily represent actual transactions.
The Company has never paid a cash dividend on its Common Stock and does
not expect to do so in the foreseeable future. The Company's loan agreements
with its primary lender contain restrictions on its ability to pay dividends on
its Common Stock. In addition, so long as the Preferred Stock remains
outstanding, no dividends can be paid on the Common Stock unless all declared
dividends on the Preferred Stock, if any, for all past quarterly dividend
periods have been paid and the full dividend for the then current quarterly
dividend period has been paid or declared or set apart for payment. In the event
the Preferred Stockholders cease to control a majority of the Board of
Directors of the Company, the Preferred Stock will become cumulative.
As of March 13, 1996, the Company's records indicate that there were in
excess of 1,949 beneficial holders of the Common Stock and approximately 468
stockholders of record.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain financial data with respect to
the Company which has been derived from consolidated financial statements
examined by Arthur Andersen LLP, independent public accountants, and should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues ................... $ 36,999,312 $ 36,046,164 $ 37,515,358 $ 38,346,615 $ 41,849,542
Expenses ................... 30,729,408 29,970,996 32,580,392 34,946,595 35,494,423
Income from center
operations ............... 6,269,904 6,075,168 4,934,966 3,400,020 6,355,119
Corporate operating
expenses ................. 4,088,252 3,670,772 3,615,264 3,892,284 3,076,870
Other expenses ............. -- -- -- 11,873,265 --
Net interest ............... (3,290,063) (3,818,046) (3,758,438) (2,319,084) (2,230,219)
Income (loss) before
provision for income
taxes .................... (1,108,411) (1,413,650) (2,438,736) (14,684,613) 1,048,030
Income (loss)
from continuing
operations ............... (1,138,411) (1,450,650) (2,465,736) (14,714,613) 1,018,030
Extraordinary gain ......... -- 305,985 -- -- --
Net income (loss) .......... $ (1,138,411) $ (1,144,665) $ (2,465,736) $(14,714,613) $ 1,018,030
EARNINGS (LOSS) PER SHARE:
Income (loss) from
continuing
operations ............... $ (0.12) $ (0.15) $ (0.25) $ (1.51) $ 0.07
Extraordinary gain ......... -- 0.03 -- -- --
------------ ------------ ------------ ------------ ------------
Earnings (loss)
per share ................ $ (0.12) $ (0.12) $ (0.25) $ (1.51) $ 0.07
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............. $(11,194,303) $ 2,587,523 $ 3,310,340 $ 4,622,621 $ 7,458,881
Total assets.......... 36,440,354 40,222,937 43,467,050 31,168,456 35,622,241
Long-term
obligations,
net of current
portion............. 22,229,840 41,096,814 42,408,404 27,905,177 19,794,057
Minority interest..... 1,602,240 81,145 807,261 1,500,549 1,585,856
Stockholders' equity
(deficit) (1)....... (12,102,033) (10,963,622) (9,848,759) (7,477,292) 6,286,638
</TABLE>
- ---------------
(1) There have been no dividends declared by the Company since inception other
than the stock dividend of the Common Stock of the Company's former
subsidiary, Neuromedical Technologies, Inc. ("NTI"), declared on January
16, 1989, payable to holders of record of the Company's Common Stock on
January 31, 1989, in connection with the spin-off of NTI and the Preferred
Stock dividends declared and payable on April 1, July 1, October 1, 1990,
January 1, and April 1, 1991, to the holders of record of the Company's
Preferred Stock on such dates.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 1995 Compared to December 31, 1994. The Company
reported revenues from the operation of its centers for the year ended December
31, 1995 of approximately $36,999,000, compared to approximately $36,046,000 for
the year ended December 31, 1994, representing an increase of approximately 3%.
This increase of approximately $953,000 is due primarily to (i) revenues
generated by two new centers (approximately $3,116,000), and (ii) increased
revenues resulting from higher utilization at the majority of the Company's
remaining centers (approximately $473,000) offset by the sale or closure of four
centers and the expiration of operating agreements relating to seven centers
subsequent to December 31, 1993 (approximately $2,636,000). Management believes
that any future increases in revenues from existing centers can only be achieved
by higher utilization and not by increases in procedure prices since
reimbursement rates are declining; however, excess capacity of diagnostic
imaging equipment, increased competition, anticipated healthcare reform and the
expansion of managed care may impact utilization and make it difficult for the
Company to achieve revenue increases in the future, absent the negotiation of
provider agreements with managed care companies and other payors, acquisition of
profitable diagnostic imaging centers and development of management services
which are not capital intensive.
Center expenses for the year ended December 31, 1995 aggregated
approximately $29,963,000, compared to approximately $29,054,000 for the year
ended December 31, 1994. This increase of approximately $909,000 or 3%, is due
primarily to (i) increased expenses related to the Company's two new centers
(approximately $2,428,000) and (ii) increased expenses related to the
development of an outside billing service (approximately $200,000). This
increase was offset by the (i) elimination of expenses at the eleven centers
discussed above (approximately $1,459,000), and (ii) a decrease in costs at the
majority of the Company's remaining centers (approximately $260,000).
Provision for center profit distributions was approximately $766,000
for the year ended December 31, 1995, compared to approximately $917,000 for the
year ended December 31, 1994. This decrease of approximately $151,000, or 16%,
is due primarily to (i) the purchase of the physician limited partnership
interests in 1994 discussed below and (ii) reduced income at certain of the
Company's other cooperative venture centers. This decrease is partially offset
by income at the Company's two new cooperative venture centers.
The Company reported income from center operations of approximately
$6,270,000 for the year ended December 31, 1995, compared to approximately
$6,075,000 for the year ended December 31, 1994, representing an increase of
approximately $195,000, or 3%. This increase in income from center operations is
due primarily to (i) increased income at the Company's centers which existed at
December 31, 1994 (approximately $668,000), (ii) income from center operations
at the Company's two new centers (approximately $688,000), and (iii) the
decrease in provision for center profit distributions. This increase was offset
by (i) the loss of income from center operations at the terminated centers
discussed above (approximately $1,177,000) and (ii) the loss incurred in the
development of an outside billing service (approximately $135,000).
15
<PAGE> 17
For the year ended December 31, 1995, the Company reported corporate
operating expenses of approximately $4,088,000, compared to corporate operating
expenses of approximately $3,671,000, for the year ended December 31, 1994. This
increase of approximately $417,000, or 11%, is due primarily to increases in
personnel, legal, and travel costs related to business development, acquisitions
and long-term debt restructure negotiations.
Interest expense was approximately $3,438,000 for the year ended
December 31, 1995, compared to approximately $3,927,000 during the year ended
December 31, 1994. This decrease of approximately $489,000, or 12%, was
primarily related to (i) reduced interest expense related to amortization of
long-term obligations and (ii) reduced interest as a result of the April 12,
1994 restructuring agreement discussed below, partially offset by long-term debt
related to the Company's two new centers.
For the year ended December 31, 1995, the Company reported a loss
before extraordinary item of approximately $1,138,000, compared to a loss before
extraordinary item of approximately $1,451,000 for the year ended December 31,
1994. This decrease in net loss of approximately $313,000 or 22% is the result
primarily of (i) increased income from center operations and (ii) decreased
interest expense, partially offset by increased corporate operating expenses. As
a result of the April 12, 1994 restructuring agreement discussed below, an
extraordinary gain on restructuring of long-term debt of approximately $306,000
was recorded. In order to stimulate income growth and return to profitability,
the Company must expand by the development of new centers and/or the acquisition
of existing profitable centers and/or the development of management services
which are not capital intensive.
Loss per share before extraordinary item for the year ended December
31, 1995 was $0.12, compared to a loss per share before extraordinary item of
$0.15 in 1994. As discussed in "Liquidity and Capital Resources", dividends on
the Series B Senior Convertible Preferred Stock are non-cumulative. Since the
Board of Directors has not declared a dividend during the years ended December
31, 1995 and 1994, respectively, no dividend has been subtracted from net loss
to determine loss per share for the years ended December 31, 1995 and 1994.
Year ended December 31, 1994 Compared to December 31, 1993. The Company
reported revenues from the operation of its centers for the year ended December
31, 1994 of approximately $36,046,000, compared to approximately $37,515,000 for
the year ended December 31, 1993, representing a decrease of approximately 4%.
This decrease of approximately $1,469,000 is due primarily to the sale or
closure of three centers and the expiration of operating agreements relating to
six centers subsequent to December 31, 1992 (approximately $3,401,000),
substantially offset by (i) revenues generated by two new centers (approximately
$1,306,000), one of which began operations in 1994, and one of which began
operations in the second half of 1993, and (ii) increased revenues resulting
from higher utilization at the majority of the Company's remaining centers
(approximately $626,000).
Center expenses for the year ended December 31, 1994 aggregated
approximately $29,054,000, compared to approximately $31,800,000 for the year
ended December 31, 1993. This decrease of approximately $2,746,000, or 9%, is
due primarily to (i) the elimination of expenses at the nine centers discussed
above (approximately $3,167,000), (ii) a reduction in equipment costs as a
result of the buy-out of certain leases and the purchase of the related
equipment and
16
<PAGE> 18
the amendment of certain other leases in 1993 (approximately $805,000), and
(iii) a slight decrease in non-equipment related costs at the majority of the
Company's remaining centers (approximately $156,000). This decrease was
partially offset by increased expenses related to the Company's two new centers
(approximately $1,382,000).
Provision for center profit distributions was approximately $917,000
for the year ended December 31, 1994, compared to approximately $781,000 for the
year ended December 31, 1993. This increase of approximately $136,000, or 17%,
is due primarily to increased income at the majority of the Company's
cooperative venture centers.
The Company reported income from center operations of approximately
$6,075,000 for the year ended December 31, 1994, compared to approximately
$4,935,000 for the year ended December 31, 1993, representing an increase of
approximately $1,140,000, or 23%. This increase in income from center operations
is due primarily to increased income at the Company's centers which existed
at December 31, 1993 (approximately $1,586,000), partially offset by (i) the
loss from center operations at the Company's two new centers (approximately
$76,000), (ii) the loss of income from center operations at the terminated
centers discussed above (approximately $234,000) and (iii) the increase in
provision for center profit distributions.
For the year ended December 31, 1994, the Company reported corporate
operating expenses of approximately $3,671,000, compared to corporate operating
expenses of approximately $3,615,000, for the year ended December 31, 1993. This
increase of approximately $56,000, or 2%, is due primarily to increases in
personnel and occupancy costs (approximately $85,000), partially offset by
decreased legal and consulting fees (approximately $48,000) related to long-term
debt restructuring negotiations in 1993.
Interest expense was approximately $3,927,000 for the year ended
December 31, 1994, compared to approximately $3,835,000 during the year ended
December 31, 1993. This increase of approximately $92,000, or 2%, was primarily
related to (i) the buy-out of certain operating leases and the purchase of the
related equipment at eight of the Company's existing centers in 1993 and (ii)
long-term debt incurred at the Company's new centers, offset by (i) reduced
interest expense related to amortization of long-term obligations and (ii)
reduced interest as a result of the April 12, 1994 restructuring agreement
discussed below.
For the year ended December 31, 1994, the Company reported a loss
before extraordinary item of approximately $1,451,000, compared to a loss before
extraordinary item of approximately $2,466,000 for the year ended December 31,
1993. This decrease in net loss of approximately $1,015,000 or 41% is the result
primarily of increased income from center operations, offset by (i) increased
corporate operating expenses and (ii) increased interest expense. As a result of
the April 12, 1994 restructuring agreement discussed below, an extraordinary
gain on restructuring of long-term debt of approximately $306,000 was recorded.
Loss per share before extraordinary item for the year ended December
31, 1994 was $0.15, compared to a loss per share before extraordinary item of
$0.25 in 1993. As discussed in "Liquidity and Capital Resources", dividends on
the Series B Senior Convertible Preferred Stock are non-cumulative. Since the
Board of Directors has not declared a dividend during the years ended December
31, 1994 and 1993, respectively, no dividend has been subtracted from net loss
to determine loss per share for the years ended December 31, 1994 and 1993.
17
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to a deficit of approximately $11,194,000 at
December 31, 1995, from approximately $2,588,000 at December 31, 1994. This
decrease of $13,782,000 is primarily due to the reclassification of long-term
obligations to current liabilities as a result of scheduled debt maturities and
principal payments on long-term obligations. This decrease was partially offset
by net income before depreciation and amortization. During the past three years,
the Company has financed its operations primarily through internally generated
funds and the lease payment deferrals and credit arrangements discussed below.
Cash increased to approximately $6,176,000 at December 31, 1995 from
approximately $3,664,000 at December 31, 1994, an increase of approximately
$2,512,000, or 69%. This increase resulted from (i) net income before
depreciation and amortization and deferred rent expense (approximately
$3,429,000), and (ii) a decrease in accounts receivable (approximately
$1,472,000, and (iii) an increase in accounts payable, accrued expenses and
professional fees payable (approximately $371,000). This increase was offset by
(i) net purchases of property and equipment (approximately $870,000), (ii) the
investment in a radiation oncology treatment center (approximately $410,000),
and (iii) a net decrease in long-term debt obligations net of the deferred
payment discussed below (approximately $714,000). The Company currently has no
lines of credit available to borrow against for working capital purposes.
Because of prevailing economic and health care market conditions, the
Company (i) reported losses from 1992 to 1995 (including a loss of approximately
$1,138,000 in 1995), (ii) expects to continue to experience cash flow shortfalls
and losses in 1996, (iii) has certain balloon payments of approximately
$12,252,000 and $1,500,000 pursuant to its long-term debt obligations with its
primary creditor maturing in June and August 1996, respectively, and (iv) has a
net capital deficiency of approximately $12,102,000 at December 31, 1995. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
On February 26, 1996, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Maxum Health Corp., a Delaware corporation
(Maxum). In anticipation of the Merger Agreement, the Company and Maxum jointly
formed InSight Health Services Corp. (InSight). The Merger Agreement provides
for the Company and Maxum to merge with newly-formed acquisition subsidiaries of
InSight. As a result, the Company and Maxum will each become wholly-owned
subsidiaries of InSight.
The Company and Maxum also entered into a Preferred Stock Acquisition
Agreement with GE and InSight. In exchange for a comprehensive debt and lease
restructuring of the existing obligations of the Company and Maxum, GE will
receive non-voting preferred stock of InSight, convertible into approximately
forty-eight percent (48%) of the common stock of InSight on a fully-diluted
basis. The terms and conditions of the debt and lease restructuring include,
among other things, (i) an extension of the Company's balloon payments totaling
approximately $11,619,000 in 1996 until December 2002, (ii) a reduction of the
Company's long-term debt by approximately $11,300,000, (iii) a restructure of
certain operating lease arrangements, (iv) the surrender by GE of warrants to
purchase 1,589,072 shares of the Company's common stock at $0.10 per share and
(v) similar restructuring for Maxum.
18
<PAGE> 20
In addition, in connection with the restructure of the Company's and
Maxum's master equipment service contracts, GE will be entitled to receive an
amount equal to approximately 14 percent of income before provision for taxes,
as defined in the agreement, from the consolidated income statement of the
Company, Maxum and InSight.
The Boards of Directors and management of the Company and Maxum, having
received fairness opinions from their respective investment banking consultants,
have agreed to recommend approval of the merger to their respective
stockholders, subject to their fiduciary obligations. The obligations of the
Company and Maxum to consummate the merger are subject to the satisfaction of
certain conditions set forth in the Merger Agreement, including the approval of
the merger by the stockholders of the Company and Maxum and consummation of the
debt and lease restructuring.
Under the Merger Agreement, each share of the Company's common stock
will be converted into the right to receive approximately .100 shares of InSight
common stock, and each share of the Company's Series B Convertible Preferred
Stock shall be converted into the right to receive approximately ten (10) shares
of InSight common stock. Each share of Maxum common stock shall be converted
into the right to receive approximately .598 shares of InSight common stock.
Immediately upon consummation of the merger, approximately one-half of the
issued and outstanding common stock of InSight will be held by former
stockholders of the Company and approximately one-half will be held by former
Maxum stockholders.
The Merger Agreement may be terminated if the merger has not been
consummated, or the approval of the Company's and Maxum's stockholders has not
been obtained, by September 30, 1996. There can be no assurance that these
transactions may be consummated in a timely manner.
Pursuant to the terms of an April 12, 1994 agreement between the
Company and GE, the maturity of a balloon principal payment of approximately
$9,600,000 which was due in May 1994, was extended until January 1, 1996 and the
principal payment was reduced from $9,600,000 to $8,000,000. In addition, the
interest rate on the note related thereto was reduced from 12.75% per annum to
9.25% per annum. As a result, the Company was required to make certain balloon
principal payments pursuant to its loan agreements with its primary lender as
follows: $10,500,000 in June 1996 and $1,500,000 in August 1996. GE also agreed
to restructure the monthly payments under a $15,200,000 equipment loan which
resulted in monthly cash savings of $75,000 in 1995. Finally, GE agreed to
provide three deferred payments to be used in 1995, under certain circumstances.
During 1995, the Company utilized all of its deferrals which totaled
approximately $2,133,000. Further, the Company is required to maintain, under
the terms of its loan agreements with its primary lender, certain financial
covenants and ratios. The Company is in technical violation of several of these
covenants and ratios, but upon consummation of the restructuring described
above, GE will agree to eliminate these covenants and ratios.
The healthcare industry is highly regulated and changes in laws and
regulations can be significant. The Company believes that the expanding managed
care environment accompanied by cost containment pressures may have a materially
adverse impact on the Company's business, since they may directly affect the
utilization of the Company's centers and reimbursement for those procedures
performed at the Company's centers; however, the Company believes that as long
as the Company is able to negotiate provider agreements with the managed care
companies and other payors to provide productive and cost efficient services
with measurable outcomes, the Company's business should not be negatively
impacted.
19
<PAGE> 21
In addition to the restructuring and merger arrangements discussed
above, the Company is also taking certain other actions to achieve
profitability. First, if utilization at certain underperforming centers
continues to deteriorate, those centers will be considered for closure and/or
disposition. During 1995 the Company sold or closed several underperforming
centers. Second, the Company has sold or negotiated the termination of leases of
all its idle diagnostic imaging equipment and has renegotiated its equipment
maintenance contracts and contracts with vendors of medical supplies and film.
Third, the Company is continuing to develop a long-term plan which includes (i)
changes in the Company's debt and capital structure, and (ii) raising additional
working capital. In this regard, the Company has engaged outside professional
assistance and continues to explore raising new capital for future operations.
The Company believes that it will be able to meet its long-term debt,
operating lease and other ongoing obligations through June 1996; however, the
Company believes that its ability to meet its long-term debt obligations beyond
June 1996 is contingent upon the consummation of the long-term restructuring and
merger plans discussed above. However, there can be no assurances that any of
these transactions may be consummated in a timely manner.
In 1994, in connection with the operation of a Gamma Knife center in
Miami, Florida, RCI entered into a loan agreement ($2,900,000) with a bank which
provided $500,000 of working capital for operations of the center and which loan
was guaranteed by Mr. Cal Kovens, then a director of the Company (deceased
February 6, 1995). In addition, RCI received a working capital loan for an
amount up to $500,000 from the Company's primary lender to fund the operations
of the center, which loan is secured by the accounts receivable of the center.
Effective March 1, 1996, RCI refinanced the remainder of the equipment
loan (approximately $2,075,000) with GE on terms substantially equivalent to the
original equipment loan. This loan is secured by all of the assets of the Gamma
Knife center, as well as by a letter of credit of $300,000 which is guaranteed
by the estate of Cal Kovens.
In connection with the Company's expansion plans, the Company has
reviewed several diagnostic imaging centers as acquisition candidates. In 1994,
the Company purchased a majority interest in a diagnostic imaging center in
Monterey Park, California. Additionally, in 1995, the Company purchased an
interest in a radiation oncology treatment facility in Valparaiso, Indiana. The
cash needed to purchase these centers was made available from long-term notes
with GE in the approximate amount of $1,359,000. The Company continues to review
diagnostic imaging centers as acquisition candidates but has not entered into
any letters of intent or definitive agreements. Approval of the Company's
primary lender is required for any equipment purchase financing in connection
with any acquisitions by the Company.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") prohibits
referring physician ownership of diagnostic imaging centers after December 31,
1994. In 1994, the Company purchased or dissolved all the physician limited
partnership interests in its cooperative ventures. As a result, the Company no
longer has any cooperative ventures with referring physician ownership. The cash
needed for these buyouts was made available from internally generated funds.
20
<PAGE> 22
Subject to the limitations described above, the Company expects to
finance the development and other start-up costs and the costs of equipment and
site improvements at any new centers through (i) financing arrangements with the
manufacturers of the equipment utilized at such centers, and (ii) other
financing sources utilized by the Company. The ability of the Company to
establish such centers and to expand operations is dependent upon the
availability of financing on terms reasonably acceptable to the Company.
Dividends on the Series B Preferred Stock are non-cumulative so long as
the Series B Preferred Stockholders control a majority of the Board of Directors
of the Company. In addition, any dividends declared on the Series B Preferred
Stock may be paid in cash or shares of common stock at the discretion of the
Board of Directors. No dividend was declared by the Board of Directors for the
year ended December 31, 1994.
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standard No. 109, Accounting
for Income Taxes ("SFAS No. 109"), pursuant to which the Company recorded the
benefit of its net operating loss carryforwards and also recorded a valuation
reserve for the entire amount.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of ("SFAS No. 121") in March 1995. SFAS
No. 121 is effective for financial statements for fiscal years beginning after
December 15, 1995. SFAS No. 121 is not expected to have a material effect on the
Company financial statements.
Inflation has not had a significant impact on the Company's operations
and, in management's opinion, based upon current trends will not have an adverse
impact on operations in the near future.
21
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
Page Number
-----------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 23
CONSOLIDATED BALANCE SHEETS, December 31, 1995 and 1994 24 - 25
CONSOLIDATED STATEMENTS OF OPERATIONS, for the
years ended December 31, 1995, 1994 and 1993 26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT),
for the years ended December 31, 1995, 1994 and 1993 27
CONSOLIDATED STATEMENTS OF CASH FLOWS,
for the years ended December 31, 1995, 1994 and 1993 28 - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 1995, 1994 and 1993 30 - 39
22
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Services Corp.:
We have audited the accompanying consolidated balance sheets of AMERICAN HEALTH
SERVICES CORP. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Health Services Corp.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 5 to the
consolidated financial statements, the Company has certain balloon payments on
its long-term obligations maturing in June 1996 and August 1996 and a net
capital deficiency. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are described in Notes 2, 5 and 11. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Orange County, California
February 26, 1996
23
<PAGE> 25
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 6,175,842 $ 3,663,795
Accounts receivable, net of an allowance for doubtful
accounts and contractual discounts of $3,793,780
and $3,691,466 at December 31, 1995 and 1994,
respectively, and an allowance for
professional fees of $1,567,308 and $1,862,399 at
December 31, 1995 and 1994, respectively 6,892,436 8,587,288
Prepaid expenses and other 447,726 345,040
----------- -----------
Total current assets 13,516,004 12,596,123
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization of $13,513,147 and
$12,348,486 at December 31, 1995
and 1994, respectively 20,169,446 25,521,012
OTHER ASSETS 2,754,904 2,105,802
----------- -----------
$36,440,354 $40,222,937
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
24
<PAGE> 26
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,917,800 $ 3,319,079
Accrued payroll and related costs 924,986 700,916
Professional fees payable 544,705 306,446
Current portion of deferred rent
expense 485,740 665,343
Current portion of reserve for center
terminations 630,000 690,000
Current portion of long-term debt 19,207,076 4,326,816
------------ ------------
Total current liabilities 24,710,307 10,008,600
------------ ------------
DEFERRED RENT EXPENSE 286,928 443,513
------------ ------------
RESERVE FOR CENTER TERMINATIONS 635,078 1,253,130
------------ ------------
LONG-TERM DEBT 21,307,834 39,400,171
------------ ------------
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 1,602,240 81,145
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
10percent convertible Series B preferred stock with a liquidation
preference of $185 per share plus declared and unpaid dividends
Authorized--5,000,000 shares
Outstanding--37,837.83 at December 31, 1995 and 1994 stated at 6,075,107 6,075,107
Common stock, $.03 par value-
Authorized--25,000,000 shares
Outstanding--9,683,647 at December 31, 1995 and 1994 290,509 290,509
Common stock warrants 1,115,569 1,115,569
Additional paid-in capital 9,343,665 9,343,665
Accumulated deficit (28,926,883) (27,788,472)
------------ ------------
(12,102,033) (10,963,622)
------------ ------------
$ 36,440,354 $ 40,222,937
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
25
<PAGE> 27
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Center revenues $ 36,999,312 $ 36,046,164 $ 37,515,358
EXPENSES:
Center expenses 29,963,020 29,053,657 31,799,652
Provision for center profit distributions 766,388 917,339 780,740
------------ ------------ ------------
Income from center operations 6,269,904 6,075,168 4,934,966
CORPORATE OPERATING EXPENSES 4,088,252 3,670,772 3,615,264
------------ ------------ ------------
Income from operations before interest 2,181,652 2,404,396 1,319,702
INTEREST INCOME AND OTHER 147,701 108,923 76,633
INTEREST EXPENSE (3,437,764) (3,926,969) (3,835,071)
------------ ------------ ------------
Loss before provision for income taxes
and extraordinary item (1,108,411) (1,413,650) (2,438,736)
PROVISION FOR INCOME TAXES 30,000 37,000 27,000
------------ ------------ ------------
Loss before extraordinary item (1,138,411) (1,450,650) (2,465,736)
EXTRAORDINARY ITEM:
Gain on restructuring of long-term debt -- 305,985 --
------------ ------------ ------------
Net Loss $ (1,138,411) $ (1,144,665) $ (2,465,736)
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Loss before extraordinary item $ (0.12) $ (0.15) $ (0.25)
Extraordinary item -- .03 --
------------ ------------ ------------
$ (0.12) $ (0.12) $ (0.25)
============ ============ ============
Weighted average number of common shares outstanding 9,683,647 9,683,647 9,683,647
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
26
<PAGE> 28
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -----------------------------------
Additional
Number of Number of Paid-In Accumulated
Shares Amount Shares Amount Warrants Capital Deficit Total
------ ------ ------ ------ -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1992 37,837.83 $6,075,107 9,683,647 $290,509 $ 991,498 $9,343,665 $(24,178,071) $ (7,477,292)
Issuance of common
stock warrants -- -- -- -- 94,269 -- -- 94,269
Net loss -- -- -- -- -- -- (2,465,736) (2,465,736)
--------- ---------- --------- -------- ---------- ---------- ------------ ------------
BALANCE,
December 31, 1993 37,837.83 6,075,107 9,683,647 290,509 1,085,767 9,343,665 (26,643,807) (9,848,759)
Issuance of common
stock warrants -- -- -- -- 29,802 -- -- 29,802
Net loss -- -- -- -- -- -- (1,144,665) (1,144,665)
--------- ---------- --------- -------- ---------- ---------- ------------ ------------
BALANCE,
December 31, 1994 37,837.83 6,075,107 9,683,647 290,509 1,115,569 9,343,665 (27,788,472) (10,963,622)
Net loss -- -- -- -- -- -- (1,138,411) (1,138,411)
--------- ---------- --------- -------- ---------- ---------- ------------ ------------
BALANCE,
December 31, 1995 37,837.83 $6,075,107 9,683,647 $290,509 $1,115,569 $9,343,665 $(28,926,883) $(12,102,033)
========= ========== ========= ======== ========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
27
<PAGE> 29
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,138,411) $ (1,144,665) $ (2,465,736)
Adjustments to reconcile net loss
to net cash provided by operating activities--
Depreciation and amortization 4,903,913 5,005,062 3,531,139
Deferred lease payments (336,188) (116,488) 245,431
Gain on restructuring of long-term debt -- (305,985) --
Changes in operating assets and liabilities-
(Increase) decrease in accounts
receivable, net 1,472,210 (64,381) (53,146)
(Increase) decrease in prepaid
expenses and other (93,936) 489,969 685,387
Increase in other assets (387,667) (705,100) (242,254)
Increase in accounts payable
and accrued expenses 132,433 377,501 97,289
Increase (decrease) in
professional fees payable 238,259 (91,216) 152,065
Increase (decrease) in reserve
for center terminations (453,733) (1,171,073) 120,013
------------ ------------ ------------
Net cash provided by operating activities 4,336,880 2,273,624 2,070,188
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (870,446) (1,098,950) (19,829,316)
Investments in centers, net of cash acquired (409,678) (671,016) --
------------ ------------ ------------
Net cash used in investing activities (1,280,124) (1,769,966) (19,829,316)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
28
<PAGE> 30
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ 4,276,152 $ 3,333,481 $ 21,403,374
Payments of long-term debt (4,990,397) (3,786,673) (2,770,876)
Increase (decrease) in minority interest 169,536 (726,116) (693,288)
------------ ------------ ------------
Net cash provided by (used in) financing activities (544,709) (1,179,308) 17,939,210
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 2,512,047 (675,650) 180,082
CASH, beginning of year 3,663,795 4,339,445 4,159,363
------------ ------------ ------------
CASH, end of year $ 6,175,842 $ 3,663,795 $ 4,339,445
============ ============ ============
</TABLE>
Interest payments: During 1995, 1994 and 1993, the Company made interest
payments of $3,585,628, $4,352,978 and $3,751,845, respectively.
During 1994 and 1993 the Company issued warrants to purchase 372,524 and
377,075 shares of the Company's common stock which was valued at $29,802
and $94,269, respectively.
In connection with the termination of a center in 1995, certain assets and
liabilities were sold as follows:
<TABLE>
<S> <C>
Book value of assets sold $2,721,065
Long-term and other liabilities assumed by buyer 2,496,746
----------
Amount applied against reserve for center terminations $ 224,319
==========
</TABLE>
In conjunction with the acquisition of the net assets of an imaging center in
1994, liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $1,257,319
Cash paid 900,000
----------
Liabilities assumed $ 357,319
==========
</TABLE>
During 1993, the Company purchased certain imaging equipment which was
previously leased to the Company. In connection with the purchase, the Company
reclassified $3,883,947 in deferred rent expense against the cost of the imaging
equipment.
The accompanying notes are an integral part of these
consolidated statements.
29
<PAGE> 31
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. Summary of Significant Accounting Policies
a. Organization and Nature of Business
American Health Services Corp. (the Company) was incorporated on November 12,
1982, in the state of Delaware. The Company was formed to develop and operate
facilities in which high capital cost, technologically advanced equipment is
used for the diagnostic imaging and treatment of patients. As of December 31,
1995, the Company operates twenty centers located throughout the United
States.
The accompanying consolidated financial statements include the Company's six
majority-owned or controlled general partnerships and the Company's
wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
b. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
c. Allowance for Doubtful Accounts and Contractual Discounts
The allowance for doubtful accounts and contractual discounts include
management's estimate of the amounts expected to be written-off on specific
accounts and for write-offs on other as yet unidentified accounts included in
accounts receivable at December 31, 1995. In estimating the write-offs and
discounts on specific accounts, management relies on a combination of
in-house analysis and a review of contractual payment rates from private
health insurance programs or under the federal Medicare program. In
estimating the allowance for unidentified write-offs and discounts,
management relies on historical experience. The amounts the Company will
ultimately realize could differ materially in the near term from the amounts
assumed in arriving at the allowance for doubtful accounts and contractual
discounts in the financial statements at December 31, 1995.
d. Allowance for Professional Fees
The Company reserves a contractually agreed upon percentage at several of its
centers, averaging 20 percent of the accounts receivable balance from
patients, for payments to radiologists for interpreting the results of the
diagnostic imaging procedures. Payments to radiologists are only due when
amounts are received from patients. At that time, the balance is transferred
from the allowance account to the professional fees payable account.
30
<PAGE> 32
e. Property and Equipment
Property and equipment are depreciated and amortized on the straight-line
method using the following estimated useful lives:
Building 17 to 19 years
Leasehold improvements Term of lease
Medical equipment 3 to 8 years
Furniture and fixtures 3 to 8 years
The Company capitalizes expenditures for betterments and major renewals.
Maintenance, repairs and minor replacements are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and related
reserves are removed from the accounts and any resulting gain or loss is
included in the results of operations.
f. Preopening Costs
The Company capitalizes certain costs incurred prior to the opening of
centers, including legal, consulting and payroll costs. These costs are being
amortized over three to five years. Net preopening costs of approximately
$207,000 and $685,000 are included in other assets in the accompanying
consolidated balance sheets at December 31, 1995 and 1994, respectively.
Amortization expense of preopening costs totaled $196,236, $185,756 and
$136,959 in 1995, 1994 and 1993, respectively.
g. Goodwill
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies or partnership interests in purchase
transactions. Goodwill is being amortized over six to fifteen years. Net
goodwill of approximately $1,801,000 and $740,000 is included in other assets
in the accompanying consolidated balance sheets at December 31, 1995 and
1994, respectively. Amortization expense of goodwill totaled $171,370 in 1995
and $0 in 1994 and 1993, respectively.
h. Revenue Recognition
The Company recognizes revenue when services are provided. A substantial
portion of the Company's revenues and related accounts receivable are derived
from healthcare providers.
No single contract accounts for more than 10 percent of the Company's
revenues; however, one customer has six individual contracts covering
separate centers. In the aggregate, revenues from these contracts represent
approximately 24 percent, 27 percent and 28 percent of revenues in 1995, 1994
and 1993, respectively.
i. Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standard No. 109,
Accounting for Income Taxes (SFAS No. 109). The Company adopted SFAS. 109 in
1993, whereby the Company recorded the benefit of its net operating loss
carryforwards and also recorded a valuation reserve for the entire amount.
The impact on the Company's financial statements was not material.
31
<PAGE> 33
j. Earnings (Loss) Per Common Share
The number of shares used in computing earnings (loss) per common share is
equal to the totals of the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents
relating to options, warrants and convertible preferred stock have not been
included in the computation of earnings (loss) per common share in 1995,
1994, and 1993 due to their antidilutive effect. Preferred stock dividends
have not been considered in the calculation of earnings (loss) per common
share since the shares are non-cumulative and no dividends have been
declared. The number of shares used in the computation of earnings (loss) per
common share in 1995, 1994 and 1993 was 9,683,647.
k. Post-Employment and Post-Retirement Benefits
The Company does not provide post-employment or post-retirement benefits to
employees. Accordingly, Statement of Financial Accounting Standards No. 112,
Employers Accounting for Post-Employment Benefits, and Statement of Financial
Accounting Standards No. 106, Employers Accounting for Post-Retirement
Benefits have no impact on the Company's financial statements.
l. Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121) in March
1995. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. SFAS No. 121 is not expected to have a
material effect on the Company's financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123) in October 1995. SFAS No. 123 requires the Company to change how it
accounts for employee stock-based compensation plans or to provide specific
disclosures for financial statements for fiscal years beginning after
December 15, 1995. The Company plans to adopt the disclosure requirements
during 1996.
2. Operating Losses and Liquidity
Because of prevailing economic and healthcare market conditions, the Company (i)
reported losses from 1992 to 1995 including a loss of approximately $1,138,000
in 1995, (ii) expects to continue to experience cashflow shortfalls and losses
in 1996, (iii) has certain balloon payments of approximately $12,252,000 and
$1,500,000 pursuant to its long-term debt obligations with its primary lender
maturing in June and August 1996, respectively, and (iv) has a net capital
deficiency of approximately $12,102,000 at December 31, 1995. These factors,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. In response thereto, the Company has undertaken the following
actions:
First, in connection with a comprehensive restructuring plan which includes a
merger and debt restructuring (see Note 11), the Company has reached an
agreement with its primary lender, subject to shareholder approval, to
significantly restructure its long-term debt. In connection with the
restructuring arrangement, the
32
<PAGE> 34
Company's primary lender will, among other things, extend the maturity of the
balloon payments until December 2002, reduce the Company's long-term debt by
approximately $11,300,000, restructure certain lease arrangements and
surrender warrants to purchase 1,589,072 shares of the Company's Common
Stock.
Second, in connection with the comprehensive restructuring plan, the Company
has reached an agreement to merge with Maxum Health Corp.
Third, the Company is attempting to reduce costs by renegotiating equipment
maintenance contracts, contracts with vendors of medical supplies and film
and certain consulting arrangements. The Company has sold or negotiated the
termination of leases of all its idle diagnostic imaging equipment.
The ability of the Company to meet its long-term debt, operating lease and other
ongoing obligations is contingent upon the consummation of the restructuring
plan as discussed above. In the event that the negotiations are not successful,
or shareholder approval is not obtained, the Company will have to seek alternate
sources of repayment and funding. However, there can be no assurances that any
of these transactions may be consummated in a timely manner on terms reasonably
acceptable to the Company.
The healthcare industry is highly regulated and changes in laws and regulations
can be significant. The Company believes that the expanding managed competition
environment accompanied by cost containment pressures may have a materially
adverse effect on the Company's business, since they may directly affect the
utilization of the Company's centers and reimbursement for those procedures
performed at the Company's centers.
3. Transactions with Related Parties
The Company compensates a director for consulting fees and related expenses in
connection with the Company's financing and acquisition activities. In addition,
the Company paid legal fees to a law firm affiliated with another director.
These amounts totaled approximately $424,000, $164,000 and $389,000 in 1995,
1994 and 1993, respectively. Additionally, the Company borrowed approximately
$2,123,000 from a stockholder/director during 1993 pursuant to the terms of a
non-recourse promissory note. The note was repaid in 1994. Total interest paid
on the note was approximately $195,000 in 1993.
4. Property and Equipment
Property and equipment consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Building and improvements $11,012,023 $10,738,434
Medical equipment 21,213,922 25,823,292
Furniture and fixtures 1,456,648 1,307,772
----------- -----------
33,682,593 37,869,498
Less: Accumulated depreciation
and amortization 13,513,147 12,348,486
----------- -----------
$20,169,446 $25,521,012
=========== ===========
</TABLE>
33
<PAGE> 35
5. Long-Term Debt
Long-term debt consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes payable to a third party bearing
interest at rates which range from
8.00 to 12.5 percent, maturing at various
dates through 2001. These notes are secured
by substantially all of the
Company's assets $36,397,147 $38,346,229
Note payable to a third party, principal
repaid in June 1995 -- 928,863
Note payable to a bank, bearing
interest at 10 percent, principal and
interest payments due monthly, maturing
in March 1999. The note is secured by certain
of the Company's equipment 2,171,313 2,714,293
Note payable to a bank, bearing interest at
8.13 percent, principal and interest payments
due monthly, maturing in September 2000. The
note is secured by certain of the Company's
building and improvements 145,783 --
Note payable to a bank, bearing interest at 8.45
percent, principal and interest payments due
monthly, maturing in December 1996. The note
is secured by certain of the Company's
building and improvements 52,609 --
Unsecured non-interest bearing notes payable
to third parties, payable in annual
installments of $190,000, maturing in 1999 760,000 600,000
Unsecured notes payable to a third
party with interest accruing monthly at prime 430,171 430,171
Obligations under capital leases 557,887 707,431
----------- -----------
40,514,910 43,726,987
Less--Current portion 19,207,076 4,326,816
----------- -----------
$21,307,834 $39,400,171
=========== ===========
</TABLE>
In 1989, the Company entered into a note payable with a financial institution
for $14,280,000. This note is secured by substantially all assets of the Company
not secured by other notes payable. During April 1994, the Company and its
primary lender entered into a debt restructuring arrangement pursuant to which
(i) the maturity of a balloon payment due was extended until January 1996, (ii)
the principal amount of the balloon payment was reduced from approximately
$9,582,000 to $8,000,000, (iii) the interest rate on the note relative to the
balloon payment was reduced from 12.75 percent per annum to 9.25 percent per
annum, (iv) payments on the $15,200,000 equipment loan discussed below were
restructured, (v) the Company could defer three monthly payments pursuant to the
34
<PAGE> 36
equipment loan mentioned above through December 31, 1995, under certain
circumstances, (vi) the shares issuable under the warrant issued in connection
with the May 1992 non-revolving line of credit discussed below were reduced to
839,478 shares, and (vii) a $500,000 working capital loan was advanced for a
Gamma Knife center. As a result of items 1 through 4, the Company realized
monthly savings of approximately $215,000. As a result of this restructuring, a
gain on restructuring of long-term debt of $305,985 has been recorded and is
accounted for as an extraordinary item in the accompanying consolidated
statement of operations. During 1995, the Company utilized its three deferrals
described above. The terms of this note agreement include certain restrictive
covenants which, among others, require the maintenance of specified financial
ratios, limit capital expenditures and restrict the payment of dividends. As of
December 31, 1995, the Company was in technical violation of certain of these
restrictive covenants but upon consummation of the restructuring plan discussed
below, the primary lender has agreed to eliminate these financial covenants.
In 1993, the Company entered into a definitive loan and security agreement with
its primary lender, pursuant to which the Company restructured all of its
imaging equipment leases held by the third party. Under the terms of the
restructuring arrangement, the Company bought out the leases and purchased the
related imaging equipment at eight centers and restructured the leases at the
remaining nine centers. The purchase was financed by a $15,200,000 loan which is
due in March 2000.
In 1994, in consideration of the restructuring arrangement discussed above, the
Company issued a warrant to its primary lender to purchase up to an aggregate of
372,524 shares of the Company's outstanding common stock for $0.10 per share,
subject to adjustment in certain circumstances. The warrant became exercisable
in 1995. In 1993, in consideration of the restructuring arrangement discussed
above, the Company issued another warrant to purchase up to an aggregate of
377,075 shares of the Company's outstanding common stock at $0.10 per share,
subject to adjustment in certain circumstances. The warrant became exercisable
in 1995. Also, in 1992, in consideration of the extension of the non-revolving
line of credit and the lease amendment, the Company issued a warrant to the
lender to purchase up to an aggregate of 1,678,946 shares of the Company's
outstanding common stock for $0.10 per share, subject to adjustment in certain
circumstances. Pursuant to the April 1994 debt restructuring discussed above,
the warrant was reduced to 839,478 shares. The warrant became exercisable in
1995. The warrants were valued at their estimated fair market value at the date
of issuance and recorded in other assets at December 31, 1995 and 1994,
respectively. Amortization expense related to these assets totaled $202,718,
$197,042, and $163,548 in 1995, 1994 and 1993, respectively. In connection with
the issuance of the warrants, the holders of the Series B Preferred Stock waived
their antidilutive rights with respect to both the issuance and exercise of the
warrants.
Subsequent to December 31, 1995 (see Note 11), in connection with a
comprehensive restructuring plan which includes a merger and debt restructuring,
the Company has reached an agreement with its primary lender, subject to
shareholder approval, to significantly restructure its long-term debt. In
connection with this restructuring arrangement, the Company's primary lender
will, among other things, extend the maturity of approximately $11,619,000 in
balloon payments from 1996 until December 2002, reduce the Company's long-term
debt by approximately $11,300,000, restructure certain operating lease
arrangements and surrender the warrants described above.
35
<PAGE> 37
The equipment related to the capital leases has an original cost of
approximately $682,000 and accumulated depreciation of approximately $227,000 at
December 31, 1995.
Principal payments on long-term debt at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31:
------------
<S> <C>
1996 $19,207,076
1997 5,614,373
1998 6,163,085
1999 5,933,792
2000 3,064,095
Thereafter 532,489
-----------
$40,514,910
===========
</TABLE>
6. Commitments and Contingencies
The Company is committed under noncancelable operating leases for its corporate
offices, and certain centers and imaging equipment. Rent expense was $7,682,650,
$7,752,546 and $13,030,706 in 1995, 1994 and 1993, respectively. Minimum annual
rental payments under noncancelable operating leases are as follows as of
December 31, 1995:
<TABLE>
<CAPTION>
Year ending
December 31:
------------
<S> <C>
1996 $ 5,516,678
1997 5,291,614
1998 4,718,273
1999 4,562,629
2000 2,482,209
Thereafter 898,546
-----------
$23,469,949
===========
</TABLE>
The Company's agreements at its co-venture centers and with its partners in the
six limited liability companies and partnerships provide for contingent payments
based on annual pretax profits, as defined, of the individual center. These
contingent payments, which are charged to operations as they become accruable,
are included in "Provision for Center Profit Distributions" in the accompanying
consolidated statements of operations. During the years ended December 31, 1995,
1994 and 1993 the Company incurred contingent rent expense and minority interest
in income from operations of $766,388, $917,339, and $780,740, respectively. In
September 1992, a complaint was filed against the Company, its primary lender
and certain individuals alleging, among other things, violations of the
Racketeer Influenced and Corrupt Organizations Act, breach of management
agreement, breach of voting trust agreement and breach of fiduciary duty.
Pursuant to Judicial orders, most of the claims against the Company have been
dismissed. The Company has been advised by its counsel that it believes a
settlement has been reached as to all remaining claims which will require the
Company to make a payment of approximately $50,000.
36
<PAGE> 38
7. Stock Option Plans
The Company has four stock option plans under which officers, key employees and
directors have been or may be granted options to purchase up to 2,300,000 shares
of the Company's common stock. The plans provide for incentive and nonqualified
stock options. The options become exercisable cumulatively over various periods
up to four years from the grant date and expire five years after the grant date.
In addition, the Company has issued an option to purchase 20,000 shares to a
non-employee director. This option is not covered by an existing plan but was
issued on terms comparable to options issued to other directors.
The following table summarizes stock option activity for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Number of Exercise
Option Shares Price Range
------------- -----------
<S> <C> <C>
Balance, December 31, 1993 605,000 $1.31 to $2.00
Granted 120,000 $0.25 to $0.25
Canceled - - -
Exercised - -
--------- --------------
Balance, December 31, 1994 725,000 $0.25 to $2.00
Granted 360,000 $0.25 to $0.38
Canceled (30,000) $2.00 to $2.00
Exercised - -
--------- --------------
Balance, December 31, 1995 1,055,000 $0.25 to $1.62
========= ==============
</TABLE>
At December 31, 1995, options to acquire 639,000 shares were exercisable and
20,000 shares were available for grants of options.
8. Income Taxes
The provision for income taxes for the years ended December 31, 1995, 1994 and
1993 consists entirely of state taxes.
The components of deferred income taxes (assuming a federal tax rate of 34
percent and a combined state tax rate of three percent) recognized in the
consolidated balance sheet at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Depreciation $ 223,000
Allowance for doubtful accounts 1,404,000
Capitalized financing costs 22,000
Reserve for center terminations 602,000
Net operating loss carry forwards 11,920,000
------------
14,171,000
Valuation allowance as required by FAS 109 (14,171,000)
------------
Net deferred tax asset $ -
============
</TABLE>
37
<PAGE> 39
As of December 31, 1995, the Company has approximately $32,216,000 of net
operating loss carry forwards for federal and state income tax purposes which
expire at various dates from 1997 through 2009.
9. Canadian Accounting Principles
The Company's common stock is listed with the Ontario Securities Commission
(OSC) and the Company is required to file its financial statements with OSC.
Although the accompanying financial statements and notes thereto have been
prepared in accordance with generally accepted accounting principles applicable
in the United States, the primary difference between these accounting principles
and those applicable in Canada is as follows:
Currency Translation
The accompanying consolidated financial statements are stated in United
States dollars. Translation of the financial statements into Canadian dollars
would be performed using the historical rates in effect on the dates
transactions occurred. No translation gains or losses would result from the
translation. The rate of exchange in effect at the end of each of the last
five years and the average exchange rate for those years are as follows:
<TABLE>
<CAPTION>
Exchange Rates
(Canadian Dollars
Per U.S. Dollar)
---------------------
Average
Year December 31 for Year
---- ----------- --------
<S> <C> <C>
1991 1.146 1.156
1992 1.271 1.209
1993 1.324 1.290
1994 1.403 1.366
1995 1.364 1.372
</TABLE>
10. Preferred Stock
Each share of Series B Preferred Stock is convertible into one hundred shares of
common stock. In addition, the preferred stockholders can elect up to two
directors of the Company and have the right to nominate an additional board
member, based on continuing ownership percentages. The Company must also obtain
approval from the preferred stockholders for certain transactions which might
affect the preferred stock and if the Company is materially delinquent for sixty
days with its creditors or is delinquent in paying preferred stock dividends for
six quarters, the preferred stockholders have certain rights which include
majority representation on the Company's Board of Directors. In addition, the
Company has issued warrants to purchase up to 700,000 shares of the Company's
common stock to the preferred stockholders. The warrants to purchase 500,000
shares of common stock had exercise prices of $1.00 and expired in February
1996. The warrant to purchase 200,000 shares has an exercise price of $0.25 and
expires in November 1997.
The Company may pay, at its option, future dividends on the Series B Preferred
Stock in shares of common stock or cash. Dividends on the Series B Preferred
Stock are non-cumulative so long as the preferred stockholders control a
majority of the Board of Directors.
38
<PAGE> 40
11. Subsequent Event
On February 26, 1996, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) with Maxum Health Corp., a Delaware corporation (Maxum).
In anticipation of the Merger Agreement, the Company and Maxum jointly formed
InSight Health Services Corp. (InSight). The Merger Agreement provides for the
Company and Maxum to merge with newly-formed acquisition subsidiaries of
InSight. As a result, the Company and Maxum will each become wholly-owned
subsidiaries of InSight.
Under the terms of a Preferred Stock Acquisition Agreement, dated as of February
26, 1996, by and among the Company, Maxum, InSight and General Electric Company,
a New York corporation acting through GE Medical Systems (GE), GE, in exchange
for a comprehensive program of debt and lease restructuring of the existing
obligations of the Company and Maxum, will receive non-voting preferred stock of
the Company and Maxum, convertible into approximately forty-eight percent (48%)
of the common stock of InSight on a fully-diluted basis. The terms and
conditions of the debt and lease restructuring are set forth in the Master Debt
Restructuring Agreement among GE, the Company and Maxum, which is an exhibit to
the Preferred Stock Acquisition Agreement and include, among other things, (i)
an extension of the Company's balloon payments totaling approximately
$11,619,000 in 1996 until December 2002, (ii) a reduction of the Company's
long-term debt by approximately $11,300,000, (iii) a restructure of certain
operating lease arrangements, (iv) the surrender by GE of warrants to purchase
1,589,072 shares of the Company's common stock at $0.10 per share and (v)
similar restructuring for Maxum.
In addition, in connection with the restructure of the Company's and Maxum's
master equipment service contracts, GE will be entitled to receive an amount
equal to approximately 14 percent of income before provision for taxes, as
defined in the agreement, of the Company, Maxum and InSight.
The Boards of Directors and management of the Company and Maxum, having received
fairness opinions from their respective investment banking consultants, have
agreed to recommend approval of the merger to their respective stockholders,
subject to their fiduciary obligations. The obligations of the Company and Maxum
to consummate the merger are subject to the satisfaction of certain conditions
set forth in the Merger Agreement, including the approval of the merger by the
stockholders of the Company and Maxum and consummation of the debt and lease
restructuring.
Under the Merger Agreement, each share of the Company's common stock will be
converted into the right to receive approximately .100 shares of InSight common
stock, and each share of the Company's Series B Convertible Preferred Stock
shall be converted into the right to receive approximately ten (10) shares of
InSight common stock. Each share of Maxum common stock shall be converted into
the right to receive approximately .598 shares of InSight common stock.
Immediately upon consummation of the merger, approximately one-half of the
issued and outstanding common stock of InSight will be held by former
stockholders of the Company and approximately one-half will be held by former
Maxum stockholders.
The Merger Agreement may be terminated if the merger has not been consummated,
or the approval of the Company's and Maxum's stockholder has not been obtained,
by September 30, 1996. There can be no assurance that these transactions may be
consummated in a timely manner.
39
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors. At the Company's 1988 Annual Meeting, the
stockholders of the Company adopted its Restated Certificate of Incorporation
("Restated Certificate") which provides for a three-tiered classified Board of
Directors with staggered terms of office. The Preferred Stock entitles the
holders thereof to elect two directors of the Company. Ordinarily, the Board of
Directors consists of three classes, designated as Class I, Class II and Class
III, and two directors elected by the holders of the Preferred Stock. In
addition, pursuant to an agreement with the Company, the holders of the
Preferred Stock are entitled to nominate a number of directors which, when added
to the number of directors elected by the Preferred Stock, equals: three, if the
holders of the Preferred Stock hold more than 20% of the Common Stock and the
Preferred Stock; two, if the holders of the Preferred Stock hold more than 10%,
but less than 20%, of the Common Stock and the Preferred Stock; and one, if the
holders of the Preferred Stock hold more than 5%, but less than 10%, of the
Common Stock and the Preferred Stock. The authorized number of directors is
seven. There are currently five directors. On April 7, 1992, Lloyd G. Glazer,
who was elected by the Board as a Class II director in September 1991, became
the nominee director of the holders of the Preferred Stock but remained a Class
II director. On December 12, 1995, two Preferred Stock Directors, Frank E. Egger
and Roz Kovens, were re-elected by written consent of a holder of a majority of
the Preferred Stock.
Pursuant to the Restated Certificate, at each Annual Meeting only one
class of directors will be elected, and each class of directors will serve a
three-year term and until their successors are duly elected and qualified. The
term of the Class II directors will expire at the 1996 Annual Meeting, the term
of the Class III director will expire at the 1997 Annual Meeting, and the term
of the Class I directors elected at the 1995 annual meeting will expire at the
1998 Annual Meeting. Pursuant to the Certificate of Designation of the Preferred
Stock, the Preferred Stock Directors are elected annually.
Set forth below are the directors of the Company, including the Preferred
Stock Directors who are elected annually by the holders of the Preferred Stock.
The Company currently has two vacancies on the Board of Directors.
<TABLE>
<CAPTION>
Year First
Elected
Name Age Position To Serve
- ---- --- -------- --------
<S> <C> <C> <C>
E. Larry Atkins 49 President and 1988
Chief Executive
Officer and
Director, Class I
</TABLE>
40
<PAGE> 42
<TABLE>
<S> <C> <C> <C>
Thomas V. Croal 36 Vice President, 1991
Chief Financial
Officer, Corporate
Secretary and
Director, Class III
Lloyd G. Glazer 56 Director, Class II 1991
Charles M. Spear 52 Director, Class II 1995
Philip D. Green 44 Director, Class I 1989
Frank E. Egger 51 Chairman of the Board
and Director, Preferred
Stock 1991
Roz Kovens 62 Director, Preferred 1995
Stock
</TABLE>
E. Larry Atkins joined the Company in 1986 and has served as the Company's
president and chief executive officer since August 1990, and chairman of the
board from December 1990 to June 1992. Mr. Atkins served as executive vice
president and chief operating officer from 1986 to August 1990. Mr. Atkins
became a director of the Company in 1988. From 1979 to 1986, Mr. Atkins served
as president and chief executive officer of AMI Diagnostic Services, a wholly-
owned subsidiary of American Medical International, Inc.
Thomas V. Croal was elected a director in March 1991 and appointed vice
president and chief financial officer of the Company in April 1991. He was
controller of the Company from 1989 until April 1991. In December 1990, Mr.
Croal was appointed corporate secretary. From 1981 to 1989, Mr. Croal was
employed by Arthur Andersen & Co., an independent public accounting firm.
Frank E. Egger has been a director of the Company since August 1991. He
was appointed Chairman of the Board in May 1995. Presently, Mr. Egger serves as
Vice President of Kovens & Associates, Inc. ("Kovens & Associates"), a successor
entity to Kovens Enterprises, where Mr. Egger served as Chief Financial Officer
from 1980 to 1995. Kovens & Associates is a group of real estate development and
investment companies based in Miami, Florida.
Lloyd G. Glazer has been a director of the Company since September 1991.
Since January 1994, he has been managing director of H.C. Wainwright & Co.,
Inc., a securities brokerage firm. From 1976 to December 1993, he was an
associate director of Bear, Stearns & Co., Inc., an investment banking and
securities brokerage firm. He was formerly a vice president and regional
coordinator with Bache & Company and has been a stock broker since 1969.
Philip D. Green has been a director of the Company since 1989. Mr. Green
is a founding partner of the Washington, D.C. based law firm of Green, Stewart &
Farber, P.C. From 1978 through 1989, Mr. Green was a partner in the Washington,
D.C. based law firm of Schwalb, Donnenfeld, Bray & Silbert, P.C.
41
<PAGE> 43
Roz Kovens has been a director of the Company since May, 1995. For the
past five years, she has been engaged in private real estate investments. She is
currently the President of Kovens & Associates. Ms. Kovens is a founder of Mount
Sinai Medical Center in Miami, Florida, and a member of the Board of Governors
of Tel Aviv University.
Charles M. Spear has been a director since August 1995. From May 1993 to
the present, Mr. Spear has been the Chairman of Spear, Inc., a privately held
financial services company. From April 1995 until February 1996, he was Chief
Financial Officer of Smith Micro Software, Inc. From April 1983 until December
1992, Mr. Spear was Chairman of the Board, President and Chief Executive Officer
of Spear Financial Services, Inc., a public company which he founded. Prior
thereto he has been Chief Operating Officer of Trading Company of the West, a
partnership operating Pacific Stock Exchange specialist posts. From June 1968
until May 1981, Mr. Spear was employed by The First National Bank of Chicago,
most recently as Vice President.
During fiscal 1995, the Board of Directors held two meetings and the Audit
Committee met once. No director attended fewer than 75% of the aggregate
meetings of the Board of Directors or the committee or committees on which he
served during 1995.
Compensation Committee Interlocks and Insider Participation. The Company
has a Compensation and Stock Option Committee (the "Compensation Committee")
which consists of two non-employee directors, Messrs. Egger (chairperson of the
Compensation Committee and the Company's Chairman of the Board) and Green. Mr.
Egger performed certain consulting services for the Company during 1994 and is
providing similar services in 1995. See "Item 13-Certain Relationships and
Related Transactions". The Compensation Committee is responsible for determining
the specific forms and levels of compensation of the Company's executive
officers and administering the Company's Employee Stock Option Plan (1983), 1987
Stock Option Plan, 1989 Stock Incentive Plan, and the 1992 Option and Incentive
Plan.
Audit Committee. The Audit Committee currently consists of Messrs. Egger
(chairperson) and Green. The Audit Committee's principal functions are to review
the results of the Company's annual audit with the Company's independent
auditors and review the performance of Company's independent auditors.
The Company does not have an executive or nominating or similar committee.
The Company's Board generally acts in its entirety upon matters which might
otherwise be the responsibility of such committees.
Compensation of Directors. None of the members of the Company's Board
received any cash compensation in fiscal 1995 for their services as directors.
None of the directors is expected to receive any cash compensation during 1996
for such services. Mr. Egger received $75,000 during fiscal 1995 for services
rendered to the Company in connection with its acquisition and financing
activities. See "Item 13 - Certain Relationships and Related Transactions".
The Company's 1992 Option and Incentive Plan provides for the automatic
grant to each non-employee director of options to purchase 30,000 shares of its
Common Stock at an exercise price equal to the fair market value of such stock
on the date of grant. Such options become exercisable 40% commencing on the
first anniversary of the grant date and 20% annually thereafter, expiring after
five years. Subject to availability, such options are to be granted at the
commencement of a directorship and each three years thereafter. In accordance
with this formula, on November 15, 1995 each of Messrs. Egger, Green, Glazer and
42
<PAGE> 44
Cal Kovens were granted options to purchase 30,000 shares of the Company's
Common Stock at a per share exercise price of $0.25. In addition, each of Roz
Kovens and Charles M. Spear were granted options to purchase 30,000 shares on
identical terms on May 25, 1995 and August 14, 1995, respectively.
Executive Officers. The executive officers of the Company, together with
the year in which they were appointed to their current positions, are set forth
below.
<TABLE>
<CAPTION>
Name Age Position Year
- ---- --- -------- ----
<S> <C> <C> <C>
E. Larry Atkins 49 President and Chief 1990
Executive Officer
Robert J. Armstrong 58 Vice President, Design 1985
and Construction
Thomas V. Croal 36 Vice President, Chief 1991
Financial Officer and
Corporate Secretary 1990
Deborah M. MacFarlane 40 Vice President, Marketing 1991
Brian G. Drazba 34 Vice President of Finance, 1995
Corporate Controller
</TABLE>
Information concerning Messrs. Atkins and Croal is set forth above under
"The Board of Directors."
Robert J. Armstrong has been vice president, design and construction of
the Company since 1985. Mr. Armstrong served as director of design and
construction for the Company from 1983 to 1985.
Deborah M. MacFarlane has served as vice president, marketing of the
Company since July 1991. From 1987 until June 1991, Ms. MacFarlane served as
director of marketing for the Center Operating Group of Medical Imaging Centers
of America, Inc.
Brian G. Drazba has been vice president, finance of the Company since June
1995. Mr. Drazba served as corporate controller for the Company from 1992 to
1995. From 1985 to 1992, Mr. Drazba was employed by Arthur Andersen & Co.
Compliance with the Securities Exchange Act of 1934. Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers
and persons who own more than 10% of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Directors and officers and greater than 10% stock-
holders are required by SEC regulation to furnish the Company with copies of the
reports they file. Based solely on the review of the copies of such reports and
written representations from certain persons that certain reports were not
required to be filed by such persons, the Company believes that all its
directors, officers and greater than 10% beneficial owners complied with all
filing requirements applicable to them with respect to transactions during
fiscal 1995.
43
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth information
concerning the annual and long-term compensation for services rendered in all
capacities to the Company for the years ended December 31, 1995, 1994 and 1993,
to (i) the Company's chief executive officer and (ii) the other executive
officers of the Company:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term All Other
Annual Compensation Compensation Compensation(3)
------------------------------------------ ------------ ---------------
Awards
------
Stock
Name and Principal Options
Position Year Salary(1) Bonus(2) Other(3) (Shares)
- ------------------ ---- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
E. Larry Atkins 1995 $246,400 61,600 $ 4,680 175,000 $ 7,882
President and Chief 1994 220,000 54,000 3,798 -- 9,327
Executive Officer 1993 200,000 -- 11,763 -- 10,245
Thomas V. Croal 1995 175,230 43,808 4,742 125,000 5,252
Vice President, Chief 1994 148,500 38,000 4,836 -- 3,519
Financial Officer 1993 135,000 10,000 8,760 -- 1,950
and Corporate Secretary
Robert J. Armstrong 1995 100,000 -- 1,889 -- 11,739
Vice President, 1994 100,000 -- 2,264 -- 10,027
Design & Construction 1993 100,000 -- 7,590 -- 7,438
Brian G. Drazba 1995 90,000 10,000 4,457 -- 4,015
Vice President,Finance -- -- -- -- -- --
and Corporate Controller -- -- -- -- -- --
Deborah M. MacFarlane 1995 112,200 -- 4,206 -- 3,709
Vice President, 1994 102,000 11,200 3,033 -- 3,782
Marketing 1993 83,000 -- 5,220 -- 3,829
</TABLE>
(1) Includes amounts for periods during which executive officers served as
such.
(2) Annual bonuses are earned and accrued during the fiscal years indicated,
and paid subsequent to the end of each fiscal year.
(3) Amounts of Other Annual Compensation include perquisites and amounts of All
Other Compensation include (i) amounts contributed to the Company's 401(k)
profit sharing plan, (ii) specified premiums on executive split-dollar
insurance arrangements, and (iii) specified premiums on executive health
insurance arrangements, for the chief executive officer and the three other
most highly compensated executive officers.
Option Grants. In fiscal 1995 the following stock options were granted
under the Company's stock option plans to executive officers:
<TABLE>
<CAPTION>
Name Number Exercise Price
---- ------ --------------
<S> <C> <C>
E. Larry Atkins 175,000 $0.25
Thomas V. Croal 125,000 $0.25
</TABLE>
44
<PAGE> 46
Option Exercises and Fiscal Year-end Values. Neither of the chief
executive officer nor the other executive officers exercised any stock options
during fiscal 1995. The following table sets forth information with respect to
the unexercised stock options to purchase the Company's Common Stock granted
under the Company's stock option plans to the chief executive officer and the
other executive officers as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
December 31, 1995 December 31, 1995
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
E. Larry Atkins 300,000 175,000 -- --
Thomas V. Croal 125,000 125,000 -- --
Deborah M. MacFarlane 50,000 -- -- --
</TABLE>
(1) Based on the closing price reported on the OTC Bulletin Board for the
Company's Common Stock on that date $0.25.
Indemnification Agreements. The Company has entered into separate
indemnification agreements with each of its directors and officers that could
require the Company, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
officers and to advance expenses incurred by them as a result of any proceedings
against them as to which they could be indemnified.
Employment Agreements and Severance Arrangements. The Company has entered
into executive employment agreements with its executive officers which provide
that in the event the executive is terminated as a result of his becoming
physically or mentally disabled; or at the discretion of the Board; or if he
terminates voluntarily in the event of a change in the location of the Company's
corporate headquarters to a location outside the counties of Los Angeles or
Orange, California, which new location is at the time more than 35 miles from
the location of the executive's principal residence; or the Company or its
stockholders enter into an agreement to dispose of, whether by sale, exchange,
merger, consolidation, reorganization, dissolution or liquidation of (a) not
less than 80% of the assets of the Company, or (b) a portion of the outstanding
Common Stock such that one person or "group" (as defined by the SEC) owns, of
record or beneficially, not less than 25% of the outstanding Common Stock; or
the Company issues and sells to one person or "group" (as defined by the SEC)
such number of shares of the Company's Common Stock that said person or group
owns, of record or beneficially, not less than 25% of the Common Stock
outstanding after such issuance; and as a result of which his ability to perform
his responsibilities or the nature of such responsibilities is substantially and
adversely altered, the employment agreements provide that the executive is
entitled to 12 months of compensation at his annual salary rate then in effect.
However, in the event that the executive's employment is terminated for cause,
he has no right to receive any monetary compensation under his employment
agreement.
45
<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership, reported to the
Company as of March 1, 1996, of the Company's Common Stock, including shares as
to which a right to acquire ownership exists (for example, through the exercise
of stock options and warrants and conversions of Preferred Stock) within the
meaning of Rule 13d-3(d)(1) under the Exchange Act, of (i) each person known to
the Company to own beneficially 5% or more of the Common Stock, (ii) each
director of the Company, (iii) the chief executive officer, (iv) the three other
most highly compensated executive officers, and (v) all directors and executive
officers, as a group.
<TABLE>
<CAPTION>
Amount and Percentage Percentage
Nature of of of
Name and Address Beneficial Common Preferred
of Beneficial Owner Ownership (1) Stock Stock
- ------------------- ---------- ---------- -------
<S> <C> <C> <C>
E. Larry Atkins 421,000(2) 4.2% N/A
4440 Von Karman
Suite 320
Newport Beach, CA
92660
Robert J. Armstrong -- * N/A
4440 Von Karman
Suite 320
Newport Beach, CA
92660
Thomas V. Croal 175,000(3) 1.8% N/A
4440 Von Karman
Suite 320
Newport Beach, CA
92660
Brian G. Drazba -- * N/A
4440 Von Karman
Suite 320
Newport Beach, CA
92660
Deborah M. MacFarlane 50,000(4) * N/A
4440 Von Karman
Suite 320
Newport Beach, CA
92660
Frank E. Egger 234,185(5)(6) 2.4% 4.5%
1301 Dade Blvd.
Miami Beach, FL
33139
Lloyd G. Glazer 106,001(6)(7) 1.1% 1.5%
One Boston Place
Boston, MA 02108
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C> <C> <C>
Philip D. Green 170,004(6)(8) 1.7% 3.0%
2600 Virginia Ave., NW
Suite 1111 Washington, D.C.
20037
Estate of Cal Kovens 4,560,083(6)(9) 36.6% 67.3%
1301 Dade Blvd.
Miami Beach, FL
33139
Roz Kovens 5,284,535(6)(10) 40.5% 82.6%
1301 Dade Blvd.
Miami Beach, FL
33139
Charles M. Spear 0(11) * N/A
51 Columbia
Aliso Viejo, CA
92656
David and Odette Rebibo 755,000(12) 7.8% N/A
202 East Berridge Lane
Phoenix, AZ 85012
General Electric Company 1,589,072(13) 14.1% N/A
20825 Swenson Drive
Suite 100
Waukesha, WI 53186
All directors and 6,440,725(14) 45.7% 91.6%
executive officers,
as a group
(10 persons)
</TABLE>
* Less than 1% of the outstanding Common Stock.
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person has the right to acquire
within 60 days after March 15, 1996.
(2) Includes (i) options to purchase 180,000 shares of Common Stock at an
exercise price of $1.34 per share (ii) options to purchase 120,000 shares
of Common Stock at an exercise price of $1.31 per share, and (iii) options
to purchase 70,000 shares of Common Stock at an exercise price of $0.25
per share. Does not include options to purchase 105,000 shares of Common
Stock at an exercise price of $0.25 per share which are not currently
exercisable.
(3) Includes (i) options to purchase 75,000 shares of Common Stock at an
exercise price of $1.34 per share, (ii) options to purchase 50,000 shares
of Common Stock at an exercise price of $1.31 per share, and (iii) options
to purchase 50,000 shares of Common Stock at an exercise price of $0.25
per share. Does not include options to purchase 75,000 shares of Common
Stock at an exercise price of $0.25 per share which are not currently
exercisable.
47
<PAGE> 49
(4) Includes an option to purchase 50,000 shares of Common Stock at an
exercise price of $1.50 per share.
(5) Includes (i) 1,716.31 shares of Preferred Stock (convertible into 171,631
shares of Common Stock), (ii) an option to purchase 30,000 shares of
Common Stock at an exercise price of $1.62 per share, and (iii) an option
to purchase 12,000 shares of Common Stock at an exercise price of $0.25
per share. Does not include an option to purchase 18,000 shares of Common
Stock at an exercise price of $0.25 per share, which is not currently
exercisable. The Common Stock and Preferred Stock held by Mr. Egger are
pledged to the estate of Cal Kovens as security for the repayment of a
loan. If the loan is not repaid when due, the estate of Mr. Kovens would
have the right to sell such of the pledged securities as are necessary to
satisfy the indebtedness.
(6) Roz Kovens and Messrs. Egger, Glazer, Green and the estate of Mr. Kovens,
along with the remaining Preferred Stockholders (Marc Kovens (Mr. Kovens'
son), Elizabeth Cobbs (Mr. Green's spouse) and Harvey Silets) may be
deemed to be a "group" under Section 13(d) of the Exchange Act. These
individuals beneficially own in the aggregate 6,276,955 shares, or 45.4%,
of the outstanding Common Stock on an as-if-converted basis, consisting of
(i) 2,167,172 shares of Common Stock, (ii) 37,837.83 shares (or 100%) of
Preferred Stock (convertible into 3,783,783 shares of Common Stock), (iii)
warrants to purchase 200,000 shares of Common Stock at an exercise price
of $0.25 per share, (iv) options to purchase 90,000 shares of Common Stock
at an exercise price of $1.62 per share, and (v) options to purchase
36,000 shares of Common Stock at an exercise price of $0.25 per share.
(7) Includes (i) 572.1 shares of Preferred Stock (convertible into 57,210
shares of Common Stock), (ii) an option to purchase 30,000 shares of
Common Stock at an exercise price of $1.62 per share and (iii) an option
to purchase 12,000 shares of Common Stock at an exercise price of $0.25
per share. Does not include an option to purchase 18,000 shares of Common
Stock at an exercise price of $0.25 per share, which is not currently
exercisable.
(8) Includes (i) 1,144.21 shares of Preferred Stock (convertible into 114,421
shares of Common Stock), (ii) an option to purchase 30,000 shares of
Common Stock at an exercise price of $1.62 per share, and (iii) an option
to purchase 12,000 shares of Common Stock at an exercise price of $0.25
per share. Does not include an option to purchase 18,000 shares of Common
Stock at an exercise price of $0.25 per share, which is not currently
exercisable. Mr. Green owns the Common Stock, Preferred Stock and warrants
with his spouse, Elizabeth Cobbs, as tenants by the entirety, and shares
with his spouse the right to vote and dispose of such securities. In
addition, the Common Stock and Preferred Stock are pledged to the estate
of Cal Kovens as security for the repayment of a loan. If the loan is not
repaid when due, the estate of Mr. Kovens would have the right to sell
such of the pledged securities as are necessary to satisfy the
indebtedness.
48
<PAGE> 50
(9) Includes (i) 19,250 shares of Common Stock held by each of the M.K. Boca
Trust, S.K. Boca Trust, K.K. Boca Trust and B.K. Boca Trust, over which
Mr. Kovens did not have or share voting and shared dispositive power, (ii)
25,458.64 shares Preferred Stock (convertible into 2,545,864 shares of
Common Stock), and (iii) warrants to purchase 200,000 shares of Common
Stock at an exercise price of $0.25 per share. Does not include 723,852
and 488,813 shares beneficially owned by Roz Kovens and Marc Kovens,
respectively
(10) Includes (i) 5,800 shares of Preferred Stock (convertible into 580,000
shares of Common Stock) and (ii) 4,560,083 shares beneficially owned by
the estate of Cal Kovens with respect to which Mrs. Kovens is the personal
representative. Does not include an option to purchase 30,000 shares of
Common Stock at an exercise price of $0.25 per share, which is not
currently exercisable.
(11) Does not include an option to purchase 30,000 shares of Common Stock at an
exercise price of $0.25 per share, which is not currently exercisable.
(12) The information in the table is taken from information furnished by Mr.
and Mrs. Rebibo. The Company believes Mr. and Mrs. Rebibo own their shares
jointly and share voting and dispositive power over such shares.
(13) Consists of warrants to purchase 1,589,072 shares of Common Stock at an
exercise price of $0.10 per share.
(14) Assumes the conversion of Preferred Stock held by directors and the
exercise in full of all warrants and currently exercisable options
described in footnotes (2), (3), (4), (5), (7), (8), (10) and (11) above.
Does not include any shares held by the estate of Cal Kovens.
Except as otherwise noted, the Company believes that each of the
stockholders listed in the table above has sole voting and dispositive power
over all shares owned.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Cal Kovens (deceased February 6, 1995). In February
1992, the Company purchased a Gamma Knife from Elekta to be located in
California and made a deposit toward the purchase of another Gamma Knife. The
Company received nonrecourse interim financing of $2,000,000 toward the
acquisition of the Gamma Knife and the deposit for the other Gamma Knife from
Cal Kovens (a director until his death on February 6, 1995). The interim
financing was borrowed from Mr. Kovens pursuant to the terms of a nonrecourse
promissory note secured by the Gamma Knife and due August 24, 1992, at an
interest rate of 10.5% per annum. Mr. Kovens extended the term of the note while
the Company sought to obtain permanent financing.
In December 1992, the Company's wholly owned subsidiary, RCI entered into
a five-year loan of $2,750,000 with City National Bank of Florida ("City
National Bank"), and the promissory note in favor of Mr. Kovens was repaid from
the proceeds of such loan in the first quarter of 1993. The new loan was
guaranteed by Mr. Kovens and his spouse, Roz Kovens. During the second half of
fiscal 1993, Mr. Kovens repurchased RCI's promissory note from City National
Bank. Pursuant thereto, Mr. Kovens was paid approximately $195,000 in interest
in fiscal 1993.
49
<PAGE> 51
In early 1993, RCI, the Company, and Elekta became involved in a dispute
when RCI advised Elekta that it intended to relocate the Gamma Knife System it
purchased for a location in California to Miami, Florida, since in December
1992, RCI had entered into an agreement with Public Health Trust, an agency and
instrumentality of Metropolitan Dade County, Florida, to establish and operate a
Gamma Knife center at Jackson Memorial Medical Center located in Miami. The
parties settled their claims and, pursuant to the terms thereof, Mr. Kovens
agreed to guarantee certain scheduled payments of $250,000 to be made by RCI to
Elekta in connection with the delivery of the Gamma Knife to Miami, which
payment has been made by RCI.
In February 1994, RCI entered into a new five-year loan of $2,900,000 with
County National Bank of South Florida. Mr. Kovens was repaid from the proceeds
of such new bank loan in the first quarter of 1994. This loan was guaranteed by
Mr. Kovens and secured by certain real property owned by Mr. Kovens. Effective
March 1, 1996, RCI refinanced the remainder of the equipment loan (approximately
$2,075,000) with GE on terms substantially equivalent to the original equipment
loan. The loan is secured by all of the assets of the Gamma Knife center, as
well as by a letter of credit of $300,000 which is guaranteed by the estate of
Cal Kovens.
In November 1994, the Company granted Mr. Kovens a warrant to purchase
200,000 shares of the Company's Common Stock at $0.25 per share in consideration
of the Gamma Knife financing activities discussed above.
Transactions with Frank E. Egger. Mr. Egger received $75,000 during fiscal
1995 for consulting services rendered to the Company in connection with its
acquisition and financing activities. For fiscal 1996, he is being paid the rate
of $100,000 for such services. In the event the Company terminates this
consulting relationship with Mr. Egger, he is entitled to a severance fee of
$100,000.
Transactions with Green Stewart & Farber, P.C. Since September 1991,
Green, Stewart & Farber, P.C., the law firm in which Mr. Green is a partner, has
represented the Company for most of its outside legal activities, including
general corporate, transactional, financing and health care matters. During
fiscal 1995, 1994, 1993, the Company paid Green, Stewart & Farber $324,428,
$104,478 and $329,418, respectively, for those services. In addition, Mr. Green
was an advisor to Cal Kovens with respect to various business matters.
Transactions with General Electric. GE Medical, as the primary creditor of
the Company, has from time to time granted the Company certain financial
accommodations with respect to certain loans and leases. In exchange for such
accommodations, the Company has issued certain considerations to GE. On the
terms and conditions set forth in the Stock Acquisition Agreement, in
contemplation of the Merger, GE has agreed to grant additional financial
accommodations to the Company in exchange for InSight Series A Preferred Stock
and certain other consideration. See "Management's Discussion and Analysis of
Financial Conditions and Results in Operations--Liquidity and Capital
Resources."
In negotiating the Merger with GE and Maxum, the Company agreed to
reimburse to GE an amount equal to 40% of the legal costs incurred by GE in
connection with such transactions. The amount reimbursed to GE in 1995 was
approximately $46,000.
50
<PAGE> 52
Transactions with Holders of the Company Series B Preferred Stock.
Pursuant to agreements to which the Company is a party, the holders of Series B
Preferred Stock have each agreed to vote in favor of the Merger, and have
further agreed to waive any rights to dividends, liquidation preferences, voting
and redemption they may have in connection with the Merger and certain other
rights. In consideration therefor, InSight will issue to such holders warrants
to purchase an aggregate of 50,000 shares of InSight Common Stock upon the
consummation of the Merger.
51
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a)(1). Financial Statements.
Included in Part II of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Operations, for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity (Deficit),
for the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, for the
years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Item 14(a)(2). Financial Statement Schedules.
Report of Independent Public Accountants on Schedules
Schedule VIII - Valuation and Qualifying Accounts
All other schedules have been omitted because they are either not required
or not applicable, or the information is presented in the consolidated financial
statements or notes thereto.
Item 14(a)(3). Exhibits.
Exhibit
Number Description and Reference
------ -------------------------
*3.1 Restated Certificate of Incorporation of the Company,
previously filed, and incorporated herein by reference from
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989, filed March 29, 1990.
*3.2 Bylaws of the Company, as amended, previously filed, and
incorporated herein by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989, filed March 29, 1990.
*10.1 Employee Stock Option Plan (1983), previously filed, and
incorporated herein by reference from the Company's
Registration Statement on Form S-18 (Registration No.
33-00088), filed September 5, 1985.
*10.2 1987 Stock Option Plan, previously filed, and incorporated
herein by reference from Post-Effective Amendment No. 4 on
Form S-1 to the Company's Registration Statement on Form S-18
(33-00088), filed August 28, 1987.
*10.3 Loan Agreement (County/USC Imaging Science Center) dated June
15, 1988, by and between Philips Credit Corporation and the
Company, previously filed, and incorporated herein by
reference from the Company's Post-Effective Amendment No. 5
on Form S-1 to the Company's Registration Statement on Form
S-18 (33-00088), filed August 7, 1988.
52
<PAGE> 54
*10.4 Loan Agreement (Harbor/UCLA Medical Center) dated June 15,
1988, by and between Philips Credit Corporation and the
Company, previously filed, and incorporated herein by
reference from Post-Effective Amendment No. 5 on Form S-1 to
the Company's Registration Statement on Form S-18 (33-00088),
filed August 7, 1988.
*10.5 Loan Agreement dated March 9, 1989, by and between the Company
and Philips Credit Corporation, previously filed, and
incorporated herein by reference from the Company's Amendment
No. 1 filed March 16, 1989 to the Company's Current Report on
Form 8-K, filed January 13, 1989.
*10.6 Security Agreement dated March 9, 1989, by and between the
Company and Philips Credit Corporation, previously filed, and
incorporated herein by reference from the Company's Amendment
No. 1 filed March 16, 1989 to the Company's Current Report on
Form 8-K, filed January 13, 1989.
*10.7 1989 Stock Incentive Plan, previously filed, and incorporated
herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1990, filed April
15, 1991.
*10.8 Executive Employment Agreement, dated as of October 2, 1986,
by and between the Company and E. Larry Atkins, as amended,
previously filed, and incorporated herein by reference from
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, filed April 15, 1991.
*10.9 Executive Employment Agreement, dated as of June 4, 1991, by
and between the Company and Thomas V. Croal, previously filed,
and incorporated herein by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, filed March 30, 1992.
*10.10 Fourth Amendment to the Executive Employment Agreement, dated
as of June 4, 1991, by and between the Company and E. Larry
Atkins, previously filed, and incorporated herein by reference
from the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, filed March 30, 1992.
*10.11 Agreement, dated August 12, 1991, between the Company and the
several preferred stock purchasers named therein, previously
filed, and incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1991, filed August 14, 1991.
*10.12 Revolving Loan and Term Loan Agreement, made as of August 19,
1991, by and between the Company and Philips Credit
Corporation, previously filed, and incorporated herein by
reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, filed March 30, 1992.
*10.13 Amendment No. 1 to Loan Agreement, dated March 9, 1989, made
as of February 14, 1990, by and between the Company and
Philips Credit Corporation, previously filed, and incorporated
herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, filed March
30, 1992.
53
<PAGE> 55
*10.14 Waiver and Amendment No. 2 to Loan Agreement, dated March 9,
1989, made as of April 12, 1991, by and between the Company
and Philips Credit Corporation, previously filed, and
incorporated herein by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, filed March 30, 1992.
*10.15 Amendment No. 3 to Loan Agreement, dated March 9, 1989, made
as of August 19, 1991, by and between the Company and Philips
Credit Corporation, previously filed, and incorporated herein
by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, filed March 30, 1992.
*10.16 Nonqualified Stock Option Agreement, dated November 11, 1991,
by and between the Company and Cal Kovens, previously filed,
and incorporated herein by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, filed March 30, 1992.
*10.17 Merrill Lynch Special Prototype Defined Contribution Plan,
401(k) Plan, Profit Sharing Plan Adoption Agreement, dated
January 10, 1992, previously filed, and incorporated herein by
reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, filed March 30, 1992.
*10.18 Amendment No. 1, dated as of December 31, 1991, to Agreement
dated August 12, 1991, by and among the Company and the
preferred stock purchasers named therein, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, filed March 30, 1992.
*10.19 Common Stock Purchase Warrant Agreement, dated as of May 19,
1992, by and between the Company and General Electric Company,
previously filed, and incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1992, filed August 14, 1992.
*10.20 Loan and Security Agreement, dated as of May 19, 1992, by and
between General Electric Capital Corporation and the Company,
previously filed, and incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1992, filed August 14, 1992.
*10.21 Addendum to Various Masterline, Leaseline and Maxiservice
Agreements, dated May 19, 1992, by and between the Company as
Lessee and General Electric Company as Lessor, previously
filed, and incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1992, filed August 14, 1992.
*10.22 Loan Agreement, dated as of June 30, 1992, by and among Gamma
Knife Partners, Philips Credit Corporation, the Company and
University Gamma Knife, Inc., previously filed, and
incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1992, filed
August 14, 1992.
*10.23 1992 Option and Incentive Plan, previously filed and
incorporated herein by reference from the Company's
Registration Statement on Form S-8 (Registration No.
33-51532), filed September 1, 1992.
54
<PAGE> 56
*10.24 Common Stock Purchase Warrant Agreement, dated as of July 16,
1993, by and between the Company and General Electric Company,
previously filed, and incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1993, filed August 14, 1993.
*10.25 Loan and Security Agreement, dated as of June 1, 1993, by and
between General Electric Capital Corporation and the Company,
previously filed, and incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1993, filed August 14, 1993.
*10.26 Common Stock Purchase Warrant Agreement, dated as of April 12,
1994, by and between the Company and General Electric Company,
previously filed, and incorporated herein by reference from
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, filed April 15, 1994.
*10.27 First Amendment to Common Stock Purchase Warrant Agreement,
dated as of April 12, 1994, by and between the Company and
General Electric Company, previously filed, and incorporated
herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, filed April
15, 1994.
*10.28 Agreement and Plan of Merger, dated as of February 26, 1996 by
and between the Company, InSight Health Services Corp., AHSC
Acquisition Company, Maxum Health Corp. And MXHC Acquisition
Company and incorporated herein by reference from the
Company's Form 8-K filed March 12, 1996.
10.29 Preferred Stock Acquisition Agreement dated as of February 26,
1996 by and between the Company, Maxum Health Corp., InSight
Health Services Corp. and General Electric Company, acting
through General Electric Medical Systems, filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Consent of Arthur Andersen LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
- ---------------
* Previously filed.
Item 14(b). Reports on Form 8-K. The Company did not file any reports on Form
8-K with the Securities and Exchange Commission during the
quarter ended December 31, 1995.
Item 14(c). The Exhibits described above in Item 14(a)(3) are incorporated by
reference herein.
Item 14(d). Not applicable.
55
<PAGE> 57
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.
AMERICAN HEALTH SERVICES CORP.
By: /s/ E. Larry Atkins
---------------------------------
E. Larry Atkins, President
and Chief Executive Officer
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director, President and
Chief Executive Officer
(Principal Executive
/s/ E. Larry Atkins Officer) March 25, 1996
- ------------------------------------
E. Larry Atkins
Director, Vice President,
Chief Financial Officer
and Corporate Secretary
(Principal Accounting
/s/ Thomas V. Croal Officer) March 25, 1996
- ------------------------------------
Thomas V. Croal
/s/ Frank E. Egger Director March 25, 1996
- ------------------------------------
Frank E. Egger
/s/ Lloyd G. Glazer Director March 25, 1996
- ------------------------------------
Lloyd G. Glazer
/s/ Philip D. Green Director March 25, 1996
- ------------------------------------
Philip D. Green
/s/ Roz Kovens Director March 25, 1996
- ------------------------------------
Roz Kovens
/s/ Charles M. Spear Director March 25, 1996
- ------------------------------------
Charles M. Spear
56
</TABLE>
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Services Corp.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements for AMERICAN HEALTH SERVICES CORP. included in this Form
10-K and have issued our report thereon dated February 26, 1996. Our report on
the financial statements includes an explanatory paragraph with respect to the
Company's ability to continue as a going concern as discussed in Notes 2 and 5
of the financial statements. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Orange County, California
February 26, 1996
57
<PAGE> 59
SCHEDULE VIII
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged
Beginning Costs and to Other Balance at
Description of Period Expenses Accounts Deductions (a) End of Period
----------- --------- -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and contractual
discounts in 1995 $3,691,466 $ 853,828 $ - $751,514 $3,793,780
Allowance for doubtful
accounts and contractual
discounts in 1994 2,685,817 954,806 - (50,843) 3,691,466
Allowance for doubtful
accounts and contractual
discounts in 1993 1,785,174 1,208,111 - 307,468 2,685,817
</TABLE>
(a) Write-off or recovery of uncollectible accounts.
58
<PAGE> 60
AMERICAN HEALTH SERVICES CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description and Reference Page
- ------ ------------------------- ------------
<S> <C> <C>
10.29 Preferred Stock Acquisition Agreement dated as of
February 26, 1996 by and between the Company, Maxum
Health Corp., InSight Health Services Corp. and General
Electric Company, acting through General Electric Medical
Systems, filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Consent of Arthur Andersen LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
</TABLE>
<PAGE> 1
Exhibit 10.29
PREFERRED STOCK ACQUISITION AGREEMENT
BY AND AMONG
AMERICAN HEALTH SERVICES CORP.,
A DELAWARE CORPORATION,
MAXUM HEALTH CORP.,
A DELAWARE CORPORATION,
INSIGHT HEALTH SERVICES CORP.,
A DELAWARE CORPORATION,
AND
GENERAL ELECTRIC COMPANY,
A NEW YORK CORPORATION
ACTING THROUGH
GE MEDICAL SYSTEMS
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PREFERRED STOCK ACQUISITION AGREEMENT
THIS PREFERRED STOCK ACQUISITION AGREEMENT (this "AGREEMENT") is dated
as of February 26, 1996, by and among InSight Health Services Corp., a Delaware
corporation ("INSIGHT"), American Health Services Corp., a Delaware corporation
("AHS"), Maxum Health Corp., a Delaware corporation ("MAXUM"), and General
Electric Company, a New York corporation acting though GE Medical Systems ("GE
MEDICAL").
RECITALS
WHEREAS, InSight has been formed in connection with the proposed
business combination of AHS and Maxum;
WHEREAS, simultaneously with the execution of this Agreement, AHS,
Maxum and InSight are executing and delivering an agreement contemplating the
merger of two newly-formed wholly-owned subsidiaries of InSight with and into
AHS and Maxum (the "MERGER"), respectively, after which AHS and Maxum will be
wholly-owned subsidiaries of InSight;
WHEREAS, the Merger shall be consummated pursuant to the Agreement and
Plan of Merger in the form attached hereto as EXHIBIT A (the "MERGER
AGREEMENT");
WHEREAS, concurrent with the consummation of the transactions
contemplated herein, GE Medical will agree to certain financial accommodations
(the "DEBT RESTRUCTURING"), in exchange for the issuance of preferred stock as
provided herein pursuant to certain debt restructuring agreements in
substantially the form attached hereto as EXHIBIT B (the "DEBT RESTRUCTURING
AGREEMENTS");
WHEREAS, the Boards of Directors of AHS, Maxum and InSight have
approved the Merger, the Merger Agreement, the Debt Restructuring, the Debt
Restructuring Agreements and GE Medical's acquisition of the preferred stock of
AHS and Maxum upon the terms and subject to the conditions set forth herein;
WHEREAS, in accordance with the terms, conditions and provisions of
this Agreement, AHS desires to sell to GE Medical,
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and GE Medical desires to acquire from AHS, an aggregate of 1,000,000 shares of
Series C Preferred Stock of AHS (the "AHS SHARES");
WHEREAS, in accordance with the terms, conditions and provisions of
this Agreement, Maxum desires to sell to GE Medical, and GE Medical desires to
acquire from Maxum, an aggregate of 15,000 shares of Series B Preferred Stock of
Maxum (the "MAXUM SHARES"); and
WHEREAS, in accordance with the terms, conditions and provisions of the
Merger Agreement, immediately after the consummation of the transactions
contemplated by this Agreement and the Debt Restructuring Agreements and as a
condition subsequent to GE Medical's acquisition of the AHS Shares and the Maxum
Shares hereunder and the consummation of the transactions contemplated by the
Debt Restructuring Agreements, the Merger will occur and the AHS Shares and the
Maxum Shares will be exchanged for an aggregate of 2,501,760 shares of Series A
Convertible Preferred Stock of InSight (the "INSIGHT PREFERRED SHARES"), which
shall constitute all of the issued and outstanding shares of preferred stock of
InSight.
AGREEMENT
NOW, THEREFORE, with reference to the foregoing and in consideration of
and subject to the conditions, representations, warranties, covenants and
agreements contained in this Agreement, AHS, Maxum, InSight and GE Medical
hereby agree as follows:
ARTICLE 1
ACQUISITION OF PREFERRED STOCK
1.1 ACQUISITION AND ACQUISITION PRICE.
(a) Subject to the terms and conditions of this Agreement, at the
Closing (as such term is defined in SECTION 2.1 hereof), AHS shall issue to GE
Medical, and GE Medical shall acquire from AHS, the AHS Shares, constituting in
the aggregate (i) all of the then-issued and outstanding shares of preferred
stock of AHS (other than the Series B Convertible Preferred Stock of AHS (the
"AHS SERIES B SHARES")), and 48 percent of the then-
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issued and outstanding shares of common stock of AHS (assuming the conversion of
the AHS Shares and the AHS Series B Shares into common stock of AHS), and (ii)
upon the Merger occurring immediately after such acquisition by GE Medical of
the AHS Shares, 50 percent of the then-issued and outstanding InSight Preferred
Shares and 24 percent of the then-issued and outstanding shares of common stock
of InSight (assuming the conversion of such InSight Preferred Shares into common
stock of InSight).
(b) Subject to the terms and conditions of this Agreement, at the
Closing, Maxum shall issue to GE Medical, and GE Medical shall acquire from
Maxum, the Maxum Shares, constituting in the aggregate as follows: (i) all of
the then-issued and outstanding shares of preferred stock of Maxum, and 48
percent of the then-issued and outstanding shares of common stock of Maxum
(assuming the conversion of the Maxum Shares into common stock of Maxum) and
(ii) upon the Merger occurring immediately after such acquisition by GE Medical
of the Maxum Shares, 50 percent of the then-issued and outstanding InSight
Preferred Shares, and 24 percent of the then-issued and outstanding shares of
common stock of InSight (assuming the conversion of the InSight Preferred Shares
into common stock of InSight).
1.2 CONSIDERATION.
(a) At the Closing, AHS agrees to issue the AHS Shares to GE
Medical, and GE Medical agrees to acquire from AHS the AHS Shares, in exchange
for GE Medical's agreement to the Debt Restructuring pursuant to the terms,
conditions and provisions set forth in the Debt Restructuring Agreements.
(b) At the Closing, Maxum agrees to issue the Maxum Shares to GE
Medical, and GE Medical agrees to acquire from Maxum the Maxum Shares, in
exchange for GE Medical's agreement to the Debt Restructuring pursuant to the
terms, conditions and provisions set forth in the Debt Restructuring Agreements.
1.3 RIGHTS, PREFERENCES AND PRIVILEGES OF PREFERRED STOCK.
(a) The rights, preferences and privileges of the AHS Shares are
set forth in the form of Certificate of
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Designation attached hereto as EXHIBIT C (the "AHS CERTIFICATE OF DESIGNATION").
(b) The rights, preferences and privileges of the Maxum Shares are
set forth in the form of Certificate of Designation attached hereto as EXHIBIT D
(the "MAXUM CERTIFICATE OF DESIGNATION").
(c) The rights, preferences and privileges of the InSight Preferred
Shares are set forth in the form of Certificate of Incorporation attached hereto
as EXHIBIT E (the "INSIGHT CERTIFICATE OF INCORPORATION").
ARTICLE 2
CLOSING
2.1 TIME AND PLACE.
(a) The consummation of the transactions described in ARTICLE 1
hereof (the "CLOSING") will be held at the offices of McDermott, Will & Emery,
located at 2049 Century Park East, 34th Floor, Los Angeles, California, at 1:00
p.m. California time, as soon as practicable after the meetings of stockholders
of AHS and Maxum, respectively, referenced in SECTION 3.8, or at such other time
and place as shall be mutually agreed upon by AHS, Maxum, InSight and GE
Medical. The date of the Closing is referred to herein as the "CLOSING DATE".
The consummation of the transactions contemplated by SECTION 1.2 shall be deemed
to take place immediately prior to the effectiveness of the Merger.
(b) In the event that the Merger does not occur immediately after
the consummation of the transactions contemplated by this Agreement and the Debt
Restructuring Agreements and as a condition subsequent to GE Medical's
acquisition of the AHS Shares and the Maxum Shares, the transactions
contemplated by this Agreement and the Debt Restructuring Agreements shall be
automatically and immediately rescinded.
2.2 DELIVERIES. At the Closing, AHS, Maxum, InSight and GE Medical
shall deliver, or cause to be delivered, such instruments and other documents as
may be reasonably necessary to
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carry out the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger and the Merger
Agreement, and to comply with the terms hereof and thereof.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES REGARDING AHS
As used in this Agreement (I) the term "MATERIAL ADVERSE EFFECT" means,
with respect to a party, a material adverse effect on the business, assets,
results of operations, financial condition or prospects of such party and its
subsidiaries, taken as a whole, or in the ability of such party to perform its
obligations hereunder, and (II) the term "SUBSIDIARY" when used with respect to
any party means any corporation or other organization, whether incorporated or
unincorporated, of which such party or any other subsidiary of such party is a
general partner or of which at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
Board of Directors or others performing similar functions with respect to such
corporations or other organizations is directly or indirectly owned or
controlled by such party or by any one or more of such subsidiaries.
AHS represents and warrants to GE Medical that, with respect to itself
and each of its subsidiaries, the statements contained in this ARTICLE 3 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this ARTICLE 3),
except as set forth in AHS' disclosure schedule attached hereto as ANNEX I (the
"AHS DISCLOSURE SCHEDULE"). Nothing in the AHS Disclosure Schedule shall be
deemed adequate to disclose an exception to a specific representation or
warranty made herein, however, unless such exception is identified to the
specific representation and warranty to which such exception applies (and not
generally to all representations and warranties) in paragraphs corresponding to
the lettered and numbered Sections contained in this ARTICLE 3. Without limiting
the generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless
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the representation or warranty has to do with the existence of the document or
other item itself).
In accordance therewith, AHS represents and warrants to GE Medical,
with respect to itself and its subsidiaries, as follows:
3.1 ORGANIZATION. Each of AHS and its subsidiaries (a) is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization, (b) has the power to carry on its business as it
is now being conducted or presently proposed to be conducted and (c) is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not have a Material Adverse Effect.
3.2 CAPITALIZATION. As of the date hereof, the authorized capital stock
of AHS consists of (a) 25,000,000 shares of common stock, par value $0.03 per
share, of which 9,713,647 shares are issued and outstanding, and (b) 5,000,000
shares of preferred stock, par value $0.03 per share, of which 37,837.83 shares
(designated as Series B Preferred Stock) are issued and outstanding. All of the
issued and outstanding shares of capital stock of AHS are validly issued, fully
paid and nonassessable and free of preemptive rights or similar rights created
by statute, the Certificate of Incorporation or Bylaws of AHS, or any agreement
by which AHS or any of its subsidiaries is a party or to which AHS or any of its
subsidiaries is bound. AHS has reserved 1,035,000 shares of its common stock for
issuance to directors, employees and consultants or other persons under stock
plans or arrangements, of which 1,015,000 shares are subject to outstanding
options as of the date hereof. Except as provided in this SECTION 3.2, there are
not any (a) shares of capital stock of AHS issued or outstanding or any options,
warrants, subscriptions, calls, rights, convertible securities or other
agreements or commitments obligating AHS to issue, transfer or sell any shares
of its capital stock or (b) issued and outstanding bonds, debentures, notes or
other indebtedness having the right to vote (or convertible into or exercisable
for securities having the right to vote) on any matters on which stockholders of
AHS may vote.
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3.3 AUTHORITY RELATIVE TO THIS AGREEMENT. AHS has the corporate power
and authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by AHS and the
consummation by AHS of the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger and the Merger
Agreement have been duly authorized by the Board of Directors of AHS, and,
except for approval by the requisite votes cast by the stockholders of AHS with
respect to the Merger, no other corporate proceedings on the part of AHS are
necessary to approve this Agreement, the Debt Restructuring, the Debt
Restructuring Agreements, the Merger or the Merger Agreement, or the
transactions contemplated hereby and thereby.
3.4 VALIDITY. This Agreement has been duly executed and delivered by
AHS and is the legal, valid and binding obligation of AHS, enforceable in
accordance with its terms.
3.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or state
securities or blue sky laws, no filing with, and no permit, authorization,
consent or approval of, any governmental body or authority is necessary for the
consummation by AHS of the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger or the Merger
Agreement, or the transactions contemplated hereby and thereby. Neither the
execution and delivery of this Agreement by AHS nor the consummation by AHS of
this Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the
Merger or the Merger Agreement, or the transactions contemplated hereby and
thereby will (a) result in any breach of the Certificate of Incorporation - or
Bylaws of AHS, (b) result in a violation or breach of, or - constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation to which AHS or any of its
subsidiaries is a party or by which any of them or any of their properties or
assets may be bound, except as would not have a Material Adverse Effect, or (c)
violate any - order, writ, injunction, decree, statute, rule or regulation
applicable to AHS, any of its subsidiaries or any of their
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properties or assets, except for violations, breaches or defaults that would
not have a Material Adverse Effect.
3.6 REPORTS AND FINANCIAL STATEMENTS. Since January 1, 1994, AHS has
filed all reports required to be filed by it with the Securities and Exchange
Commission (the "SEC") pursuant to the Exchange Act, including, without
limitation, an Annual Report on Form 10-K for the year ended December 31, 1994
(collectively and as amended through the Closing Date, the "AHS SEC REPORTS"),
and has previously furnished or made available to GE Medical true and complete
copies of all of the AHS SEC Reports. None of the AHS SEC Reports, as of their
respective dates, contained any untrue statement of a material fact or omitted
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. Each of the balance sheets (including the related notes)
included in the AHS SEC Reports fairly presents in all material respects the
consolidated financial position of AHS and its subsidiaries as of the respective
dates thereof, and the other related statements (including the related notes)
included therein fairly present in all material respects the results of
operations and cash flows of AHS and its subsidiaries for the respective periods
or as of the respective dates set forth therein, all in conformity with
generally accepted accounting principles ("GAAP"), except as otherwise noted
therein and subject, in the case of the unaudited interim financial statements,
to normal year-end adjustments and any other adjustments described therein and
the absence of any notes thereto.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1994,
neither AHS nor any of its subsidiaries has:
(a) Taken any of the actions set forth in clauses (E) through (O)
of SECTION 9.1;
(b) Incurred any liability material to AHS and its subsidiaries on
a consolidated basis, except in the ordinary course of its business,
consistent with past practices;
(c) Suffered a Material Adverse Effect; or
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(d) Conducted its business and operations other than in the
ordinary course of business and consistent with past practices.
3.8 INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION STATEMENT.
None of the information to be supplied by AHS to be included in (a) the
Registration Statement on Form S-4 to be filed with the SEC by InSight under the
Securities Act for the purpose of registering the common stock of InSight (and,
if required, the InSight Preferred Shares) to be issued in connection with the
consummation of the Merger (the "REGISTRATION STATEMENT") and (b) the joint
proxy statement to be distributed in connection with the meetings of
stockholders of AHS and Maxum to vote upon the Merger (the "PROXY STATEMENT"),
will:
(a) in the case of the Registration Statement, at the time it
becomes effective and at the Closing,
(b) in the case of the Proxy Statement or any amendments thereof or
supplements thereto, at the time of the mailing of the Proxy Statement
and any amendments or supplements thereto, and
(c) in either case, at the time of the meeting of stockholders of
AHS to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and regulations
promulgated thereunder. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated thereunder.
3.9 LITIGATION. Except as, in the aggregate, would not reasonably be
expected to have a Material Adverse Effect:
(a) There is no action, suit, judicial or administrative
proceeding, arbitration or investigation pending or, to the knowledge of
AHS, threatened against or
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involving AHS or any of its subsidiaries, or any of their properties or
rights, before any court, arbitrator, or administrative or governmental
body;
(b) There is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency or instrumentality,
or arbitrator outstanding against AHS or any of its subsidiaries; and
(c) Neither AHS not its subsidiaries are in violation of any term
of any judgments, decrees, injunctions or orders outstanding against them.
(d) Included in the AHS Disclosure Schedule is a true and complete
description of all litigation, actions, suits, judicial and
administrative proceedings, arbitrations, investigations (as to which AHS
is aware), judgments, decrees, injunctions and orders pending or, to the
knowledge of AHS, threatened against or involving AHS or any of its
subsidiaries, or any of their respective properties or rights.
3.10 CONTRACTS. (a) Each of the contracts, instruments, mortgages,
notes, security agreements, leases, agreements and understandings, whether
written or oral, to which AHS or any of its subsidiaries is a party or that
relates to or affects the assets or operations of AHS or any of its subsidiaries
or to which AHS or any of its subsidiaries, or their respective assets or
operations may be bound or subject, is a valid and binding obligation of AHS and
in full force and effect (with respect to AHS or such subsidiary) in accordance
with its terms, except for where the failure to be in full force and effect
could not, in the aggregate, have a Material Adverse Effect. There are no
existing defaults by AHS or any of its subsidiaries thereunder or, to the
knowledge of AHS, by any other party thereto, which defaults, in the aggregate,
would have a Material Adverse Effect; and, no event of default has occurred, and
no event, condition or occurrence exists, that (whether with or without notice,
lapse of time or the happening or occurrence of any other event) would
constitute a default by AHS or any of its subsidiaries thereunder which default
would, in the aggregate, have a Material Adverse Effect.
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(b) Except for this Agreement, neither AHS nor any of its
subsidiaries is a party to any oral or written (i) consulting agreement with an
individual not terminable on less than 60 calendar days notice and involving the
payment of more than $50,000 per annum, (ii) joint venture agreement, (iii)
non-competition or similar agreement that restricts AHS or any of its
subsidiaries from engaging in one or more specified lines of business, except
for agreements entered into in the ordinary course of business which could not
have a Material Adverse Effect, (iv) agreement with any executive officer or
other employee of AHS, or any of its subsidiaries, the benefits of which are
contingent upon, or the terms of which may be materially altered by, the
occurrence of a transaction involving AHS of the nature contemplated by this
Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
or the Merger Agreement, or the transactions contemplated hereby and thereby,
and which provides for the payment of in excess of $50,000, (v) agreement with
respect to any executive officer of AHS or any of its subsidiaries providing any
term of employment beyond one year or compensation guaranty in excess of $50,000
per annum or (vi) agreement or plan, including any stock option plan, stock
appreciation rights 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, the Debt Restructuring, the Debt Restructuring Agreements,
the Merger or the Merger 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, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
or the Merger Agreement.
3.11 EMPLOYEE BENEFIT PLANS. (a) Included in the AHS Disclosure
Schedule is a true and complete list of each written or formal employee benefit
plan (including, without limitation, any "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), policy or agreement that is maintained by AHS or any of its
subsidiaries (all of the foregoing, the "AHS BENEFIT PLANS"), or is or was
contributed to by AHS or pursuant to which AHS (or any trade or business,
whether or not incorporated (an "AHS ERISA AFFILIATE"), which together with AHS
would be deemed a "single employer" within the meaning of Section 4001 of ERISA)
is still potentially liable for
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payments, benefits or claims. A copy of each AHS Benefit Plan as currently in
effect and, if applicable, the most recent Annual Report, Actuarial Report or
Valuation, Summary Plan Description, Trust Agreement and a Determination Letter
issued by the IRS for each AHS Benefit Plan have heretofore been delivered to GE
Medical. No AHS Benefit Plan (including any "multiemployer plan," as defined in
Section 3(37) of ERISA) was or is subject to Title IV of ERISA or Section 412 of
the Internal Revenue Code of 1986, as amended (the "CODE").
(b) Each of the AHS Benefit Plans that is subject to ERISA is in
substantial compliance with ERISA. Each of the AHS Benefit Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code is so qualified. No
event has occurred, and to the knowledge of AHS, no condition or set of
circumstances exists, in connection with which AHS or any AHS ERISA Affiliate is
or could be subject to liability (except liability for benefit claims and
funding obligations payable in the ordinary course of business) under ERISA, the
Code or any other applicable law with respect to any AHS Benefit Plan.
(c) All contributions and other amounts payable by AHS or any of
its subsidiaries through September 30, 1995, with respect to each AHS Benefit
Plan in respect of current or prior plan years have been either paid or accrued
on the most recent financial statements of AHS. Any contributions or other
amounts payable by AHS or any of its subsidiaries for periods between September
30, 1995, and the Closing with respect to each AHS Benefit Plan in respect of
current or prior plan years have been or will be either paid or accrued in the
normal course of business on the books and records of AHS at or prior to the
Closing. There are no pending, or, to the knowledge of AHS, threatened or
anticipated claims (other than routine claims for benefits which will not, in
the aggregate, have a Material Adverse Effect) by or on behalf of or against any
of the AHS Benefit Plans or any trusts or other funding vehicles related
thereto.
(d) No AHS Benefit Plan (other than general employment policies
and agreements) provides benefits, including without limitation, death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination of
service (other than (i) coverage mandated by Part 6 of Subtitle B of
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Title I of ERISA, Section 4980B of the Code or any comparable state law, (ii)
death benefits or retirement benefits under any "employee pension plan," as that
term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits
accrued as liabilities on the books of AHS or the AHS ERISA Affiliates, or (iv)
benefits the full cost of which is borne by the current or former employee or
his or her beneficiary).
3.12 TAXES. For the purposes of this SECTION 3.12, the term "TAX" shall
include all taxes, charges, withholdings, fees, levies, penalties, additions,
interest or other assessments imposed by any United States federal, state or
local authority or any other taxing authority on AHS or any of the AHS Tax
Affiliates (as defined in this SECTION 3.12) as to their respective income,
profit, franchise, gross receipts, payroll, sales, employment, worker's
compensation, use, property, withholding, excise, occupancy, environmental, and
other taxes, duties or assessments of any nature whatsoever. AHS has filed or
caused to be filed timely all material federal, state, local and foreign tax
returns required to be filed by AHS and any member of its consolidated,
combined, unitary or similar group (each such member, an "AHS TAX AFFILIATE").
Such returns, reports and other information are accurate and complete in all
material respects. AHS has paid or caused to be paid, or has made adequate
provision or set up an adequate accrual or reserve for the payment of, all taxes
shown to be due in respect of the periods for which returns are due, and has
established an adequate accrual or reserve for the payment of all taxes payable
in respect of the period subsequent to the last of such periods in respect of
which any such accrual or reserve is required. Neither AHS nor any of the AHS
Tax Affiliates has any material liability for taxes in excess of the amount so
paid or accruals or reserves so established. Neither AHS nor any of the AHS Tax
Affiliates is delinquent in the payment of any tax in excess of the amount
reserved or provided therefor, and no deficiencies for any tax, assessment or
governmental charge in excess of the amount reserved or provided therefor have
been threatened, claimed, proposed or assessed. No waiver or extension of time
to assess any taxes has been given or requested.
3.13 COMPLIANCE WITH APPLICABLE LAW. AHS and each of its subsidiaries
holds all licenses, franchises, permits, variances, exemptions, orders,
approvals and authorizations necessary for the lawful conduct of its business
under and
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pursuant to, and the business of AHS and its subsidiaries is not being conducted
in violation of, any provision of any federal, state, local or foreign statute,
law, ordinance, rule, regulation, judgment, decree, order, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to AHS or any of its subsidiaries, except to the extent that the
failure to hold any such licenses, franchises, permits or authorizations, or any
such violation, would not, in the aggregate, have a Material Adverse Effect.
3.14 SUBSIDIARIES. Exhibit 22.1 to the most recent Form 10-K included
in the AHS SEC Reports lists all the subsidiaries of AHS and indicates for each
subsidiary of AHS as of such date the jurisdiction of incorporation or
organization thereof. All of the outstanding shares of capital stock or other
equity interests of each of the subsidiaries of AHS are (a) held by AHS or one
of its wholly-owned subsidiaries, (b) fully paid and nonassessable, and (c)
owned by AHS or one of its wholly-owned subsidiaries free and clear of any
claim, lien or encumbrance.
3.15 LABOR AND EMPLOYMENT MATTERS. AHS and each of its subsidiaries (a)
are and have been in compliance in all material respects with all applicable
laws respecting employment and employment practices and terms and conditions of
employment and wages and hours (including, without limitation, the Immigration
Reform and Control Act, the Worker Adjustment and Retraining Notification Act
and such laws respecting employment discrimination, equal opportunity,
affirmative action, worker's compensation, occupational safety and health
requirements and unemployment insurance and related matters) and (b) are not
engaged in and have not engaged in any unfair labor practice. No investigation
or review by or before any governmental entity concerning any violation of any
such law is pending or, to the knowledge of AHS, threatened or has occurred
during the last three years, and no governmental entity has provided any notice
to AHS or any of its subsidiaries or otherwise asserted an intention to conduct
any such investigation. There is no labor strike, dispute, slowdown or stoppage
actually pending or threatened against AHS or any of its subsidiaries. No union
representation question or union organizational activity exists respecting the
employees of AHS or any of its subsidiaries. No collective bargaining agreement
exists which is binding on AHS or any of its subsidiaries. Neither AHS nor any
of its subsidiaries
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has experienced any material work stoppage or other material labor difficulty.
In the event of termination of the employment of any of the current officers,
directors, employees or agents of AHS or any of its subsidiaries, neither AHS
nor any of its subsidiaries will, pursuant to any agreement or by reason of
anything done prior to the Closing be liable to any of such officers, directors,
employees or agents for so-called "severance pay" or any other similar payments
or benefits, including, without limitation, post-employment health care benefits
(other than pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA")) or insurance benefits.
3.16 INSURANCE. AHS and each of its subsidiaries are insured by
insurers reasonably believed by AHS to be of recognized financial responsibility
against such losses and risks and in such amounts as are customary in the
businesses in which they are engaged. All material policies of insurance and
fidelity or surety bonds insuring AHS or any of its subsidiaries or their
respective businesses, assets, employees, officers and directors are in full
force and effect. There are no material claims by AHS or any of its subsidiaries
under any such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause.
3.17 CONTRACTS WITH PHYSICIANS, HOSPITALS, HMOS AND THIRD PARTY
PROVIDERS. AHS has made available to representatives of GE Medical copies (or in
the case where no written documentation exists, a summary) of all outstanding
contracts, partnerships, joint ventures and other arrangements or understandings
(written or oral) between (a) AHS or any of its subsidiaries and (b) any
physician, hospital, health maintenance organization or other managed care
organization, or other third-party provider relating to the provision of medical
or consulting services, treatments, patient referrals or similar activities.
3.18 ABSENCE OF UNDISCLOSED LIABILITIES. Neither AHS nor any of its
subsidiaries is obligated under or subject to any indebtedness, duty,
responsibility, liability or obligation of any nature, whether absolute,
accrued, contingent or otherwise, other than (a) in the ordinary course of
business on terms and conditions and in amounts consistent with past practices
of AHS and in no event on terms atypical to those of other companies in the same
or a similar industry or (b) as disclosed in the financial statements included
in the AHS SEC Reports.
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3.19 ENVIRONMENTAL MATTERS. Except as could not have a Material Adverse
Effect, the ownership, use and operation by AHS and its subsidiaries, and each
of their predecessors, of each facility used by AHS in the operation of its
business has been and is in compliance with all federal, state and local
environmental and anti-pollution laws and regulations, including (a) the
Resource Conservation and Recovery Act, as amended, and its implementing
regulations and all applicable state hazardous waste laws and regulations, (b)
the Clean Water Act, as amended, and its implementing regulations and all
applicable state effluent discharge laws and regulations, (c) the Clean Air Act,
as amended, and its implementing regulations and all applicable state air
emission laws and regulations and (d) all such laws and regulations concerning
particulate emissions, hazard communication, surface water pollution,
groundwater pollution, air pollution, solid wastes, hazardous wastes, storage,
handling, treatment, transportation, spills or other releases, or disposal of
any substance, material or waste, or exposure to or notification regarding any
substance, material or waste. No action, suit, proceeding, investigation,
complaint or charge exists for violation of any such laws, rules or regulations
and there is no meritorious basis therefor.
3.20 DISCLOSURE. The representations and warranties of AHS contained in
this Agreement and each certificate or other written statement delivered
pursuant to this Agreement, the Debt Restructuring, the Debt Restructuring
Agreements, the Merger or the Merger Agreement and the transactions contemplated
hereby and thereby, are accurate, correct and complete, do not contain any
untrue statement of a material fact or, considered in the context in which
presented, omit to state a material fact necessary in order to make the
statements and information contained herein or therein not misleading. AHS is
not aware of any material information necessary to enable GE Medical to make an
informed investment decision to purchase the AHS Shares which has not been
expressly disclosed to GE Medical in writing. There is no fact which would have,
or in the future may have (so far as AHS can now foresee), a Material Adverse
Effect which has not been set forth or described in this Agreement or in a
certificate, exhibit or other written statement furnished to GE Medical in
connection herewith.
ARTICLE 4
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REPRESENTATIONS AND WARRANTIES REGARDING MAXUM
Maxum represents and warrants to GE Medical that, with respect to
itself and each of its subsidiaries, the statements contained in this ARTICLE 4
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
ARTICLE 4), except as set forth in Maxum's disclosure schedule attached hereto
as ANNEX II (the "MAXUM DISCLOSURE SCHEDULE"). Nothing in the Maxum Disclosure
Schedule shall be deemed adequate to disclose an exception to a specific
representation or warranty made herein, however, unless such exception is
identified to the specific representation and warranty to which such exception
applies (and not generally to all representations and warranties) in paragraphs
corresponding to the lettered and numbered Sections contained in this ARTICLE 4.
Without limiting the generality of the foregoing, the mere listing (or inclusion
of a copy) of a document or other item shall not be deemed adequate to disclose
an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself).
In accordance therewith, Maxum represents and warrants to GE Medical,
with respect to itself and its subsidiaries, as follows:
4.1 ORGANIZATION. Each of Maxum and its subsidiaries (a) is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization, (b) has the power to carry on its business as it
is now being conducted or presently proposed to be conducted and (c) is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not have a Material Adverse Effect.
4.2 CAPITALIZATION. As of the date hereof, the authorized capital stock
of Maxum consists of (a) 10,000,000 shares of common stock, par value $0.01 per
share, 2,273,555 shares of which are issued and outstanding, and (b) 56,000
shares of preferred stock, par value $0.01 per share, none of which are issued
and outstanding. All of the issued and outstanding shares
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of capital stock of Maxum are validly issued, fully paid and nonassessable and
free of preemptive rights or similar rights created by statute, the Certificate
of Incorporation or Bylaws of Maxum, or any agreement by which Maxum or any of
its subsidiaries is a party or to which Maxum or any of its subsidiaries is
bound. Maxum has reserved 1,037,500 shares of its common stock for issuance to
directors, employees and consultants or other persons under stock plans or
arrangements, of which 416,250 shares are subject to outstanding options as of
the date hereof. Except as provided in this SECTION 4.2, there are not any (a)
shares of capital stock of Maxum issued or outstanding or any options, warrants,
subscriptions, calls, rights, convertible securities or other agreements or
commitments obligating Maxum to issue, transfer or sell any shares of its
capital stock or (b) issued and outstanding bonds, debentures, notes or other
indebtedness having the right to vote (or convertible into or exercisable for
securities having the right to vote) on any matters on which stockholders of
Maxum may vote.
4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Maxum has the corporate power
and authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by Maxum and the
consummation by Maxum of the transactions contemplated by this Agreement, the
Debt Restructuring, the Debt Restructuring Agreements, the Merger and the Merger
Agreement have been duly authorized by the Board of Directors of Maxum, and,
except for approval by the requisite votes cast by the stockholders of Maxum
with respect to the Merger, no other corporate proceedings on the part of Maxum
are necessary to approve this Agreement, the Debt Restructuring, the Debt
Restructuring Agreements, the Merger or the Merger Agreement, or the
transactions contemplated hereby and thereby.
4.4 VALIDITY. This Agreement has been duly executed and delivered by
Maxum and is the legal, valid and binding obligation of Maxum, enforceable in
accordance with its terms.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable
requirements of the Securities Act, the Exchange Act, or state securities or
blue sky laws, no filing with, and no permit, authorization, consent or approval
of, any governmental body or authority is necessary for the consummation by
Maxum of the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger or
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the Merger Agreement, or the transactions contemplated hereby and thereby.
Neither the execution and delivery of this Agreement by Maxum nor the
consummation by Maxum of this Agreement, the Debt Restructuring, the Debt
Restructuring Agreements, the Merger or the Merger Agreement, or the
transactions contemplated hereby and thereby will (a) result in any breach of
the Certificate of Incorporation or Bylaws of Maxum, (b) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which Maxum or any of its subsidiaries is a party or by which any
of them or any of their properties or assets may be bound, except as would not
have a Material Adverse Effect, or (c) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Maxum, any of its subsidiaries
or any of their properties or assets, except for violations, breaches or
defaults that would not have a Material Adverse Effect.
4.6 REPORTS AND FINANCIAL STATEMENTS. Since January 1, 1994, Maxum has
filed all reports required to be filed by it with the SEC pursuant to the
Exchange Act, including, without limitation, an Annual Report on Form 10-K for
the year ended December 31, 1994 (collectively and as amended through the
Closing Date, the "MAXUM SEC REPORTS"), and has previously furnished or made
available to GE Medical true and complete copies of all of the Maxum SEC
Reports. None of the Maxum SEC Reports, as of their respective dates, contained
any untrue statement of a material fact or omitted 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. Each of
the balance sheets (including the related notes) included in the Maxum SEC
Reports fairly presents in all material respects the consolidated financial
position of Maxum and its subsidiaries as of the respective dates thereof, and
the other related statements (including the related notes) included therein
fairly present in all material respects the results of operations and cash flows
of Maxum and its subsidiaries for the respective periods or as of the respective
dates set forth therein, all in conformity with GAAP, except as otherwise noted
therein and subject, in the case of the unaudited interim financial statements,
to normal year-end adjustments and
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any other adjustments described therein and the absence of any notes thereto.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1994,
neither Maxum nor any of its subsidiaries has:
(a) Taken any of the actions set forth in clauses (E) through (O)
of SECTION 9.1;
(b) Incurred any liability material to Maxum and its subsidiaries
on a consolidated basis, except in the ordinary course of its business,
consistent with past practices;
(c) Suffered a Material Adverse Effect; or
(d) Conducted its business and operations other than in the
ordinary course of business and consistent with past practices.
4.8 INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION STATEMENT.
None of the information to be supplied by Maxum to be included in the
Registration Statement and the Proxy Statement, will:
(a) in the case of the Registration Statement, at the time it
becomes effective and at the Closing,
(b) in the case of the Proxy Statement or any amendments thereof or
supplements thereto, at the time of the mailing of the Proxy Statement
and any amendments or supplements thereto, and
(c) in either case, at the time of the meeting of stockholders of
Maxum to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement will
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comply as to form in all material respects with the provisions of the Securities
Act, and the rules and regulations promulgated thereunder. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
4.9 LITIGATION. Except as, in the aggregate, would not reasonably be
expected to have a Material Adverse Effect:
(a) There is no action, suit, judicial or administrative
proceeding, arbitration or investigation pending or, to the knowledge of
Maxum, threatened against or involving Maxum or any of its subsidiaries,
or any of their properties or rights, before any court, arbitrator, or
administrative or governmental body;
(b) There is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency or instrumentality, or
arbitrator outstanding against Maxum or any of its subsidiaries; and
(c) Neither Maxum not its subsidiaries are in violation of any term
of any judgments, decrees, injunctions or orders outstanding against them.
(d) Included in the Maxum Disclosure Schedule is a true and
complete description of all litigation, actions, suits, judicial and
administrative proceedings, arbitrations, investigations (as to which
Maxum is aware), judgments, decrees, injunctions and orders pending, or,
to the knowledge of Maxum, threatened against or involving Maxum or any of
its subsidiaries, or any of their respective properties or rights.
4.10 CONTRACTS.
(a) Each of the contracts, instruments, mortgages, notes, security
agreements, leases, agreements and understandings, whether written or oral, to
which Maxum or any of its subsidiaries is a party or that relates to or affects
the assets or operations of Maxum or any of its subsidiaries or to which Maxum
or any of its subsidiaries or their respective assets or operations may be bound
or subject, is a valid and binding obligation of Maxum and in full force and
effect (with respect to Maxum or such subsidiary) in accordance with its terms,
except for where the failure to be in full force and effect could not,
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in the aggregate, have a Material Adverse Effect. There are no existing defaults
by Maxum or any of its subsidiaries thereunder or, to the knowledge of Maxum, by
any other party thereto, which defaults, in the aggregate, would have a Material
Adverse Effect; and, no event of default has occurred, and no event, condition
or occurrence exists, that (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default by Maxum
or any of its subsidiaries thereunder which default would, in the aggregate,
have a Material Adverse Effect.
(b) Except for this Agreement, neither Maxum nor any of its
subsidiaries is a party to any oral or written (i) consulting agreement with an
individual not terminable on 60 calendar days or less notice involving the
payment of more than $50,000 per annum, in the case of any such agreement, (ii)
joint venture agreement, (iii) non-competition or similar agreement that
restricts Maxum or its subsidiaries from engaging in a line of business, except
for agreements entered into in the ordinary course of business which could not
have a Material Adverse Effect, (iv) agreement with any executive officer or
other employee of Maxum, or any of its subsidiaries, the benefits of which are
contingent upon, or the terms of which are materially altered by, the occurrence
of a transaction involving Maxum of the nature contemplated by this Agreement,
the Debt Restructuring, the Debt Restructuring Agreements, the Merger or the
Merger Agreement, or the transactions contemplated hereby and thereby, and which
provides for the payment of in excess of $50,000, (v) agreement with respect to
any executive officer of Maxum or any of its subsidiaries providing any term of
employment beyond one year or compensation guaranty in excess of $50,000 per
annum, or (vi) agreement or plan, including any stock option plan, stock
appreciation rights 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, the Debt Restructuring, the Debt Restructuring Agreements,
the Merger or the Merger 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, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
or the Merger Agreement.
4.11 EMPLOYEE BENEFIT PLANS.
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(a) Included in the Maxum Disclosure Schedule is a true and
complete list of each written or formal employee benefit plan (including,
without limitation, any "employee benefit plan" as defined in Section 3(3) of
ERISA), policy or agreement that is maintained by Maxum or any of its
subsidiaries (all of the foregoing, the "MAXUM BENEFIT PLANS"), or is or was
contributed to by Maxum or pursuant to which Maxum (or any trade or business,
whether or not incorporated (a "MAXUM ERISA AFFILIATE"), which together with
Maxum would be deemed a "single employer" within the meaning of Section 4001 of
ERISA) is still potentially liable for payments, benefits or claims. A copy of
each Maxum Benefit Plan as currently in effect and, if applicable, the most
recent Annual Report, Actuarial Report or Valuation, Summary Plan Description,
Trust Agreement and a Determination Letter issued by the IRS for each Maxum
Benefit Plan have heretofore been delivered to GE Medical. No Maxum Benefit Plan
(including any "multiemployer plan," as defined in Section 3(37) of ERISA) was
or is subject to Title IV of ERISA or Section 412 of the Code.
(b) Each of the Maxum Benefit Plans that is subject to ERISA is in
substantial compliance with ERISA. Each of the Maxum Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code is so qualified.
No event has occurred, and to the knowledge of Maxum, no condition or set of
circumstances exists, in connection with which Maxum or any Maxum ERISA
Affiliate is or could be subject to liability (except liability for benefit
claims and funding obligations payable in the ordinary course of business) under
ERISA, the Code or any other applicable law with respect to any Maxum Benefit
Plan.
(c) All contributions and other amounts payable by Maxum or any of
its subsidiaries through September 30, 1995, with respect to each Maxum Benefit
Plan in respect of current or prior plan years have been either paid or accrued
on the most recent financial statements of Maxum. Any contributions or other
amounts payable by Maxum or any of its subsidiaries for periods between
September 30, 1995, and the Closing with respect to each Maxum Benefit Plan in
respect of current or prior plan years have been or will be either paid or
accrued in the normal course of business on the books and records of Maxum at or
prior to the Closing. There are no pending, or, to the knowledge of Maxum,
threatened or anticipated claims (other than routine claims for benefits which
will not, in the aggregate, have a Material
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Adverse Effect) by or on behalf of or against any of the Maxum Benefit Plans or
any trusts or other funding vehicles related thereto.
(d) No Maxum Benefit Plan (other than general employment policies
and agreements) provides benefits, including without limitation, death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination of
service (other than (i) coverage mandated by Part 6 of Subtitle B of Title I of
ERISA, Section 4980B of the Code or any comparable state law, (ii) death
benefits or retirement benefits under any "employee pension plan," as that term
is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits
accrued as liabilities on the books of Maxum or the Maxum ERISA Affiliates, or
(iv) benefits the full cost of which is borne by the current or former employee
or his or her beneficiary).
4.12 TAXES. For the purposes of this SECTION 4.12, the term "TAX" shall
include all taxes, charges, withholdings, fees, levies, penalties, additions,
interest or other assessments imposed by any United States federal, state or
local authority or any other taxing authority on Maxum or any of the Maxum Tax
Affiliates (as defined in this SECTION 4.12) as to their respective income,
profit, franchise, gross receipts, payroll, sales, employment, worker's
compensation, use, property, withholding, excise, occupancy, environmental, and
other taxes, duties or assessments of any nature whatsoever. Maxum has filed or
caused to be filed timely all material federal, state, local and foreign tax
returns required to be filed by Maxum and any member of its consolidated,
combined, unitary or similar group (each such member, a "MAXUM TAX AFFILIATE").
Such returns, reports and other information are accurate and complete in all
material respects. Maxum has paid or caused to be paid or has made adequate
provision or set up an adequate accrual or reserve for the payment of, all taxes
shown to be due in respect of the periods for which returns are due, and has
established an adequate accrual or reserve for the payment of all taxes payable
in respect of the period subsequent to the last of such periods in respect of
which any such accrual or reserve is required. Neither Maxum nor any of the
Maxum Tax Affiliates has any material liability for taxes in excess of the
amount so paid or accruals or reserves so established. Neither Maxum nor any of
the Maxum Tax Affiliates is delinquent in the payment of any tax
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in excess of the amount reserved or provided therefor, and no deficiencies for
any tax, assessment or governmental charge in excess of the amount reserved or
provided therefor have been threatened, claimed, proposed or assessed. No waiver
or extension of time to assess any taxes has been given or requested.
4.13 COMPLIANCE WITH APPLICABLE LAW. Maxum and each of its subsidiaries
holds all licenses, franchises, permits, variances, exemptions, orders,
approvals and authorizations necessary for the lawful conduct of its business
under and pursuant to, and the business of Maxum and its subsidiaries is not
being conducted in violation of, any provision of any federal, state, local or
foreign statute, law, ordinance, rule, regulation, judgment, decree, order,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to Maxum or any of its subsidiaries, except
to the extent that the failure to hold any such licenses, franchises, permits or
authorizations, or any such violation, would not, in the aggregate, have a
Material Adverse Effect.
4.14 SUBSIDIARIES. Exhibit 22.1 to the most recent Form 10-K included
in the Maxum SEC Reports lists all the subsidiaries of Maxum and indicates for
each subsidiary of Maxum as of such date the jurisdiction of incorporation or
organization thereof. All of the outstanding shares of capital stock or other
equity interests of each of the subsidiaries of Maxum are (a) held by Maxum or
one of its wholly-owned subsidiaries, (b) fully paid and nonassessable, and (c)
owned by Maxum or one of its wholly-owned subsidiaries free and clear of any
claim, lien or encumbrance.
4.15 LABOR AND EMPLOYMENT MATTERS. Maxum and its subsidiaries (a) are
and have been in compliance in all material respects with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, the Immigration
Reform and Control Act, the Worker Adjustment and Retraining Notification Act,
and such laws respecting employment discrimination, equal opportunity,
affirmative action, worker's compensation, occupational safety and health
requirements and unemployment insurance and related matters, and (b) are not
engaged in and have not engaged in any unfair labor practice. No investigation
or review by or before any governmental entity
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concerning any violation of any such law is pending or, to the knowledge of
Maxum, threatened, nor has any such investigation occurred during the last three
years, and no governmental entity has provided any notice to Maxum or any of its
subsidiaries or otherwise asserted an intention to conduct any such
investigation. There is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against Maxum or any of its subsidiaries. No union
representation question or union organizational activity exists respecting the
employees of Maxum or any of its subsidiaries. No collective bargaining
agreement exists which is binding on Maxum or any of its subsidiaries. Neither
Maxum nor any of its subsidiaries has experienced any material work stoppage or
other material labor difficulty. In the event of termination of the employment
of any of the current officers, directors, employees or agents of Maxum or any
of its subsidiaries, neither Maxum nor any of its subsidiaries will, pursuant to
any agreement or by reason of anything done prior to the Closing be liable to
any of such officers, directors, employees or agents for so-called "severance
pay" or any other similar payments or benefits, including, without limitation,
post-employment health care benefits (other than pursuant to COBRA) or insurance
benefits.
4.16 INSURANCE. Maxum and each of its subsidiaries are insured by
insurers reasonably believed by Maxum to be of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which they are engaged. All material policies of
insurance and fidelity or surety bonds insuring Maxum or any of its subsidiaries
or their respective businesses, assets, employees, officers and directors are in
full force and effect. There are no material claims by Maxum or any of its
subsidiaries under any such policy or instrument as to which any insurance
company is denying liability or defending under a reservation of rights clause.
4.17 CONTRACTS WITH PHYSICIANS, HOSPITALS, HMOS AND THIRD PARTY
PROVIDERS. Maxum has made available to representatives of GE Medical copies (or
in the case where no written documentation exists, a summary) of all outstanding
contracts, partnerships, joint ventures and other arrangements or understandings
(written or oral) between (a) Maxum or any of its subsidiaries and (b) any
physician, hospital, health maintenance organization or other managed care
organization, or other third-
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party provider relating to the provision of medical or consulting services,
treatments, patient referrals or similar activities.
4.18 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Maxum nor any of its
subsidiaries is obligated under or subject to any indebtedness, duty,
responsibility, liability or obligation of any nature, whether absolute,
accrued, contingent or otherwise, other than (a) in the ordinary course of
business on terms and conditions and in amounts consistent with past practices
of Maxum and in no event on terms atypical to those of other companies in the
same or a similar industry or (b) as disclosed in the financial statements
included in the Maxum SEC Reports.
4.19 ENVIRONMENTAL MATTERS. Except as would not have a Material Adverse
Effect, the ownership, use and operation by Maxum and its subsidiaries, and each
of their predecessors, of each facility used by Maxum in the operation of its
business has been and is in compliance with all federal, state and local
environmental and anti-pollution laws and regulations, including (a) the
Resource Conservation and Recovery Act, as amended, and its implementing
regulations and all applicable state hazardous waste laws and regulations, (b)
the Clean Water Act, as amended, and its implementing regulations and all
applicable state effluent discharge laws and regulations, (c) the Clean Air Act,
as amended, and its implementing regulations, and (d) all applicable state air
emission laws and regulations; and all such laws and regulations concerning
particulate emissions, hazard communication, surface water pollution,
groundwater pollution, air pollution, solid wastes, hazardous wastes, storage,
handling, treatment, transportation, spills or other releases, or disposal of
any substance, material or waste, or exposure to or notification regarding any
substance, material or waste. No action, suit, proceeding, investigation,
complaint or charge exists for violation of any such laws, rules or regulations
and there is no meritorious basis therefor.
4.20 DISCLOSURE. The representations and warranties of Maxum contained
in this Agreement and each certificate or other written statement delivered
pursuant to this Agreement, the Debt Restructuring, the Debt Restructuring
Agreements, the Merger or the Merger Agreement and the transactions contemplated
hereby and thereby, are accurate, correct and complete, do not contain any
untrue statement of a material fact or, considered in the
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context in which presented, omit to state a material fact necessary in order to
make the statements and information contained herein or therein not misleading.
Maxum is not aware of any material information necessary to enable GE Medical to
make an informed investment decision to purchase the Maxum Shares which has not
been expressly disclosed to GE Medical in writing. There is no fact which would
have, or in the future may have (so far as Maxum can now foresee), a Material
Adverse Effect which has not been set forth or described in this Agreement or in
a certificate, exhibit or other written statement furnished to GE Medical in
connection herewith.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES REGARDING INSIGHT
AHS, Maxum and InSight (collectively, the "INSIGHT PARTIES"), jointly
and severally, represent and warrant to GE Medical as follows:
5.1 ORGANIZATION. Each of InSight and its subsidiaries (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, (b) has the corporate power to carry on its business
as it is now being conducted or presently proposed to be conducted and (c) is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not have a Material Adverse Effect.
5.2 CAPITALIZATION. The authorized capital stock of InSight consists of
(a) 25,000,000 shares of common stock, par value $0.001 per share, 1,000 of
which are issued and outstanding, and (b) 3,500,000 shares of preferred stock,
par value $0.001 per share, of which 2,501,760 shares have been designated
Series A Convertible Preferred Stock and none of which are issued and
outstanding. InSight has reserved (a) 1,303,000 shares of its common stock for
issuance to directors, employees and consultants or other persons under stock
plans or arrangements, of which an aggregate of 350,566.51 shares are subject to
outstanding options granted by AHS and Maxum which will be assumed by InSight in
connection with the consummation of
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the Merger and (b) an aggregate of 70,000 shares of its common stock for
issuance upon exercise of warrants issued or issuable to certain stockholders of
AHS. Except as provided in this SECTION 5.2, there are not (a) any shares of
capital stock of InSight issued or outstanding or any options, warrants,
subscriptions, calls, rights, convertible securities or other agreements or
commitments obligating InSight to issue, transfer or sell any shares of its
capital stock or (b) any issued and outstanding bonds, debentures, notes or
other indebtedness having the right to vote (or convertible into or exercisable
for securities having the right to vote) on any matters on which stockholders of
InSight may vote.
5.3 AUTHORITY RELATIVE TO THIS AGREEMENT. InSight has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by InSight
and the consummation by InSight of the transactions contemplated by this
Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
and the Merger Agreements have been duly authorized by the Board of Directors of
InSight, and, except for approval by the requisite vote of the stockholders of
InSight with respect to the Merger, no other corporate proceedings on the part
of InSight are necessary to approve this Agreement, the Debt Restructuring, the
Debt Restructuring Agreements, the Merger or the Merger Agreement, or the
transactions contemplated hereby or thereby.
5.4 VALIDITY. This Agreement has been duly executed and delivered by
InSight and is the legal, valid and binding obligation of InSight, enforceable
in accordance with its terms.
5.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable
requirements of the Securities Act, the Exchange Act, state securities or blue
sky laws, no filing with, and no permit, authorization, consent or approval of,
any governmental body or authority is necessary for the consummation by InSight
of the transactions contemplated by this Agreement, the Debt Restructuring, the
Debt Restructuring Agreements, the Merger, the Merger Agreement or the
transactions contemplated hereby or thereby. Neither the execution and delivery
of this Agreement by InSight nor the consummation by InSight of this Agreement,
the Debt Restructuring, the Debt Restructuring Agreements, the Merger the Merger
Agreement or the transactions contemplated hereby or thereby, will (a) result in
any breach of the Certificate of
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Incorporation or Bylaws of InSight, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, contract, agreement or other instrument or obligation to which InSight
or any of its subsidiaries is a party or by which InSight or any of its
subsidiaries or any of their respective properties or assets may be bound,
except as would not have a Material Adverse Effect, or (c) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to InSight or
any of its subsidiaries or any of their respective properties or assets, except
for violations, breaches and defaults that would not, in the aggregate, have a
Material Adverse Effect.
5.6 SUBSIDIARIES. All of the outstanding shares of capital stock and
other equity interests of each of the subsidiaries of InSight are (a) held by
InSight, (b) fully paid and nonassessable, and (c) owned by InSight free and
clear of any claim, lien or encumbrance.
5.7 NO ASSETS; NO ACTIVITIES. InSight has no material assets or
liabilities and has not engaged in any activities except in connection with and
furtherance of the transactions contemplated by this Agreement, the Merger
Agreement and the Debt Restructuring Agreements.
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Neither InSight nor any of
its subsidiaries has conducted any business or operations, except with respect
to the consummation of the Merger and the transactions related thereto.
5.9 DISCLOSURE. The representations and warranties of InSight contained
in this Agreement and each certificate and other written statement delivered in
connection with this Agreement, the Debt Restructuring, the Debt Restructuring
Agreements, the Merger and the Merger Agreement, and the transactions
contemplated hereby and thereby (a) are accurate, correct and complete and (b)
do not contain any untrue statement of a material fact or, considered in the
context in which presented, omit to state a material fact necessary in order to
make the statements and information contained herein or therein not misleading.
InSight is not aware of any material information
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necessary to enable GE Medical to make an informed investment decision to
acquire the AHS Shares and the Maxum Shares which has not been expressly
disclosed to GE Medical in writing. There is no fact which would have, or in the
future may have (so far as InSight can now foresee), a Material Adverse Effect
which has not been set forth or described in this Agreement or in a certificate,
exhibit or other written statement furnished to GE Medical in connection
herewith.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF GE MEDICAL
GE Medical represents and warrants to the InSight Parties as follows:
6.1 AUTHORITY RELATIVE TO THIS AGREEMENT. GE Medical has the power and
authority to enter into this Agreement and to carry out its obligations
hereunder.
6.2 VALIDITY. This Agreement has been duly executed and delivered by GE
Medical and is the legal, valid and binding obligation of GE Medical,
enforceable in accordance with its terms.
6.3 AUTHORITY. GE Medical has full legal right, power and authority,
without the consent of any other person, to execute and deliver this Agreement
and to carry out the transactions contemplated hereby. All actions required to
be taken by GE Medical to authorize the execution, delivery and performance of
this Agreement and all transactions contemplated hereby have been duly and
properly taken.
6.4 INVESTMENT EXPERIENCE. GE Medical acknowledges that it can bear the
economic risk of its investment and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the AHS Shares and the Maxum Shares.
6.5 RESTRICTED SECURITIES. GE Medical understands that the AHS Shares
and Maxum Shares may be characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from AHS and Maxum,
respectively, in a transaction not involving a public offering,
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and that under such laws and applicable regulations such securities may be
resold without registration under the Securities Act only in certain limited
circumstances.
6.6 LEGENDS. GE Medical understands that the certificates evidencing
the AHS Shares and the Maxum Shares may bear any legend required by applicable
state securities laws and the following legend:
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"These securities have not been registered under the Securities Act
of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of
counsel satisfactory to the Company that such registration is not
required or unless sold pursuant to Rule 144 of such Act."
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS OF GE MEDICAL
The obligations of GE Medical to consummate the transactions
contemplated by this Agreement are subject to fulfillment prior to or at the
Closing, as the case may be, of the following conditions:
7.1 ACCURACY OF WARRANTIES; PERFORMANCE OF COVENANTS. The
representations and warranties of the InSight Parties contained herein shall be
accurate in all material respects as if made on and as of the Closing Date. Each
InSight Party shall have performed all of the obligations and complied with all
of the covenants required to be performed or complied with on or prior to the
Closing.
7.2 NO PENDING ACTION. No action or proceeding before any court or
governmental body shall be pending or threatened, seeking to, or under which an
unfavorable judgment, decree or order would (a) prevent the carrying out of this
Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
or the Merger Agreement or the transactions contemplated hereby and thereby, (b)
declare unlawful the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger or the Merger
Agreement, (c) cause such transactions to be rescinded, or (d) affect the right
of GE Medical to own or control the AHS Shares, the Maxum Shares or the InSight
Preferred Shares.
7.3 CONSENTS. Except as could not have a Material Adverse Effect, all
consents by third parties that are required for the transfer of the AHS Shares
and the Maxum Shares, for the consummation of the transactions contemplated
hereby, or in order
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to prevent a breach of or a default under or a termination of any agreement to
which any of the InSight Parties is a party or to which any portion of the
property of any of the InSight Parties is subject, will have been obtained or
provided for. For purposes of this SECTION 7.3, the consents described on
SCHEDULE 7.3 attached hereto are hereby deemed to be required to have been
obtained.
7.4 CONDITION OF BUSINESS AND ASSETS. There shall have been no change
which would have a Material Adverse Effect upon any of the InSight Parties.
7.5 DELIVERIES AT CLOSING. GE Medical shall have received from one or
more of the InSight Parties, the following:
(a) Stock certificates, evidencing all of the AHS Shares and the
Maxum Shares (which, immediately after the Closing, shall be converted
into the right to receive the InSight Preferred Shares as provided in the
Merger Agreement);
(b) A copy of the AHS Certificate of Designation, certified by the
Secretary of State of the State of Delaware as of the Closing Date;
(c) A copy of the Maxum Certificate of Designation, certified by
the Secretary of State of the State of Delaware as of the Closing Date;
(d) A copy of the InSight Certificate of Incorporation, certified
by the Secretary of State of the State of Delaware as of the Closing Date;
(e) A certificate of the secretary of AHS, certifying copies of the
AHS Certificate of Designation, the Bylaws of AHS and the resolutions of
the Board of Directors of AHS authorizing the transactions contemplated by
this Agreement, the Debt Restructuring, the Debt Restructuring Agreements,
the Merger and the Merger Agreement;
(f) A certificate of the secretary of Maxum, certifying copies of
the Maxum Certificate of Designation, the Bylaws of Maxum and the
resolutions of the Board of Directors of Maxum authorizing the
transactions contemplated
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by this Agreement, the Debt Restructuring, the Debt Restructuring
Agreements, the Merger and the Merger Agreement;
(g) A certificate of the secretary of InSight, certifying copies of
the InSight Certificate of Incorporation, the Bylaws of InSight and the
resolutions of the Board of Directors of InSight authorizing the
transactions contemplated by this Agreement, the Debt Restructuring, the
Debt Restructuring Agreements, the Merger and the Merger Agreement;
(h) The opinion of Arent Fox Kinter Plotkin & Kahn, AHS's legal
counsel, in substantially the form attached hereto as EXHIBIT F;
(i) The opinion of Storey Armstrong Steger & Martin, Maxum's legal
counsel, in substantially the form attached hereto as EXHIBIT G;
(j) Duly executed copies of the Debt Restructuring Agreements;
(k) A duly executed Registration Rights Agreement in the form
attached hereto as EXHIBIT H; and
(l) Such other instruments or documents as may be reasonably
necessary to carry out the transactions contemplated by this Agreement,
the Debt Restructuring, the Debt Restructuring Agreements, the Merger and
the Merger Agreement.
7.6 CONSUMMATION OF TRANSACTIONS. The transactions contemplated by the
Debt Restructuring, the Debt Restructuring Agreements (all closing conditions
thereunder to GE Medical's obligations thereunder having been satisfied or
waived), the Merger, the Merger Agreement (all closing conditions thereunder
having been satisfied) and the execution and delivery of that certain Master
Service Agreement Addendum (substantially in the form attached hereto as EXHIBIT
I) shall have been consummated concurrent with or immediately after, as the case
may be, the consummation of the transactions contemplated by this Agreement. The
Merger Agreement shall be in full force and effect without modification.
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7.7 COMFORT LETTERS. Each of the InSight Parties shall have received a
"comfort letter," in a form reasonably acceptable to GE Medical, of such InSight
Party's independent auditors with respect to the financial statements and other
information of such InSight Party included in the Registration Statement, each
such letter dated a date within two business days before the date on which the
Registration Statement shall become effective.
7.8 AFFILIATE AGREEMENTS. Each officer and director of each InSight
Party shall have delivered to InSight a written "affiliate agreement," in a form
reasonably acceptable to GE Medical, restricting the disposition by such person
of any shares of common stock of InSight to be received by such person in the
Merger, as contemplated by Rule 145 under the Securities Act and as required
under Section 351 of the Code.
7.9 1996 MANAGEMENT STOCK OPTION PLAN. InSight shall have adopted its
1996 Directors' Stock Option Plan and its 1996 Employee Stock Option Plan, in
the form attached hereto as EXHIBIT J-1 and EXHIBIT J-2, respectively
(collectively, the "INSIGHT STOCK PLANS").
7.10 EMPLOYMENT AGREEMENTS. InSight shall have entered into employment
agreements, in the form previously delivered to GE Medical (collectively, the
"INSIGHT EMPLOYMENT AGREEMENTS"), with the executive officers listed on SCHEDULE
7.10 attached hereto, and such Insight Employment Agreements shall be in full
force and effect without modification. All severance and other related
provisions set forth in all written agreements between either AHS or Maxum, and
its employees, shall have been waived in writing to the extent the transactions
contemplated by the Debt Restructuring, the Debt Restructuring Agreements, the
Merger and the Merger Agreement shall give effect to such severance and other
related provisions, such waivers to be in such form as reasonably acceptable to
GE Medical.
7.11 FAIRNESS OPINIONS. Each of AHS and Maxum shall have received an
expert opinion (a copy of which, and any "bring-down" thereof, shall have been
delivered to GE Medical) that the Merger and the transactions contemplated in
connection therewith are fair from a financial point of view to it and its
stockholders, and such opinions shall not have been withdrawn.
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7.12 SETTLEMENT OF LITIGATION. The settlement of the civil action filed
in the United States District Court of the District of Puerto Rico styled
P.R.F., Inc. d/b/a San Juan Health Centre, Inc., et. al. v. Philips Credit
Corporation, American Health Services Corporation, et. al., 92 Civ. 2266, and
the civil action filed in the United States District Court of the Southern
District of New York styled In re Maxum Health Corp. Securities Litigation, 93
Civ. 3287, and all claims related thereto or asserted therein, shall have been
effected on terms satisfactory to GE Medical and, with respect to such Maxum
litigation, a final judgment of dismissal shall have been entered and shall
encompass all plaintiffs and potential plaintiffs to such Maxum litigation.
7.13 AGREEMENT WITH HOLDERS OF AHS SERIES B SHARES. Those certain
Agreements by and among InSight, AHS and each of the holders of the AHS Series B
Shares, attached hereto as EXHIBIT L, shall be in full force and effect without
modification.
7.14 LOCATION OF PRINCIPAL EXECUTIVE OFFICE. The InSight Parties shall
have used such reasonable efforts, to the satisfaction of GE Medical, to make
all arrangements necessary to consolidate the principal executive offices and
administration functions of the InSight Parties at one location.
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ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF AHS, MAXUM AND INSIGHT
The obligations of the InSight Parties to consummate the transactions
contemplated by this Agreement are subject to fulfillment prior to or at the
Closing of the following conditions:
8.1 ACCURACY OF WARRANTIES; PERFORMANCE OF COVENANTS. The
representations and warranties of GE Medical contained herein shall be accurate
in all material respects as if made on and as of the Closing Date. GE Medical
shall have performed all of the obligations and complied with each and all of
the covenants required to be performed or complied with on or prior to the
Closing.
8.2 NO PENDING ACTION. No action or proceeding before any court or
governmental body will be pending or threatened, seeking to, or under which an
unfavorable judgment, decree or order would (a) prevent the carrying out of this
Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
or the Merger Agreement or the transactions contemplated hereby and thereby, (b)
declare unlawful the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger or the Merger
Agreement, (c) cause such transactions to be rescinded.
8.3 CONSENTS. Except as could not have a Material Adverse Effect, all
consents by third parties that are required for the transfer of the AHS Shares
and the Maxum Shares or otherwise, for the consummation of the transactions
contemplated hereby, or in order to prevent a breach of or a default under or a
termination of any agreement to which any of the InSight Parties is a party or
to which any portion of the property of the InSight Parties is subject, will
have been obtained or provided for. For purposes of this SECTION 8.3, the
consents described on SCHEDULE 7.3 attached hereto are hereby deemed to be
required to have been obtained.
8.4 DELIVERIES AT CLOSING. AHS, Maxum or InSight, as the case may be,
shall have received from GE Medical the following:
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(a) Duly executed copies of the Debt Restructuring Agreements
(including that certain Master Service Agreement Addendum referred to in
SECTION 7.6); and
(b) Such other instruments or documents as may be reasonably
necessary to carry out the transactions contemplated by this Agreement,
the Debt Restructuring, the Debt Restructuring Agreements, the Merger and
the Merger Agreement.
8.5 STOCKHOLDER APPROVAL. Each of AHS and Maxum shall have received the
approval by the requisite votes cast by the stockholders of AHS and Maxum,
respectively, with respect to the Merger.
ARTICLE 9
PRE-CLOSING COVENANTS OF THE INSIGHT PARTIES
Each of the InSight Parties hereby agrees, from the date hereof until
the Closing, to keep, perform and fully discharge the following covenants and
agreements:
9.1 INTERIM CONDUCT OF BUSINESS. Such InSight Party shall preserve,
protect and maintain its business and operate its businesses as a going concern
consistent with prior practice and not other than in the ordinary course of
business (except as may be expressly authorized pursuant to this Agreement).
Without limiting the generality of the foregoing, from the date hereof until the
Closing, except for transactions expressly approved in writing by GE Medical,
such InSight Party shall:
(a) Maintain inventories at current levels, except for sales in the
ordinary course of business, and maintain the properties and assets of
their respective businesses in good repair, order and condition,
reasonable wear and tear excepted;
(b) Maintain and keep in full force and effect all insurance on
assets and property or for the benefit of employees of its business, all
liability and other casualty insurance, and all bonds on personnel,
presently carried;
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(c) Preserve intact the organization of its business and to keep
available the services of the present executives, employees and agents of
its business and preserve the good will of suppliers, customers and others
having business relationships with its business;
(d) Maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years;
(e) Not enter into or amend any employment, bonus, severance or
retirement contract or arrangement (other than an InSight Employment
Agreement with Glenn Cato), nor increase any salary or other form of
compensation payable or to become payable to any executives or employees
whose annual compensation is in excess of $60,000 (other than for
customary year-end raises and bonuses consistent with past practices and
in the ordinary and regular course of business and which do not (i) in any
individual employee case (other than executives), exceed an increase of
ten percent, or (ii) with respect to all employees (including executives),
exceed an increase of five percent in the aggregate, over previous annual
compensation);
(f) Not enter into or agree to enter into any lease, contract,
purchase or sale order or other commitment (other than in the ordinary
and regular course of business) which involves an expenditure, obligation,
purchase or sale of more than $2,000,000 or which cannot be fully
performed or terminated without premium or penalty within one year from
the date thereof;
(g) Not extend credit in the sale of products, collection of
receivables or otherwise, other than in the ordinary and regular course of
business;
(h) Not purchase, lease or otherwise acquire any real estate or any
interest therein other than leases which involve rental and other payment
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commitments not exceeding $250,000 per year, in the aggregate;
(i) Not declare, set aside or pay any dividend or make any other
distribution with respect to its capital stock which is not normal and
not determined in relation to its earnings during the relevant period and
in accordance with its previous dividend policies and records;
(j) Not merge or consolidate with or agree to merge or consolidate
with, nor purchase or agree to purchase all or substantially all of the
assets of, nor otherwise acquire, any corporation, partnership, or other
business organization or division thereof, except as contemplated pursuant
to this Agreement, the Merger and the Merger Agreement;
(k) Not sell, lease or otherwise dispose of or agree to sell, lease
or otherwise dispose of any of its assets, properties, rights or claims,
except in the ordinary course of business;
(l) Not authorize for issuance, issue, sell or deliver any
additional shares of its capital stock of any class or any securities or
obligations convertible into shares of its capital stock of any class or
issue or grant any option, warrant or other right to purchase any shares
of its capital stock of any class, other than with respect to (i) the
authorization for issuance of shares of the capital stock of InSight
issuable under the InSight Stock Plans and (ii) shares of the capital
stock of AHS and Maxum issuable upon the exercise of the stock options and
warrants listed in Section 3.2 of the AHS Disclosure Schedule and Section
4.2 of the Maxum Disclosure Schedule;
(m) Not split, combine or reclassify any shares of its capital
stock of any class or redeem or otherwise acquire, directly or indirectly,
any shares of its capital stock of any class;
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(n) Not incur or become subject to, nor agree to incur or become
subject to, any debt, obligation or liability, contingent or otherwise,
except current liabilities and contractual obligations in the regular and
ordinary course of business; and
(o) Not terminate or make or permit, or agree to make or permit,
any material amendment of, any material contract, mortgage, lease,
license, agreement or other instrument to which it is a party or by which
any of its properties or assets is bound.
9.2 NON-SOLICITATION. Unless and until this Agreement is terminated in
accordance with ARTICLE 13, such InSight Party shall not take any action to
seek, encourage, solicit or support any inquiry, proposal, expression of
interest or offer from any other person or entity with respect to an
acquisition, combination or similar transaction involving such InSight Party or
its business, or any property, assets or securities related thereto (except as
contemplated pursuant to this Agreement, the Merger and the Merger Agreement),
and such InSight Party shall promptly upon receipt thereof inform GE Medical of
the existence of any such inquiry, proposal, expression of interest or offer and
shall not furnish any information to, or participate in any discussions or
negotiations with, any other person or entity with respect thereto.
9.3 CONSENTS. Such InSight Party shall use its best efforts to obtain
all consents (including the consents described on SCHEDULE 7.3) by third parties
that are required for the transfer of the AHS Shares and the Maxum Shares or
otherwise, for the consummation of the transactions contemplated hereby, or in
order to prevent a material breach of or a default under or a termination of any
agreement to which any of the InSight Parties is a party or to which any portion
of the property of the InSight Parties is subject.
ARTICLE 10
ADDITIONAL COVENANTS OF THE INSIGHT PARTIES
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Each of the InSight Parties hereby agrees, from and after the date
hereof (including following the Closing), to keep, perform and fully discharge
the following covenants and agreements:
10.1 ACCESS. Each of the InSight Parties shall give GE Medical and its
representatives full and free access to all properties, books, contracts,
commitments and records and shall furnish GE Medical with all financial and
operating data and other information regarding their respective businesses and
the properties and assets of the InSight Parties as GE Medical may from time to
time reasonably request. Each of the InSight Parties shall promptly notify GE
Medical of any change in the normal course of business or prospects of such
InSight Party or its business and shall keep GE Medical fully informed with
respect thereto.
10.2 ADDITIONAL COVENANTS. Except for transactions expressly approved
in writing by GE Medical, each of the InSight Parties agrees as follows:
(a) Each of the InSight Parties will promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges and levies imposed upon the
income, profits, property, or business of such InSight Party or any
subsidiary thereof; provided, however, that no such tax, assessment,
charge or levy need be paid by an InSight Party if the validity thereof
shall currently be contested in good faith by appropriate proceedings and
if such InSight Party shall have set aside on its books adequate reserves
with respect thereto (unless such tax, assessment, charge, or levy has
given rise to the commencement of proceedings to foreclose any lien that
may have attached as security therefor). Each of the InSight Parties will
promptly pay or cause to be paid when due, or in conformance with
customary trade terms, all other indebtedness incident to the operations
of such InSight Party;
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(b) Each of the InSight Parties will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted,
and from time to time make all necessary and proper repairs, renewals,
replacements, additions and improvements thereto; and, each of the InSight
Parties will at all times comply with the provisions of all material
leases to which such InSight Party is a party or under which such InSight
Party occupies property so as to prevent any loss or forfeiture thereof or
thereunder;
(c) Each of the InSight Parties will keep its assets that are of
an insurable character insured by financially sound and reputable insurers
against loss or damage by fire and maintain extended coverage insurance
in amounts customary for companies in similar businesses and each of the
InSight Parties will maintain, with financially sound and reputable
insurers, insurance against other hazards, risks and liabilities to
persons and property to the extent and in the manner customary for
companies in similar businesses;
(d) Each of the InSight Parties will keep true records and books
of account in which full, true and correct entries will be made of all
dealings or transactions relating to its business and affairs in
accordance with GAAP;
(e) Each of the InSight Parties shall duly observe and conform to
all valid requirements of governmental authorities relating to the
conduct of such InSight Party's businesses or to such InSight Party's
property or assets;
(f) Each of the InSight Parties shall maintain in full force and
effect its corporate existence, rights and franchises and all licenses
and other rights to use patents, processes, licenses, trademarks, trade
names and copyrights owned or possessed thereby and deemed to be
necessary to the conduct of its business;
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(g) In the event the services of the independent public
accountants hereafter employed by the InSight Parties are terminated,
the InSight Parties will (i) promptly thereafter notify GE Medical by
letter setting forth the reasons for the termination of such services and
(ii) request the firm of independent public accountants whose services are
terminated to deliver to GE Medical a letter from such firm setting forth
the reasons for the termination of their services. In the event of such
termination, the InSight Parties will promptly thereafter engage another
firm of independent public accountants. In its notice to GE Medical, the
InSight Parties shall state whether the change of accountants was
recommended or approved by the InSight Parties' Board of Directors;
(h) Each of the InSight Parties will cause each person now or
hereafter employed thereby in a management position with access to
confidential information to enter into a proprietary information agreement
substantially in the form approved by such InSight Party's Board of
Directors.
10.3 MAINTENANCE OF SINGLE LOCATION OF PRINCIPAL EXECUTIVE OFFICE. Each
of the InSight Parties shall use its best efforts to establish and maintain the
principal executive offices and principal administration functions of the
InSight Parties at one location.
10.4 ADOPTION OF STOCK OPTION GUIDELINES. InSight shall not, without
first obtaining the approval of GE Medical, establish, adopt or approve (a)
guidelines with respect to the granting and vesting of stock options or shares
issued under the Insight Stock Plans or (b) the specific terms, conditions and
provisions of stock options or shares issued under the Insight Stock Plans which
could result in the issuance of more than 882,434 shares, in the aggregate,
under such Insight Stock Plans.
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ARTICLE 11
COVENANTS OF ALL PARTIES
Each party hereto hereby agrees to keep, perform and fully discharge
the following covenants and agreements:
11.1 CONFIDENTIALITY. (a) Each party hereto shall treat all information
regarding the other parties hereto obtained in connection with the negotiation
and consummation of the transactions contemplated by this Agreement, the Debt
Restructuring, the Debt Restructuring Agreements, the Merger and the Merger
Agreement as confidential and shall not use any such information in any manner
other than in furtherance of such transactions; provided, however, that such
confidentiality obligation shall not apply to information disclosed or used by
any party (the "DISCLOSING PARTY") with respect to any other party hereto (the
"SUBJECT PARTY") that (i) is or becomes generally available to the public other
than as a result of a disclosure by the Disclosing Party, (ii) was available to
the Disclosing Party on a nonconfidential basis prior to the disclosure by the
Subject Party or (iii) becomes available to the Disclosing Party on a
nonconfidential basis from a person or entity (other than the Subject Party)
which is not otherwise bound by a confidentiality agreement with the Subject
Party.
(b) Unless otherwise required by law, none of the parties hereto
shall, without the prior written consent of the other parties hereto, disclose
to any person or entity (other than those actively and directly participating in
the transactions contemplated by this Agreement, the Debt Restructuring, the
Debt Restructuring Agreements, the Merger and the Merger Agreement) the terms,
conditions or acts relating to the transactions contemplated by this Agreement,
the Debt Restructuring, the Debt Restructuring Agreements, the Merger and the
Merger Agreement (including the fact that discussions are taking place with
respect to such transactions or the status thereof), or the fact that
confidential information has been made available thereto. In the event that any
of the parties hereto is required by law to make any disclosure otherwise
prohibited under this SECTION
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<PAGE> 48
11.1(b), such party shall provide to the other parties hereto advance written
notice of such required disclosure (including with such advance written notice
the text of such required disclosure) at least two business days prior to such
required disclosure.
11.2 EXPENSES. Notwithstanding SECTION 2.1(b), each of AHS and Maxum
shall reimburse to GE Medical an amount equal to 40 percent of the legal costs
incurred by GE Medical in connection with the transactions contemplated by this
Agreement, the Debt Restructuring, the Debt Restructuring Agreements, the Merger
and the Merger Agreement from and after July 1, 1995. Such payments shall be
made by AHS and Maxum within 30 days of the receipt by AHS or Maxum, as the case
may be, of GE Medical's invoice with respect to such legal costs, whether or not
such transactions are consummated.
11.3 FURTHER ASSURANCES. Each party hereto shall execute and deliver
such instruments and take such other actions as the other parties hereto may
reasonably require in order to carry out the transactions contemplated by this
Agreement.
ARTICLE 12
SURVIVAL AND INDEMNIFICATION
12.1 SURVIVAL. All representations, warranties, covenants and
agreements contained in this Agreement or in any document delivered pursuant
hereto shall be deemed to be material and to have been relied upon by the
parties hereto and shall survive the Closing and shall be fully effective and
enforceable for a period of two years following the Closing Date (unless a
different period is specifically assigned thereto), but shall thereafter be of
no further force or effect, except as they relate to claims for indemnification
timely made pursuant to this ARTICLE 12. The representations and warranties set
forth in this Agreement shall not be affected by any investigation, verification
or examination by any party hereto or by any person or entity on behalf of any
such party except as specifically set forth in an Exhibit, Schedule or document
delivered pursuant to this Agreement.
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<PAGE> 49
The indemnification provisions set forth in this Agreement are nonexclusive and
shall not affect any other remedy which may be available under common law or
otherwise.
12.2 INDEMNIFICATION BY AHS. AHS shall indemnify and hold harmless GE
Medical from and against any and all loss, damage, expense, claim, liability or
obligation, including court costs, reasonable attorneys' fees and other expenses
for investigating or defending any actions or threatened actions (collectively,
"LOSSES"), related to, caused by or arising from any misrepresentation, breach
of warranty or failure to fulfill any covenant or agreement of AHS contained
herein, together with interest thereon at a floating interest rate (equal at all
times to the rate of interest published by the Wall Street Journal from time to
time as the "prime rate" (the "ANNOUNCED RATE")) from the date upon which such
loss, damage, expense or liability was incurred to the date of payment (but in
no event higher than the highest rate then permissible under law); provided,
however, that nothing herein shall be construed to entitle GE Medical as
indemnitee under this Section to recover interest on Losses, in excess of the
interest that would be payable if the Announced Rate is applied to Losses
(exclusive of any interest component thereof) from the date such Losses were
incurred until the date that such Losses are paid to GE Medical.
12.3 INDEMNIFICATION BY MAXUM. Maxum shall indemnify and hold harmless
GE Medical from and against any and all Losses related to, caused by or arising
from any misrepresentation, breach of warranty or failure to fulfill any
covenant or agreement of Maxum contained herein, together with interest thereon
at the Announced Rate, subject to the limitation on payment of interest set
forth in the proviso to SECTION 12.2.
12.4 INDEMNIFICATION BY THE INSIGHT PARTIES. The InSight Parties shall,
jointly and severally, indemnify and hold harmless GE Medical from and against
any and all Losses related to, caused by or arising from any misrepresentation,
breach of warranty or failure to fulfill any covenant or agreement of the
InSight Parties contained herein, together with interest thereon at the
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<PAGE> 50
Announced Rate, (subject to the limitation on payment of interest set forth in
the proviso to SECTION 12.2).
12.5 NOTICE. Any party seeking indemnification pursuant to this ARTICLE
12 (an "INDEMNIFIED PARTY") shall give prompt written notice to the indemnifying
party (the "INDEMNIFYING PARTY") of the facts and circumstances giving rise to
the claim (the "NOTICE"). Any claim for indemnification asserted in writing
before the second anniversary of the Closing Date shall survive until resolved
or judicially determined. Upon receipt of the Notice, the Indemnifying Party
receiving the Notice shall have the option to protest any claim or demand
referred to in the Notice, at the Indemnifying Party's own cost and expense. In
addition, each Indemnified Party may also participate at such party's expense in
such contest or defense. Such option shall be exercised by the giving of notice
by the Indemnifying Party to each Indemnified Party within 30 calendar days of
receipt of the Notice. Any claim for indemnification which is not protested by
the 30th day following receipt of notice thereof shall be deemed valid and shall
be due and payable in full on the 31st day following such receipt.
ARTICLE 13
TERMINATION
13.1 TERMINATION. This Agreement may be terminated at any time prior to
the consummation of the Merger, and the transactions related thereto:
(a) by mutual consent of GE Medical and the InSight Parties;
(b) by either GE Medical or the InSight Parties if the Merger
shall not have been consummated on or before September 30, 1996 despite
the good faith effort of such party to effect such consummation (unless
the failure to so consummate the Merger by such date shall be due to the
breach of this Agreement or the Merger Agreement by the party seeking to
terminate this Agreement);
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<PAGE> 51
(c) by GE Medical if (i)(A) there are inaccuracies in the
representations and warranties of any of the InSight Parties that would
have a Material Adverse Effect on any of the InSight Parties, (B) there
has been a material breach on the part of any of the InSight Parties in
the covenants of such InSight Party set forth herein, or any failure on
the part of any of the InSight Parties to comply with its material
obligations hereunder, or any other events or circumstances shall have
occurred, such that, in any such case, any of the InSight Parties could
not satisfy, on or prior to September 30, 1996, any of the conditions to
the Closing set forth herein or (ii) AHS and Maxum shall not have received
the approval by the requisite votes cast by the stockholders of AHS and
Maxum, respectively, with respect to the Merger or any other transaction
contemplated in connection therewith or herewith;
(d) by the InSight Parties if (i)(A) there are inaccuracies in the
representations and warranties of GE Medical having a Material Adverse
Effect on its ability to consummate the transaction contemplated hereby or
(B) there has been any failure on the part of GE Medical to comply with
its material obligations hereunder, or any other events or circumstances
shall have occurred, such that, in any such case, GE Medical could not
satisfy on or prior to September 30, 1996, any of the conditions to the
Closing set forth in Article 7 of this Agreement, (ii) AHS and Maxum shall
not have received the approval by the requisite votes cast by the
stockholders of AHS and Maxum, respectively, with respect to the Merger,
or (iii) prior to the approval of the Merger by the stockholders of AHS
and Maxum, (A) either AHS or Maxum receives a firm offer with respect to
any transaction (other than the Merger) involving any disposition or other
change of ownership of its stock or material assets (an "ACQUISITION
TRANSACTION") that is reasonably capable of being financed, (B) in the
good faith determination of its Board of Directors after consultation with
its financial advisors, such Acquisition Transaction is financially
superior to
50
<PAGE> 52
the Merger and (C) its Board of Directors, after consulting with its
outside legal counsel, determines in good faith that to proceed with the
Merger would violate its fiduciary duties under applicable law.
13.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement by either the InSight Parties or GE Medical as provided in SECTION
13.1, this Agreement shall forthwith become void and there shall be no liability
or obligation on the part of GE Medical or the InSight Parties or their
respective officers or directors (other than as provided in SECTION 11.2 and
except for breach of the confidentiality provisions of SECTION 11.1, and except
to the extent that such termination results from the breach by a party hereto of
any of its representations, warranties, covenants or agreements set forth in
this Agreement).
ARTICLE 14
GENERAL
14.1 EXPENSES. Except as otherwise provided in SECTION 11.2, each party
to this Agreement shall pay its own costs and expenses in connection with the
transactions contemplated hereby.
14.2 AMENDMENT. This Agreement cannot be altered, amended, or modified,
in any respect, except by a writing duly executed by all of the parties hereto.
14.3 ENTIRE AGREEMENT. This Agreement is the entire agreement between
the parties with respect to the subject matter hereof and all prior agreements,
understandings, oral agreements and writings are expressly superseded hereby.
14.4 SEVERABILITY. The provisions of this Agreement are severable. If a
court of competent jurisdiction rules that any provision of this Agreement is
invalid or unenforceable, the court's ruling will not effect the validity and
enforceability of the other provisions of this Agreement.
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<PAGE> 53
14.5 CONSTRUCTION. The parties agree that this Agreement shall be
construed without regard to the draftsman thereof and shall be construed as
though all parties to this Agreement equally participated in its drafting so as
to fairly accomplish the purpose and intentions of the parties hereto and shall
not be construed for or against any party. Each of the parties acknowledges that
it has been represented by legal counsel of its own choice in connection with
the preparation, review and execution of this Agreement, and that this Agreement
has been executed by the parties with the consent of and on advice of such
counsel.
14.6 ATTORNEYS' FEES. In the event any party brings an action to
enforce any of the provisions of this Agreement or the rights of the parties
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees and costs.
14.7 STRICT PERFORMANCE. The failure of any party to this Agreement to
insist upon strict performance of any of the terms or conditions of this
Agreement, or to exercise any right or remedy, shall not be construed as waiving
subsequent strict performance of any such terms, covenants, conditions, or any
such rights or remedies.
14.8 GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the internal laws
of the State of Delaware, without giving effect to principles of conflicts of
laws.
14.9 INTERPRETATION. Whenever used in this Agreement, the word "PERSON"
includes, without any limitation, natural persons, corporations, partnerships,
associations, organizations, joint ventures, government entities, and any and
every other entity. The title of the various paragraphs in this Agreement are
intended solely for convenience of reference, and are not intended and shall not
be deemed for any purpose whatsoever to modify, explain or place any
construction upon any of the provisions of this Agreement and shall not affect
the meaning or interpretation of this Agreement.
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<PAGE> 54
14.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective legal representatives, successors
and assigns, as applicable. Notwithstanding the forgoing, this Agreement may not
be assigned by AHS, Maxum or InSight without the prior written consent of GE
Medical.
14.11 INJUNCTIVE RELIEF. InSight acknowledges that GE Medical would be
irreparably harmed in the event of any breach or violation by InSight of any of
the terms of this Agreement and that remedies at law would be inadequate. In the
event of any breach or threatened breach of such terms, GE Medical shall be
entitled to obtain, without posting bond, a temporary restraining order and
temporary and permanent injunctive relief restraining and enjoining any such
breach or threatened breach. The remedies provided for in this SECTION 14.11
shall be in addition to any and all other rights and remedies that may be
available to GE Medical at law, in equity and under this Agreement, all of which
are expressly reserved.
14.12 ATTORNEYS' FEES. In the event any party brings an action to
enforce any of the provisions of this Agreement or the rights of the parties
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees and costs.
14.13 ARBITRATION. Any dispute arising out of, relating to or in
connection with this Agreement shall be resolved by binding arbitration. The
arbitration shall consist of a panel of three arbitrators from the JAMS panel of
retired judges and shall take place in Milwaukee, Wisconsin, at a place
designated by the parties (or, failing agreement, by the arbitrators) and shall
commence as soon as practicable on a date mutually agreed upon by counsel for
the parties (or the party if a party does not have counsel) and the arbitrators.
The arbitration proceeding shall be conducted confidentially and the parties
shall take the necessary actions to assure the confidentiality of the
arbitration proceeding. The arbitration proceeding shall be in accordance with
the then-current rules for arbitration established by JAMS, insofar as such
rules are not inconsistent with the
53
<PAGE> 55
provisions of this Agreement. The party desiring to institute arbitration shall
serve written notice to the other party (with copies to all parties to this
Agreement). InSight shall name one arbitrator and GE Medical shall name a second
arbitrator and the two arbitrators so named shall name a third arbitrator. The
names of the two arbitrators named by GE Medical and InSight shall be submitted
within 45 days of the notice instituting arbitration. When such arbitrators have
chosen the third arbitrator, such three arbitrators shall proceed with the
arbitration. The prevailing party in any such arbitration proceeding (or legal
or equitable action instituted as authorized elsewhere in this Agreement) shall
be entitled to an award of attorneys' fees and costs in addition to any other
relief awarded. Any award rendered in such an arbitration proceeding shall be
final and binding on the parties and may be entered in any court having
jurisdiction over the parties and/or the subject matter thereof. The arbitrators
shall have no jurisdiction or authority to add to, detract from, or alter in any
way the provisions of this Agreement, but shall limit their considerations and
decision to the interpretation and application of this Agreement to the subject
matter presented to them. Nothing contained in this SECTION 14.13 shall restrict
GE Medical's right to institute and prosecute any legal or equitable action in
court for temporary restraining orders and temporary and permanent injunctive
relief or otherwise as deemed appropriate by GE Medical.
14.14 NOTICES. All notices or demands by any party relating to this
Agreement shall be in writing and shall be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested, or by
telefacsimile, or telegram to the parties at their addresses set forth below:
If to AHS
or InSight: American Health Services Corp.
4440 Von Karman Avenue, Suite 320
Newport Beach, California 92660
Attn: Thomas V. Croal
Fax No.: (714) 851-4488
54
<PAGE> 56
with a
copy to: Harvey C. Flodin, Esq.
c/o American Health Services Corp.
4440 Von Karman Avenue, Suite 320
Newport Beach, California 92660
Fax No.: (714) 851-4488
If to Maxum
or InSight: Maxum Health Corp.
14850 Quorum Drive, Suite 400
Dallas, Texas 75240
Attn: Glenn Cato
Fax No.: (714) 777-7599
with a
copy to: Storey Armstrong Steger & Martin, P.C.
1445 Ross Avenue, Suite 1600
Dallas, Texas 75202
Attn: Stephen C. Morton, Esq.
Fax No.: (214) 855-6853
If to GE
Medical: General Electric Company
20825 Swenson Drive
Waukesha, Wisconsin 53186
Attn: Richard Berger
Fax No.: (414) 798-4528
with a
copy to: McDermott, Will & Emery
2049 Century Park East, 34th Floor
Los Angeles, CA 90067
Attn: Ira J. Rappeport, Esq.
Fax No.: (310) 277-4730
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other
parties. All notices or demands sent in accordance with this paragraph, shall be
deemed to have been duly given (a) on the date of service if served personally
on the party to whom notice is to be given or if transmitted via telefacsimile
or (b) three (3) calendar days if mailed to the party to whom
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<PAGE> 57
notice is to be given by first class or air mail, postage prepaid.
14.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
56
<PAGE> 58
IN WITNESS WHEREOF, the parties hereto have entered into and executed
this Preferred Stock Acquisition Agreement as of the date indicated above.
AMERICAN HEALTH SERVICES CORP.
By: _____________________________
Title: _____________________________
MAXUM HEALTH CORP.
By: _____________________________
Title: _____________________________
INSIGHT HEALTH SERVICES CORP.
By: _____________________________
Title: _____________________________
GENERAL ELECTRIC COMPANY
By: _____________________________
Title: _____________________________
<PAGE> 1
EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Radiosurgery Centers, Inc. Delaware
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statements, File Numbers 33-7609, 33-22873 and 33-51532.
ARTHUR ANDERSEN LLP
Orange County, California
March 25, 1996
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