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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission
For the fiscal year ended December 31, 1997 File Number: 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3119929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Red Bank, New Jersey 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 224-9292
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
--
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant based upon the last reported sale price of the Common Stock on March
27, 1998 was approximately 9,802,000. As of March 27, 1998 there were
10,386,474 shares of Common Stock outstanding.
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HEALTHCARE IMAGING SERVICES, INC.
1997 Annual Report on Form 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K 49
Signatures 56
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PART I
ITEM 1. BUSINESS
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Introduction
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Since its formation in 1991, HealthCare Imaging Services, Inc. and its
subsidiaries (the "Company") have been principally engaged in the business of
establishing and operating fixed-site magnetic resonance imaging ("MRI")
centers. MRI involves the utilization of high strength magnetic fields and
applied radio waves to provide cross sectional images of the anatomy. MRI has
become a preferred diagnostic tool of the medical profession because its images
are generally better defined and more precise than those produced by other
diagnostic imaging tests, without the use of harmful ionizing radiation. As of
December 31, 1997, the Company operated seven fixed-site MRI centers, including
one multi-modality fixed-site facility providing MRI, computerized axial
tomography ("CAT"), bone densitometry, mammography, ultrasound and x-ray/
fluoroscopy services. See "The Company and its Facilities."
As the Company previously announced on March 2, 1998, it has decided
to expand its strategic focus into the area of physician practice management.
To that end, the Company has entered into two letters of intent with respect
to the acquisition of all of the outstanding capital stock of Jersey Integrated
HealthPractice, Inc. ("JIHP"), a management services organization formed and
owned by Pavonia Medical Associates, P.A. ("Pavonia") and Liberty Health Care
Systems, Inc. ("Liberty") of Jersey City, New Jersey. Pavonia, one of the
largest independent, multi-specialty practices in New Jersey, is comprised of
over 60 physicians serving over 75,000 patients in 6 locations in New Jersey.
In consideration for this acquisition, the letters of intent provide, among
other things, that the Company would pay and/or issue to Pavonia and Liberty,
in the aggregate, (i) $7.0 million in cash, (ii) 5.5 million shares of the
Company's common stock (500,000 shares of which may be subject to certain
post-closing adjustments), and (iii) $5.0 million of convertible redeemable
preferred stock of the Company. The preferred stock would be redeemable by the
Company at any time and would be convertible, after the second anniversary
of issuance, at the election of the Company or the holder at the then fair
market value of the common stock. The letters of intent also provide that
JIHP would enter into a non-cancelable (subject to certain limited exceptions)
management services agreement with Pavonia, pursuant to which JIHP would
provide all non-medical management services to Pavonia and, in exchange
therefore, would be entitled to an annual management fee equal to the greater of
(x) 10% of the annual gross revenues of Pavonia and (y) $2.0 million per
annum. The consummation of the transactions is subject to several material
conditions including among others, the receipt of necessary financing, the
approval of the Company's stockholders, the negotiation of definitive
documentation, the absence of material adverse changes and the satisfactory
completion of due diligence. Although, there can be no assurance that the
transaction will be completed, the Company expects, subject to the
satisfaction of all conditions, to consummate it within the next several
months.
In furtherance of its objective of establishing physician practice
management operations in New York and New Jersey, the Company is actively
negotiating with several primary care and multi-specialty physician practices,
as well as the faculty practices of several hospitals. The Company has not
entered into any definitive acquisition agreement or administrative service
agreement with respect to its physician practice management operations,
although it expects to do so within the next several months.
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One of the Company's seven fixed-site MRI centers is an MRI facility
located in Brooklyn, New York (the "Brooklyn Facility") which was acquired by
the Company in October 1991 and which had been operating (through New York MR
Associates, a predecessor entity) since 1986. The Company also operates (i) a
fixed-site MRI facility, with x-ray, in Edgewater, New Jersey (the "Edgewater
Facility") (which commenced operations in July 1991 and was operated as a joint
venture prior to July 1, 1994 when such venture was restructured), (ii) a
multi-modality fixed-site facility in Ocean Township, New Jersey ("the "Ocean
Township Facility") providing MRI, CAT, bone densitometry, mammography,
ultrasound and x-ray/fluoroscopy services (which commenced MRI services in
December 1993) and (iii) a fixed-site MRI facility, with ultrasound, in New
York City, New York (the "New York City Facility") (which was acquired by the
Company in November 1997 and which had been operating since February 1991.
See "The Company and its Facilities." The other three fixed-site MRI facilities
are joint ventures in which the Company is the general partner. These joint
ventures operate fixed-site MRI facilities in Wayne, New Jersey (the "Wayne
Facility") (which commenced operations in April 1992), Philadelphia,
Pennsylvania (the "Philadelphia Facility") (which commenced operations in
November 1992) and Secaucus, New Jersey (the "Secaucus Facility") (which
commenced operation in May 1997). See "The Company and its Facilities." The
Company subleases its fixed-site MRI facility located in Catonsville, Maryland.
The Company also owns one specially designed mobile MRI unit (through May 1997
the Company owned two mobile MRI units, of which one was sold in June 1997).
See "Mobile MRI Division."
The Company provides MRI services, directly or through joint ventures
in which the Company (or a subsidiary) is the general partner, to health care
providers which consist primarily of individual physicians and private medical
practices. The Company generally leases its MRI equipment directly or through
such joint ventures to professional practice groups ("Medical Lessees") who, in
turn, make the equipment available to their patients and other health care
providers with whom they or the Company have relationships. A typical Medical
Lessee pays the Company a flat fee on a daily, weekly, or per scan basis for
the use of the equipment and an administrative charge for the use of the
Company's support personnel and support services, such as clerical work,
billing and collection services and performing other associated non-medical
functions. The health care providers utilizing the Company's services have a
need for MRI services but typically do not own their own equipment due to
insufficient patient volume, the high cost of owning and operating such
equipment or the lack of expertise in this highly specialized field.
Over the past few years, the Company's results of operations have been
negatively impacted by several developments in the health care field. Among
other things, the trend in the industry towards managed care and Health
Maintenance Organizations ("HMOs") business has resulted in lower reimbursement
rates for the medical procedures performed and an increased demand for lower
health care costs. The Company is addressing this trend by actively pursuing
managed care opportunities and is continuing to assess the health care industry
within which the Company participates in order to adapt to the changing
marketplace.
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MRI Technology
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Since 1983, when MRI technology was introduced for medical imaging,
this modality has become a powerful tool for diagnostic imaging. MRI provides
clinicians with information pertaining to soft tissue, neurology and orthopedic
applications which otherwise would be unavailable without utilizing diagnostic
equipment having the ability to perform invasive procedures.
MRI uses radio frequencies and high strength magnetic field technology
to produce images in all anatomic planes and of varying thin sections. This
combination permits visualization of small, similar structures to be evaluated
without surgical intervention in most cases to determine pathology and
physiologic deficiencies. Once acquired, these images are viewed on video
screens and stored on x-ray film and optical disc storage for long term use.
MRI does not use ionizing radiation to provide images. Therefore, it
has been recognized as a safer modality than CAT scans or conventional x-ray
studies. MRI has proven to be superior to other diagnostic imaging procedures
by providing superior contrast resolution between normal/abnormal structures
and the ability to discern disease in the brain, such as multiple sclerosis.
MRI is also the modality of choice for lesions and tumors in the central
nervous system, as well as for orthopedic applications such as tears of
structures in the joints.
Originally, MRI was used solely for brain, spine and orthopedic
imaging. Now there are both approved and experimental MRI methods which are
able to monitor brain activity. Magnetic resonance spectroscopic imaging
("MSRI") displays brain cells based on the different chemicals they contain. By
utilizing this procedure, physicians will become more knowledgeable of
abnormalities such as epilepsy, AIDS, brain tumors and Alzheimer and their
affects on the brain. Neurodegenerative diseases such as Alzheimers are
diagnosed by examining the composition of the brain cells and neurons.
As MRI progresses into the next decade of enhancements, manufacturers
have invested their research efforts into the applications of magnetic
resonance angiography ("MRA"). MRA involves the acquisition of pulse sequences
and computer manipulation of data to compile images which may be viewed on
x-ray film or a monitor and permit complete visualization of anatomy in a
360-degree plan of rotation. The anatomy which is demonstrated is the vascular
structures of the central nervous system and displays the blood flow, or
abnormalities, of the region. Researchers have found that MRAs have the
potential to reduce the cost of bypass surgery in the legs by cutting down the
length of inpatient hospital stays, and in some cases, it can replace the
conventional angiography.
Cine applications permit visualization of multiple scans into a block
so that the heart and cardiac vasculature may be "put into motion" for the
performance of a diagnostic evaluation of cardiac structures.
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Kinematic studies, also known as range of motion ("ROM"), has enabled
MRI providers to demonstrate the joints of the body as if in motion. This
technique requires images to be acquired in various degrees of
flexion/extension, permitting the radiologist to view the full motion phase of
the joint in question. This has been helpful in demonstrating diseases of the
knee, shoulder and spine, as well as viewing the temporomandibular joint as
never seen before due to the dynamics of the scan itself.
Fast spin echo ("FSE") has also had a dramatic impact on MRI. MRI
equipment with FSE has the capability to scan at a faster speed without
compromising quality. This technique provides rapid acquisition of data which
helps to eliminate patient time within the scanner, thereby increasing patient
comfort, patient throughput and ability to visualize pathology more
effectively. In addition to throughput, this enhancement also allows more
anatomy to be covered, therefore increasing the amount of information available
to the radiologist for interpretation.
A combination of new fast scan capabilities and improved imaging
contrast agents have been developed to be used in connection with MRI to
diagnose liver metastases, pelvic diseases and certain vascular abnormalities.
These applications are expected to become cost-effective alternatives to
certain exploratory surgical procedures.
According to some researchers, MRI is becoming the modality of choice
for gynecologic imaging purposes. Ultrasound is often the prescribed imaging
tool because it is less expensive. MRI can more precisely discover
gynecological disorders such as the location of recurring endometriosis. If
ultrasound imaging of the pelvis is found to be indeterminate, the patient will
undergo diagnostic laparoscopy, which can cost up to four times the amount of
an MRI.
Manufacturers of MRI systems have identified the need to improve the
quality of the information acquired by the system. This is done with the use of
"surface coils," which act as an antenna to the MRI system. New technology has
introduced quadrature surface coils, which provide a minimum of four times the
signal produced by the system. The advantage of these coils is better image
quality, faster scan times and better information available to the radiologist
for interpretation.
Over the next several years, it is expected that new imaging
techniques and configurations of MRI systems will surface. Breast imaging for
implants and carcinomas is currently under investigation and will soon become a
forerunner in state of the art diagnostic tools for patients. MRA protocols and
research continues to progress in cardiac and abdominal areas as well as
peripheral (extremity) arterial and venus acquisitions. Manufacturers have
determined the need for mid-field imaging systems as well as the specialty
systems for large and claustrophobic patients, therefore, all major
manufacturers of MRI systems are now in the process of providing "open" MRI
units. Manufacturers have been working on other surface coils, such as phased
array coils and intracavitary coils, to provide higher quality scans with
better diagnostic capabilities in the future.
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The Company plans to continue to provide the medical community with
state of the art technology. Currently, three of the Company's MRI systems have
been upgraded to include FSE, allowing faster scan times with improved imaging,
as well as the improvement of throughput at the facilities using such systems.
Likewise, these systems have been upgraded to include the surface coils
(quadrature) needed to provide superior image quality.
Also, the Company, keeping with its plan to provide the community with
state of the art equipment, has installed a new Hitachi Airis MRI unit at its
Ocean Township Facility. The advanced Open Air MRI is completely open to
eliminate patient claustrophobia. This magnet is six times stronger than most
other open-air-type MRIs, resulting in greater image detail, equal to that of
tunnel-type units. In addition, the Company has accepted delivery of, and is
presently installing, a new Hitachi Airis at its Edgewater Facility, which
installation will be completed in April 1998.
The Company and its Facilities
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The Company provides various management services, including billing
and collection services, clerical and bookkeeping services and all
non-physician personnel services, including trained MRI radiological
technologists, to its Medical Lessees.
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The Company's longest operating facility is the Brooklyn Facility. The
Company leases its Brooklyn premises from DMR Associates, L.P., a limited
partnership ("DMR"), and the MRI equipment at such facility from DVI Financial
Services, Inc. ("DFS"), a former significant stockholder of the Company. DMR is
owned by MR General Associates, L.P., as the general partner ("MR Associates")
and DFS, as a limited partner. MR Associates is in turn owned by the Company's
Chairman of the Board, President and Chief Executive Officer (the "CEO") and
another director of the Company. Pursuant to an arrangement with Kings Medical
Diagnostic Imaging, P.C. ("Kings Medical"), one of the Company's Medical
Lessees, the Company subleases the premises and the necessary MRI equipment to
Kings Medical. In return, Kings Medical pays the Company monthly lease payments
for the use of the facility and equipment, a flat fee per patient scan and an
administrative charge.
The Company also operates fixed-site MRI facilities in Edgewater and
Wayne, New Jersey, Philadelphia, Pennsylvania and a multi-modality fixed-site
facility in Ocean Township, New Jersey. The Edgewater Facility commenced
operations in July 1991, the Wayne Facility commenced operations in April 1992,
the Philadelphia Facility commenced operations in November 1992 and the Ocean
Township Facility commenced operations in December 1993. The Ocean Township
Facility and the Edgewater Facility (which was operated as a joint venture
prior to July 1, 1994 when such venture was restructured) are wholly-owned by
the Company. Each of the Wayne, Secaucus and Philadelphia facilities are joint
ventures and therefore are structured similarly. In each joint venture, a
wholly-owned subsidiary of the Company has formed a partnership with certain
individual medical professionals and other individuals (the "Medical Group").
Between 51% and 60% of each of the partnerships is owned by one of the
Company's subsidiaries, which is the general partner, and the remainder is
owned by the Medical Group, which is the limited partner. The Company has
entered into equipment leases for the MRI units and related medical equipment
and has subleased such equipment to each partnership. Each partnership makes
the MRI equipment available to the health care providers who utilize its
facility in exchange for a per scan use charge plus an administrative fee for
the provision of the MRI equipment and associated support services, comparable
to the support services provided at the Brooklyn, New York City, Edgewater and
Ocean Township facilities. In addition, in order to provide the necessary
non-medical support services to the health care providers who utilize its
facility, each partnership has entered into a management services arrangement
with the Company pursuant to which the Company provides all non-medical
services and personnel necessary to support the provision of the MRI services
at the facility in exchange for an administrative support fee.
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"), a
professional corporation owned by Dr. George Braff. This professional
corporation operates a fixed-site MRI facility, with ultrasound, located at 45
Beekman Street in New York City (New York City Facility). The consideration for
the acquisition was (i) the assumption of certain obligations and liabilities
of NYC MRI, including payments to be made under a capital lease of up to
approximately $300,000, (ii) cash in the amount of $900,000, (iii) the issuance
of one million (1,000,000) shares of Common Stock, and (iv) the issuance of a
$300,000 promissory note that was due and paid on December 31, 1997. The
Company anticipates, based on the historic utilization rate of the facility,
this acquisition will be immediately accretive to earnings. In connection with
the acquisition, the Company also entered into a consulting services agreement
which, among other things, provides that Dr. Braff will continue to provide all
medical services at the New York City Facility. Dr. Braff is also the Medical
Director of the Company and the supervising radiologist at two of the Company's
other MRI facilities. See "Item 13. Certain Relationships and Related
Transactions."
In November 1996, the Company formed a limited liability company, of
which it owns sixty (60%) percent, with Practice Management Corporation to
provide on-site MRI services to the Meadowlands Hospital Medical Center
(Secaucus Facility). The site commenced operations on May 8, 1997 utilizing one
of the Company's mobile MRI units. The operating results of the Company for
the year ended December 31, 1997 were adversely affected by this facility
which incurred a loss of $383,195. In addition, as of December 31, 1997, the
Company made working capital loans to the joint venture of approximately
$941,000 inclusive of management fees and intercompany interest. Based upon
losses sustained and due to the expectation of continuing losses, the Company
has decided to sell the mobile MRI unit and cease its MRI services at the
Secaucus Facility. The Company has entered into an agreement for the sale of
the mobile MRI unit to an unaffiliated third party and entered into an
agreement, effective December 31, 1997, to purchase 40% of this
joint venture which resulted in the Company owning 100% of the venture as of
January 1, 1998. No loss is anticipated in connection with the sale and
cessation of operations and termination of the joint venture.
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Mobile MRI Division
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The Company entered into an arrangement, effective September 1, 1994
until July 1996, pursuant to which it operated solely as a sublessor of its
four (4) mobile MRI units rather than as an operator of such equipment. Mark R.
Vernon, the brother of the CEO, and the Vice President, Director of Operations
of the Company since April 1997, is the President and a significant stockholder
of such sublessee of the Company's mobile MRI equipment. The other stockholders
of the sublessee include certain former customers of the Company. The Company
decided to enter into this restructuring arrangement due to the competitive
pressures associated with the mobile MRI business and in order to focus its
energy and management expertise on fixed-site imaging sites as well as further
diversification in the health care industry. As a result of the restructuring
of its mobile MRI operations, the Company recorded a restructuring charge in
fiscal 1994 in the amount of $2,375,000.
In December 1995, due to the sublessee's failure to remain current
with its 1995 monthly payment obligations, the Company repossessed and sold one
of its mobile MRI units for $625,000. In February 1996, the Company terminated
its master agreement with the sublessee and repossessed the remaining three (3)
mobile MRI units from the sublessee as a result of the failure of the sublessee
and its customers to satisfy their obligations thereunder to the Company. In an
attempt to satisfy the past due amounts owed to the Company, the sublessee and
its customers provided the Company with cash and additional patient receivable
claims to partially offset the amounts owed to the Company. The additional
patient receivable claims were to supplement the amounts previously submitted
to the Company to satisfy prior past due indebtedness from the sublessee and
its customers. The Company soon after returned the three (3) mobile MRI units
to the sublessee. Effective July 27, 1996, the Company again repossessed the
three (3) mobile MRI units due to the sublessee's continuing failure to meet
its obligations to the Company.
In August 1996, the Company sold one of the Company's mobile MRI
units. There was no gain or loss resulting from such disposition.
The Company has entered into an agreement with certain other creditors
of the sublessee in respect to the collection of the sublessee's accounts
receivable. At December 31, 1997 the Company re-evaluated its future
obligations relating to its restructured mobile MRI division and concluded that
the remaining reserve at December 31, 1997 is adequate.
Philadelphia Facility
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The Company's Philadelphia Facility, which has been operating since
November 1992, continues to operate at a loss. The overall operating results of
the Company were affected during the years ended December 31, 1997 and 1996 due
to the operational results of the Philadelphia Facility which incurred losses
of $175,247 and $374,969, respectively. In addition, in order to
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support the operations of this facility, the Company has made, and continues to
make, working capital loans to this facility. As of December 31, 1997, the
amount of the working capital loans made to this joint venture was
approximately $2,550,000 (of which approximately $437,000 was loaned during
1997) inclusive of management fees and intercompany interest. In order to
become profitable, this facility must attain a certain volume of business and
it is uncertain whether such business level will ever be attained. The Company
cannot at this time determine when or if these working capital loans will be
repaid. The Company has expanded advertising and marketing efforts on behalf of
the Philadelphia Facility which has resulted in a significantly reduced loss
for the year ended December 31, 1997 as compared to December 31, 1996. The
Company is negotiating the purchase of the interest in the Philadelphia
facility not currently owned by it (ie. the limited partners interest) and it
expects to consummate such purchase by the end of fiscal 1998. However, there
can be no assurance as to the timing or consummation of this purchase or as to
the timing or magnitude of a restructuring charge, if any, relating to the
Philadelphia Facility.
Relationship with Certain Medical Lessees
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As previously noted, the Company generally leases its MRI equipment
(directly or through joint ventures) to Medical Lessees primarily located in
New York, New Jersey and Pennsylvania who, in turn, make the equipment
available to their patients and other health care providers (including
individual physicians, physicians' groups and other health care providers
consisting of managed care organizations, labor unions and self-funded
corporations) with whom they or the Company have relationships. For the year
ended December 31, 1997, the Company had five Medical Lessees (Monmouth
Diagnostic Imaging, P.A.; Edgewater Diagnostic Imaging, P.A.; Wayne MRI, P.A.;
Rittenhouse Square Imaging Associates, L.P.; and Kings Medical Diagnostic
Imaging, P.C.) which accounted for approximately 30%, 18%, 17%, 15% and 12% of
total revenues, respectively. For the year ended December 31, 1996, the Company
had five Medical Lessees (Monmouth Diagnostic Imaging, P.A.; Wayne MRI, P.A.;
Edgewater Diagnostic Imaging, P.A.; Kings Medical Diagnostic Imaging, P.C. and
Rittenhouse Square Imaging, L.P.) which accounted for approximately 30%, 21%,
19%, 18% and 12% of total revenues, respectively. For the year ended December
31, 1995, the Company had five Medical Lessees (Monmouth Diagnostic Imaging,
P.A.; Edgewater Diagnostic Imaging, P.A.; Wayne MRI, P.A.; Kings Medical
Diagnostic Imaging, P.C. and Rittenhouse Square Imaging, L.P.) which accounted
for approximately 29%, 21%, 20%, 13% and 12% of total revenues, respectively.
To the extent the Company were to lose any of its existing Medical Lessees,
its revenues and operations would not be materially affected because the
Company believes it will be readily able to replace such Medical Lessees.
Many health care providers do not own MRI equipment because of
insufficient patient volume to justify the costs associated with the
acquisition and operation of an MRI unit, as well as the strict regulatory
environment and management and marketing considerations. Depending upon
features and options selected, an MRI unit costs between approximately $800,000
and $1.6 million. Many health care providers cannot afford a capital investment
of this size or cannot utilize the equipment in a cost-effective manner.
Moreover, a health care provider with sufficient
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patient volume and resources to purchase an in-house MRI unit may still
contract for the use of the Company's services. Among the reasons for such use
of the Company's MRI units are: avoidance of the risk of technological
obsolescence of the equipment; elimination of the need to recruit and employ
qualified technicians; establishment of a patient base before an in-house unit
is installed; provision of additional coverage when patient demand exceeds
in-house capacity; lack of a suitable interior location; changes in Medicare
reimbursement systems resulting in declining profit margins for many hospitals
and other health care providers, thereby reducing capital available to purchase
new and expensive equipment; and lessening the risks of medical malpractice
suits by utilizing state of the art medical technology and related services.
Managed Care
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As managed care continues to take a stronger foothold in the New York
Tri-State region, the diagnostic radiology business has had to cope with
changes brought on by radical reforms in the health care industry. The
continuing consolidation of health care services and the growing number of
partnerships between hospitals and physicians will continue to be the trend
over the next few years. Managed care organizations, which mostly reimburse on
a discounted fee-for-service basis, continue to move toward capitation for all
radiology services.
To date, the Company has contracted with more than 135 managed care
payors and continues to actively pursue managed care contracts with HMOs,
preferred provider organizations and networks ("PPOs" and "PPNs"), third-party
administrators ("TPAs"), labor unions and self-insured companies.
The Company recently secured its first capitated contract with Aetna U.S.
Healthcare for its Ocean Township Facility. The opening of the Women's Center
at the facility and the addition of its new modalities, including CAT,
mammography, ultrasound, x-ray/fluoroscopy and bone densitometry, enabled the
facility to obtain this contract since it now is a multi-modality site. Aetna
U.S. Healthcare currently has more than 40,000 lives in Monmouth County, New
Jersey through its various HMO, point-of-service ("POS") and worker's
compensation managed care products. By February 1998, less than two months
after securing this contract, 39 provider groups had selected the facility as
their capitated radiology facility, representing 15,349 capitated lives in
Monmouth County or more than one-third of the total of Aetna U.S Healthcare
capitated lives in the county. The Company plans to obtain additional capitated
contracts in the near future for all of its facilities.
Nearly thirty-percent (30%) of the Company's gross revenues for 1997
were derived from its managed care business and this number is expected to
exceed thirty-five (35%) by the end of 1998.
Marketing/Sales
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As of December 31, 1997, the Company employed one full-time marketing
and managed
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care executive, one full-time assistant director of marketing, four full-time
sales representatives and two part-time sales representatives. The Company has
also employed other part-time marketing representatives from time to time.
These personnel identify and contact health care providers, managed care
organizations and corporate subscribers which may require the Company's
services. In addition, the Company had entered into excess capacity
arrangements whereby the Company provides the use of its Brooklyn Facility
and all ancillary services during "off-hours" to two licensees. These
arrangements were terminated during fiscal 1997. The Company recognized revenue
on a fixed fee per procedure basis from these licensees. (See Note 11 to the
accompanying financial statements.)
A significant resource for the Company has been existing customer
referrals. Based on historical data, there are over 9,000 physicians who have
referred patients to the Company's seven facilities. A significant amount of
these referrals have been generated through the efforts of the Company's sales
and marketing representatives, who directly call on both existing referring
physicians and potential referrers. The Company also employs consumer
advertising, such as local radio spots and print ads, as a marketing tool to
attract not only physicians, but the patient population as well.
Competition
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The health care industry in general, and the market for advanced
diagnostic imaging services in particular, are highly competitive. In addition
to direct competition from other MRI providers, the Company must compete with
larger health care providers as well as hospitals, private clinics and
radiology practices that own MRI units or other diagnostic imaging equipment
and with equipment manufacturers which sell equipment to health care providers
for in-house installation.
A number of competitors operate fixed-site MRI units in New York, New
Jersey and Pennsylvania, the Company's service areas. Moreover, certain of
these competitors have substantially greater financial resources than those of
the Company, which may give them advantages in negotiating equipment
acquisitions, advertising and responding quickly to new demand. The Company
believes that it competes effectively against other fixed-site providers based
on the reputation of the Company and the physicians with whom the Company has
relationships, the location of the Company's facilities, the state of the art
equipment the Company uses, and the ability of the Company to quickly respond
to demand.
MRI competes with less expensive diagnostic imaging devices and
procedures which may provide similar information to the physician. Alternative
diagnostic imaging technologies include CAT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, mammography and conventional x-ray. The
Company believes that MRI's significant benefits justify the pricing
differential between MRI and other diagnostic imaging modalities.
Existing health care providers who are customers of the Company may
purchase MRI
12
<PAGE>
equipment if their patient volume increases to the point where it becomes cost
effective to own and operate their own MRI equipment. Ownership and operation
of MRI equipment and the provision of related services does not require
proprietary information, trade secrets or similar nonpublic intellectual
property but does require in most states the obtainment of a Certificate of
Need ("CON") and certain other approvals from the state/local health
departments, which CON and approvals may not be granted. Consequently, there
are no significant barriers to entry other than the costs of the equipment,
hiring of qualified technicians and management and, where applicable,
compliance with CON regulations and other regulatory or legislative
constraints.
Equipment
- ---------
The MRI equipment currently operated by the Company is located in
fixed-site facilities, with the exception of the mobile MRI unit being utilized
at the Secaucus Facility. All of the diagnostic imaging equipment utilized by
the Company is technologically sophisticated and complex, requires regular
maintenance and is subject to unpredictable malfunctions and breakdowns. The
Company contracts with MRI equipment manufacturers for comprehensive
maintenance programs for its MRI units to minimize downtime (the period of time
equipment is unavailable during scheduled use hours because of malfunctions).
On most equipment, the maintenance contract provides that such repairs will be
performed during regular operating hours. Although the maintenance contracts
provide for inspections and maintenance of the equipment on a fixed-fee basis,
equipment servicing adversely affects revenue generation by reducing the number
of regular operating hours the equipment is available for use. Additionally,
MRI equipment is generally warranted by the equipment manufacturer for a
specified period of time, usually one year from the date of purchase, during
which the Company receives uptime guarantees (a guarantee that the equipment
will function for a specified percentage of scheduled use hours) from the
manufacturer of the MRI units. However, these guarantees are not expected to
substantially compensate the Company for loss of revenue for downtime,
scheduled maintenance and software update (upgrading of the computer program
which aids the generation of the scanned image). The Company also carries
business interruption insurance which provides for $750,000 of coverage for
each fixed-site facility, after 5 days of downtime, to help protect itself from
unexpected long-term equipment failures.
Reimbursement
- -------------
Many of the Company's customers are health care providers that are
subject to extensive federal and state legislation and regulation relating to
the reimbursement and control of health care costs. As a result of federal
cost-containment legislation currently in effect, hospital inpatients covered
by Medicare are classified into diagnostic related groups ("DRGs") in
accordance with the patient's diagnosis, and reimbursement is limited to
predetermined amounts assigned to particular DRGs based upon the diagnosis of
the ailment of a patient. Generally, free-standing MRI centers that provide
services for hospital in-patients must look to the referring hospital for
payment, which the hospital must take out of its DRG reimbursement. For out-
patients who are not admitted to a hospital, the Medicare approved
reimbursement for single
13
<PAGE>
MRI scans generally range between $482 and $1,212, depending on the type of
scan performed. Revenues associated with Medicare claims accounted for less
than 8% of the Company's revenues for the year ended December 31, 1997. Because
Medicare reimbursement for MRI services is limited, it does not necessarily
cover all of the costs of the medical services provided. Therefore, the
physicians who provide professional services at the Company's MRI centers may
be prevented, to the extent they rely on Medicare reimbursement, from using an
MRI profitably after they pay use fees to the Company and other expenses of
operations. However, Medicare billings currently are not a material component
of the Company's revenues.
Currently, DRGs are not applicable to out-patient services that the
licensee-physicians provide to non-Medicare patients at a MRI center. If the
DRG reimbursement method were applied to out-patient services, the Company's
business could be adversely affected since patient reimbursement has an
indirect, but significant, effect on the Company's pricing structure.
When patients are directly billed for services, most of their health
care insurers, including Blue Cross/Blue Shield, reimburse service providers
for 80% to 100% of the physician's charge for MRI scans as long as this fee is
"reasonable and customary" for that geographical area. Any difference is due
from the patient. The health care insurer determines what is considered
"reasonable and customary." However, some insurers have adopted DRG-type
reimbursement schedules and others may be investigating the possibility of
implementing such schedules, but the Company believes that such private
reimbursement schedules are not and will not be as stringent as those under the
Medicare DRG program. Since patient reimbursement affects the levels of fees
the Company can charge the physician-licensee, widespread application of DRG-
type reimbursement schedules could adversely affect the Company's business. In
addition, the Company has entered into many contracts with managed care
organizations which generally provide for lower reimbursement rates than those
received from other insurance carriers.
Licensing and Certification Law
- -------------------------------
All states in which the Company currently operates or may operate have
laws that may require a licensing of facilities, personnel, standards of
testing, CON and other required certificates for certain types of health care
facilities and major medical equipment, such as an outpatient diagnostic
imaging center using MRI or other imaging equipment. At the present time, the
licencing and certification laws of the states of New Jersey, New York and
Maryland pertain to the Company's operations. Effective December 1996, the CON
requirements in the State of Pennsylvania expired, and to date no new CON
requirements have been implemented, but there can be no assurance that new
rules or regulations will not be enacted which may affect or restrict the
Company's operations in Pennsylvania, as well as affect expansion plans in
Pennsylvania, if any.
Although the licensing and certification laws programs vary from state
to state, generally such programs require state approval before acquiring and
operating major medical equipment or establishing new inpatient services, but
various exceptions apply. In New York, for example, the
14
<PAGE>
acquisition of MRI equipment to be placed outside of a hospital or other
licensed healthcare facility which is leased and operated by an independent
physician or group of physicians does not require a CON. Where a CON is
required, approval of the acquisition of MRI equipment may be tied to the
satisfaction of various criteria relative to costs, need for the services and
quality of construction and operation. The licensure and certification
requirements serve as a barrier to entry in certain states in which the Company
operates and can increase the costs of and delays in certain expansions or
renovations or the addition of health care services in the areas covered by
such requirements.
The Company also has to comply with federal certification
requirements. For example, the Ocean Township Facility which offers mammography
must be certified by the federal government, which accreditation was received
in January 1997. Further, additional certification requirements may affect the
Company's centers, but such certification generally will follow specific
standards and requirements set forth in public documents.
Although the Company believes that currently it has obtained all such
necessary licenses and certifications, the failure to obtain a required license
or certification, could have a material adverse effect on the Company's
business. The Company believes that the provision of health care services will
continue to be subject to intense regulation at the federal and state levels
and cannot predict the scope and affect thereof nor the cost to the Company of
compliance.
Corporate Practice of Medicine: Fee Splitting
- ---------------------------------------------
The laws of many states, including the states in which the Company
operates, prohibit business corporations, such as the Company, from exercising
control over the medical judgements or decisions of physicians and from
engaging in certain financial arrangements, such as fee-splitting, with
physicians. These laws and their interpretations vary from state to state.
These laws are enforced by both the courts and regulatory authorities. The
Company's strategy is to acquire certain assets and assume certain liabilities
of, and to enter into service agreements with, affiliated physicians and other
health care practitioners. Pursuant to service agreements the Company will
provide management, administrative, technical and other non-medical services to
the affiliated practitioners in exchange for a fee. The Company intends to
structure its relationships with the affiliated practitioners (including the
purchase of assets and the provision of services under the service agreements)
to keep the Company from engaging in the unlicensed practice of medicine or
exercising control over the medical judgements or decisions of the affiliated
practitioners. There can be no assurance that regulatory authorities or other
parties will not assert that the Company is engaged in the unlicensed corporate
practice of medicine in such states or that the payment of service fees to the
Company by the affiliated practitioners under the service agreements
constitutes fee-splitting or unlicensed corporate practice of medicine. If such
a claim were successfully asserted, the Company (and affiliated practitioners)
could be subject to civil and criminal penalties and could be required to
restructure or terminate its contractual arrangements. Such results could have
a material adverse effect on the Company's business, financial condition and
results of operations.
15
<PAGE>
Anti-Kickback Statute under Federal Medicare Program
- ----------------------------------------------------
The federal Anti-Kickback Statute, which is included in the Social
Security Act, prohibits the offering, payment, solicitation or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patients
or patient care opportunities, or in return for the purchase, lease or order or
provision of any item or service that is covered by Medicare or Medicaid.
Violations of the Anti-Kickback Statute, which is a criminal statute, are
punishable by fines and/or imprisonment. Pursuant to the Medicare and Medicaid
Patient and Program Protection Act of 1987, persons convicted of violating the
Anti-Kickback Statute may be excluded from the Medicare or Medicaid programs.
Scrutiny by the federal government of possible unlawful arrangements between
health care providers and referral sources extends to indirect payments which
have the potential of inducing patient referrals, such as situations in which
physicians hold investment interests in companies which benefit from their
Medicare referrals.
Beginning in 1991, the Office of the Inspector General ("OIG") of the
Department of Health and Human Services ("HHS") has published safe harbor
regulations that specify the conditions under which certain types of financial
relationships, including investment interests in public companies, management
and personal service contracts and leases of space and equipment, will be
protected from criminal or civil sanctions under the Anti-Kickback Statute if
the standards set forth in the regulations are strictly followed. Although the
Company believes that the financial arrangements involved in the operation of
its healthcare centers qualify for protection under the applicable safe harbor
protections, these regulations have been thus far relatively untested in
practice. The OIG has stated that failure to satisfy the conditions of an
applicable safe harbor does not necessarily indicate that the arrangement
violates the Anti- Kickback Statute, but such arrangements are not among those
that the safe harbor regulations protect from criminal and civil sanctions. Due
to the broad and sometimes vague nature of these laws and requirements, there
can be no assurance that an enforcement action will not be brought against the
Company or that the Company will not be found to be in violation of the Anti-
Kickback Statute. Further, there can be no assurance that new laws or
regulations will not be enacted or existing laws or regulations interpreted or
applied in the future in such a way as to have a material adverse impact on the
Company, or that federal or state governments will not impose additional
restrictions upon all or a portion of the Company's activities which might
adversely affect the Company's business.
Stark Law
- ---------
Sections of the Omnibus Budget Reconciliation Act of 1989 ("Stark I")
and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), as amended,
prohibits physicians (including medical doctors, osteopaths, dentists,
chiropractors and podiatrists) from referring their patients for the provision
of "designated health services" (including diagnostic imaging, clinical lab,
physical therapy and other services) to an entity with which such physician (or
an immediate family member) has a financial relationship. Stark I and Stark II
(collectively the "Stark Law") also prohibit the provider entity from
presenting or causing to be presented a claim or bill to any
16
<PAGE>
individual, third-party payor, or other entity for designated health services
furnished under a prohibited referral. A violation of the Stark Law by the
Company or an affiliate medical practice could result in significant civil
penalties, which may include exclusion or suspension of the physician or
provider entity from future participation in the Medicare and Medicaid programs
and substantial fines.
The Stark Law provides exceptions from its prohibitions for referrals
which include certain types of referrals within a qualifying group medical
practice, employment relationships and certain personal services and leasing
arrangements and certain other contractual relationships. The Company has
reviewed the effects of the Stark Law and believes that it complies in all
material respects with the applicable provisions of the Stark Law, although
because of the broad and sometimes vague nature of this law and the final and
proposed interpreting regulations, there can be no assurance that an
enforcement action will not be brought against the Company or that the Company
will not be found to be in violation of the Stark Law.
False Claims Act
- ----------------
Several federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or knowingly
making a false statement to obtain governmental approval or payment for a false
claim. Under the False Claims Act, civil damages may include a penalty of up to
three times the government's loss plus $5,000 to $10,000 per claim. Actions to
enforce the False Claims Act may be commenced by individuals on behalf of the
government (known as qui tam suit) and such private citizens could receive up
to thirty percent of the recovery. The Company carefully monitors its
submissions for reimbursement on behalf of the Company and its affiliated
health care providers to assure that they are not false or fraudulent and
believes that it is not in violation of the False Claims Act, but there is no
assurance that such activities will not be challenged by governmental
authorities or private parties resulting in a false claim action.
State Laws
- ----------
Many states, including some where the Company operates, have laws that
prohibit certain direct and indirect payments made by health care providers
that are designed to induce referrals. Further, some states expressly prohibit
referrals by physicians to entities in which such physicians have a financial
interest. Sanctions for violating the state statutes may include loss of
licensure for the physicians and civil and criminal penalties assessed against
both the referral source and the recipient provider. The Company continues to
review all aspects of its operations, and where appropriate has insured that
physicians do not have investment interests in its operations.
The Company believes that it complies in all material respects with
all applicable provisions of the Anti-Kickback Statute, the Stark Law and
applicable state laws governing fraud and abuse as well as licensing and
certification, although because of the broad and sometime
17
<PAGE>
vague nature of these laws and requirements, there can be no assurance that an
enforcement action will not be brought against the Company or that the Company
will not be found to be in violation of one or more of these regulatory
provisions. Further, there can be no assurance that new laws or regulations
will not be enacted, or existing laws or regulations interpreted or applied in
the future in such a way as to have a material adverse impact on the Company.
Insurance Laws & Regulations
- ----------------------------
Certain states have enacted statutes or adopted regulations ("Laws")
affecting risk assumption in the health care industry, including Laws that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance Laws, which may include, among other things, Laws
providing for minimum capital requirements and other safety and soundness
requirements. Failure to comply with these Laws could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, implementation of additional regulations or compliance
requirements could result in substantial costs to the Company. The inability to
enter into capitated or other risk-sharing arrangements or the cost of
complying with certain applicable Laws that would permit expansion of the
Company's risk-based contracting activities could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Employees
- ---------
As of December 31, 1997, the Company had 71 full-time employees,
including 15 trained diagnostic imaging technologists, 1 marketing and managed
care executive, 4 sales representatives, and 51 administrative and clerical
personnel. None of the Company's employees are represented by labor
organizations, and the Company is not aware of any activity seeking such
organization. The Company considers its relationships with its employees to be
good.
ITEM 2. PROPERTIES
- -------------------
The Company leases space for its fixed-site MRI center of
approximately 5,000 square feet in Brooklyn, New York from DMR. In addition,
the Company leases space for its fixed-site MRI center of approximately 4,000
square feet in New York City, New York. The Company leases its corporate
headquarters in Red Bank, New Jersey and leases a separate billing center in
Ocean Township, New Jersey in the same building which contains the Ocean
Township MRI center (approximately 7,400 and 9,200 square feet, respectively).
In Edgewater, Wayne and Secaucus, New Jersey and Philadelphia, Pennsylvania the
Company, through its joint ventures, lease space for these fixed-site
facilities (approximately 2,000, 700, 2,000 and 4,500 square feet,
respectively). Management believes that its corporate offices and its MRI
facilities are suitable for the purposes for which they are used.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not involved in any pending legal proceedings which in
the opinion of its management may have a material adverse effect on its
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
a) The Company's 1997 Annual Meeting of Stockholders was held on
December 18, 1997.
b) The following directors were elected for a one year term and until their
successors are duly elected and qualified:
1) Jerold L. Fisher
2) Shawn A. Friedkin
3) Mitchell Hymowitz
4) Munr Kazmir, M.D.
5) Dominic A. Polimeni
6) Joseph J. Raymond
7) Elliott H. Vernon
(i) Election of directors. The following is a summary of the vote tabulation:
Jerold L. Fisher For: 7,123,759 votes (99.2%) Against: 55,800 votes,
Withheld: 0 votes and Abstentions: 0 votes, Shawn A. Friedkin For:
7,123,759 votes (99.2%) Against: 55,800 votes, Withheld: 0 votes and
Abstentions: 0 votes, Mitchell Hymowitz For: 7,123,759 votes (99.2%)
Against: 55,800 votes, Withheld: 0 votes and Abstentions: 0 votes, Munr
Kazmir, M.D. For: 7,123,759 votes (99.2%) Against: 55,800 votes,
Withheld: 0 votes and Abstentions: 0 votes, Dominic A. Polimeni For:
7,123,759 votes (99.2%) Against: 55,800 votes, Withheld: 0 votes and
Abstentions: 0 votes, Joseph J. Raymond For: 7,123,609 votes (99.2%)
Against: 55,950 votes, Withheld: 0 votes and Abstentions: 0 votes, Elliott
H. Vernon For: 7,123,759 votes (99.2%) Against: 55,800 votes, Withheld:
0 votes and Abstentions: 0 votes.
Jerold L. Fisher and Mitchell Hymowitz resigned from the Board of
Directors of the Company effective as of February 18, 1998, and Dominic
A. Polimeni resigned from the Board of Directors of the Company effective
February 17, 1998.
c) The following additional matters were voted upon at the Annual
Meeting:
(i) A restricted stock award to Elliott H. Vernon, the Company's
Chairman of the Board, President and Chief Executive Officer of
the Company was ratified and approved by the following vote:
For: 1,838,915 votes (25.6%) Against: 220,350 votes,
19
<PAGE>
Withheld: 5,074,369 votes and Abstentions: 45,925 votes.
(ii) The HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan
was approved by the following vote: For: 2,022,215 votes (28.2%)
Against: 212,150 votes, Withheld: 4,919,169 votes and Abstentions:
26,025 votes.
(iii) The HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase
Plan was approved by the following vote: For:
1,805,165 votes (25.1%) Against: 144,900 votes,
Withheld: 5,205,969 votes and Abstentions: 23,525
votes.
</TABLE>
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------
The Company's Common Stock, par value $.01 per share (the "Common
Stock"), is included in The Nasdaq National Market ("HISS").
The following table sets forth the high and low sale prices for the
Common Stock for the period from January 1, 1995 through March 27, 1998 based
on transaction data as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------- ----------
<S> <C> <C>
Year Ended December 31, 1996
----------------------------
First Quarter $ 2-3/8 $ 1- 1/16
Second Quarter $ 2-5/8 $ 1-11/16
Third Quarter $ 2-7/16 $ 1-11/16
Fourth Quarter $ 2 $ 7/8
Year Ended December 31, 1997
-----------------------------
First Quarter $ 2-1/16 $ 15/16
Second Quarter $ 2 $ 1
Third Quarter $ 1-7/16 $ 3/4
Fourth Quarter $ 1-15/32 $ 25/32
Year Ending December 31, 1998
-----------------------------
First Quarter (through March 27,
1998) $ 1-31/32 $ 31/32
</TABLE>
As of March 27, 1998, there were 76 holders of record of the Common
Stock. The Company believes that there were approximately 870 beneficial
holders of the Common Stock as of such date.
21
<PAGE>
The Company has paid no dividends on the Common Stock since its
inception. Any future declaration of cash dividends on the Common Stock will
depend upon the Company's earnings, financial condition, capital requirements
and other relevant factors. The Company does not intend to pay cash dividends
on the Common Stock in the foreseeable future but intends to retain its
earnings for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is provided
for the Company and its predecessor entities.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
- --------------
Revenues $10,247,940 $ 9,787,591 $ 9,249,284 $11,398,794 $13,235,567
(Loss) income before minority
interests and income taxes $ (331,094) $ (396,256) $ 33,227 $(5,769,180) $ 52,846
Net loss $ (804,305) $ (861,796) $ (118,430) $(6,053,612) $ (470,925)
Loss per common share $ (0.13) $ (0.18) $ (0.03) $ (1.35) $ (0.12)
BALANCE SHEET DATA:
- ------------------
Working Capital $ 1,152,667 $ 2,943,313 $ 1,160,247 $ 658,828 $ 2,731,742
Total assets $13,540,635 $10,566,732 $10,006,699 $13,800,753 $23,392,405
Long-term debt, reserves for
restructuring costs and capital lease
obligations $ 3,101,912 $ 2,717,216 $ 3,275,445 $ 4,778,306 $ 9,997,416
Stockholders' equity $ 5,412,898 $ 5,004,807 $ 3,222,876 $ 3,341,306 $ 6,900,169
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. STATEMENTS IN THIS ANNUAL REPORT THAT ARE NOT HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ANY STATEMENTS CONTAINED HEREIN WHICH ARE NOT
HISTORICAL FACTS OR WHICH CONTAIN THE WORDS "EXPECT", "BELIEVE" OR "ANTICIPATE",
SHALL BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE
RISK THAT THE COMPANY MAY NOT BE ABLE TO IMPLEMENT ITS GROWTH STRATEGY IN THE
INTENDED MANNER, THE AVAILABILITY OF ADEQUATE WORKING CAPITAL AND EQUIPMENT
FINANCING, RISKS ASSOCIATED WITH COMPETITIVE PRESSURES AND RISKS AFFECTING THE
COMPANY'S INDUSTRY SUCH AS INCREASED HEALTHCARE REGULATION AND THE EFFECTS OF
GENERAL ECONOMIC CONDITIONS. IN ADDITION, THE COMPANY'S BUSINESS, OPERATIONS
AND FINANCIAL CONDITION ARE SUBJECT TO CERTAIN OTHER RISKS WHICH ARE DESCRIBED
IN THE COMPANY'S OTHER REPORTS AND STATEMENTS FILED FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
For the Year Ended December 31, 1997 vs. December 31, 1996
- ----------------------------------------------------------
For the year ended December 31, 1997, revenues were $10,247,940 as
compared to $9,787,591 for the year ended December 31, 1996, an increase of
approximately $460,000. This increase was primarily due to increased revenues
at certain of the Company's MRI facilities, as well as the commencement,
through a joint venture, of fixed-site MRI services in May 1997 at the Secaucus
Facility and the acquisition of the New York City Facility, a fixed-site MRI
facility, with ultrasound, in November 1997.
For the year ended December 31, 1997, operating expenses were
$10,579,034 as compared to $10,183,847 for the year ended December 31, 1996, an
increase of approximately $395,000. This increase was primarily due to (i) the
start-up expenses incurred in establishing the Secaucus Facility (approximately
$798,000), (ii) additional operating costs associated with the New York City
Facility (approximately $107,000), (iii) increased consulting and marketing
fees (approximately $420,000) arising from various consulting agreements
entered into by the Company during fiscal 1997 deemed to be in its strategic
interest, (iv) increased equipment operating lease expense (approximately
$192,000) all of which were partially offset by, (v) a decrease in non-cash
compensation charges recorded during the year ended December 31, 1997
(approximately $399,000) as compared to December 31, 1996 (approximately
$1,445,000) and (vi) a gain (approximately $105,000) on the sale of one of the
Company's mobile MRI units to an unaffiliated third party. The non-cash
compensation charges primarily result from the grant of (i) stock options and
a restricted stock award to the CEO and (ii) stock options to Biltmore
Securities, Inc. ("Biltmore") pursuant to a consulting agreement. See
"Overview-Recent Developments."
23
<PAGE>
During the year ended December 31, 1997, as a corporate general
partner the Company recorded $70,099 of losses attributable to the third party,
limited partnership interest in the Philadelphia, Pennsylvania joint venture
("Philadelphia Facility") in excess of the limited partners' capital accounts.
In addition, because the Company is the only member in the related limited
liability company obligated to fund working capital for the Secaucus Facility,
the Company recorded $153,278 of losses attributable to the other member's
interest in such facility in excess of the other member's capital account.
The operating results for the year ended December 31, 1997 and 1996 were
adversely affected by the Philadelphia Facility which incurred losses of
$175,247 and $374,969, respectively. However, the Company's expanded
advertising and marketing efforts on behalf of the Philadelphia Facility has
resulted in a significantly reduced loss for the year ended December 31, 1997
as compared to December 31, 1996. The Company is negotiating the purchase of
the interest in the Philadelphia Facility not currently owned by it (i.e. the
limited partners' interests) and it expects to consummate such purchase by the
end of fiscal 1998. However, there can be no assurance as to the timing or
consummation of this purchase, or as to the timing or magnitude of a
restructuring charge, if any, relating to the Philadelphia Facility. In
addition, the operating results for the year ended December 31, 1997 were
adversely effected by decreasing margins at the Company's Brooklyn Facility
resulting from competitive pressures, as well as the funding of the expenses
associated with the Secaucus Facility during its start-up phase.
The Company has not yet made an assessment as to Year 2000 compliance
issues. Therefore, no assurances can be given that Year 2000 failure will not
have a material adverse affect on the Company's operations and financial
condition.
For the Year Ended December 31, 1996 vs. December 31, 1995
- ----------------------------------------------------------
For the year ended December 31, 1996, revenues were $9,787,591 as
compared to $9,249,284 for the year ended December 31, 1995, an increase of
approximately $538,000. This increase was primarily due to (1) increased
revenues from the Brooklyn Facility (approximately $517,000), (2) increased
revenues from the Ocean Township Facility (approximately $225,000) and (3)
increased revenues from the Wayne Facility (approximately $214,000), all of
which were partially offset by (i) the elimination of operating revenues from
the Company's lithotripsy operations (approximately $427,000) as a result of
the sale of the lithotripsy unit on August 31, 1995 and (ii) decreased revenues
from the Edgewater Facility (approximately $132,000) due to increased
competition resulting in fewer procedures being performed.
For the year ended December 31, 1996, operating expenses were
$10,183,847 as compared to $9,216,057 for the year ended December 31, 1995, an
increase of approximately $968,000. This increase was primarily due to non-cash
compensation charges (approximately $1,445,000) resulting from the grant of (i)
stock options to two of the Company's former directors, (ii) stock options and
a restricted stock award to the CEO and (iii) stock options to Biltmore
pursuant to a consulting agreement. The Company's operating expenses before the
24
<PAGE>
non-cash compensation charges decreased approximately $478,000, primarily due
to the elimination of operating expenses relating to the Company's former
lithotripsy operations (approximately $744,000) and recoveries on accounts
receivable (approximately $392,000) relating to a provision for bad debts
recorded at the time of the restructuring of the Company's mobile MRI
operations. Other operating expenses increased by approximately $311,000,
primarily due to higher advertising and promotion expense, rent expense, travel
and entertainment expense, patient car service expense, temporary help expense
and typing service expense, most of which were directly impacted by the
increase in patient procedures being performed in 1996. Equipment maintenance
and repairs decreased approximately $82,000, primarily due to the termination
of a maintenance agreement relating to the disposition of the lithotripsy unit.
Professional fees increased approximately $167,000, primarily due to the
preparation of the proxy statement for the Company's 1996 Annual Meeting of
Stockholders held May 2, 1996, certain New Jersey and New York state sales and
use tax examinations and various other matters. Depreciation and amortization
decreased approximately $292,000, primarily due to the elimination of
depreciation expense for the lithotripsy equipment and the MRI unit located at
the Edgewater Facility which was fully depreciated in July 1996. Interest
expense decreased approximately $172,000, primarily due to the elimination of
interest expense relating to the disposition of the lithotripsy unit and the
refinancing of certain equipment leases as of September 30, 1995 at lower
interest rates.
During the year ended December 31, 1996, as a corporate general
partner, the Company recorded an additional $149,988 of losses attributable to
the limited partnership interests in the Philadelphia Facility in excess of the
limited partners' capital accounts.
The operating results for the year ended December 31, 1996 and 1995
were substantially affected by the Philadelphia Facility which incurred losses
of $374,969 and $490,042, respectively. The Company recently expanded its
advertising and marketing efforts on behalf of the Philadelphia Facility. This
resulted in a significantly reduced loss for the quarter ended December 31,
1996 of $57,006 as compared to the $212,903 loss for the quarter ended December
31, 1995. The Company is in the process of finalizing documentation with the
present limited partners as to its purchase of their interests in such joint
venture which it expects to consummate in 1997. However, there can be no
assurance as to the timing of this purchase, if at all, or as to the timing and
magnitude of a restructuring charge, if any, relating to the Philadelphia
Facility.
OVERVIEW - RECENT DEVELOPMENTS
- ------------------------------
As the Company announced on March 2, 1998, it has decided to expand its
strategic focus into the area of physician practice management. To that end,
the Company has entered into two letters of intent with respect to the
acquisition of all of the outstanding capital stock of JIHP, a management
services organization formed and owned by Pavonia and Liberty of Jersey City,
New Jersey. Pavonia, one of the largest independent, multi-specialty practices
in New Jersey, is comprised of over 60 physicians servicing over 75,000
patients in 6 locations in New Jersey. In consideration for this acquisition,
the letters of intent provide, among other things, that the Company would pay
and/or issue to Pavonia and Liberty, in the aggregate, (i) $7.0 million in
cash, (ii) 5.5 million shares of the Company's common stock (500,000 shares of
which may be subject to certain post-closing adjustments), and (iii) $5.0
million of convertible redeemable preferred stock of the Company. The preferred
stock would be redeemable by the Company at any time and would be convertible,
after the second anniversary of issuance, at the election of the Company or
the holder at the then fair market value of the common stock. The letters of
intent also provide that JIHP would enter into a non-cancellable (subject to
certain limited exceptions) management services agreement with Pavonia,
pursuant to which JIHP would provide all non-medical management services to
Pavonia and, in exchange therefore, would be entitled to an annual management
fee equal to the greater of (x) 10% of the annual gross revenues of Pavonia
and (y) $2.0 million per annum. The consummation of the transactions is
subject to several material conditions including among others, the receipt of
necessary financing, the approval of the Company's stockholders, the
negotiation of definitive documentation, the absence of material adverse
changes and the satisfactory completion of due diligence. Although, there can
be no assurance that the transaction will be completed, the Company expects,
subject to the satisfaction of all conditions, to consummate it within the
next several months.
In furtherance of its objective of establishing physician practice
management operations in New York and New Jersey, the Company is actively
negotiating with several primary care and multi-specialty physician practices,
as well as the faculty practices of several hospitals. The Company has not
entered into any definitive acquisition agreement or administrative service
agreement with respect to its physician practice management operations,
although it expects to do so within the next several months.
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"), a
professional corporation owned by Dr. George Braff. This professional
corporation operates a fixed-site MRI facility, with ultrasound, located at 45
Beekman Street in New York City ("New York City Facility"). The consideration
for the acquisition was (i) the assumption of certain obligations and
liabilities of NYC MRI, including payments to be made under a capital lease of
up to approximately $300,000, (ii) cash in the amount of $900,000, (iii) the
issuance of one million (1,000,000) shares
25
<PAGE>
of Common Stock, and (iv) the issuance of a $300,000 promissory note that was
due and paid on December 31, 1997. The Company anticipates based on the
historical utilization rate of the facility, it should be immediately accretive
to earnings. In connection with the acquisition, the Company also entered into
a consulting services agreement which, among other things, provides that Dr.
Braff will continue to provide all medical services at the New York City
Facility. Dr. Braff is also the Medical Director of the Company and the
supervising radiologist at two of the Company's other MRI facilities.
26
<PAGE>
As of January 30, 1996, the Company entered into a one year consulting
agreement with Biltmore. On January 30, 1997, the Company extended the term of
the Consulting Agreement to January 30, 1998, and on November 3, 1997, the
Company further extended the term of the Consulting Agreement to January 30,
1999. Pursuant to the consulting agreement, Biltmore acts as a consultant to
the Company in connection with, among other things, corporate finance and
evaluations of possible business partners and will seek to find business
partners suitable for the Company and assist in the structuring, negotiating
and financing of such transactions. The consulting agreement provides for the
issuance to Biltmore upon execution thereof of options (the "Biltmore Options")
exercisable to purchase 750,000 shares of Common Stock at a cash exercise price
of $0.75 per share and for the additional issuance to Biltmore of 750,000
shares (the "Biltmore Fee Shares") of Common Stock upon consummation by the
Company of an acquisition of a company (or companies) with assets of at least
$2,500,000 (the "Acquisition") during the term of the consulting agreement. The
consulting agreement provided that the Biltmore Options only will become
exercisable upon the consummation by the Company of a financing (the
"Financing") providing gross proceeds to the Company of at least $900,000 by
March 30, 1996. Upon the sale of the Series C Preferred Stock on February 9,
1996, the Biltmore Options became fully vested. The holders of the Biltmore
Options and the Biltmore Fee Shares are also entitled to certain demand and
"piggyback" registration rights with respect to the shares of Common Stock
issuable upon exercise of the Biltmore Options and the Biltmore Fee Shares.
Furthermore, in consideration of Biltmore's placement agent services with
respect to the offering of the Series C Preferred Stock, contemporaneous with
the sale of the Series C Preferred Stock on February 9, 1996, the Company
issued 60,000 shares of Series C Preferred Stock to Biltmore.
In February 1998, the company entered into an agreement with those parties
who have been assigned the Biltmore Options and the rights to the Biltmore Fee
Shares pursuant to which the Company, will pay an aggregate of $3,500,000, for
the Biltmore Options and the rights to the Biltmore Fee Shares. The agreement
provides that in no event will the closing of this contemplated transaction
occur later than the ninetieth day following the earlier to occur of (i) the
consummation of the acquisition of Jersey Integrated HealthPractice Inc. or
(ii) the company raising aggregate gross proceeds of $60 million from one or
more debt and/or equity financings. In the event that neither above referenced
contingency is met this agreement shall terminate and be of no further force or
effect.
27
<PAGE>
On November 3, 1997, the Board (upon the recommendation of the Compensation
Committee) approved the material terms of a new three-year employment agreement
with the CEO. Pursuant to such new employment agreement, the CEO agreed to
continue to serve as the Chairman of the Board, President and Chief Executive
Officer of the Company at an annual base salary of $100,000, subject to
increase to $250,000 upon the Company's attainment in any fiscal year of
consolidated income before taxes of $1.25 million, which condition was waived in
February 1998 (upon the recommendation of the Compensation Committee), and to
annual cost of living increases. See Item 11. "Employment Contracts and
Termination of Employment and Changes in Control Arrangements"
28
<PAGE>
In November 1996, the Company formed a limited liability company, of
which it owns sixty (60%) percent, with Practice Management Corporation to
provide on-site MRI services to the Meadowlands Hospital Medical Center
("Secaucus Facility"). The site commenced operations on May 8, 1997 utilizing
one of the Company's mobile MRI units. The operating results of the Company, for
the year ended December 31, 1997 were substantially affected by the facility
which incurred a loss of $383,195. In addition, as of December 31, 1997, the
Company made working capital loans to the joint venture of approximately
$941,000 inclusive of management fees and intercompany interest. Based upon
losses sustained and due to the expectation of continuing losses, the Company
has decided to sell the mobile MRI unit and cease its MRI services at the
Secaucus Facility. The Company has entered into an agreement for the sale of
the mobile MRI unit to an unaffiliated third party and entered into an agreement
effective December 31, 1997, to purchase 40% of this joint venture which
resulted in the Company owning 100% of the venture as of January 1, 1998. No
loss is anticipated in connection with the sale and cessation of operations
and termination of the joint venture.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
- ----------------------------------------------
As of December 31, 1997, the Company had a cash balance of $70,626,
current assets of $5,632,059 and working capital of $1,152,667. Cash flows
provided by operating activities were $1,045,881 for the year ended December
31, 1997, which consisted primarily of depreciation and amortization of
$1,509,649, amortization of non-cash compensation of $398,646, an increase in
the allowance for doubtful accounts receivable of $659,000 and minority
interests in joint ventures of $430,172. Other significant components of cash
flows provided by operating activities included an increase in accounts
receivable of $1,258,052 due to an increase in the number of procedures being
performed, repayments by licensees on advances of $153,586 and an increase in
accounts payable and accrued expenses of $160,977.
Cash flows used in investing activities were $698,890, which related
to payments of the cash portion of the purchase price of the New York City
Facility of $1,203,721, partially offset by proceeds of $625,000 received from
the sale of marketable securities.
Cash flows used in financing activities were $450,244, which consisted
primarily of payments on capital lease obligations of $1,363,860, payments on
obligations related to restructured operations of $413,419 and distributions to
limited partners of joint ventures of $384,308, partially offset by borrowings
of $1,462,000 under the revolving line of credit, proceeds of $105,000 received
from the sale of one of the Company's mobile MRI units to an unaffiliated third
party and proceeds of $161,843 received from the subleases related to
restructured operations.
The Company's Philadelphia Facility, which has been operating since
November 1992, continues to operate at a loss. The overall operating results of
the Company were affected during the years ended December 31, 1997 and 1996 due
to the operational results of the Philadelphia Facility which incurred losses
of $175,247 and $374,969, respectively. In addition, in order to support the
operations of this facility, the Company has made, and continues to make,
working capital loans to this facility. As of December 31, 1997, the amount of
the working capital loans made to this joint venture was approximately
$2,550,000 (of which approximately $437,000 was loaned during 1997) inclusive
of management fees and intercompany interest. In order to become profitable,
this facility must attain a certain volume of business and it is uncertain
whether such business level will ever be attained. The Company cannot at this
time determine when or if these working capital loans will be repaid. The
Company's expanded advertising and marketing efforts on behalf of the
Philadelphia Facility has resulted in a significantly
29
<PAGE>
reduced loss for the year ended December 31, 1997 as compared to December 31,
1996. The Company is negotiating the purchase of the limited partners' interest
in the Philadelphia Facility and it expects to consummate such purchase by the
end of fiscal 1998. However, there can be no assurance as to the consummation
or timing of this purchase, if at all, or as to the timing or magnitude of a
restructuring charge, if any, relating to the Philadelphia Facility.
The competitive environment in which the Brooklyn Facility operates
has adversely affected its operating results. The operating results of the
Company for the year ended December 31, 1997 were substantially affected by
the Brooklyn Facility which incurred a loss of $773,040. In connection with the
Company's review of the viability of this facility, the Company is actively
considering the sale or lease of this facility. However, there can be no
assurance that such a sale or lease will be consummated. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On May 8, 1997, the Company sold one of its remaining two mobile MRI
units to an unaffiliated third party for $105,000. The sale enabled the Company
to eliminate the operating losses associated with the operation of this mobile
MRI unit, thereby resulting in cash savings.
The nature of the Company's operations require significant capital
expenditures which have historically been financed through the issuance of debt
and the execution of capital leases, proceeds received from the Company's
initial public offering in November 1991 and sale of the Series C Preferred
Stock in February 1996, and the offering and exercise of warrants. Continued
expansion, if any, of the Company's business will require substantial cash
resources and will have an impact on the Company's liquidity. Also, such
expansions, if any, will require the purchase of additional MRI units and
financing sources to fund the purchase of these additional units. Historically,
the Company has been able to obtain financing for its medical equipment through
various lenders. The Company believes it will continue to be able to obtain
financing from its various lenders for its future equipment needs although no
assurance can be given.
In February 1998, the company entered into an agreement with those parties
who have been assigned the Biltmore Options and the rights to the Biltmore Fee
Shares pursuant to which the Company will pay an aggregate of $3,500,000 for
the Biltmore Options and the rights to the Biltmore Fee Shares. The agreement
provides that in no event will the closing of this contemplated transaction
occur later than the ninetieth day following the earlier to occur of (i) the
consummation of the acquisition of JIHP or (ii) the Company raising aggregate
gross proceeds of $60 million from one or more debt and/or equity financings.
In the event that neither above referenced contingency is met this agreement
shall terminate and be of no further force or effect.
In December 1997, the Company agreed to guarantee a loan of $1,000,000
from DFS to JIHP. This loan bears interest at 12% per annum and is repayable
over forty-eight (48) months which commenced February 1998 at $26,330. This
loan was funded by DFS to JIHP on January 8, 1998. Pavonia and each
Physician Stockholder of Pavonia have acknowledged that such extension of
credit is for their benefit and have agreed that to the extent that the
Company is or becomes liable in respect of any indebtedness or other liability
or obligation of either Pavonia or JIHP, and the acquisition by the Company of
100% of the outstanding capital stock of JIHP is not consummated, then Pavonia
and each physician stockholder of Pavonia agree to indemnify and hold the
Company harmless from and against any and all claims.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with a lender to provide a revolving line of credit to the
Company. The maximum amount available under such credit facility is $2.0
million, with advances limited to seventy-five percent (75%) of eligible
accounts receivable, as determined by the lender. Borrowings under the line of
credit bear interest at the rate of three percent (3%) over the prime lending
rate and are repayable within two years from the execution of the
aforementioned loan and security agreement. The Company's obligations under the
credit facility are collateralized through a grant of a first security interest
in all eligible accounts receivable. The agreement contains customary
affirmative and negative covenants including covenants requiring the Company to
maintain certain financial ratios and minimum levels of working capital.
Borrowings under this credit facility will be used to fund working capital
needs as well as acquiring businesses which are complementary to the Company.
At December 31, 1997, the Company had $1,462,000 of borrowings outstanding
under this credit facility.
30
<PAGE>
In December 1996, the Company agreed to guarantee a loan of
approximately $250,000 from DFS to DMR in connection with DMR's refinancing of
an equipment lease related to the Company's Brooklyn Facility. This loan bears
interest at 12% per annum and is repayable over thirty-four (34) months which
commenced February 15, 1997. The outstanding balance of this loan was
approximately $178,000 at December 31, 1997. See "The Company and its
Facilities."
The Company believes that cash to be provided by operating
activities together with borrowings available from the Company's revolving line
of credit will provide adequate financing to maintain its normal operations for
the foreseeable future. If for any reason the Company's estimates prove
inaccurate, the Company is prepared to adopt additional expense reduction
measures in addition to those already implemented, although there can be no
assurance that any such expense reduction measures will be successful.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages listed below, as part of Part II,
Item 8.
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1997 and 1996 F-2
Consolidated statements of operations -
For the years ended December 31, 1997,
1996 and 1995 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31,
1997, 1996 and 1995 F-4
Consolidated statements of cash flows - For the years ended December
31, 1997, 1996 and 1995 F-5
Notes to consolidated financial statements F-7
</TABLE>
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------------
Not applicable.
32
<PAGE>
PART III
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The members of the Board of Directors of the Company, their respective
ages and the period during which they have served as Directors are as follows:
<TABLE>
<CAPTION>
PERIOD DURING
NAME AGE WHICH A DIRECTOR
- ---- --- ----------------
<S> <C> <C>
Shawn A. Friedkin 33 May 1996 - Present
Munr Kazmir, M.D. 40 December 1997 - Present
Joseph J. Raymond 62 December 1995 - Present
Elliott H. Vernon 55 July 1991 - Present
</TABLE>
Jerold L. Fisher and Mitchell Hymowitz resigned from the Board of
Directors of the Company effective as of February 18, 1998, and Dominic A.
Polimeni resigned from the Board of Directors of the Company effective
February 17, 1998.
Shawn A. Friedkin has been the President of Paramount Funding
Corporation, a Florida based factoring company specializing in commercial
receivable funding, since July 1992. From January 1990 through June 1992, Mr.
Friedkin was the Vice President of Friedkin Industries, a Florida company
engaged in the aluminum extrusion and eyeglass manufacturing businesses. Mr.
Friedkin is a graduate of Syracuse University School of Management.
Munr Kazmir, M.D. has been the President of Quality Home Care Inc., a
home healthcare and medical staffing company, since he founded it in 1989. Dr.
Kazmir is a N.Y.S. board-certified internist and received a B.S. from
Cambridge College in Manchester, England in 1974 and an M.D. from King Edward
Medical College in Lahore, Pakistan in 1980. Dr. Kazmir held residency
positions at the Mayo Hospital in Lahore, Pakistan and the Westchester County
Medical Center as well as a fellowship position at the Holy Family Hospital in
Rawil Pindi, Pakistan and a research assistant position in oncology at the
White Plains Hospital.
Joseph J. Raymond has been the President of Transworld Management
Services, Inc. (an investment and strategic planning consultation firm which
Mr. Raymond founded) since April 1996. From July 1992 through August 1996, Mr.
Raymond was the Chairman of the Board, Chief Executive Officer and President of
Transworld Home HealthCare, Inc., a publicly-held regional supplier of a broad
range of alternate site healthcare services and products including respiratory
therapy, drug infusion therapy, nursing and para-professional services, home
medical equipment, radiation and oncology therapy and a nationwide specialized
mail order pharmacy
33
<PAGE>
("THH"). Prior thereto, he was the Chairman of the Board and President
of Transworld Nursing, Inc. ("TNI"), a wholly-owned subsidiary (and
predecessor) of THH, from its inception in 1987.
Elliott H. Vernon has been the Chairman of the Board, President and
Chief Executive Officer of the Company since the Company's inception in July
1991. For over ten years, Mr. Vernon has also been the managing partner of MR
General Associates, a New Jersey general partnership ("MR General") which is
the general partner of DMR Associates, L.P., a Delaware limited partnership
("DMR Associates"). See "Certain Relationships and Related Transactions." Since
December 1995, Mr. Vernon has been a director of Pacific Pharmaceuticals, Inc.,
a publicly-traded company engaged in the development and commercialization of
medical products with a primary focus on cancer treatment. Since December 1997,
Mr. Vernon has been a director of Procept, Inc., a publicly-traded company
engaged in the developement of novel drugs for the prevention of infectious
diseases, with a primary focus on the HIV disease. Mr. Vernon is also one of
the founders of TNI and was, until April 1997, a director of THH. Mr. Vernon is
also a principal of HealthCare Financial Corp., LLC, a healthcare financial
consulting company engaged primarily in FDA matters. From January 1990 to
December 1994, Mr. Vernon was a director and the Executive Vice President and
General Counsel of the Wall Street firm of Aegis Holdings Corporation which
offered financial services through its investment management subsidiary and
its capital markets consulting subsidiary on an international basis. Prior to
entering the healthcare field on a full-time basis, Mr. Vernon was in private
practice as a trial attorney specializing in federal white collar criminal
and federal regulatory matters. Prior to founding his own law firm in 1973, Mr.
Vernon was commissioned as a Regular Army infantry officer in the United
States Army (1964). He is a former paratrooper and Vietnam War veteran with
service in the 82nd Airborne Division and 173rd Airborne Brigade. Upon his
return from Vietnam in 1970, Mr. Vernon served as Chief Prosecutor and Director
of Legal Services at the United States Army Communications and Electronics
Command until 1973.
EXECUTIVE OFFICERS OF THE COMPANY
The names of the current executive officers of the Company, and certain
information about them, are set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Elliott H. Vernon 55 Chairman of the Board, President and
Chief Executive Officer
Scott P. McGrory 33 Vice President, Controller
</TABLE>
See above for information regarding Mr. Vernon.
Scott P. McGrory, C.P.A. has been the Vice President, Controller of the
Company (as well as the Assistant Secretary of the Company) since October 1996.
As the Vice President, Controller of the Company, Mr. McGrory is the Principal
Financial and Accounting Officer of the Company and is responsible for
overseeing all financial reporting aspects of the Company.
34
<PAGE>
Mr. McGrory was the Company's Controller from August 1995 to October 1996; the
Company's Manager of Accounting from January 1994 to August 1995; and the
Company's Manager of Budgeting from December 1992 to January 1994. From April
1988 to December 1992, Mr. McGrory was employed as a Senior Accountant by NMR
of America, Inc., a provider of outpatient services in the field of advanced
diagnostic imaging. Mr. McGrory is a licensed certified public accountant in
the State of New Jersey.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and executive officers, and persons who
own more than 10% of the outstanding shares of Common Stock, to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company (collectively, "Section 16 reports") on a timely basis. Directors,
executive officers and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16 reports. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and certain written representations that no other
reports were required, during fiscal 1997, all Section 16(a) filing
requirements applicable to its directors, executive officers and greater than
10% beneficial owners were complied with on a timely basis, except that Jeffrey
S. Dahlman, a former vice president and general counsel of the Company, did not
timely file a Form 3 with respect to his becoming an officer of the Company,
and Munr Kazmir, M.D., also did not timely file a Form 3 with respect to his
becoming a member of the Board of Directors.
35
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid to, the Chief Executive Officer and each other executive officer of the
Company (whose total annual salary and bonus exceed $100,000) for services
rendered in all capacities to the Company and its subsidiaries during fiscal
1997, 1996 and 1995 (the "named executive officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS
ANNUAL COMPENSATION ------
-----------------------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING OTHER
POSITION YEAR SALARY ($) BONUS ($) ($)(1) AWARD(S) ($) OPTIONS (#) COMPENSATION
- ------------------ ---- ---------- --------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ELLIOTT H.
VERNON................ 1997 $100,415 -- $29,359(2) -- 500,000 $88,076(4)
(Chairman of the
Board, President 1996 $181,923 $111,710 $28,121(2) $468,750(3) 500,000 --
and Chief Executive
Officer) 1995 $200,000 -- $29,635(2) -- -- --
</TABLE>
(1) Unless noted, the value of perquisites and other personal benefits,
securities and other property paid to or accrued for the named
executive officers did not exceed $50,000 for each such officer, or 10%
of such officer's total reported salary and bonus, and thus are not
included in the table.
(2) Represent payments for personal life and disability insurance made by
the Company on behalf of Mr. Vernon pursuant to Mr. Vernon's
employment agreement.
(3) The restricted stock award vests upon consummation by the Company of
both (i) a financing providing gross proceeds to the Company of at least
$900,000 by March 30, 1996 (which condition was satisfied
by the sale of Series C Preferred Stock on February 9, 1996) and (ii)
the acquisition of, or other business combination with, a company (or
companies) with assets of at least $2,500,000. In November 1997, the
Company (upon the recommendation of the Compensation Committee of the
Board of Directors) extended the required consummation date of such
acquisition to January 30, 1999 (subject to stockholder ratification
and approval of such extension which ratification and approval was
obtained at the 1997 Annual Meeting of Stockholders. However, the
restricted stock grant will be forefeited if such acquisition is not
consummated by January 31, 1999. At December 31, 1997, the restricted
stock award had a value of $257,800.
(4) Represents non-interest bearing advance made to Mr. Vernon during
fiscal 1997.
COMPENSATION OF DIRECTORS
The Company does not presently pay non-employee directors any fees in
connection with their services as such; however, the Company reimburses them
for all costs and expenses incident to
36
<PAGE>
their participation in meetings of the Board and its committees. In addition,
non-employee directors are entitled to participate in the 1996 Non-Employee
Directors Plan and the 1997 Omnibus Incentive Plan. Pursuant to the 1996
Non-Employee Directors Plan, stock options exercisable to purchase an aggregate
of twenty-five thousand (25,000) shares of Common Stock automatically are
granted to newly elected or appointed non-employee directors of the Company.
The purchase price of the shares of Common Stock subject to such stock options
is equal to the fair market value of such shares on the date of the grant, as
determined in accordance with the 1996 Non-Employee Directors Plan. Stock
options awarded under the 1996 Non-Employee Directors Plan vest in increments
of 40% after the sixth month, 80% after the eighteenth month and 100% after the
thirtieth month anniversary of the date of grant. Upon termination of a
non-employee director's service on the Board, any stock options vested as of
the date of termination may be exercised until the six month anniversary of
such date (unless such options expire earlier in accordance with their terms);
provided that if such termination is a result of such directors's removal from
the Board other than due to his death or disability, all stock options will
terminate immediately.
No remuneration is paid to executive officers of the Company for
services rendered in their capacities as directors of the Company.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In October 1991, the Company entered into a five-year employment
agreement with the CEO, pursuant to which the CEO agreed to serve as the
Chairman of the Board, President and Chief Executive Officer of the Company at
an annual base salary of $200,000. The employment agreement provides that if a
"constructive termination of employment" shall occur, the CEO shall be entitled
to a continuation of full salary and bonus compensation for a period equal to
the remainder of the term. "Constructive termination of employment" is defined
in the employment agreement to include a material change in the CEO's
responsibilities, removal of the CEO from his position as the Company's
Chairman of the Board, President and Chief Executive Officer (other than for
"Cause," as defined in the employment agreement) or a "Change in Control." A
"Change in Control" is defined to include a change in the majority of the Board
which is not approved by the incumbent directors or an accumulation by any
person or group, other than the CEO, of in excess of 30% of the outstanding
voting securities of the Company. The employment agreement further provides
that a constructive termination of employment shall not include (i) any sale of
the business of the Company, whether through merger, sale of stock or sale of
assets, which is approved by the vote of two-thirds of the full Board or (ii) a
change in the CEO's title and/or the person or persons to whom the CEO reports
resulting from a Change of Control approved by the affirmative vote of
two-thirds of the full Board, so long as it does not result in any other event
constituting a constructive termination of employment.
As of February 1, 1996, the Company amended its employment agreement
with its CEO.
37
<PAGE>
In addition, upon execution of such amendment, options that the CEO held as of
such date exercisable to purchase an aggregate of two hundred and seventy
thousand (270,000) shares of Common Stock under the 1991 Plan (at exercise
prices ranging from $1.50 to $5.00 per share) were terminated and the Company
granted the CEO options exercisable to purchase an aggregate of five hundred
thousand (500,000) shares of Common Stock at a cash exercise price of $0.75 per
share (the "CEO New Options"). The vesting of the CEO New Options were also
subject to the consummation by the Company of a Financing (which condition was
satisfied by the sale of the Series C Preferred Stock on February 9, 1996).
Furthermore, as additional incentive compensation, upon execution of such
amendment, the CEO received from the Company a restricted stock award of two
hundred and fifty thousand (250,000) shares of Common Stock. According to the
amendment, the restrictions thereon lapse upon consummation by the Company of
both (i) the Financing by March 30, 1996 (which condition was satisfied by the
sale of the Series C Preferred Stock on February 9, 1996) and (ii) the
Acquisition. However, according to such amendment, such restricted stock grant
would have been forfeited if the Acquisition was not consummated by January 31,
1997. In January 1997, the Company (upon the recommendation of the Compensation
Committee) extended the required consummation date of the Acquisition to
January 30, 1998 and also extended the expiration date of CEO's employment
agreement with the Company to October 22, 1998. In November 1997, the Company
(upon the recommendation of the Compensation Committee) further extended the
required consummation date of the Acquisition to January 30, 1999. The CEO is
entitled to certain demand and "piggyback" registration rights with respect to
such 250,000 shares and the 500,000 shares of Common Stock issuable upon
exercise of the CEO New Options. At any time commencing April 16, 1996 and
ending April 16, 2000, the CEO will have the right to demand that the Company
prepare and file, and use its best efforts to cause to become effective, a
registration statement under the Act to permit the sale of the Registrable
Securities. The Company will be obligated to file one (1) such registration
statement for which all expenses (other than fees of counsel for such holders
and underwriting discounts) will be payable by the Company.
In November 1997, the Board (upon the recommendation of the
Compensation Committee) approved the material terms of a new three-year
employment agreement with the CEO. Pursuant to such new employment agreement,
the CEO agreed to continue to serve as the Chairman of the Board, President and
Chief Executive Officer of the Company at an annual base salary of $100,000,
subject to increase to $250,000 upon the Company's attainment in any fiscal
year of consolidated income before taxes of $1.25 million, which condition was
waived in February 1998 (upon the recommendation of the Compensation Committee)
and to annual cost of living increases. The employment agreement will be
subject to successive one year renewal periods. The employment agreement will
provide that if the CEO resigns for "Good Reason" (to be defined in the
employment agreement) or if his employment is terminated by the Company other
than for "Cause" (to be defined in the employment agreement), the CEO will be
entitled to receive a payment of 2.99 times his highest annual salary and bonus
pursuant to the employment agreement.
The CEO's new employment agreement will also provide for annual profit
sharing with
38
<PAGE>
other executive level employees of a bonus pool consisting of 15% of the
Company's consolidated income before taxes (the "Bonus Pool"). The CEO will be
entitled to 50% of the Bonus Pool. It is expected that the entitlement of the
other officers of the Company to the remainder of the Bonus Pool will be made
by the CEO in his capacity as the Chairman of the Board, President and Chief
Executive Officer of the Company. In addition, the employment agreement will
provide for certain insurance and automobile benefits for the CEO and his
participation in the Company's other benefit plans. In connection with this new
employment agreement, the CEO was granted options to purchase four hundred
seventy one thousand two hundred (471,200) shares of Common Stock under the
1991 Plan and twenty eight thousand eight hundred (28,800) shares of Common
Stock under the 1997 Omnibus Plan at an exercise price of $1.0625 per share.
Such options vest in increments of 25% upon the Company's attainment of
consolidated income before taxes of $1.25 million, $2.5 million, $3.75 million
and $5.0 million, respectively, subject to immediate vesting upon (x) the
occurrence of a Change in Control (to be defined in the award agreement) and
(y) the fifth anniversary of the date of grant. The Company intends to enter
into such new employment agreement with the CEO, to be effective as of November
3, 1997, as soon as practicable.
OPTION GRANTS IN FISCAL 1997
The following table sets forth each grant of stock options made by the
Company during fiscal 1997 to each of the named executive officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------
NAME GRANTED($)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ----------- ------------ ---------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Elliott H. Vernon 500,000 83.7% $1.0625 Nov. 2007 $334,100 $846,676
- ---------
</TABLE>
(1) Such options vest in increments of 25% upon the Company's attainment of
consolidated income before taxes of $1.25 million, $2.5 million, $3.75
million and $5.0 million, respectively, subject to immediate vesting upon
(X) the occurrence of a Change in Control (to be defined in the award
agreement) and (y) the fifth anniversay of the date of grant.
(2) The potential realizable values represent future opportunity and have not
been reduced to present value in 1997 dollars. The dollar amounts
included in these columns are the result of calculations at assumed rates
set by the Securities and Exchange Commission for illustration purposes,
and these rates are not intended to be a forecast of the Common Stock
price and are not necessarily indicative of the values that may be
realized by the named executive officer.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND 1997 FISCAL YEAR END OPTION
VALUES
The following table summarizes for each of the named executive officers
the total number of unexercised stock options held at December 31, 1997 and
the aggregate dollar
39
<PAGE>
value of in-the-money, unexercised options held at December 31, 1997.
No options were exercised by such person during fiscal 1997. The value of
unexercised, in-the-money options at fiscal year-end is the difference between
its exercise or base price and the fair market value (i.e., the closing sale
price on such date) of the underlying Common Stock on December 31, 1997 (the
last trading day in fiscal 1997), which was $1.0312 per share. These values,
unlike the amounts set forth in the column headed "Value Realized," have not
been, and may never be, realized. The stock options have not been, and may
never be, exercised; and actual gains, if any, on exercise will depend on the
value of the Common Stock on the date of exercise. There can be no assurance
that these values will be realized.
40
<PAGE>
None of the named executive officers exercised any stock options during
fiscal 1997. The Company does not have any stock appreciation rights ("SARs")
outstanding.
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
--------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Elliott H. Vernon -0- N/A 500,000/500,000 $140,600/$0
</TABLE>
41
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of the outstanding
shares of Common Stock as of March 27, 1998 of (i) each person known by the
Company to beneficially own 5% or more of the outstanding shares of Common
Stock, (ii) each of the Company's directors, (iii) each of the Company's
executive officers named in the Summary Compensation Table and (iv) all of the
Company's directors and executive officers as a group. An asterisk indicates
beneficial ownership of less than 1% of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
AS OF MARCH 27, 1998
----------------------
Number Percent
of Shares (1) of Class
------------ --------
<S> <C> <C>
Elliott H. Vernon (2) 1,080,500 10.1%
c/o Healthcare Imaging Services, Inc.
200 Schulz Drive
42
<PAGE>
Red Bank, New Jersey 07701
George Braff, M.D. 1,000,000 9.9%
43 West 13th Street
New York, New York 10011
Ulises C. Sabato, M.D. (3) 732,365 7.2%
106 Grand Avenue
Englewood, New Jersey 07701
Elliott Loewenstern (4) 543,000 5.2%
c/o Biltmore Securities, Inc.
6700 North Andrews Ave.
Suite 500
Fort Lauderdale, Florida 33309
Richard Bronson (5) 637,258 6.1%
c/o Biltmore Securities, Inc.
6700 North Andrews Ave.
Suite 500
Fort Lauderdale, Florida 33309
Shawn A. Friedkin (6) 20,000 *
Munr Kazmir, M.D. -- *
Joseph J. Raymond (6) 20,000 *
All directors and 1,146,100 10.6%
executive officers
as a group (7 persons)
(2)(6)(7)
</TABLE>
- --------------
(1) In no case was voting and investment power shared with others.
(2) Includes beneficial ownership of (i) an aggregate of 500,000 shares of
Common Stock issuable upon the exercise of certain currently exercisable
stock options and (ii) an aggregate of 80,500 shares of Common Stock
issuable upon conversion of 11,500 shares of Series C Convertible
Preferred Stock of the Company (the "Series C Preferred Stock"). Does not
include beneficial ownership of an aggregate of 250,000 shares of Common
Stock issuable pursuant to a restricted stock award. Does not include
an aggregate of 500,000 shares of Common Stock issuable upon the exercise
of certain stock options which are not exercisable within sixty (60) days
of March 27, 1998. See "Executive Compensation -- Employment Contracts
and Termination of Employment and Change in Control Arrangements."
(3) Includes beneficial ownership of 50,000 shares of Common Stock issuable
upon the exercise of certain currently exercisable stock options.
(4) Includes beneficial ownership of (i) 84,000 shares of Common Stock owned
by the Stephanie Loewenstern Irrevocable Trust, (ii) 84,000 shares of
Common Stock owned by the Brett Loewenstern Irrevocable Trust, (iii)
125,000 shares of Common Stock issuable upon the exercise of certain
currently exercisable stock options owned by the Stephanie Loewenstern
Irrevocable Trust, (iv) 125,000 shares of Common Stock issuable
upon the exercise of certain currently exercisable stock options
owned by the Brett Loewenstern Irrevocable Trust and (v) 125,000 shares
of Common Stock owned by the Victoria Loewenstern Irrevocable Trust.
Mr. Loewenstern is the trustee of each of the aforementioned trusts.
Does not include 56,000 shares of Common Stock owned by Shelley
Loewenstern, the wife of Mr. Loewenstern.
(5) Includes beneficial ownership of 375,000 shares of Common Stock
issuable upon the exercise of certain currently exercisable stock
options owned by the Richard B. Bronson Revocable Trust. Mr. Bronson
is the trustee of the Richard B. Bronson Revocable Trust.
(6) Such shares represent shares of Common Stock issuable upon exercise of
certain currently exercisable stock options granted pursuant to the
Company's 1996 Stock Option Plan for Non-Employee Directors (the "1996
Non-Employee Directors Plan").
43
<PAGE>
(7) Includes an aggregate of 80,500 shares of Common Stock issuable upon
conversion of an aggregate of 11,500 shares of Series C Preferred Stock
and an aggregate of 565,600 shares of Common Stock issuable upon the
exercise of stock options exercisable within sixty (60) days of March 27,
1998. Does not include an aggregate of 560,000 shares of Common Stock
issuable upon the exercise of stock options which are not exercisable
within sixty (60) days of March 27, 1997.
44
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1997 and 1996, Elliott H. Vernon owed the
Company $264,125 and $176,049, respectively, in connection with certain
non-interest bearing advances.
The Company entered into an arrangement, effective September 1, 1994
until July 1996, pursuant to which it operated solely as a sublessor of its
four (4) mobile MRI units rather than as an operator of such equipment. Mark R.
Vernon, the brother of the CEO and the Vice President, Director of Operations
of the Company since April 1997, is the President and a significant stockholder
of such sublessee of the Company's mobile MRI equipment. The other
45
<PAGE>
stockholders of the sublessee include certain former customers of the Company.
The sublease provided for monthly payments to the Company, which commenced
September 1, 1994, in the amount of $50,000 per month for the first three (3)
months and $115,000 per month for the next forty five (45) months. These
monthly payments included maintenance and insurance of approximately $44,000
per month paid directly by the Company. The total monthly sublease payments due
to the Company were collateralized by the accounts receivable due to the
sublessee by the sublessee's mobile MRI customers. Effective May 1, 1995, the
sublease agreement was amended to provide for monthly payments to the Company
in the amount of $76,373 per month for the next forty (40) months excluding
maintenance of $38,627 per month originally paid directly by the Company since
the sublessee entered into a maintenance agreement with an unrelated third
party and began paying the equipment maintenance directly for the subleased
mobile MRI units. At December 31, 1994, the sublessee was current with its
monthly payment obligations. However, for fiscal 1995, the Company was entitled
to receive from the sublessee approximately $1,047,000 in rental income of
which it received approximately $685,000 resulting in past due amounts of
approximately $362,000. The Company, due to the sublessee's failure to remain
current with its 1995 monthly payment obligations, notified the sublessee that
it was in default of the sublease agreement. As a result, after assessing the
sublease business arrangement, the Company sold one of its mobile MRI units for
$625,000 in December 1995, which in turn reduced the sublessee's monthly
payment obligation to the Company from $76,373 to $52,582 a month for the
remaining thirty three (33) months of the sublease. As a result of the sale of
the mobile MRI unit, the Company incurred a loss of approximately $31,000
representing the difference between the remaining sublease income attributed to
such mobile MRI unit and the sales proceeds received. In February 1996, the
Company terminated the master agreement with the sublessee and repossessed the
remaining three (3) mobile MRI units from the sublessee as a result of the
failure of the sublessee and its customers to satisfy their obligations
thereunder to the Company. In an attempt to satisfy the past due amounts owed
to the Company, the sublessee and its customers provided the Company with cash
and additional patient receivable claims to partially offset the amounts they
owe to the Company. The additional patient receivable claims were to supplement
the amounts previously submitted to the Company to satisfy prior past due
indebtedness from the sublessee and its customers. The Company soon after
returned the three (3) mobile MRI units to the sublessee. Effective July 27,
1996, the Company again repossessed the three (3) mobile MRI units due to the
sublessee's continuing failure to meet its obligations to the Company. In
August 1996, the Company entered into a lease purchase agreement with respect
to the sale of one of the Company's mobile MRI units. The lease purchase
agreement provided for a $20,000 down payment upon execution of the agreement,
eleven (11) monthly installments of $5,000 each which commenced October 1, 1996
and a final payment of $35,000 due in September 1997. Such amounts have been
paid. The Company has entered into an agreement with certain other creditors of
the sublessee in respect of the collection of the sublessee's receivables.
As of January 30, 1996, the Company entered into a one year consulting
agreement with Biltmore. On January 30, 1997, the Company extended the term of
the Consulting Agreement to January 30, 1998, and on November 3, 1997, the
Company further extended the term of the Consulting Agreement to January 30,
1999. Pursuant to the consulting agreement, Biltmore acts as a consultant to
the Company in connection with, among other things, corporate finance and
evaluations of possible
46
<PAGE>
business partners and will seek to find business partners suitable for the
Company and assist in the structuring, negotiating and financing of such
transactions. The consulting agreement provides for the issuance to Biltmore
upon execution thereof of options ("Biltmore Options") exercisable to purchase
750,000 shares of Common Stock at a cash exercise price of $0.75 per share and
for the additional issuance to Biltmore of 750,000 shares ("Biltmore Fee
Shares") of Common Stock upon consummation by the Company of the Acquisition
during the term of the consulting agreement. The consulting agreement provided
that the Biltmore Options only will become exercisable upon the consummation by
the Company of the Financing (which condition was satisfied upon the sale of the
Series C Preferred Stock on February 9, 1996, whereby the Biltmore Options
became fully vested). The holders of the Biltmore Options and the Biltmore Fee
Shares are also entitled to certain demand and "piggyback" registration rights
with respect to the shares of Common Stock issuable upon exercise of the
Biltmore Options and the Biltmore Fee Shares. Furthermore, in consideration of
Biltmore's placement agent services with respect to the offering of the Series
C Preferred Stock, contemporaneous with the sale of the Series C Preferred
Stock on February 9, 1996, the Company issued 60,000 shares of Series C
Preferred Stock to Biltmore.
In February 1998, the Company entered into an agreement with those
parties who have been assigned the Biltmore Options and the rights to the
Biltmore Fee Shares pursuant to which the Company will pay an aggregate of
$3,500,000 for the Biltmore Options and the rights to the Biltmore Fee Shares.
The agreement provides that in no event will the closing of this contemplated
transaction occur later than the ninetieth day following the earlier to occur
of (i) the consummation of the acquisition of JIHP or (ii) the Company raising
aggregate gross proceeds of $60 million from one or more debt and/or equity
financings. In the event that neither above referenced contingency is met this
agreement shall terminate and be of no further force or effect.
During fiscal 1997, Dr. George Braff, a director of the Company from
December 1995 until April 1997 and the Company's Medical Director since October
1997, was the majority shareholder and officer of four of the Company's Medical
Lessees: Edgewater Diagnostic Imaging, P.A. ("Edgewater"), M.R. Radiology
Imaging of Lower Manhattan, P.C. ("MRILM"), Monmouth Diagnostic Imaging, P.A.
("MDI") and Kings Medical Diagnostic Imaging, P.C. ("KMDI"). For fiscal 1997,
EDI, MRILM, MDI and KMDI, respectively, paid the Company approximately $1.4
million, $0.0 million, $2.8 million and $2.4 million in fees for services
previously rendered. In addition, revenues generated to the Company by EDI,
MRILM, MDI and KMDI accounted for 18%, 1%, 30% and 12%, respectively, of the
Company's total revenues in fiscal 1997. For fiscal 1997, EDI, MRILM, MDI and
KMDI paid Dr. Braff approximately $154,000, $100, $382,000 and $265,000 in fees
for professional services rendered by him on their behalf. It is anticipated
that such entities will continue to be Medical Lessees of the Company in fiscal
1998. Dr. Braff sold his interest in EDI in October 1997. The Company entered
into a professional services agreement with Dr. Braff pursuant to the
acquisition of the MRILM facility by the Company.
47
<PAGE>
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"), a
professional corporation owned by Dr. George Braff. This professional
corporation operates a fixed-site MRI facility, with ultrasound, located at 45
Beekman Street in New York City (New York City Facility). The consideration for
the acquisition was (i) the assumption of certain obligations and liabilities
of NYC MRI, including payments to be made under a capital lease of up to
approximately $300,000, (ii) cash in the amount of $900,000, (iii) the issuance
of one million (1,000,000) shares of Common Stock, and (iv) the issuance of a
$300,000 promissory note that was due and paid on December 31, 1997. The
Company anticipates, based on the historical utilization rate of the facility,
it should be immediately accretive to earnings. In connection with the
acquisition, the Company also entered into a consulting services agreement
which, among other things, provides that Dr. Braff will continue to provide
all medical services at the New York City Facility. Dr. Braff is also the
Medical Director of the Company and the supervising radiologist at two of the
Company's other MRI facilities.
The Company leases its Brooklyn, New York fixed-site MRI facility from
DMR, and the MRI equipment at such facility from DFS. DMR is owned by MR
General Associates, L.P., as the general partner ("MR Associates"), and DFS,
as a limited partner. MR Associates is in turn owned by the CEO and another
director of the Company. For fiscal 1997, the Company paid DMR an aggregate of
approximately $407,000 in lease payments for the Brooklyn Facility. The
Company's lease payments to DMR are structured to fully satisfy DMR's costs
and expenses related to the facility, including mortgage payments, taxes and
other related costs. Effective December 1996, the Company agreed to guarantee
a loan of approximately $250,000 loan from DFS to DMR in connection with DMR's
refinancing of an equipment lease related to this Brooklyn Facility. This loan
bears interest at 12% per annum and is repayable over thirty-four (34) months
which commenced February 15, 1997. The outstanding balance of this loan was
approximately $178,000 at December 31, 1997.
During fiscal 1996, the Company entered into an Excess Capacity
License Agreement with Corehealth, Inc., a corporation wholly-owned by Mark R.
Vernon (the "Licensee"), whereby the Company licensed its office space,
equipment and employees at its Brooklyn Facility to the Licensee during times
such space, equipment and employees were not being utilized by the Company. The
Licensee in turn licensed such "excess" space, equipment and employees to
physicians and medical practices ("sublicensees") for the provision of MRI
scans. The Company received a fee for every MRI scan performed by the Licensee
and/or sublicensees at the facility and also furnished related billing and
collection services for an additional fee. For fiscal 1997, the Licensee paid
the Company approximately $109,000 in fees under this arrangement. This
arrangement was terminated in March 1997 and shortly thereafter Mr. Vernon
became an employee with the Company in the capacity as Vice President, Director
of Operations.
In May 1997, the Company entered into a consulting agreement with Dr.
Kazmir, a director of the Company, for a one-year term commencing June 1, 1997.
In January 1998, such agreement was terminated and a new consulting agreement
for a one-year term commenced effective January 1, 1998. Pursuant to such
agreement, Dr. Kazmir will provide such consultation and advice as the Company
may reasonably request, including advice in respect of new developments in the
diagnostic imaging market and the Company's relationships with current and
potential referral sources, and assistance in the development of Company
newsletters and the preparation and arrangement of seminars, luncheons and
other training and education vehicles for current and potential referral
sources. Dr. Kazmir will be entitled to an annual consulting fee of $72,000.
In October 1996, the Company entered into a consulting agreement with
Ulises C. Sabato, M.D., a significant stockholder of the Company, for a one-
year term which commenced on October 15, 1996. Pursuant to such agreement,
Dr. Sabato will provide such consultation and advice as the Company may
reasonably request, including advice in respect of new developments in the
diagnostic imaging market and the Company's relationships with current and
potential referral sources, and assistance in the development of Company
newsletters and the preparation and arrangement of seminars, luncheons and
other training and education vehicles for current and potential referral
sources. Pursuant to such agreement Dr. Sabato will be entitled to an annual
consulting fee of $48,000. In addition, upon execution of such agreement, the
Company granted to Dr. Sabato, stock options exercisable to purchase an
aggregate of 50,000 shares of Common Stock over a five-year period at an
exercise price of $1.0625 per share. The options vested quarterly in equal
installments over the term of the one-year consulting agreement. In December
1997, the consulting agreement was extended until October 16, 1998. Dr. Sabato
is a limited partner in Edgewater Imaging Associates, L.P., a joint venture
partner of HealthCare Imaging Services of Edgewater, Inc., a wholly-owned
subsidiary of the Company.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
- -----------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages below, as part of Part II, Item 8 of this
report:
<TABLE>
<CAPTION>
<S> <C> <C>
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1997 and 1996 F-2
Consolidated statements of operations -
For the years ended December 31, 1997,
1996 and 1995 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated statements of cash flows - For the
years ended December 31, 1997, 1996 and 1995 F-5
Notes to consolidated financial statements F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts -
For the years ended December 31, 1997, 1996 and 1995 F-21
3. EXHIBITS
3.1 Certificate of Incorporation of HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 Registration No.33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
49
<PAGE>
3.2 Certificate of Designations, Preferences and Rights of Series C Convertible
Preferred Stock of HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
3.3 By-Laws of HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
3.4 Certificate of Amendment of the Certificate of Incorporation of HealthCare Imaging
Services, Inc. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996)
10.1 Master Equipment Lease dated March 29, 1991 by and between DVI Financial Services Inc.
and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
10.2 Master Equipment Lease between DVI Financial Services Inc. and MR General Associates -
Mobile I dated as of December 31, 1990 (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
10.3 Assignment, Assumption and Consent Agreement relating to the Mobile I Master Equipment
Lease between MR General and HealthCare Imaging Services, Inc. dated as of January 14,
1991 (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed with the Securities and Exchange Commission on
August 13, 1991)
10.4 Consulting Services and License Agreement between New York MR Associates and Kings
Medical Diagnostic Imaging, P.C. dated January 27, 1986 (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.5 Addendum to Consulting Services and License Agreement dated June 15, 1990 between
New York MR Associates and Kings Medical Diagnostic Imaging, P.C. (Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1
Registration No. 33-42091 filed with the Securities and Exchange Commission on August 13, 1991)
50
<PAGE>
10.6 Administrative Management Agreement between NYMR Associates and MR General Associates
dated January 27, 1986 (Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities
and Exchange Commission on August 13, 1991)
10.7 Assignment and Consent Agreement dated as of July 24, 1991 by and among Kings Medical
Diagnostic Imaging, P.C., Kings Plaza Radiology Associates (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form S-1 Registration
No. 33- 42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.8 Lease between New York MR Associates and King Medical Diagnostic Imaging, P.C. as of
January 27, 1986 for Brooklyn property (Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on August 13, 1991)
10.9 Assignment and Assumption of Lease dated October 22, 1991 between Kings Medical
Diagnostic Imaging, P.C. and HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on Form S-1 Registration No. 33-
42901 filed with the Securities and Exchange Commission on November 6, 1991)
10.10 Sublease dated October 22, 1991 between Kings Medical Diagnostic Imaging, P.C. and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on November 6, 1991)
10.11 Siemens Service Agreement dated March 5, 1991 between Siemens Medical Systems, Inc.
and New York MR Associates (Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on August 13, 1991)
10.12 Mortgage between New York MR Associates and DVI Financial Services Inc. dated
November 16, 1987 in the principal amount of $685,000 (Incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.13 Promissory Note of MR General Associates to Midlantic Bank in the face
amount of $300,000 (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13, 1991)
51
<PAGE>
10.14 Promissory Note of New York MR Associates to Midlantic Bank in the face amount of
$400,000 and correspondence relating thereto (Incorporated by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13, 1991)
10.15 Employment Agreement dated October 22, 1991 between Elliott Vernon and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities
and Exchange Commission on November 6, 1991)*
10.16 Employment Agreement dated January 19, 1993 between Michael J. Rutkin and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)*
10.17 Employment Agreement dated January 8, 1994 between Calvin M. Sprung and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)*
10.18 Form of Guaranty, dated October 22, 1991, issued by HealthCare Imaging Services, Inc.
pertaining to a series of Promissory Notes in the aggregate principal amount of
$630,000 issued by DMR Associates, L.P. (Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on November 6, 1991)
10.19 HealthCare Imaging Services, Inc. 1991 Stock Option Plan (Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on November 6, 1991)*
10.20 HealthCare Imaging Services, Inc. 1991 Stock Option Plan for Non-Employee Directors
(Incorporated by Reference to Exhibit 10.20 to the Company's 1991 Annual Report on Form
10-K)*
10.21 Consulting Agreement dated October 22, 1991 between Joseph Raymond and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 Registration Commission on October 24, 1991)*
10.22 Promissory Note of HealthCare Imaging Services, Inc. to DMR Associates, L.P. in the face
amount of $123,000 (Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on November 6, 1991)
10.23 Registration Rights Agreement dated October 22, 1991 between HealthCare Imaging
Services, Inc. and DVI Financial Services Inc. (Incorporated by reference to Exhibit 10.23
52
<PAGE>
to the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on November 6, 1991)
10.24 Agreement for Purchase and Sale dated October 22, 1991 between DMR Associates, L.P.
and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on November 6, 1991)
10.25 Purchase Agreement dated as of October 22, 1991 by and among DMR Associates, L.P., HIS
Acquisition, Inc. and DVI Financial Services Inc. (Incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on November 6, 1991)
10.26 Merger Agreement dated October 22, 1991 between HealthCare Imaging Services, Inc. and
HIS Acquisition, Inc. (Incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on November 6, 1991)
10.27 Unit Purchase Option dated November 19, 1991, between HealthCare Imaging Services, Inc.
and Stratton Oakmont, Inc. (Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on November 6, 1991)
10.28 Master Equipment Lease (No. 91-11-0534) dated December 31, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-0535) dated December 31, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992)
10.30 Master Mobile Lease Agreement dated September 1, 1994 between Universal Diagnostic
Corp., Medibest Imaging Corp., Ocean Diagnostic Radiology, P.C., Eagle Diagnostic
Imaging Corp., Junction Diagnostic Imaging Corp., HealthCare Imaging Services, Inc. and
Omni Medical Imaging, Inc. (Together with certain Exhibits thereto) (Incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994)
53
<PAGE>
10.31 Master Lease Agreement dated March 14, 1995 between HealthCare Imaging Services, Inc.
and Maiden Choice MRI, L.L.C. (Together with certain Exhibits thereto) (Incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994)
10.32 Restructuring Agreement, dated as of July 1, 1994, among Edgewater Imaging Associates,
L.P., HealthCare Imaging Services of Edgewater, Inc., and the certain individuals
signatory thereto (Incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on August 12,
1994)
10.33 Master Equipment Lease dated September 26, 1995 by and between DVI Financial Services
Inc. and HealthCare Imaging Services, Inc. (Together with certain Schedules thereto).
(Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
10.34 Placement Agent Agreement dated as of January 22, 1996 by and between Biltmore
Securities, Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995)
10.35 Consulting Agreement dated as of January 30, 1996 by and between Biltmore Securities, Inc.
and HealthCare Imaging Services, Inc. (Together with certain Exhibits thereto).
(Incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
10.36 Form of Subscription Agreement for the Purchase of Series C Convertible Preferred Stock
of HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
10.37 Amendment No. 1 dated as of February 1, 1996 to Employment Agreement by and between
Elliott H. Vernon and HealthCare Imaging Services, Inc. (Together with a Stock Option
Agreement, Restricted Stock Award Agreement and Registration Rights Agreement, each
dated as of February 1, 1996 and by and between Mr. Vernon and HealthCare Imaging
Services, Inc., which are exhibits thereto)* (Incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995)
10.38 Amendment No. 2 to HealthCare Imaging Services, Inc. 1991 Stock Option Plan
(Incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1996)*
54
<PAGE>
10.39 HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 Registration No. 333-8699 filed with the Securities and Exchange Commission on July
24, 1996)*
10.40 Agreement, dated as of January 30, 1997, between HealthCare Imaging Services, Inc. and
Biltmore Securities, Inc. (Incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.41 Agreement, dated as of January 30, 1997, between HealthCare Imaging Services, Inc. and
Elliott H. Vernon (Incorporated by reference to Exhibit 10.41 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)*
10.42 Amendment No. 2 to Employment Agreement between HealthCare Imaging Services, Inc
and Elliott H. Vernon (Incorporated by reference to Exhibit 10.42 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)*
10.43 Amendment No. 3 to HealthCare Imaging Services, Inc. 1991 Stock Option Plan
(Incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997)*
10.44 Form of Excess Capacity Agreement (Incorporated by reference to Exhibit 10.44
to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.45 Loan and Security Agreement, dated as of December 26, 1996, between HealthCare Imaging
Services, Inc., Edgewater Imaging Associates, L.P., Wayne Imaging Associates, L.P.,
Rittenhouse Square Imaging Associates, L.P. and DVI Business Credit Corporation
(Incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997)
10.46 Asset Purchase Agreement dated as of November 4, 1997, between Healthcare Imaging
Services, Inc. and M.R. Radiology Imaging of Lower Manhattan, P.C. (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 19, 1997)
10.47 Promissory Note of Healthcare Imaging Services, Inc. to M.R. Radiology Imaging of Lower
Manhattan, P.C. (Incorporated by reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on November 19, 1997)
10.48 Amendment No. 1 to HealthCare Imaging Services, Inc. 1996 Stock Option Plan for
Non-Employee Directors*
10.49 Agreement, dated as of November 3, 1997, betwen HealthCare Imaging Services, Inc. and
Biltmore Securities, Inc.
10.50 Agreeement, dated as of November 3, 1997, between HealthCare Imaging Services, Inc. and
Elliott H. Vernon*
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase Plan*
10.53 Stock Purchase Agreement, dated as of February 25, 1998 by and among HealthCare Imaging
Services, Inc., the Stephanie Loewenstern Irrevocable Trust, the Brett Loewenstern
Irrevocable Trust, the Victoria Loewenstern Irrevocable Trust, the Richard B. Bronson
Revocable Trust and the Reiter Family Partnership
22.1 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 22.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
23.1 Consent of Independent Auditors, Deloitte & Touche LLP
27 Financial Data Schedule
- ------------------------------------------------------------------------------
* Such exhibit is a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of this Annual
Report on Form 10-K.
- ------------------------------------------------------------------------------
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities
and Exchange Commission on November 19, 1997.
(i) Item 2. Acquisition or Disposition of Assets
(ii) Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired-
Audited Financial Statments of M.R. Radiology Imaging of Lower
Manhattan, P.C. for the year ended December 31, 1996.
55
<PAGE>
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.
HEALTHCARE IMAGING SERVICES, INC.
---------------------------------
Dated: March 31, 1998 By: /s/Elliott H. Vernon
--------------------
By: Elliott H. Vernon
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual 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>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Elliott H. Vernon Chairman of the March 31, 1998
- -------------------- Board, President and
Elliott H. Vernon Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/ Scott P. McGrory Vice President, March 31, 1998
- ------------------- Controller
Scott P. McGrory (Principal
Financial and
Accounting Officer)
/s/ Shawn A. Friedkin Director March 31, 1998
- --------------------
Shawn A. Friedkin
Director March , 1998
- --------------------
Munr Kazmir
56
<PAGE>
/s/ Joseph J. Raymond Director March 31, 1998
- --------------------
Joseph J. Raymond
</TABLE>
57
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
--------
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
--------
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS Page
- -------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of HealthCare
Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
3.2 Certificate of Designations, Preferences
and Rights of Series C Convertible
Preferred Stock of HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995)
3.3 By-Laws of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit
3.2 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
3.4 Certificate of Amendment of the
Certificate of Incorporation of HealthCare
Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.4 to the Company's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.1 Master Equipment Lease dated March 29,
1991 by and between DVI Financial
Services Inc. and HealthCare Imaging
58
<PAGE>
Services, Inc. (Incorporated by reference
to Exhibit 10.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.2 Master Equipment Lease between DVI
Financial Services Inc. and MR General
Associates - Mobile I dated as of
December 31, 1990 (Incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.3 Assignment, Assumption and Consent
Agreement relating to the Mobile I Master
Equipment Lease between MR General
and HealthCare Imaging Services, Inc.
dated as of January 14, 1991 (Incorporated
by reference to Exhibit 10.3 to the
Company's Registration Statement on
Form S-1 Registration No.33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.4 Consulting Services and License
Agreement between New York MR
Associates and Kings Medical Diagnostic
Imaging, P.C. dated January 27, 1986
(Incorporated by reference to Exhibit 10.4
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13, 1991)
10.5 Addendum to Consulting Services and
License Agreement dated June 15, 1990
between New York MR Associates and
Kings Medical Diagnostic Imaging, P.C.
(Incorporated by reference to Exhibit 10.5
59
<PAGE>
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13,1991)
10.6 Administrative Management Agreement
between NYMR Associates and MR
General Associates dated January 27,1986
(Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13, 1991)
10.7 Assignment and Consent Agreement dated
as of July 24, 1991 by and among Kings
Medical Diagnostic Imaging, P.C., Kings
Plaza Radiology Associates (Incorporated
by reference to Exhibit 10.7 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.8 Lease between New York MR Associates
and King Medical Diagnostic Imaging,
P.C. as of January 27, 1986 for Brooklyn
property (Incorporated by reference to
Exhibit 10.8 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.9 Assignment and Assumption of Lease
dated October 22, 1991 between Kings
Medical Diagnostic Imaging, P.C. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement
on Form S-1 Registration No. 33-42901
filed with the Securities and Exchange
Commission on November 6, 1991)
60
<PAGE>
10.10 Sublease dated October 22, 1991 between
Kings Medical Diagnostic Imaging, P.C.
and HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.10 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on November 6,
1991)
10.11 Siemens Service Agreement dated March
5, 1991 between Siemens Medical
Systems, Inc. and New York MR
Associates (Incorporated by reference to
Exhibit 10.11 to the Company's Registra
tion Statement on Form S-1 Registration
No. 33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
10.12 Mortgage between New York MR
Associates and DVI Financial Services
Inc. dated November 16, 1987 in the
principal amount of $685,000
(Incorporated by reference to Exhibit
10.12 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
10.13 Promissory Note of MR General
Associates to Midlantic Bank in the face
amount of $300,000 (Incorporated by
reference to Exhibit 10.13 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.14 Promissory Note of New York MR
Associates to Midlantic Bank in the face
amount of $400,000 and correspondence
61
<PAGE>
relating thereto (Incorporated by reference
to Exhibit 10.14 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.15 Employment Agreement dated October
22, 1991 between Elliott Vernon and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.15 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on November 6,
1991)*
10.16 Employment agreement dated January 19,
1993 between Michael J. Rutkin and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994)*
10.17 Employment agreement dated January 8,
1994 between Calvin M. Sprung and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994)*
10.18 Form of Guaranty, dated October 22,
1991, issued by HealthCare Imaging
Services, Inc. pertaining to a series of
Promissory Notes in the aggregate
principal amount of $630,000 issued by
DMR Associates, L.P. (Incorporated by
reference to Exhibit 10.18 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
62
<PAGE>
with the Securities an Exchange
Commission on November 6, 1991)
10.19 HealthCare Imaging Services, Inc. 1991
Stock Option Plan (Incorporated by
reference to Exhibit 10.19 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on November 6, 1991)*
10.20 HealthCare Imaging Services, Inc. 1991
Stock Option Plan for Non-Employee
Directors (Incorporated by Reference to
Exhibit 10.20 to the Company's 1991
Annual Report on Form 10-K)*
10.21 Consulting Agreement dated October 22,
1991 between Joseph Raymond and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.19 to the Company's Registration
Statement on Form S-1 Registration
Commission on October 24, 1991)*
10.22 Promissory Note of HealthCare Imaging
Services, Inc. to DMR Associates, L.P. in
the face amount of $123,000 (Incorporated
by reference to Exhibit 10.22 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on November 6, 1991)
10.23 Registration Rights Agreement dated
October 22, 1991 between HealthCare
Imaging Services, Inc. and DVI Financial
Services Inc. (Incorporated by reference to
Exhibit 10.23 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
63
<PAGE>
10.24 Agreement for Purchase and Sale dated
October 22, 1991 between DMR
Associates, L.P. and HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 2.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
10.25 Purchase Agreement dated as of October
22, 1991 by and among DMR Associates,
L.P., HIS Acquisition, Inc. and DVI
Financial Services Inc. (Incorporated by
reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
10.26 Merger Agreement dated October 22,
1991 between HealthCare Imaging
Services, Inc. and HIS Acquisition, Inc.
(Incorporated by reference to Exhibit 2.3
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on November 6, 1991)
10.27 Unit Purchase Option dated November 19,
1991, between HealthCare Imaging
Services, Inc. and Stratton Oakmont, Inc.
(Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on November 6, 1991)
10.28 Master Equipment Lease (No. 91-11-
0534) dated December 31, 1991 by and
between DVI Financial Services Inc. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
64
<PAGE>
10.28 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-
0535) dated December 31, 1991 by and
between DVI Financial Services Inc. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.29 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1992)
10.30 Master Mobile Lease Agreement dated
September 1, 1994 between Universal
Diagnostic Corp., Medibest Imaging
Corp., Ocean Diagnostic Radiology, P.C.,
Eagle Diagnostic Imaging Corp., Junction
Diagnostic Imaging Corp., HealthCare
Imaging Services, Inc. and Omni Medical
Imaging, Inc. (Together with certain
Exhibits thereto) (Incorporated by
reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1994)
10.31 Master Lease Agreement dated March 14,
1995 between HealthCare Imaging
Services, Inc. and Maiden Choice MRI,
L.L.C. (Together with certain Exhibits
thereto) (Incorporated by reference to
Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1994)
10.32 Restructuring Agreement, dated as of July
1, 1994, among Edgewater Imaging
Associates, L.P., HealthCare Imaging
Services of Edgewater, Inc., and the
certain individuals signatory thereto
(Incorporated by reference to Exhibit 1 to
the Company's Current Report on Form 8-
65
<PAGE>
K filed with the Securities and Exchange
Commission on August 12, 1994)
10.33 Master Equipment Lease dated September
26, 1995 by and between DVI Financial
Services Inc. and HealthCare Imaging
Services, Inc. (Together with certain
Schedules thereto). (Incorporated by
reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995)
10.34 Placement Agent Agreement dated as of
January 22, 1996 by and between
Biltmore Securities, Inc. and HealthCare
Imaging Services, Inc. (Incorporated by
reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995)
10.35 Consulting Agreement dated as of January
30, 1996 by and between Biltmore
Securities, Inc. and HealthCare Imaging
Services, Inc. (Together with certain
Exhibits thereto). (Incorporated by
reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995)
10.36 Form of Subscription Agreement for the
Purchase of Series C Convertible
Preferred Stock of HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 10.36 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995)
10.37 Amendment No. 1 dated as of February 1,
1996 to Employment Agreement by and
between Elliott H. Vernon and HealthCare
66
<PAGE>
Imaging Services, Inc. (Together with a
Stock Option Agreement, Restricted Stock
Award Agreement and Registration Rights
Agreement, each dated as of February 1,
1996 and by and between Mr. Vernon and
HealthCare Imaging Services, Inc.,
which are exhibits thereto)* (Incorporated
by reference to Exhibit 10.37 to the
Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995)
10.38 Amendment No. 2 to HealthCare Imaging
Services, Inc. 1991 Stock Option Plan.
(Incorporated by reference to Exhibit
10.38 to the Company's Form 10-Q for the
quarter ended June 30, 1996)
10.39 HealthCare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee
Directors (Incorporated by reference to
Exhibit 4.1 to the Company's Registration
Statement on Form S-8 Registration No.
333-8699 filed with the Securities and
Exchange Commission on July 24, 1996)*
10.40 Agreement, dated as of January 30, 1997,
between HealthCare Imaging Services,
Inc. and Biltmore Securities, Inc.
(Incorporated by reference to Exhibit 10.40
to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997)
10.41 Agreement, dated as of January 30, 1997,
between HealthCare Imaging Services,
Inc. and Elliott H. Vernon* (Incorporated by
reference to Exhibit 10.41 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997)
10.42 Amendment No. 2 to Employment
Agreement between HealthCare Imaging
Services, Inc and Elliott H. Vernon*
(Incorporated by reference to Exhibit 10.42 to
the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997)
10.43 Amendment No. 3 to HealthCare Imaging
Services, Inc. 1991 Stock Option Plan*
(Incorporated by reference to Exhibit
10.43 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997)
67
<PAGE>
10.44 Form of Excess Capacity Agreement
(Incorporated by reference to Exhibit
10.44 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March
31, 1997)
10.45 Loan and Security Agreement, dated as of
December 26, 1996, between HealthCare
Imaging Services, Inc., Edgewater
Imaging Associates, L.P., Wayne Imaging
Associates, L.P., Rittenhouse Square
Imaging Associates, L.P. and DVI
Business Credit Corporation (Incorporated
by reference to Exhibit 10.45 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997)
10.46 Asset Purchase Agreement dated as of November 4,
1997, between Healthcare Imaging Services, Inc.
and M.R. Radiology Imaging of Lower Manhattan,
P.C. (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on
November 19, 1997)
10.47 Promissory Note of Healthcare Imaging Services, Inc.
to M.R. Radiology Imaging of Lower Manhattan, P.C.
(Incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 19, 1997)
10.48 Amendment No. 1 to HealthCare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee Directors*
10.49 Agreement, dated as of November 3, 1997, betwen HealthCare
Imaging Services, Inc. and Biltmore Securities, Inc.
10.50 Agreeement, dated as of November 3, 1997, between HealthCare
Imaging Services, Inc. and Elliott H. Vernon*
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase
Plan*
10.53 Stock Purchase Agreement, dated as of February 25, 1998 by and
among HealthCare Imaging Services, Inc., the Stephanie
Loewenstern Irrevocable Trust, the Brett Loewenstern
Irrevocable Trust, the Victoria Loewenstern Irrevocable Trust,
the Richard B. Bronson Revocable Trust and the Reiter Family
Partnership
22.1 Subsidiaries of the Registrant.
(Incorporated by reference to Exhibit 22.1
to the Company's Annual Report on Form
10-K for the fiscal year ended December
31, 1995)
23.1 Consent of Independent Auditors, Deloitte
& Touche LLP
27 Financial Data Schedule
- -------------------------------------------------------------------
* Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report
on Form 10-K pursuant to Item 14(c) of this Annual Report on
Form 10-K.
- -------------------------------------------------------------------
</TABLE>
68
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
HealthCare Imaging Services, Inc.
Red Bank, New Jersey
We have audited the accompanying consolidated balance sheets of HealthCare
Imaging Services, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
Item 14 to the Company's Annual Report on Form 10-K for the year ended December
31, 1997. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1997 and 1996, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 24, 1998
F-1
<PAGE>
- ------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 70,626 $ 173,879
Marketable securities - 625,000
Accounts receivable - net of allowances for doubtful accounts of $4,977,000
in 1997 and $4,318,000 in 1996 5,375,351 4,328,553
Prepaid expenses and other 186,082 160,021
------- -----------
Total current assets 5,632,059 5,287,453
--------- ----------
PROPERTY, PLANT AND EQUIPMENT - NET 5,518,772 4,347,745
--------- ----------
Advances to licensee 197,815 351,401
Due from officer 264,125 176,049
Other assets 232,810 265,278
Goodwill - net of accumulated amortization of $78,011 in 1997 and $46,269 in 1996 1,695,054 138,806
--------- ------------
Total other assets 2,389,804 931,534
--------- ------------
TOTAL ASSETS $13,540,635 $10,566,732
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under a revolving line of credit $ 1,462,000 $ -
Accounts payable and accrued expenses 1,354,200 1,083,223
Current portion of capital lease obligations 1,647,148 1,102,559
Reserve for restructuring costs - 150,054
Income taxes payable 16,044 8,304
------------ -------------
Total current liabilities 4,479,392 2,344,140
--------- ----------
NONCURRENT LIABILITIES:
Capital lease obligations 2,780,447 2,141,627
Reserve for restructuring costs 321,465 575,589
------- -----------
3,101,912 2,717,216
--------- ----------
MINORITY INTEREST 546,433 500,569
------- -----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.10 par value: 1,000,000 shares authorized, 185,000
and 660,000 outstanding at December 31, 1997 and 1996, respectively (Each
convertible into seven (7) shares of common stock) 18,500 66,000
Common stock, $.01 par value: 50,000,000 shares authorized, 9,286,974
and 4,961,974 outstanding at December 31, 1997 and 1996, respectively 92,870 49,620
Additional paid-in capital 12,694,678 11,876,678
Accumulated deficit (7,393,150) (6,588,845)
Unearned compensation - (398,646)
--------- --------------
Total stockholders' equity 5,412,898 5,004,807
--------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,540,635 $10,566,732
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES $10,247,940 $9,787,591 $9,249,284
---------- ---------- ----------
OPERATING EXPENSES:
Salaries 2,819,601 2,838,739 2,654,503
Other operating expenses 3,196,373 2,645,275 2,334,470
Provision/(recovery) of bad debts - (392,286) -
Films and supplies 478,543 552,067 526,641
Equipment maintenance and repairs 619,491 645,231 727,359
Consulting and marketing fees 582,687 72,344 106,650
Professional fees 538,392 457,797 291,156
Depreciation and amortization 1,509,649 1,450,074 1,742,494
Interest 540,652 469,133 641,603
(Gain) /Loss on sale of property, plant and equipment (105,000) - 191,181
Non-cash compensation charge 398,646 1,445,473 -
------- ----------- ------------
10,579,034 10,183,847 9,216,057
---------- ----------- -----------
(LOSS) INCOME BEFORE MINORITY INTERESTS IN
JOINT VENTURES AND INCOME TAXES (331,094) (396,256) 33,227
MINORITY INTERESTS IN JOINT VENTURES (430,172) (416,192) (293,924)
--------- ------------- -------------
LOSS BEFORE INCOME TAXES (761,266) (812,448) (260,697)
INCOME TAX PROVISION (BENEFIT) 43,039 49,348 (142,267)
------ ------------- -------------
NET LOSS $(804,305) $ (861,796) $ (118,430)
========== ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,187,822 4,711,974 4,711,974
========= =========== ===========
NET LOSS PER COMMON SHARE $ (0.13) $ (0.18) $ (0.03)
========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
----------
PREFERRED STOCK COMMON STOCK PAID-IN
--------------- ------------ -------
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995 - - 4,711,974 $ 47,120 $8,902,805
Net loss - - - - -
--------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 - - 4,711,974 47,120 8,902,805
--------------------------------------------------------------------
Proceeds from sale of Preferred Stock,
(each convertible into seven (7) shares of
Common Stock) net of expenses
of $151,746 660,000 $ 66,000 - - 1,132,254
Issuance of Restricted Stock Grant - - 250,000 2,500 466,244
Unearned compensation in connection
with stock option grant - - - - 1,375,375
Amortization of unearned
compensation for stock options
and restricted stock grant - - - - -
Net loss - - - - -
--------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 660,000 66,000 4,961,974 49,620 11,876,678
--------------------------------------------------------------------
Conversion of Series C Convertible, (475,000) (47,500) 3,325,000 33,250 14,250
Preferred Stock
Amortization of unsecured
compensation for stock options and
restricted stock grant - - - - -
Purchase of M.R. Radiology Imaging of
Lower Manhattan, P.C. - - 1,000,000 10,000 821,250
Net loss - - - - -
Other - - - - (17,500)
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 185,000 18,500 9,286,974 $92,870 $12,694,678
--------------------------------------------------------------------
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
-----
ACCUMULATED UNEARNED STOCKHOLDER
----------- -------- -----------
DEFICIT COMPENSATION EQUITY
------- ------------ ------
<S> <C> <C> <C>
BALANCE JANUARY 1, 1995 $(5,608,619) - $3,341,306
Net loss (118,430) - (118,430)
------------------------------------------
BALANCE DECEMBER 31, 1995 (5,727,049) - 3,222,876
------------------------------------------
Proceeds from sale of Preferred Stock,
(each convertible into seven (7) shares of
Common Stock) net of expenses
of $151,746 - - 1,198,254
Issuance of Restricted Stock Grant - $(468,744) -
Unearned compensation in connection
with stock option grant - (1,375,375) -
Amortization of unearned
compensation for stock options
and restricted stock grant - 1,445,473 1,445,473
Net loss (861,796) - (861,796)
------------------------------------------
BALANCE DECEMBER 31, 1996 (6,588,845) (398,646) 5,004,807
------------------------------------------
Conversion of Series C Convertible, - - -
Preferred Stock
Amortization of unsecured
compensation for stock options and
restricted stock grant - 398,646 398,646
Purchase of M.R. Radiology Imaging of
Lower Manhattan, P.C. - - 831,250
Net loss (804,305) - (804,305)
Other - (17,500)
------------------------------------------
BALANCE, DECEMBER 31, 1997 $(7,393,150) $ - $5,412,898
------------------------------------------
</TABLE>
F-4
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (804,305) $ (861,796) $ (118,430)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 1,509,649 1,450,074 1,742,494
Amortization of non-cash compensation 398,646 1,445,473 -
(Gain)/ Loss on sale of property, plant and equipment (105,000) - 191,181
Minority interests in joint ventures 430,172 416,192 293,924
Deferred income taxes - - (254,194)
Allowance for doubtful accounts 659,000 17,000 663,000
Changes in assets and liabilities:
Accounts receivable (1,258,052) (632,022) 710,460
Prepaid expenses and other (26,061) 57,741 51,760
Due from officer (88,076) 55,855 -
Deferred costs - (4,767) (28,888)
Advances to licensee 153,586 (351,401) -
Accounts payable and accrued expenses 160,977 317,965 (1,362)
Income taxes payable 7,740 8,304 (19,407)
Other non-current assets 7,605 (156,762) 27,232
----------- ------------ --------------
Net cash provided by operating activities 1,045,881 1,761,856 3,257,770
----------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of M.R. Radiology Imaging of Lower Manhattan, P.C. (1,203,721) - -
Purchases of property, plant and equipment (120,169) (171,654) (93,375)
Proceeds from sale of marketable securities 625,000 375,000 -
Purchase of marketable securities - (1,000,000) -
Proceeds from sale of property, plant and equipment - - 525,000
----------- -------------- -------------
Net cash (used in) provided by investing activities (698,890) (796,654) 431,625
----------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from the sale of Series C Preferred Stock - 1,198,254 -
Borrowing under the revolving line of credit 1,462,000 - -
Payments on capital lease obligations (1,363,860) (985,084) (1,665,602)
Payments on note payable - (52,530) (70,933)
Proceeds received from sale of property, plant and equipment
related to restructured operations 105,000 - 625,000
Proceeds received on sublease for restructured operations 161,843 444,173 755,000
Payments for reserve for restructuring costs (413,419) (1,306,013) (3,004,180)
Distributions to limited partners of joint ventures (384,308) (371,539) (282,524)
Other (17,500) - -
-------- --------------- -----------------
Net cash used in financing activities (450,244) (1,072,739) (3,643,239)
--------- -------------- -----------------
(DECREASE)/INCREASE IN CASH (103,253) (107,537) 46,156
CASH:
Beginning of the year 173,879 281,416 235,260
----------- --------------- -------------------
End of the year $ 70,626 $ 173,879 $ 281,416
============= ================= ===================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 535,784 $ 477,196 $ 747,501
============ ============= ============
Income taxes paid $ 35,300 $ 53,756 104,563
============ ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital leases principally for medical equipment $ 2,221,584 $ 306,634
============ ============
Stock issued as partial consideration for the purchase of M.R.
Radiology Imaging of Lower Manhattan, P.C. (See Note 2.) $831,250
========
Reinstatement of mobile MRI unit related to previously recorded
restructured operations $421,973
========
Reinstatement of capital lease obligation related to previously
recorded restructured operations $574,575
========
Refinancing of certain capital lease obligations $ 69,746
============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - The Company is principally engaged in the business
of establishing and operating fixed-site magnetic resonance imaging
("MRI") centers.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include HealthCare Imaging Services, Inc. (together with its
subsidiaries and joint ventures hereinafter referred to as the
"Company") and its wholly-owned subsidiaries, which are corporations
usually formed to be the general partner of the Company's various
limited partnership arrangements. The Company's consolidated financial
statements also include 100% of the assets, liabilities and results of
operations of its operating joint ventures in which the Company has a
majority interest (ranging from 51% to 60%) and exercises unilateral
management control including day-to-day management of operations,
strategic planning, equipment financing and capital transactions. The
ownership interests of the limited partners in these joint ventures
are recorded as minority interests. All significant intercompany
balances and transactions have been eliminated in consolidation.
REVENUES - The Company provides MRI services to health care providers,
which consist primarily of individual physicians and private medical
practices. The Company generally leases its MRI equipment to
professional practice groups ("Medical Lessees") primarily located in
New York, New Jersey and Pennsylvania who, in turn, make the equipment
available to their patients and other health care providers with whom
they or the Company have relationships. A typical Medical Lessee pays
the Company a flat fee on a daily, weekly, or per scan basis for the
use of the equipment and an administrative charge for the use of the
Company's support personnel and support services, such as clerical
work, billing and collection services and performing other associated
nonmedical functions. Such fees are received when the Medical Lessees
are paid by either their patients or other third-party payers.
The Company has entered into several Consulting Services and Licensing
Agreements with physicians to provide them with management and
administrative services, and medical equipment for periods ranging
from five (5) to ten (10) years. Under the terms of the Consulting
Services and Licensing Agreements, the Company receives revenues in
the following manner:
PROCEDURE FEES - Procedures revenue represents fees earned by
the Company for each scan performed for the physicians. Fees
are revised each year based upon the Company's Consulting
Services and Licensing Agreements with the physicians.
ADMINISTRATIVE FEES - Administrative revenue represents fees
earned by the Company for medical support services. This fee,
per the administrative services agreements, fluctuates
annually based upon total revenues and type of services
provided.
MARKETABLE SECURITIES - The Company's marketable securities portfolio
is classified as "Available For Sale." Such securities are valued at
fair value with net changes in unrealized holding gains and losses
included as a separate component of shareholders' equity until
realized. Debt and equity securities which are classified as
"Available For Sale" are those which are not actively traded or those
which will not be held to maturity. At December 31, 1996, cost
approximated fair market value and there were no unrealized holding
gains or losses. All marketable securities were disposed of in 1997.
There were no significant gains or losses resulting from such
dispositions.
F-7
<PAGE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, stated
at cost, are depreciated on a straight-line basis over the estimated
useful lives of the assets. Assets held under capital leases are
stated at the lower of the fair market value or the present value of
the future minimum lease payments. Leasehold improvements are
amortized over the shorter of the life of the lease or the useful
life. The estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Office and computer equipment
and furniture and fixtures 5-8 years
Medical equipment 5-8 years
Leasehold improvements 6-8 years
</TABLE>
GOODWILL - Goodwill is being amortized on a straight-line basis over ten
(10) to twenty (20) years.
NET LOSS PER COMMON SHARE - Net loss per common share is computed by
dividing net loss by the number of weighted average common shares
outstanding. Common stock equivalents have been excluded from the
computation because they are anti-dilutive.
INCOME TAXES - Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For financial instruments
including cash, accounts receivable and payable and accruals, it was
assumed that the carrying amount approximated fair value because of
their short maturity. The Company's marketable securities were carried
at fair market value at December 31, 1996. The fair values of the
Company's long-term debt and capital lease obligations are estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amount and fair value for the Company's long-term debt and
capital lease obligations are $4,427,595 and $4,478,970 at December 31,
1997, respectively, and $3,244,186 and $3,332,202 at December 31, 1996,
respectively.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivables. The Company furnishes services in various states
(primarily in New York, New Jersey and Pennsylvania) on behalf of
professional entities primarily comprised of radiologists who in turn
provide such services to individual physicians, physicians' groups and
other health care providers which consist of managed care organizations,
labor unions and self-funded corporations. The Company currently earns
substantially all of its MRI revenues through its arrangements with its
Medical Lessees. Although the Company's right to payment for services
rendered to Medical Lessees is not dependent upon payments received by
the Medical Lessees, as part of its arrangements with certain Medical
Lessees, the Company does not seek payment from the Medical Lessee until
the Medical Lessee has been paid for the MRI services it has provided.
Therefore, the Company bears the risk of delayed payment since
principally all amounts due to the Medical Lessees are subject to
third-party reimbursement from health insurance companies, which
historically have proven to be credit worthy. Upon the expiration or
other termination of the arrangements with such Medical Lessees, the
Company is contractually entitled to seek payment from such Medical
Lessees for all services provided, including those with respect to which
the Medical Lessees have not been paid. However, the Company generally
does not seek to recover unpaid claims from Medical Lessees.
F-8
<PAGE>
The Company's accounts receivable (principally due from Medical Lessees)
represent the Company's proportionate share of Medical Lessees'
procedure fees and administrative fees. Such accounts receivable are
shown net of an allowance for doubtful accounts which consists of the
Company's estimate of amounts that will not be collected.
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards
Board (the "FASB") 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." The Company adopted this standard
in 1996 without any significant impact on the Company's financial
position or results of operations. The Company evaluates long-lived
assets and certain identifiable intangibles held and used by the Company
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
STOCK OPTIONS AND WARRANTS - In October 1995, the FASB issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Pursuant to this statement, companies are encouraged, but
are not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to
continue to account for such transactions under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," but
are required to disclose in a note to the annual audited financial
statements pro forma net income (loss) and pro forma earnings (losses)
per share as if the company had applied the newer method of accounting.
The Company has elected to continue to follow the provisions of APB
Opinion No. 25 and related interpretations in accounting for employee
stock options.
2. NEW BUSINESS DEVELOPMENTS AND RESTRUCTURINGS
NEW BUSINESS DEVELOPMENTS
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"),
a professional corporation owned by Dr. George Braff, a related party.
This professional corporation operates a fixed-site MRI facility, with
ultrasound, located at 45 Beekman Street in New York City ("New York
City Facility"). The consideration for the acquisition was (i) the
assumption of certain obligations and liabilities of NYC MRI, including
payments to be made under a capital lease of up to approximately
$300,000, (ii) cash in the amount of $900,000, (iii) the issuance of
one million (1,000,000) shares of Common Stock, and (iv) the issuance
of a $300,000 promissory note that was due and paid on December 31,
1997. The total purchase price for the acquisition of the New York City
Facility has been allocated to tangible and identifiable intangible
assets and liabilities based upon their respective fair market values
with the excess of cost over fair market value of net assets acquired
allocated to goodwill. In connection with the acquisition, the Company
also entered into a consulting services agreement which, among other
things, provides that Dr. Braff will continue to provide all medical
services at the New York City Facility. Dr. Braff is also the Medical
Director of the Company and the supervising radiologist at two of the
Company's other MRI facilities.
The following table presents the results of operations, unaudited as if
this acquisition occurred on January 1, 1996:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues $11,124,914 $11,392,784
=========== ===========
Net loss $ (833,458) $ (523,014)
=========== ===========
Net loss per common
share $ (0.12) $ (0.09)
=========== ===========
</TABLE>
<PAGE>
As the Company has previously announced, it has decided to expand its
strategic focus into the area of physician practice management. To that
end, the Company has entered into a letter of intent with respect to the
acquisition of all of the outstanding capital stock of Jersey Integrated
HealthPractice, Inc., a management services organization formed and
owned by Pavonia Medical Associates, P.A. and Liberty Health Care
Systems, Inc. of Jersey City, New Jersey. Pavonia Medical Associates,
P.A., one of the largest independent, multi-specialty practices in New
Jersey, is comprised of over 60 physicians servicing over 75,000
patients in 6 locations in New Jersey. In consideration for the
acquisition, the letter of intent provides, among other things, that the
Company will pay and/or issue to Pavonia and Liberty, in the aggregate,
(i) $7.0 million in cash, (ii) 5.5 million shares of the Company's
common stock (500,000 shares of which may be subject to certain
post-closing adjustments), and (iii) $5.0 million of convertible
redeemable preferred stock of the Company. The preferred stock is
redeemable by the Company at any time and is convertible, after the
second anniversary of issuance, at the election of the Company or the
holder at the then fair market value of the common stock. The
consummation of the transactions is subject to several material
conditions including among others, the receipt of necessary financing,
the approval of the Company's stockholders, the negotiation of
definitive documentation, the absence of adverse changes and the
satisfactory completion of due diligence. Although, there can be no
assurance that the transaction will be
F-9
<PAGE>
completed, the Company expects, subject to the satisfaction of all
conditions, to consummate it within the next several months.
RESTRUCTURINGS
The Company entered into an arrangement, effective September 1, 1994,
pursuant to which it operated solely as a sublessor of its mobile MRI
equipment rather than as an operator of such equipment. Mark R. Vernon,
the President and a significant stockholder of Omni Medical Imaging,
Inc. (the "sublessee"), is an officer of the Company and the brother of
the Company's Chairman of the Board, President and Chief Executive
Officer (the "CEO"). The other stockholders of the sublessee include
certain former customers of the Company with whom the Company had
agreements for the use of the mobile MRI equipment. The Company decided
to enter into this restructuring arrangement due to the competitive
pressures associated with the mobile MRI business and in order to focus
its energy and management expertise on fixed-site imaging sites as well
as further diversification in the health care industry. As a result
of the restructuring of its mobile MRI operations, the Company recorded
a restructuring charge in fiscal 1994 in the amount of $2,375,000.
In December 1995, due to the sublessee's failure to remain current with
its 1995 monthly payment obligations, the Company repossessed and sold
one of its mobile MRI units for $625,000. In February 1996, the Company
terminated its master agreement with the sublessee and repossessed the
remaining three mobile MRI units from the sublessee as a result of the
failure of the sublessee and certain of its customers to satisfy their
obligations to the Company. In an attempt to satisfy the past due
amounts, the sublessee and its customers provided the Company with cash
and additional patient receivable claims to partially offset the amounts
owed to the Company. The additional patient receivable claims were to
supplement the amounts previously submitted to the Company to satisfy
prior past due indebtedness . The Company soon after returned the three
mobile MRI units to the sublessee.
Effective July 27, 1996, the Company again repossessed the three mobile
MRI units due to the sublessee's continuing failure to meet its
obligations to the Company. In August 1996, the Company sold one of the
Company's mobile MRI units. There was no significant gain or loss
resulting from such disposition.
At December 31, 1997, the Company reevaluated its future obligations
under the capital leases for its MRI units and other obligations
relating to its restructured operations and concluded that the remaining
reserve at December 31, 1997 is adequate.
In November 1996, the Company formed a limited liability company, of
which it owns sixty (60%) percent, with Practice Management Corporation
to provide on-site MRI services to Meadowlands Hospital Medical Center
(Secaucus Facility). The site commenced operations on May 8, 1997
utilizing one of the Company's mobile MRI units. The operating results
of the Company, for the year ended December 31, 1997 were already
affected by the facility which incurred a loss of $383,195. In addition,
as of December 31, 1997, the Company made working capital loans to the
joint venture of approximately $941,000 inclusive of management fees and
intercompany interest. Based upon losses sustained and due to the
expectation of continuing losses, the Company has decided to sell the
mobile MRI unit and cease its MRI services at the Secaucus Facility.
The Company has entered into an agreement for the sale of the mobile
MRI unit with an unaffiliated third party and entered into an agreement
effective December 31, 1997, to purchase forty (40%) percent of this
joint venture which resulted in the Company owning 100% of the venture
as of January 1, 1998. No loss is anticipated in connection with the
sale and cessation of operations and termination of the joint venture.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
F-10
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Medical equipment under capital leases $ 7,179,680 $ 7,088,383
Medical equipment 540,771 536,608
Office equipment under capital leases 45,466 48,789
Office equipment 106,039 113,182
Furniture and fixtures under capital leases 88,959 88,959
Furniture and fixtures 354,040 404,232
Computer equipment under capital leases 16,880 -
Computer equipment 366,309 344,492
Leasehold improvements 1,219,917 1,128,186
Leasehold improvements under capital leases 1,231,655 971,379
------------- ------------
11,149,716 10,724,210
Less accumulated depreciation and amortization 5,630,944 6,376,465
---------- -----------
$ 5,518,772 $ 4,347,745
=========== ============
</TABLE>
4. REVOLVING CREDIT FACILITY
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with a lender to provide a revolving line of credit
to the Company. The maximum amount available under such credit facility
is $2.0 million, with advances limited to seventy-five percent (75%) of
eligible accounts receivable, as determined by the lender. Borrowings
under the line of credit bear interest at the rate of three percent (3%)
over the prime lending rate and are repayable within two years from the
execution of the aforementioned loan and security agreement. The
Company's obligations under the credit facility are collateralized
through a grant of a first security interest in all eligible accounts
receivable. The agreement contains customary affirmative and negative
covenants including covenants requiring the Company to maintain certain
financial ratios and minimum levels of working capital. Borrowings under
this credit facility will be used to fund working capital needs as well
as acquiring businesses which are complementary to the Company. At
December 31, 1997, the Company has $1,462,000 of borrowings under this
credit facility. The Company believes that cash to be provided by
operating activities together with borrowings available from the
Company's revolving line of credit will provide adequate financing to
maintain its normal operations for the foreseeable future.
5. CAPITAL LEASE OBLIGATIONS
The Company leases various pieces of medical equipment from a lender, at
interest rates ranging from 10.4 percent to 15.3 percent due through
December 2002. Future minimum lease payments under noncancellable
operating leases, the present value of future minimum capital lease
payments and long-term debt payments as of December 31, 1997 (excluding
amounts relating to the restructured operations) are:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL LEASE
DECEMBER 31, OBLIGATIONS OPERATING LEASES
<S> <C> <C>
1998 $2,078,104 $695,290
1999 1,747,463 574,206
2000 557,613 328,182
2001 528,254 80,200
2002 394,800 66,700
Thereafter - 22,233
----------- ---------
Total minimum lease/debt payments 5,306,234 $1,766,811
==========
Less amounts representing interest and maintenance 878,639
----------
F-11
<PAGE>
Present value of minimum capital lease payments 4,427,595
Less current portion of obligations 1,647,148
-----------
$2,780,447
===========
</TABLE>
The carrying value of property, plant and equipment under capital lease
obligations was $4,550,208 and $3,203,437 at December 31, 1997 and 1996,
respectively. These amounts exclude property, plant and equipment
relating to the restructured operations (Note 2).
Rent expense was $723,136, $711,188 and $618,244 for 1997, 1996 and
1995, respectively.
Future minimum lease payments under capital leases and anticipated
sublease income relating to restructured operations are as follows at
December 31, 1997. These amounts are included in the reserve for
restructuring costs.
YEAR ENDING CAPITAL LEASE SUBLESSEE
DECEMBER 31, OBLIGATIONS INCOME
1998 $ 325,941 $ (466,549)
1999 225,031 (120,000)
2000 85,353 (30,000)
Thereafter - -
--------- ----------
$ 636,325 $(616,549)
========= ==========
The capital lease obligations for the restructured operations include
interest.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL TOTAL
<S> <C> <C> <C>
December 31, 1997:
Current $ - $ 43,039 $ 43,039
Deferred - - -
----------------- ------------ -------------
$ - $ 43,039 $ 43,039
================= ============ ============
December 31, 1996:
Current $ - $ 49,348 $ 49,348
Deferred - - -
----------------- ----------- -------------
$ - $ 49,348 $ 49,348
================= =========== ===========
December 31, 1995:
Current $ 13,099 $ 98,828 $ 111,927
Deferred (21,854) (232,340) (254,194)
----------------- ----------- ------------
$ (8,755) $ (133,512) $ (142,267)
================= ============= ============
</TABLE>
In July 1995, the Company merged certain wholly-owned subsidiaries into
the Company in order to be able to offset operating profits and losses
in the same jurisdiction, thereby reducing state income taxes.
F-12
<PAGE>
The difference between the income tax provision (benefit) and the tax
benefit computed by applying the statutory Federal income tax rate to
the loss before taxes is attributable to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
------ ------ -----
Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C>
Statutory Federal income tax rate $(258,830) (34.0) $ (276,232) (34.0) $(88,637) (34.0)
State income taxes - net of Federal 28,406 3.7 32,570 4.0 (88,119) (33.8)
benefit
Other - net (242,474) (31.9) (146,173) (18.0) (25,155) (9.7)
Valuation allowance 515,937 67.9 439,183 54.1 59,644 22.9
---------- ------- ------------ ----- ---------- --------
Actual income tax (benefit) $ 43,039 5.7 $ 49,348 6.1 $ (142,267) (54.6)
============ ========= ============ ====== ============ ========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred tax
position as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Difference between financial reporting and tax basis of property,
plant and equipment $ 321,396 $ 272,175
-------------- --------------
Deferred tax assets:
Federal and State tax NOL carryforwards 2,510,004 2,063,327
Non cash compensation 756,088 592,644
Provision for bad debts 172,774 193,172
Restructuring charges 43,183 80,361
Other 53,587 40,974
---------------- ----------------
3,535,636 2,970,478
Valuation allowances (3,214,240) (2,698,303)
--------------- -------------
Total deferred tax assets - net 321,396 272,175
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
</TABLE>
At December 31, 1997 and 1996, in view of prior operating losses and
inherent uncertainties regarding future operations, the Company has
provided valuation allowances of $2,830,294 and $2,301,402,
respectively, against Federal deferred tax assets and $383,946 and
$396,901, respectively, against state deferred tax assets.
The Company has net operating loss ("NOLs") carryforwards of
approximately $6.6 million for Federal income tax purposes which
expire December 31, 2006 through December 31, 2012.
F-13
<PAGE>
7. STOCK OPTIONS
The following is a summary of the number of options outstanding under
each of the plans:
<TABLE>
<CAPTION>
Omnibus
Plan and
1996 Stock
1991 Directors' Purchase Other
Plan Plan Plan Options
---- ------ ------ -------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 479,650 24,000 - -
Options forfeited at exercise prices
ranging from $1.50 to $5.00 per share (60,250) - - -
-------- ------------ ------------ ----------
Balance at December 31, 1995 419,400 24,000 - -
Options granted at an exercise price
ranging from $.75 to $2.09 per share 15,000 150,000 - 1,400,000
Options forfeited at an exercise price
ranging from $1.50 to $5.00 per share (363,800) (24,000) - -
--------- ------------ ------------ ----------
Balance at December 31, 1996 70,600 150,000 - 1,400,000
Options granted at an exercise price
ranging from $.75 to $1.09 per share 648,600 25,000 28,800 -
Options forfeited at an exercise price
ranging from $.75 to $1.69 per share (70,750) (25,000) - -
--------- ----------- ------------ -----------
Balance at December 31, 1997 648,450 150,000 28,800 1,400,000
========= ============ ============ ==========
Options exercisable at December 31,
1997 (exercisable at prices ranging
from $.75 to $5.00 per share) 61,400 100,000 - 1,400,000
========= =========== ============ =========
</TABLE>
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its employee stock options.
Accordingly, no compensation cost has been recognized for the
foregoing options, except as discussed below under the heading "Other
Options". Had compensation cost for these options been determined
using the Black-Scholes option-pricing model described in SFAS
Statement No. 123, the Company would have recorded aggregate
compensation expense of approximately $1,102,454 which would be
expensed over the options' vesting period. The assumptions used in
the option-pricing model include a risk-free interest rate of 6%,
expected life of 3 years and expected volatility of 106%. The pro
forma impact of following the provisions of SFAS Statement No. 123
on the Company's operations and loss per share would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Net loss - as reported $ (804,305) $ (861,796)
============ =============
- pro forma $ (970,051) $ (1,039,654)
============ =============
Net loss per common share - as reported $ (.13) $ (.18)
============ =============
- pro forma $ (.16) $ (.22)
============ =============
</TABLE>
F-14
<PAGE>
As of December 31, 1997, the Company has reserved Common Stock for
issuance upon conversion of the Series C Preferred Stock and exercise
of stock options as follows:
Series C Convertible Preferred Stock 1,295,000
1991 Plans 648,450
1996 Directors' Plan 250,000
Other Options 1,400,000
Omnibus Plan and Stock Purchase Plan 5,000,000
---------
8,593,450
=========
1991 EMPLOYEE PLAN
The 1991 Stock Option Plan (the "1991 Plan"
provided for the issuance of stock options exercisable to purchase up
to seven hundred thousand (700,000) shares of Common Stock (subject to
appropriate adjustments in the event of stock splits, stock dividends
and similar dilutive events) to be granted to key employees (including
officers who may also be directors) of the Company and its
subsidiaries, as selected by a committee appointed by the Board of
Directors (the "Board") to administer the Plan (the "Stock Option
Committee"). This plan was replaced by the 1997 Omnibus Incentive Plan
pursuant to which there will be no further grants of awards under
this plan.
Stock options granted to employees under the 1991 Plan were either
incentive stock options or nonqualified stock options. The purchase
price of the shares of Common Stock issuable upon exercise of a stock
option was not to be less than the fair market value of the Common
Stock on the date of grant in the case of incentive stock options, or
85% of such value in the case of nonqualified stock options. The terms
of each option and the increments in which it is exercisable are
determined by the Stock Option Committee, but the term of a
nonqualified stock option generally may not exceed ten years from the
date of grant and the term of an incentive stock option may in no
event be more than ten years from the date of grant (and shall
otherwise be consistent with the Internal Revenue Code of 1986. The
stock options are non-transferable during the life of the option
holder except as otherwise provided in the 1991 Plan.
1996 NON-EMPLOYEE DIRECTORS PLAN
The 1996 Stock Option Plan for Non-Employee Directors (the "1996
Directors' Plan") is administered by a committee of the Board
consisting of at least two (2) directors. Up to an aggregate of two
hundred and fifty thousand (250,000) shares of Common Stock may be
issued pursuant to stock options awarded under the 1996 Directors'
Plan. Shares of Common Stock subject to an award which are not issued
prior to expiration or termination of an award may thereafter be
available for future awards under the 1996 Directors' Plan and will
not be deemed to increase the aggregate number of shares of
Directors' Plan provides for appropriate adjustment of shares of
Common Stock available thereunder and of shares of Common Stock
subject to outstanding awards in the event of any changes in the
outstanding Common Stock by reason of any recapitalization,
reclassification, stock dividend, stock split, reverse stock split or
other similar transaction.
F-15
<PAGE>
Under the 1996 Director's Plan, non-qualified stock options
exercisable to purchase an aggregate of twenty-five thousand (25,000)
shares of Common Stock are granted pursuant to a director's appointment
to the Board. The purchase price of the shares of Common Stock subject
to such stock options will equal the fair market value of such shares
on the date of the grant, as determined in accordance with the 1996
Directors' Plan. Stock options awarded under the 1996 Directors's Plan
vest in increments of 40% after the sixth month, 80% after the
eighteenth month and 100% after the thirtieth month anniversary of the
date of grant. No stock option may be granted under the 1996
Directors' Plan after ten (10) years from the effective date of the
Plan. The stock options are non-transferable during the life of the
option holder except as otherwise provided in the 1996 Directors'
Plan. Upon termination of a director's service on the Board, any stock
options vested as of the date of termination may be exercised until
the sixth month anniversary of such date (unless such options expire
earlier in accordance with their terms); provided that if such
termination is a result of such directors's removal from the Board
other than due to his death or disability, all stock options will
terminate immediately.
1997 OMNIBUS INCENTIVE PLAN
In November 1997, the Company adopted the 1997 Omnibus Incentive Plan
(the "Omnibus Plan") to replace the 1991 Plan pursuant to which there
will be no further grants of awards under such plan. The Omnibus Plan
provides for compensatory equity-based awards (each an "Award") to
employees, directors and consultants of the Company and its affiliates.
There are reserved for issuance pursuant to, or by reason of, stock
awards and stock-based awards an aggregate number of shares of Common
Stock equal to the lesser of (i) 12.5% of the number of shares of
Common Stock outstanding, from time to time, calculated on a fully
diluted basis (including the maximum number of shares of Common Stock
that may be issued, or subject to awards, under the Omnibus Plan, the
Stock Purchase Plan, the 1991 Plan and the 1996 Directors' Plan
(collectively, the "Employee Stock Plans")) less the number of shares
of Common Stock that are issued under the Employee Stock Plans after
the effective date of the Omnibus Plan or are subject to outstanding
awards under the Employee Stock Plans plus the number of shares of
Common Stock forfeited under the Employee Stock Plans or surrendered
to the Company in payment of the exercise price of options issued
under any of the Employee Stock Plans or (ii) 5,000,000 shares of
Common Stock. Awards may be granted for no consideration and may
consist of stock options, stock awards, SARs, dividend equivalents,
other stock-based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing. Any Award
issued under the Omnibus Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available for
Award under the Omnibus Plan. No participant may receive stock awards
or stock-based awards to acquire more than 500,000 shares in any one
year. The Stock Option Committee will administer the Omnibus Plan and
have the full power and authority, subject to the provisions of the
Omnibus Plan, to designate participants, grant Awards and determine
the terms of all Awards. Members
F-16
<PAGE>
of the Stock Option Committee are not eligible to receive Awards under
the Omnibus Plan. The Omnibus Plan will terminate on November 3, 2007,
ten years from the date of adoption of the Plan by the Board, unless
earlier terminated by the Board..
1997 STOCK PURCHASE PLAN
In November 1997, the Company adopted the 1997 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan
will be administered by the Stock Option Committee. It is the Company's
intention that the Stock Purchase Plan qualify as an "employee stock
purchase plan" under Section 423 of the Code.
The Stock Purchase Plan authorizes the Stock Option Committee to grant
options to purchase shares of Common Stock to eligible employees
pursuant to one or more offerings to be made under the Stock Purchase
Plan.
There are reserved for issuance upon the exercise of options to be
granted under the Stock Purchase Plan an aggregate number of shares of
Common Stock equal to the lesser of (i) 12.5% of the number of shares
of Common Stock outstanding, from time to time, calculated on a fully
diluted basis (including the maximum number of shares of Common Stock
that may be issued, or subject to awards, under the Employee Stock
Plans) less the number of shares of Common Stock that are issued under
the Employee Stock Plans after the effective date of the Omnibus Plan
or are subject to outstanding awards under the employee Stock Plans
plus the number of shares of Common Stock forfeited under the Employee
Stock Plans or surrendered to the Company in payment of the exercise
price of options issued under any of the Employee Stock Plans or (ii)
5,000,000 shares of Common Stock.
The Stock Option Committee may exclude employees of any specific
subsidiary from any offering made under the Stock Purchase Plan and
may determine not to include certain highly compensated employees. In
addition, no option may be granted to any employee who, immediately
after the option is granted, owns 5% or more of the value or voting
power of all classes of stock of the Company or its parent, if any, or
subsidiary corporations, after taking into account certain attribution
rules, and no employee may be granted an option which permits his
right to purchase Common Stock under the Stock Purchase Plan to accrue
at a rate which exceeds twenty-five thousand dollars ($25,000) of the
fair market value of such Common Stock for each calendar year in which
such option is outstanding any time.
F-17
<PAGE>
Options granted under the Stock Purchase Plan will be subject to
adjustment upon a recapitalization, stock split, stock dividend,
merger, reorganization, liquidation, extraordinary dividend or other
similar event affecting the Common Stock. Options will not be
transferable, other than by will or the laws of descent and the
distribution, or, if permitted pursuant to the Code, and the
Regulations thereunder, without affecting the options's or the Stock
Purchase Plan's qualifications under Section 423 of the Code, pursuant
to qualified domestic relations order.
The Stock Purchase Plan will terminate ten (10) years from the date of
adoption (i.e., November 3, 2007), and an option shall not be granted
under the Stock Purchase Plan after such date. Any options outstanding
at the time of termination of the Stock Purchase Plan will continue in
full force and effect according to the terms and conditions of the
option and the Stock Purchase Plan.
OTHER OPTIONS
As consideration for the execution of a consulting agreement between
the Placement Agent and the Company, the Company granted, as of
January 30, 1996, to the Placement Agent stock options (the "Placement
Agent Options") exercisable to purchase an aggregate of 750,000 shares
of Common Stock over a five year period at a cash exercise price of
$0.75 per share. In addition, such consulting agreement provides that
the Placement Agent will receive from the Company 750,000 shares of
Common Stock (the "Placement Agent Shares") upon consummation by the
Company by January 30, 1997, which date was extended to January 30,
1999, of an acquisition of, or other business combination with, a
company (or companies) with assets of at least $2.5 million (the
"Acquisition"). In connection with the issuance of the Placement Agent
Options, the Company recorded a non-cash compensation charge of
$685,800 amortized over the initial one year term of the consulting
agreement.
In February 1998, the Company entered into an agreement with those
parties who have been assigned the Biltmore Options and the rights to
the Biltmore Fee Shares pursuant to which the Company will pay an
aggregate of $3,500,000 for the Biltmore Options and the rights to the
Biltmore Fee Shares. The agreement provides that in no event will the
closing of this contemplated transaction occur later than the
ninetieth day following the earlier to occur of (i) the consummation
of the acquisition of JIHP or (ii) the Company raising aggregate gross
proceeds of $60 million from one or more debt and/or equity
financings. In the event that neither above referenced contingency is
met this agreement shall terminate and be of no further force or
effect.
As of January 30, 1996, the Company granted stock options (the "Former
Directors Options") to each of two former directors of the Company
immediately exercisable to purchase 50,000 shares of Common Stock over
a five year period at a cash exercise price of $0.75 per share. In
connection with the issuance of the Former Directors Options, the
Company recorded a non-cash compensation charge of $91,441 in the
quarter ended March 31, 1996.
As of February 1, 1996, the Company amended its employment agreement
with the CEO. Pursuant to such amendment, the employment agreement's
expiration date of October 22, 1996 was extended to October 22, 1997
and during such one-year extension the CEO's annual base compensation
was reduced from $200,000 to $100,000. In addition, upon execution of
such amendment, options that the CEO held as of such date exercisable
to purchase an aggregate of 270,000 shares of Common Stock under the
1991 Plan were terminated, and the Company granted to the CEO stock
options exercisable until February 1, 2001 to purchase an aggregate
of 500,000 shares of Common Stock at a cash exercise price of $0.75
per share (the "CEO New Options"). In connection with the issuance of
the CEO New Options, the Company recorded a non-cash compensation
charge of $562,506 which was amortized over the twenty-one months
ending October 31, 1997. Furthermore, as incentive compensation the
CEO received a restricted stock grant of 250,000 shares of Common
Stock (the "CEO Restricted Stock Grant"). The restrictions related
to the CEO Restricted Stock Grant will lapse upon consummation
by the Company of an Acquisition. As in the case of the Placement
Agent Shares, the Company extended the required consummation date
of the Acquisition to January 30, 1999. In connection with the
issuance of the CEO Restricted Stock Grant, the Company recorded
a non-cash compensation charge of $468,744 which was amortized over
the twelve-month initial contingency period ended January 30, 1997.
F-18
<PAGE>
To the extent the Company does not consummate an Acquisition meeting
the specified standards by January 30, 1999, the CEO Restricted Stock
Grant will be forfeited and the previously recorded non-cash
compensation charge will be reversed accordingly. In January 1997, the
term of the employment agreement was further extended to October 22,
1998 on the same terms and conditions. In November 1997, the Board
approved the material terms of a new three-year employment agreement
with the CEO. Pursuant to such new employment agreement, the CEO will
agree to continue to serve as the Chairman of the Board, President and
Chief Executive Officer of the Company at an annual base salary of
$100,000, subject to increase to $250,000 upon the Company's
attainment in any fiscal year of consolidated income before taxes of
$1.25 million, which condition was waived in February 1998 (upon the
recommendation of the Compensation Committee), and to annual cost of
living increases. The employment agreement will be subject to
successive one year renewal periods. The employment agreement will
provide that if the CEO resigns for "Good Reason" (to be defined
in the employment agreement) or if his employment is terminated
by the Company other than for "Cause" (to be defined in the
employment agreement), the CEO will be entitled to receive a
payment of 2.99 times his highest annual salary and bonus pursuant
to the employment agreement. In connection with this new employment
agreement, the CEO was granted options to purchase four hundred
seventy one thousand two hundred (471,200) shares of Common Stock
under the 1991 Plan and twenty eight thousand eight hundred (28,800)
shares of Common Stock under the Omnibus Plan at an exercise price
of $1.0625 per share. Such options vest in 25% increments upon the
Company's attainment of consolidated income before taxes of
$1.25 million, $2.5 million, $3.75 million and $5.0 million,
respectively, subject to immediate vesting upon (x) the occurrence
of a change in Control and (y) the fifth anniversary of the date
of grant. The Company intends to enter into such new employment
agreement with the CEO, to be effective as of November 3, 1997, as
soon as practicable.
As consideration for the execution of a one-year consulting agreement,
as of October 15, 1996, the Company granted to a consultant stock
options (the "Consultant Options") exercisable to purchase an
aggregate of 50,000 shares of Common Stock over a five-year period at
a cash exercise price of $1.0625 per share. The Consultant Options
vested quarterly in equal installments over the one-year consulting
agreement term. In connection with the issuance of the Consultant
Options, the Company recorded a non-cash compensation charge of
$35,628 which was amortized over the term of the consulting agreement.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution profit sharing plan
covering substantially all employees. Matching contributions by the
Company are discretionary. During the year ended December 31, 1997,
matching contributions were made by the Company in the amount of
$17,163. During the years ended December 31, 1996 and 1995, no
matching contributions were made by the Company.
9. OTHER
DUE FROM OFFICER - At December 31, 1997 and 1996, the CEO owed the
Company $264,125 and $176,049, respectively, in connection with
certain non-interest bearing advances. The advances through December
31, 1996 were scheduled to be repaid by December 31, 1994 but have
not been repaid to date.
BROOKLYN, NEW YORK MRI FACILITY - The Company leases its Brooklyn,
New York MRI facility from a limited partnership, the general
partner of which, consists of the CEO and another director of the
Company, and MRI Financial Services, Inc. as a limited partner.
In December 1996, the Company guaranteed a loan of approximately
$250,000 to the limited partnership. The outstanding balance of
this loan was approximately $178,000 at December 31, 1997.
In May 1997, the Company entered into a consulting agreement with Dr.
Kazmir, a director of the Company, for a one-year term commencing
June 1, 1997. In January 1998, such agreement was terminated and
a new consulting agreement for a one-year term commenced effective
January 1, 1998. Pursuant to such agreement, Dr. Kazmir will provide
such consultation and advice as the Company may reasonably request,
including advice in respect of new developments in the diagnostic
imaging market and the Company's relationships with current and
potential referral sources, and assistance in the development of
Company newsletters and the preparation and arrangement of seminars,
luncheons and other training and education vehicles for current and
potential referral sources. Dr. Kazmir will be entitled to an annual
consulting fee of $72,000.
In October 1996, the Company entered into a consulting agreement with
Ulises C. Sabato, M.D., a significant stockholder of the Company,
for a one-year term which commenced on October 15, 1996. Pursuant to
such agreement, Dr. Sabato will provide such consultation and advice
as the Company may reasonably request, including advice in respect
of new developments in the diagnostic imaging market and the
Company's relationships with current and potential referral sources,
and assistance in the development of Company newsletters and the
preparation and arrangement of seminars, luncheons and other
training and education vehicles for current potential referral
sources. Pursuant to such agreement Dr. Sabato will be entitled to
an annual consulting fee of $48,000. In addition, upon execution
of such agreement, the Company granted to Dr. Sabato, stock options
exercisable to purchase an aggregate of 50,000 shares of Common
Stock over a five-year period at an exercise price of $1.0625 per
share. The options vested quarterly in equal installments over the
term of the one-year consulting agreement. In December 1997, the
consulting agreement was extended until October 16, 1998. Dr. Sabato
is a limited partner in Edgewater Imaging Associates, L.P., a joint
venture partner of HealthCare Imaging Services of Edgewater, Inc.,
a wholly-owned subsidiary of the Company.
In December 1997, the Company agreed to guarantee a loan of
$1,000,000 from DFS to JIHP. This loan bears interest at 12% per
annum and is repayable over forty-eight (48) months which commenced
February 1998 at $26,330. This loan was funded by DFS to JIHP on
January 8, 1998. Pavonia and each Physician Stockholder of Pavonia
have acknowledged that such extension of credit is for their benefit
and have agreed that to the extent that the Company is or becomes
liable in respect of any indebtedness or other liability or
obligation of either Pavonia or JIHP, and the acquisition by the
Company of 100% of the outstanding capital stock of JIHP is not
consummated, then Pavonia and each physician stockholder of Pavonia
agree to indemnify and hold the Company harmless from and against
any and all claims.
F-19
<PAGE>
10. RELATIONSHIP WITH CERTAIN MEDICAL LESSEES
For the year ended December 31, 1997, the Company had five Medical
Lessees (Monmouth Diagnostic Imaging, P.A.; Edgewater Diagnostic
Imaging, P.A.; Wayne MRI, P.A.; Rittenhouse Square Imaging
Associates, LP; and Kings Medical Diagnostic Imaging, P.C.) which
accounted for approximately 30%, 18%, 17%, 15% and 12% of total
revenues, respectively. For the year ended December 31, 1996, the
Company had five Medical Lessees (Monmouth Diagnostic Imaging, P.A.;
Wayne MRI, P.A.; Edgewater Diagnostic Imaging, P.A.; Kings Medical
Diagnostic Imaging, P.C. and Rittenhouse Square Imaging, L.P.) which
accounted for approximately 30%, 21%, 19%, 18% and 12% of total
revenues, respectively. For the year ended December 31, 1995, the
Company had five Medical Lessees (Monmouth Diagnostic Imaging, P.A.;
Edgewater Diagnostic Imaging, P.A.; Wayne MRI, P.A.; Kings Medical
Diagnostic Imaging, P.C. and Rittenhouse Square Imaging, L.P.) which
accounted for approximately 29%, 21%, 20%, 13% and 12% of total
revenues, respectively. To the extent the Company were to lose any
of its existing Medical Lessees, the impact on revenues and
operations would not be materially affected because the Company
believes it will be readily able to replace such Medical Lessees.
11. COMMITMENTS AND CONTINGENCIES
The Company entered into Excess Capacity License Agreements with
Licensees whereby it licenses its office space, equipment and
employees at its Brooklyn, New York MRI facility during times such
space, equipment and employees are not being utilized by the
Company. The Licensees in turn license such "excess" space,
equipment and employees to physicians and medical practices
("sublicensees") for the provision of MRI scans. The Company
receives a fee for every MRI scan performed by the Licensees and/or
sublicensees at the facility and also furnishes related billing and
collection services for an additional fee. Furthermore, the Company
provides a short term line of credit to the Licensees under the
Excess Capacity License Agreements for certain working capital
purposes based upon a percentage of the fees payable to the
Licensees and/or the sublicensees which is secured by the Licensees'
and sublicensees' related patient accounts receivable. Advances
under the line of credit amounted to $197,815 and $351,401 at
December 31, 1997 and 1996, respectively, which are solely
attributed to the unrelated licensee.
The Company is a defendant in a number of lawsuits. The Company
believes the claims are without merit and will be defended
vigorously. At December 31, 1997, the Company believes that the
resolution of these matters will not have a material impact on the
Company's financial condition or results of operations.
F-20
<PAGE>
12. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial
information for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
NET EARNINGS (LOSS)
QUARTER ENDED NET REVENUES AMOUNT PER SHARE
------------- ------------ ------ ---------
<S> <C> <C> <C>
3-31-97 $2,680,450 $2,812 $ .00
6-30-97 2,425,181 (51,154) (.01)
9-30-97 2,566,669 (287,993) (.04)
12-31-97 2,575,640 (467,970) (.06)
--------- --------- -----
$10,247,940 $(804,305) $(.13)
=========== ========== ======
3-31-96 $2,354,892 $(266,324) $(.06)
6-30-96 2,283,056 (372,260) (.08)
9-30-96 2,425,043 (271,155) (.06)
12-31-96 2,724,600 47,943 .02
----------- ----------- ----
YEAR $9,787,591 $(861,796) $(.18)
========== ========== ======
</TABLE>
F-21
<PAGE>
SCHEDULE II
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1997 Expenses Deductions 1997 (C)
-------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $471,150 $ - $49,750(B) $ 421,400
receivable - Mobile MRI Operations ======== ======== ======= ==========
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1996 Expenses Deductions 1996 (C)
-------------- ----------- ---------- -------------
Allowance for doubtful accounts
receivable - Mobile MRI Operations $1,082,000 $ - $610,850(B) $ 471,150
========== ======= ======== ==========
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1995 Expenses Deductions 1995
-------------- ----------- ---------- -------------
Allowance for doubtful accounts
receivable - Mobile MRI Operations (A) $1,082,000 $ - $ - $1,082,000
========== ======== ======= ==========
</TABLE>
Notes:
- ------
(A) The Company entered into an arrangement, effective August 31, 1994,
pursuant to which it operated solely as a sublessor of its mobile
MRI equipment rather than as an operator of such equipment (See Note
2).
(B) Represents recoveries of accounts receivable of $49,750 for December
31, 1997 and recoveries and write-offs of accounts receivable of
$392,286 and $218,564 for December 31, 1996.
(C) The above noted amounts are included in the allowance for doubtful
accounts receivable as disclosed on the consolidated balance sheets.
Such allowance for doubtful accounts receivable disclosed on the
consolidated balance sheets also represents the Medical Lessee's
allowance of approximately $4,555,584 and $3,847,347 in 1997 and
1996, respectively.
F-22
<PAGE>
10.48
AMENDMENT NO. 1 TO
HEALTHCARE IMAGING SERVICES, INC.
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
Section 8(c)(vi) of the HealthCare Imaging Services, Inc. 1996 Stock
Option Plan for Non-Employee Directors is hereby amended by adding the
following sentence at the end thereof:
Notwithstanding anything contained herein to the contrary, a
Participant may transfer a NSO (x) to the spouse or any
lineal ancestor or descendant of such Participant or to any
trust, the sole beneficiaries of which are any one or all of
such Participant's spouse or any lineal ancestor or
descendant of such Participant and (y) in such other
circumstances as the Committee may approve.
This Amendment No. 1 was approved by the Board of Directors of HealthCare
Imaging Services, Inc. on November 3, 1997.
<PAGE>
10.49
AGREEMENT
AGREEMENT, dated as of November 3, 1997, between HEALTHCARE IMAGING
SERVICES, INC., a Delaware corporation ("HIS"), and BILTMORE SECURITIES, INC.,
a Florida corporation ("Biltmore").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, HIS and Biltmore are parties to a consulting agreement, dated
as of January 30, 1996, as amended by an Agreement dated January 30, 1997 (the
"Consulting Agreement;" all capitalized terms used herein but not otherwise
defined herein shall have the respective meanings ascribed thereto in the
Consulting Agreement); and
WHEREAS, HIS and Biltmore wish to extend the term of the Consulting
Agreement upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 3 of the Consulting Agreement is hereby amended to extend
the Term for an additional one (1) year (the "Extended Term") and, accordingly,
the Consulting Agreement shall terminate on January 30, 1999. All references to
"Term" in the Consulting Agreement shall be deemed to include the Extended
Term.
2. Except as set forth herein, the Consulting Agreement shall remain
in full force and effect.
3. This Agreement shall bind and inure to the benefit of the parties
hereto, and their respective successors and assigns.
4. The validity, interpretation, construction, performance and
enforcement of this Agreement shall be governed by the internal laws of the
State of New York, without regard to its conflicts of law rules.
5. This Agreement may be executed in one or more counterparts, which
together shall constitute one agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/Elliott H. Vernon
-------------------------------------
Elliott H. Vernon
Chairman, President and Chief Executive
Officer
BILTMORE SECURITIES, INC.
By: /s/Elliot Loewenstern
--------------------------------------
Elliot Loewenstern
Chief Executive Officer
2
<PAGE>
10.50
AGREEMENT
AGREEMENT, dated as of November 3, 1997, between HEALTHCARE IMAGING
SERVICES, INC., a Delaware corporation ("HIS"), and ELLIOTT H. VERNON, the
Chairman, President and Chief Executive Officer of HIS ("EHV").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, HIS and EHV are parties to a restricted stock award
agreement, dated as of February 1, 1996 as amended by an Agreement dated
January 30, 1997 (the "Restricted Stock Award Agreement;" all capitalized terms
used herein but not otherwise defined herein shall have the respective meanings
ascribed thereto in the Restricted Stock Award Agreement); and
WHEREAS, HIS and EHV wish to revise certain of the terms and
provisions of the Restricted Stock Award Agreement upon the terms and subject
to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Subject to the provisions of Section 2 hereof, Section 2 of the
Restricted Stock Award Agreement is hereby revised by deleting the January 30,
1998 date in clause (y) of the second sentence of such section and inserting
"January 30, 1999" in its place. Accordingly (subject to the provisions of
Section 2 hereof), all of the Shares subject to the Restricted Stock Award will
vest upon the consummation of an Acquisition by January 30, 1999 (or will be
forfeited in the event of such non-consummation).
2. The foregoing revision of the Restricted Stock Award Agreement is
subject to the ratification and approval of such revision by HIS' stockholders,
which ratification and approval will be presented to HIS' stockholders at their
next regularly scheduled annual meeting.
3. Except as set forth herein, the Restricted Stock Award Agreement
shall remain in full force and effect.
4. This Agreement shall bind and inure to the benefit of the parties
hereto, and their respective successors, assigns, heirs and personal
representatives.
5. The validity, interpretation, construction, performance and
enforcement of this Agreement shall be governed by the internal laws of the
State of New Jersey, without regard to its conflicts of law rules.
6. This Agreement may be executed in one or more counterparts, which
together shall constitute one agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/Elliott H. Vernon
-------------------------------
Elliott H. Vernon
Chairman, President and Chief Executive
Officer
/s/Elliott H. Vernon
------------------------------------
ELLIOTT H. VERNON
2
<PAGE>
10.51
HEALTHCARE IMAGING SERVICES, INC.
1997 OMNIBUS INCENTIVE PLAN
SECTION 1. PURPOSE
The purposes of this Healthcare Imaging Services, Inc. 1997
Omnibus Incentive Plan (the "Plan") are to encourage selected employees,
directors or consultants of Healthcare Imaging Services, Inc. (together with
any successor thereto, the "Company") and its Affiliates (as defined below) to
acquire a proprietary interest in the growth and performance of the Company, to
generate an increased incentive to contribute to the Company's future success
and prosperity, thus enhancing the value of the Company for the benefit of its
stockholders, and to enhance the ability of the Company and its Affiliates to
attract and retain qualified individuals upon whom, in large measure, the
sustained progress, growth and profitability of the Company depend.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the
meanings set forth below:
(a) "Affiliate" shall mean any entity that, directly or
through one or more intermediaries, is controlled by, controls, or is under
common control with, the Company.
(b) "Award" shall mean any Option, Stock Appreciation
Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend
Equivalent, or other Stock Award or Stock-Based Award granted under the Plan.
(c) "Award Agreement" shall mean a written agreement,
contract, or other instrument or document evidencing an Award granted under the
Plan.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Cause" shall mean (i) the Participant's willful
misconduct, gross negligence or dishonesty in the performance of his or her
duties on behalf of the Company, (ii) the neglect, failure or refusal of the
Participant to carry out any reasonable request of the Board or other officer
or supervisor having supervisory authority over the Participant, (iii) the
material breach of any provision of any employment, consulting or other
services contract between the Participant and the Company, (iv) the entering of
a plea of guilty or nolo contendere to, or the Participant's conviction of, a
felony or other crime involving moral turpitude, dishonesty, theft or unethical
business conduct.
(f) "Change in Control" of the Company shall mean (i) the
acquisition of beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly,
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 2
by any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Company, of securities of the Company
representing a majority or more of the combined voting power of the Company's
then outstanding securities, (ii) the failure, for any reason, of the
individuals who presently constitute the Board (the "Incumbent Board") to
constitute at least a majority thereof, provided that any director whose
election has been approved in advance by directors representing at least
two-thirds (2/3) of the directors comprising the Incumbent Board shall be
considered, for these purposes, as though such director were a member of the
Incumbent Board, (iii) the Stockholders approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least a majority of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation, and such merger or consolidation occurs;
(iv) the Stockholders approve a plan of complete liquidation of the Company or
an agreement for the sale or disposition by the Company of all or substantially
all of the Company's assets; or (v) there is a corporate separation or
division, including, but not limited to, a split-up, spin-off or extraordinary
distribution of cash, securities or other property .
(g) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(h) "Committee" shall mean a committee of the Board
designated by the Board to administer the Plan and composed of not less than
two directors.
(i) "Covered Employee" shall mean an employee of the Company
if either (i) as of the close of the fiscal year, such employee is the chief
executive officer of the Company or is an individual acting in such capacity,
or (ii) the total compensation of such employee for the fiscal year is required
to be reported to Stockholders under the Exchange Act by reason of such
employee being among the four highest compensated officers for the taxable year
(other than the chief executive officer).
(j) "Dividend Equivalent" shall mean any right granted under
Section 6(d) of the Plan.
(k) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
- 2 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 3
(l) "Fair Market Value" means, with respect to the Shares,
(A) if the Shares are listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or The Nasdaq SmallCap
Market, the last reported sales price as reported on such exchange; (B) if the
Shares are not listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or The Nasdaq SmallCap
Market, the average of the last reported closing bid and asked quotation for
the Shares as reported on the Automated Quotation System of NASDAQ or a similar
service if NASDAQ is not reporting such information; (C) if the Shares are not
listed or admitted for trading on any national securities exchange or included
in The Nasdaq National Market or The Nasdaq SmallCap Market or quoted by NASDAQ
or a similar service, the average of the last reported bid and asked quotation
for the Shares as quoted by a market maker in the Shares (or if there is more
than one market maker, the bid and asked quotation shall be obtained from two
market makers and the average of the lowest bid and highest asked quotation
shall be the "Fair Market Value"); or (D) if the Shares are not listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or The Nasdaq SmallCap Market or quoted by NASDAQ and
there is no market maker in the Shares, the fair market value of the Shares as
determined by the Committee in good faith.
(m) "Incentive Stock Option" shall mean an option granted
under Section 6(a) of the Plan that meets the requirements of Code Section 422
or any successor provision thereto.
(n) "Key Employee" shall mean any employee who is a regular
employee of the Company or any of its present or future Affiliates.
(o) "Non-Qualified Stock Option" shall mean an option granted
under Section 6(a) of the Plan that is not an Incentive Stock Option.
(p) "Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option.
(q) "Participant" shall mean a Key Employee, director or
consultant who has been granted an Award under the Plan.
(r) "Performance Award" shall mean any right granted under
Section 6(f) of the Plan.
- 3 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 4
(s) "Person" shall mean any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated
organization, or government or political subdivision thereof.
(t) "Released Securities" shall mean securities that were
Restricted Securities with respect to which all applicable restrictions have
expired, lapsed, or been waived.
(u) "Restricted Securities" shall mean Restricted Stock or
any other Award under which issued and outstanding Shares are held subject to
restrictions imposed by the terms of the Award.
(v) "Restricted Stock" shall mean any Share granted under
Section 6(c) of the Plan.
(w) "Restricted Stock Unit" shall mean any right granted
under Section 6(c) of the Plan that is denominated in Shares.
(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the
Securities and Exchange Commission under the Exchange Act, or any successor
rule or regulation thereto.
(y) "Shares" shall mean the common stock of the Company, $.01
par value per share, and such other securities or property as may become the
subject of Awards pursuant to an adjustment made under Section 4(b) of the
Plan.
(z) "Stock Appreciation Right" shall mean any right granted
under Section 6(b) of the Plan.
(aa) "Stock Award" shall mean an Award of an Option,
Restricted Stock, or other right or security consisting of or convertible into
Shares.
(bb) "Stock-Based Award" shall mean an Award of a Stock
Appreciation Right, Dividend Equivalent, Restricted Stock Unit or other right,
the value of which is determined by reference to Shares.
(cc) "Stockholder" shall mean a stockholder of the Company.
(dd) "Tandem Option" shall mean a Non-Qualified Option issued
in tandem with a Stock Appreciation Right.
- 4 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 5
SECTION 3. ADMINISTRATION
(a) Generally. The Plan shall be administered by the
Committee. Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time, and shall be final, conclusive and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Award, any Stockholder and any employee of the Company or of
any Affiliate.
(b) Powers. Subject to the terms of the Plan and applicable
law, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to each
Participant under the Plan; (iii) determine the number of Shares to be covered
by (or with respect to which payments, rights or other matters are to be
calculated in connection with) Awards; (iv) determine the terms and conditions
of any Award; (v) determine whether, to what extent, and under what
circumstances Awards may be settled or exercised in cash, Shares, other Awards,
or other property, or canceled, forfeited, or suspended, and the method or
methods by which Awards may be settled, exercised, canceled, forfeited, or
suspended; (vi) determine whether, to what extent, and under what circumstances
cash, Shares, other Awards, other property, and other amounts payable with
respect to an Award under the Plan shall be deferred; (vii) interpret and
administer the Plan and any instruments or agreements relating to, or Awards
made under, the Plan; (viii) establish, amend, suspend, or waive such rules and
regulations and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for the
administration of the Plan.
(c) Reliance, Indemnification. The Committee may employ
attorneys, consultants, accountants or other persons and the Committee, the
Company and its officers and directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. No member of the Committee
shall be personally liable for any action, determination or interpretation
taken or made in good faith with respect to the Plan, or Awards made
thereunder, and all members of the Committee shall be fully indemnified and
protected by the Company in respect of any such action, determination or
interpretation.
SECTION 4. SHARES AVAILABLE FOR AWARDS
(a) Shares Available. Subject to adjustment as
provided in Section 4(b):
- 5 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 6
(i) Limitation on Number of Shares. Awards issuable
under the Plan are limited such that the maximum aggregate number of
Shares which may issued pursuant to, or by reason of, Stock Awards and
Stock-Based Awards is 500,000 per Participant in any fiscal year, and
is an aggregate maximum for all Participants in all years of 12.5% of
the number of Shares outstanding from time to time, calculated on a
fully diluted basis (including the maximum number of Shares that may
be issued, or subject to awards, under this Plan, the Company's
Employee Stock Purchase Plan, the Company's 1991 Stock Option Plan, as
amended, and the Company's 1996 Stock Option Plan for Non-Employee
Directors (collectively, the "Employee Stock Plans")), less that
number of Shares that are issued under the Employee Stock Plans after
the effective date of this Plan or are subject to outstanding awards
under the Employee Stock Plans, plus (A) any Shares that are forfeited
under the Employee Stock Plans and (B) any Shares surrendered to the
Company in payment of the exercise price of options issued under any
of the Employee Stock Plans; provided, however, that no Awards may be
granted that would bring the total of all outstanding Awards under
this Plan to more than 5,000,000 Shares. The number of Shares reserved
for issuance hereunder shall not be reduced in the event of the
redemption, repurchase or other acquisition by the Company of
outstanding Shares. All or any number of such Shares may be the
subject of Incentive Stock Options, in the sole discretion of the
Committee. To the extent that an Award ceases to remain outstanding by
reason of termination of rights granted thereunder, forfeiture or
otherwise, the Shares subject to such Award shall again become
available for Award under the Plan; provided, however, that in the
case of an Option or Stock Appreciation Right which is terminated or
otherwise cancelled in the same fiscal year in which it is granted
(or, for purposes of determining the aggregate maximum number of
Shares which may be subject to Awards granted to any Participant
during the term of the Plan, in the case of an Option or Stock
Appreciation Right which is terminated or otherwise cancelled at any
time), both the new Option or Stock Appreciation Right and the
terminated Option or Stock Appreciation Right shall be counted for
purposes of determining whether the Participant has received the
maximum number of Awards permitted under this Plan.
(ii) Accounting for Awards. For purposes of this
Section 4, for any Award which is denominated in, or with respect to,
Shares, the number of Shares covered by such Award, or to which such
Award relates, shall be counted on the date of grant of such Award
against the aggregate number of Shares available for granting Awards
under the Plan; provided, however, that Awards that operate in tandem
with (whether granted simultaneously with or at a different time
from), or that are substituted for, other Awards may be counted or not
counted under procedures adopted by the Committee in order to avoid
double counting. Any Shares that are delivered by the Company pursuant
to any
- 6 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 7
Award, and any Awards that are granted by, or become obligations of,
the Company, through the assumption by the Company or an Affiliate of,
or in substitution for, outstanding awards previously granted by an
acquired company shall be counted against the Shares available for
granting Awards under the Plan.
(iii) Sources of Shares Deliverable Under Awards.
Any Shares delivered pursuant to an Award may consist, in whole or
in part, of authorized and unissued Shares or of treasury Shares.
(b) Adjustments. In the event that the Committee shall
determine that any (i) subdivision or consolidation of Shares, (ii) dividend or
other distribution (in the form of Shares), (iii) recapitalization or other
capital adjustment of the Company or (iv) merger, consolidation or other
reorganization of the Company or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or event
described in Treasury Regulation Section 1.162-27(e)(2)(iii)(C), affects the
Shares such that an adjustment is determined by the Committee to be appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan, then the Committee
shall, in such manner as it may deem equitable, adjust any or all of (A) the
number and type of Shares (or other securities or property) which thereafter
may be made the subject of Awards, (B) the number and type of Shares (or other
securities or property) subject to outstanding Awards, and (C) the grant,
purchase, or exercise price with respect to any Award or, if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
Award; provided, however, in each case, that no such adjustment shall be
authorized to the extent that such adjustment would (1) with respect to Awards
of Incentive Stock Options, cause the Plan to violate Code Section 422 or (2)
would constitute a termination and reissuance of an Option or Stock
Appreciation Right as described in Treasury Regulation Section
1.162-27(e)(2)(vi)(B); and provided further, however, that the number of Shares
subject to any Award denominated in Shares shall always be a whole number.
SECTION 5. ELIGIBILITY
Awards may be granted only to Key Employees, directors or
consultants. In determining the employees, directors and consultants to whom
Awards shall be granted and the number of shares or units to be covered by each
Award, the Committee shall take into account the nature of such persons' duties
to the Company, their present and potential contributions to the success of the
Company and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the Plan. A Key Employee, director or consultant
who has been granted an Award or Awards under the Plan may be granted an
additional Award or Awards, subject to such limitations as may be imposed by
the Code on the grant of Incentive Stock
- 7 -
<PAGE>
Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 8
Options. No member of the Committee shall be eligible to receive an Award under
the Plan. Notwithstanding anything to the contrary herein, Incentive Stock
Options may be granted only to employees of this Company, or its present or
future parent or subsidiary corporations (as defined in Code Section 424).
SECTION 6. AWARDS
(a) Options. The Committee is hereby authorized to grant
Options to Participants with the following terms and conditions and with such
additional terms and conditions, in either case not inconsistent with the
provisions of the Plan, as the Committee shall determine:
(i) Exercise Price. The purchase price per Share
purchasable under an Option shall be determined by the Committee;
provided however, that the purchase price per Share purchasable under
an Incentive Stock Option shall not be less than 100% of the Fair
Market Value of a Share on the date of grant (110% in the case of an
Incentive Stock Option granted to 10-percent shareholder within the
meaning of Code Section 422(c)(5)).
(ii) Option Term. The term of each Non-Qualified
Stock Option shall be fixed by the Committee but generally shall not
exceed 10 years from the date of grant. The term of each Incentive
Stock Option shall in no event be more than 10 years from the date of
grant (5 years in the case of a 10-percent shareholder within the
meaning of Code Section 422(c)(5)).
(iii) Time and Method of Exercise. The Committee
shall determine the time or times at which an Option may be exercised
in whole or in part, and the method or methods by which, and the form
or forms (including, without limitation, cash, Shares, outstanding
Awards or other consideration, or any combination thereof, having a
Fair Market Value on the exercise date equal to the relevant option
price) in which, payment of the option price with respect thereto may
be made or deemed to have been made.
(iv) Early Termination. Unless otherwise determined
by the Committee and set forth in, and subject to the terms of, any
applicable Award Agreement, the unexercised portion of any Option
granted under the Plan will generally be terminated (A) on the
termination date of the Option if the Participant's employment or
other retention is terminated for any reason other than (1) Cause, (2)
mental or physical disability (as defined in Code Section 22(e)(3)),
or (3) death; (B) immediately upon the termination of the
Participant's employment or other retention for Cause; (C) 12 months
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 9
after the date on which the Participant's employment or other
retention is terminated by reason of mental or physical disability; or
(D)(1) 24 months after the date on which the Participant's employment
or other retention is terminated by reason of the death of the
Participant, or (2) 12 months after the date on which the Participant
shall die if such death shall occur during the 12-month period
following the termination of the Participant's employment or other
retention by reason of mental or physical disability. Notwithstanding
the foregoing, in no event may the unexercised portion of any
Incentive Stock Option granted under the Plan be exercisable for more
than (A) 3 months after the termination of any Participant's
employment or other retention other than for (1) mental or physical
disability (as defined in Code Section 22(e)(3)), or (2) death; or (B)
12 months after the date on which the Participant's employment or
other retention is terminated by reason of mental or physical
disability (as defined in Code Section 22(e)(3)). In no event may an
Option be exercised after the termination date.
(v) Change of Control. Upon the occurrence of a
Change of Control of the Company, the Participant shall have the
right, exercisable during the 30 day period preceding the occurrence
of such Change of Control, and, in addition, with respect to a Change
of Control described in clauses (i) and (ii) of the definition
thereof, within 30 days after the occurrence of such Change of
Control, to exercise in whole or in part his or her Options without
regard to the vesting provisions thereof. The Company will mail or
cause to be mailed to each Participant a notice specifying the date
that is to be fixed as of which all holders of record shall be
entitled to exchange their Shares for securities, cash or other
property issuable or deliverable pursuant to a Change of Control
described in clauses (iii) or (iv) of the definition thereof. In the
event any Option is not exercised in its entirety on or prior to the
date specified therein, any and all remaining rights under such
Options shall terminate as of said date.
(vi) Incentive Stock Options. All terms of any
Incentive Stock Option granted under the Plan shall comply in all
respects with the provisions of Code Section 422, or any successor
provision thereto, and any regulations promulgated thereunder. The
Fair Market Value of Shares subject to Incentive Stock Options
(determined as of the date such Incentive Stock Options are granted)
exercisable for the first time by any individual during any calendar
year shall in no event exceed $100,000.
(b) Stock Appreciation Rights. The Committee is
authorized to grant Stock Appreciation Rights to Participants. Subject to the
terms of the Plan and any applicable Award Agreement, a Stock Appreciation
Right granted under the Plan shall confer upon the holder thereof a right to
receive, upon exercise thereof, an amount in cash equal of the excess of (i)
the
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 10
Fair Market Value of one Share on the date of exercise over (ii) the Fair
Market Value of one Share on the date of grant of the Stock Appreciation Right.
Subject to the terms of the Plan and any applicable Award Agreement, the grant
price, term, methods of exercise, methods of settlement, and any other terms
and conditions of any Stock Appreciation Right shall be as determined by the
Committee. The Committee may impose such conditions or restrictions on the
exercise of any Stock Appreciation Right as it may deem appropriate, including,
but not limited to, the following: (A) no aggregate payment by the Company
during any fiscal year upon the exercise of Stock Appreciation Rights may
exceed $100,000 without Committee approval ratified by the Board, and (B) a
Participant may not exercise a Stock Appreciation Right if the aggregate amount
to be received as a result of his or her exercise of Stock Appreciation Rights
in the preceding 12 month period exceeds such Participant's current base
salary.
(c) Restricted Stock and Restricted Stock Units. The
Committee is hereby authorized to grant Awards of Restricted Stock and
Restricted Stock Units to Participants upon such conditions and subject to such
restrictions as the Committee may impose (including, without limitation, any
limitation on the right to vote a Share of Restricted Stock or the right to
receive any dividend or other right or property), which restrictions may lapse
separately or in combination at such time or times, in such installments or
otherwise, as the Committee may deem appropriate but not inconsistent with the
provisions of the Plan:
(i) Registration. Any Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee may deem
appropriate, including, without limitation, book-entry registration or
issuance of a stock certificate or certificates. In the event any
stock certificate is issued in respect of shares of Restricted Stock
granted under the Plan, such certificate shall be registered in the
name of the Participant and shall bear an appropriate legend referring
to the terms, conditions, and restrictions applicable to such
Restricted Stock.
(ii) Forfeiture. Except as otherwise determined by
the Committee, upon termination of employment or other retention (as
determined under criteria established by the Committee) for any reason
during the applicable restriction period, all shares of Restricted
Stock and all Restricted Stock Units still, in either case, subject to
restriction shall be forfeited to and reacquired by the Company;
provided, however, that the Committee may, when it finds that a waiver
would be in the best interests of the Company, waive in whole, or in
part, any or all remaining restrictions with respect to shares of
Restricted Stock or Restricted Stock Units.
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 11
(iii) Lapse of Restrictions. Unrestricted Shares,
evidenced in such manner as the Committee shall deem appropriate,
shall be delivered to the holder of Restricted Stock promptly after
such Restricted Stock shall become Released Securities.
(d) Dividend Equivalents. The Committee is hereby authorized
to grant Awards to Participants under which the holders thereof shall be
entitled to receive payments equivalent to dividends with respect to a number
of Shares and payable on such date or dates as determined by the Committee, and
the Committee may provide that such amounts (if any) shall be deemed to have
been reinvested in additional Shares or otherwise reinvested. Subject to the
terms of the Plan and any applicable Award Agreement, such Awards may have such
terms and conditions as the Committee shall determine.
(e) Other Awards. The Committee is hereby authorized, to the
extent permitted under Rule 16b-3 and applicable law, to grant to Participants
such other Awards that are denominated or payable in, valued in whole or in
part by reference to, or otherwise based on or related to, Shares (including,
without limitation, securities convertible into Shares), as are deemed by the
Committee to be consistent with the purposes of the Plan. Subject to the terms
of the Plan and any applicable Award Agreement, the Committee shall determine
the terms and conditions of such Awards. Shares or other securities delivered
to a Participant pursuant to a purchase right granted under this Section 6(e)
shall be purchased for such consideration, which may be paid by such method or
methods and in such form or forms, including, without limitation, cash, Shares,
outstanding Awards, or other consideration, or any combination thereof, as the
Committee shall determine.
(f) Performance Awards. The Committee is hereby authorized to
grant Performance Awards to Participants. Subject to the terms of the Plan and
any applicable Award Agreement, a Performance Award granted under the Plan (i)
may be denominated as a Stock Award or a Stock-Based Award and payable in cash,
Shares, other securities or other property and (ii) shall confer on the holder
thereof rights valued as determined by the Committee and payable to, or
exercisable by, the holder of the Performance Award, in whole or in part, upon
the achievement of such performance goals and during such performance periods
as the Committee shall establish. Subject to the terms of the Plan and any
applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, and the amount of any
payment or transfer to be made pursuant to any Performance Award shall be
determined by the Committee. Prior to granting any Performance Award, the
Committee shall, if it intends for such Awards to be exempt from the
limitations of Code Section 162(m), take such action as is necessary to qualify
such Awards as performance-based compensation, within the meaning of Code
Section 162(m). For example, the material terms of
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 12
the performance goals must be disclosed to and approved by the public
stockholders of the Company prior to any payments with respect to such an
Award.
(g) General.
(i) No Cash Consideration for Awards. Awards
shall be granted for no cash consideration or such minimal cash
consideration as may be required by applicable law.
(ii) Awards May Be Granted Separately or Together.
Awards may, in the discretion of the Committee, be granted either
alone or in addition to, in tandem with, or in substitution for, any
other Award or any award granted under any other plan of the Company
or any Affiliate. Awards granted in addition to or in tandem with
other Awards, or in addition to or in tandem with awards granted under
any other plan of the Company or any Affiliate, may be granted either
at the same time as or at a different time from the grant of such
other Awards or awards; provided, that any Tandem Option shall be
subject to the following provisions: upon exercise of an Option issued
as part of a Tandem Option, the Participant shall be entitled to a
credit toward the option exercise price equal to the value of the
Stock Appreciation Rights issued in tandem with the Option exercised,
but not in an amount that would exceed the amount of the federal
income tax deduction allowed to the Company in respect of such Stock
Appreciation Rights. Upon such exercise of a Tandem Option, the
related Stock Appreciation Right shall terminate and the value of such
Stock Appreciation Right shall be limited to such credit. Upon the
exercise of a Stock Appreciation Right issued as part of a Tandem
Option, the Option to which such Stock Appreciation Right relates
shall cease to be exercisable to the extent of the number of Shares
with respect to which the Stock Appreciation Right was exercised.
(iii) Forms of Payment Under Awards. Subject to the
terms of the Plan and of any applicable Award Agreement, payment or
transfers to be made by the Company or an Affiliate upon the grant or
exercise of an Award may be made in such form or forms as the
Committee shall determine, including, without limitation, cash,
Shares, other securities, other Awards, or other property, or any
combination thereof, and may be made in a single payment or transfer,
in installments, or on a deferred basis, in each case in accordance
with rules and procedures established by the Committee. Such rules and
procedures may include, without limitation, provisions for the payment
or crediting of reasonable interest on installment or deferred
payments or the grant or
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 13
crediting of Dividend Equivalents in respect of installment or
deferred payments denominated in Shares or other securities.
(iv) Limits on Transfer of Awards. No Award (other
than Released Securities), and no right under any such Award, shall be
assignable, alienable, saleable, or transferable by a Participant
otherwise than (A) by will or by the laws of descent and distribution,
(B) in the case of an Award of Restricted Securities, to the Company,
or (C) in the case of an Award other than an Incentive Stock Option,
(1) to the spouse or any lineal ancestor or descendant of the
Participant, (2) to a trust, the sole beneficiaries of which are any
are or all of such Participant or the spouse or any lineal ancestor or
descendant of such Participant, or (3) with the consent of, or in
accordance with rules and procedures established by, the Committee.
Each Award, and each right under any Award, shall be exercisable,
during the Participant's lifetime, only by the Participant or, if
permissible under the Code and applicable law with respect to any
Award, by the Participant's guardian or legal representative and, if
an Award or any right under such Award has been transferred in
accordance with the provisions hereof, by the transferee of such
Award, or the right therein, or such other person as may be entitled
to exercise such Award or right on behalf of such transferee. No Award
(other than Released Securities), and no right under any such Award,
may be pledged, alienated, attached, or otherwise encumbered, and any
purported pledge, alienation, attachment, or encumbrance thereof shall
be void and unenforceable against the Company or any Affiliate.
(v) Term of Awards. Except as set forth in
Section 6(a)(ii), the term of each Award shall be for such period as
may be determined by the Committee.
(vi) Share Certificates. All certificates for Shares
or other securities of the Company or any Affiliate delivered under
the Plan pursuant to any Award or the exercise thereof shall be
subject to such stop transfer orders and other restrictions as the
Committee may deem advisable under the Plan or the rules, regulations,
and other restrictions of the Securities and Exchange Commission, any
stock exchange upon which such Shares or other securities are then
listed, and any applicable federal or state securities laws, and the
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
SECTION 7. AMENDMENT AND TERMINATION
Except to the extent prohibited by applicable law and unless
otherwise expressly provided in an Award Agreement or in the Plan:
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 14
(a) Amendments to the Plan. The Board may amend, alter,
suspend, discontinue or terminate the Plan, except that any amendment,
alteration, suspension, discontinuation or termination that would impair the
rights of any Participant, or any other holder or beneficiary of any Award
theretofore granted to the extent such rights are not then accrued and vested,
shall require the consent of such Participant, other holder or beneficiary of
an Award. Notwithstanding the foregoing, the Board may condition any amendment
on the approval of the Stockholders if such approval is necessary or advisable
with respect to tax (including Code Sections 162(m) and 422), securities or
other applicable laws and rules and regulations to which the Company, this
Plan, Participants or other applicable Persons are subject.
(b) Correction of Defects, Omissions, and Inconsistencies.
The Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem desirable to carry the Plan into effect.
SECTION 8. GENERAL PROVISIONS
(a) No Rights to Awards. No Participant shall have any claim
to be granted any Award under the Plan, and there is no obligation for
uniformity of treatment of Participants, or holders or beneficiaries of Awards
under the Plan. The terms and conditions of Awards need not be the same with
respect to each Participant.
(b) Withholding. The Company or any Affiliate shall be
authorized to withhold from any Award granted or any payment due or transfer
made under any Award or under the Plan the amount (in cash, Shares, other
securities, or other property) of withholding taxes due in respect of an Award,
its exercise, or any payment or transfer under such Awards or under the Plan
and to take such other action as may be necessary in the opinion of the Company
to satisfy all obligations for the payment of such taxes. In case of Awards
paid in Shares, the Participant or other person receiving such Shares may be
required to pay the Company or its Affiliate, as appropriate, the amount of any
such withholding taxes which is required to be withheld with respect to such
Shares.
(c) No Limit on Other Plans. Nothing contained in the Plan
shall prevent the Company or any Affiliate from adopting or continuing in
effect other or additional compensation arrangements and such arrangements may
be either generally applicable or applicable only in specific cases.
(d) No Right to Employment. The grant of an Award shall not
be construed as giving a Participant the right to be retained in the employ or
other service of the Company or
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 15
any Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment or other service, free from any liability, or any
claim under the Plan, unless otherwise expressly provided in the Plan or in any
Award Agreement.
(e) Governing Law. The validity, construction, and
effect of the Plan and any rules and regulations relating to the Plan shall be
determined in accordance with the laws of the State of Delaware and applicable
federal law.
(f) Severability. If any provision of the Plan or any Award
is or becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction, or would disqualify the Plan or any Award under any law, rule or
regulation deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan, such provision shall be deemed null
and void and shall be stricken, and the remainder of the Plan and any such
Award shall remain in full force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any Award
shall create or be construed to create a trust or separate fund of any kind or
a fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(h) No Fractional Shares. No fractional Shares shall be
issued or delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities, or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional Shares
or any rights thereto shall be canceled, terminated, or otherwise eliminated.
(i) Headings. Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the
construction or interpretation of the Plan or any provision hereof.
SECTION 9. TERM OF THE PLAN
The Plan shall continue until the earliest of (a) the date on
which all Stock Awards and Stock-Based Awards issuable hereunder have been
issued, (b) the termination of the Plan by the Board or (c) November 3, 2007,
ten years from the date of adoption of the Plan by the Board.
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Healthcare Imaging Services, Inc.
1997 Omnibus Incentive Plan
Page 16
However, unless otherwise expressly provided in the Plan or in an applicable
Award Agreement, any Award theretofore granted may extend beyond such date and
the authority of the Committee to amend, alter, adjust, suspend, discontinue,
or terminate any such Award or to waive any conditions or rights under any such
Award, and the authority of the Board to amend the Plan, shall extend beyond
such date.
SECTION 10. EFFECTIVENESS OF THE PLAN
The Plan shall become effective when approved by the Board
provided, however, that this Plan, and all Awards granted hereunder, shall be
null and void and of no force and effect if, and no Options granted under this
Plan may be exercised until, the Plan is not approved by the affirmative votes
of the holders of Shares having a majority of the voting power of the Shares
represented at a meeting duly held in accordance with the Delaware General
Corporation Law within twelve (12) months after being approved by the Board.
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<PAGE>
10.52
HEALTHCARE IMAGING SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE OF THE PLAN. This Employee Stock Purchase Plan of
Healthcare Imaging Services, Inc. adopted on this 3rd day of November, 1997, is
intended to encourage eligible employees of the Company and its current and/or
future Subsidiaries, who are designated by the Committee, as defined herein, to
acquire or increase their ownership of common stock of the Company on
reasonable terms. The opportunity so provided is intended to foster in
participants a strong incentive to put forth maximum effort for the continued
success and growth of the Company and its Subsidiaries, to aid in retaining
individuals who put forth such efforts, and to assist in attracting the best
available individuals to the Company and its Subsidiaries in the future. It is
the Company's intention that this Employee Stock Purchase Plan qualify as an
"employee stock purchase plan" under Section 423 of the Code. Accordingly, the
provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS. When used herein, the following terms shall have the
meanings set forth below:
2.1 "Account" means the account maintained for an Employee
who elects to participate in any offering of Shares made under the
Plan for the purpose of recording the amounts withheld from his Annual
Compensation pursuant to Section 9 of the Plan.
2.2 "Annual Compensation" means an amount equal to the sum of
(i) the annual base rate of pay of an Employee as determined from the
payroll records of the Company on the first day of the Subscription
Period of an offering of Shares made pursuant to the Plan, and (ii)
the amount paid to the Employee by the Company or any of its
Subsidiaries under any incentive compensation plan or bonus plan
during the twelve (12) month period immediately preceding the first
day of the Subscription Period of an offering of Shares made pursuant
to the Plan.
2.3 "Board" means the Board of Directors of Healthcare
Imaging Services, Inc.
2.4 "Code" means the Internal Revenue Code of 1986, as in
effect at the time of reference, or any successor revenue code which
may hereafter be adopted in lieu thereof, and reference to any
specific provisions of the Code shall refer to the corresponding
provisions of the Code as it may hereafter be amended or replaced.
2.5 "Committee" means the Compensation Committee of the
Board or any other committee appointed by the Board which is invested
by the Board with the responsibility for
<PAGE>
the administration of the Plan and whose members meet the requirements
for eligibility to serve as set forth in Rule 16b-3 and in the Plan.
2.6 "Company" means Healthcare Imaging Services, Inc.
2.7 "Employees" means persons employed by the Company or any
of its current or future Subsidiaries designated by the Committee on
the first day of the Subscription Period of any offering of Shares
made pursuant to the Plan; provided, however, that no person shall be
considered an Employee unless he (i) is normally employed by the
Company or any of its Subsidiaries for more than twenty (20) hours per
week and more than five (5) months in a calendar year and (ii) has
been employed by the Company or any of its Subsidiaries for at least
six (6) months as of the first day of the Subscription Period of any
such offering.
2.8 "Fair Market Value" means, with respect to the Shares, (i)
if the Shares are listed or admitted for trading on any national
securities exchange or included in The Nasdaq National Market or The
Nasdaq SmallCap Market, the last reported sales price as reported on
such exchange; (ii) if the Shares are not listed or admitted for
trading on any national securities exchange or included in The Nasdaq
National Market or The Nasdaq SmallCap Market, the average of the last
reported closing bid and asked quotation for the Shares as reported on
the Automated Quotation System of NASDAQ or a similar service if
NASDAQ is not reporting such information; (iii) if the Shares are not
listed or admitted for trading on any national securities exchange or
included in The Nasdaq National Market or The Nasdaq SmallCap Market
or quoted by NASDAQ or a similar service, the average of the last
reported bid and asked quotation for the Shares as quoted by a market
maker in the Shares (or if there is more than one market maker, the
bid and asked quotation shall be obtained from two market makers and
the average of the lowest bid and highest asked quotation shall be the
"Fair Market Value"); or (iv) if the Shares are not listed or admitted
for trading on any national securities exchange or included in The
Nasdaq National Market or The Nasdaq SmallCap Market or quoted by
NASDAQ and there is no market maker in the Shares, the fair market
value of the Shares as determined by the Committee in good faith.
2.9 "Option" means the right granted to an Employee to
purchase Shares pursuant to an offering made under the Plan and
pursuant to such Employee's election to purchase Shares in such
offering, at a price, and subject to such limitations and
restrictions, as the Plan and the Committee may impose.
2.10 "Parent" means any corporation, other than the employer
corporation, in an unbroken chain of corporations ending with the
employer corporation if each of the corporations other than the
employer corporation owns stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
2
<PAGE>
2.11 "Plan" means the Company's Employee Stock Purchase
Plan.
2.12 "Purchase Period" means the number of calendar months
during which installment payments for Shares purchased pursuant to
options granted under the Plan shall be made.
2.13 "Rule 16b-3" means Rule 16b-3 of the General Rules and
Regulations of the Securities Exchange Act of 1934, as in effect at
the time of reference, or any successor rules or regulations which may
hereafter be adopted in lieu thereof, and any reference to any
specific provisions of Rule 16b-3 shall refer to the corresponding
provisions of Rule 16b-3 as it may hereafter be amended or replaced.
2.14 "Shares" means shares of the Company's common stock,
$0.01 par value per share, or, if by reason of the adjustment
provisions contained herein, any rights under the Plan pertain to any
other security, such other security.
2.15 "Subscription Period" means that period of time
prescribed in any offering of Shares made pursuant to the Plan
beginning on the first day Employees may elect to participate in such
offering and ending on the last day such elections to participate are
authorized to be received and accepted.
2.16 "Subsidiary" or "Subsidiaries" means any corporation or
corporations other than the employer corporation in an unbroken chain
of corporations beginning with the employer corporation if each of the
corporations other than the last corporation in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
2.17 "Successor" means the legal representative of the estate
of a deceased Employee or the person or persons who shall acquire the
right to exercise or receive an Option by bequest or inheritance or by
reason of the death of the Employee.
3. STOCK SUBJECT TO THE PLAN. There will be reserved for issuance,
upon the exercise of Options to be granted from time to time pursuant to
offerings made under the Plan, an aggregate number of Shares equal to 12.5% of
the number of Shares outstanding from time to time, calculated on a fully
diluted basis (including the maximum number of Shares that may be issued, or
subject to awards, under this Plan, the Company's 1997 Omnibus Incentive Plan,
the Company's 1991 Stock Option Plan, as amended, and the Company's 1996 Stock
Option Plan for Non-Employee Directors (collectively, the "Employee Stock
Plans")), less that number of Shares which are issued under the Employee Stock
Plans after the effective date of the Plan or are subject to outstanding awards
under the Employee Stock Plans, plus (i) any Shares that are forfeited under
the Employee Stock Plans, and (ii) any Shares surrendered to the Company in
payment of the exercise price of options issued under any of the Employee Stock
Plans; provided, however, that no Option may be issued that would bring the
total of all outstanding awards under this Plan to more than 5,000,000
3
<PAGE>
Shares. The number of Shares reserved for issuance hereunder shall not be
reduced in the event of the redemption, repurchase or other acquisition by the
Company of outstanding Shares. The Shares subject to Options may be, in whole
or in part, as the Committee shall from time to time determine, authorized but
unissued Shares, or issued Shares which shall have been reacquired by the
Company. The number of Shares reserved under the Plan may be issued pursuant to
the exercise of Options granted pursuant to one or more offerings made under
the Plan. Any Shares subject to issuance upon exercise of Options but which are
not issued because of a surrender, lapse, expiration or termination of any such
Option prior to issuance of the Shares shall once again be available for
issuance in satisfaction of Options.
4. ADMINISTRATION OF THE PLAN. The Board shall appoint the Committee,
which shall consist of not less than two (2) "Non-Employee Directors" as
defined in Rule 16b-3. Subject to the provisions of the Plan, the Committee
shall have full authority, in its discretion, to determine when offerings shall
be made under the Plan, the number of Shares to be made available in any such
offering, the length of the Subscription Period and Purchase Period of any such
offering (provided, however, that in no event shall the Subscription Period and
the Purchase Period of any offering together exceed twenty-seven (27) months)
and such other terms and conditions not inconsistent with the Plan as may be
necessary or appropriate; to interpret the Plan; and to prescribe, amend and
rescind rules and regulations relating to the Plan; and generally to interpret
and determine any and all matters whatsoever relating to the administration of
the Plan. The Board may from time to time appoint members to the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee shall select one of
its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of its members shall constitute a
quorum. Any action of the Committee may be taken by a written instrument signed
by all of the members, and any action so taken shall be fully as effective as
if it had been taken by a vote of a majority of the members at a meeting duly
called and held. The Committee shall make such rules and regulations for the
conduct of its business as it shall deem advisable and shall appoint a
Secretary who shall keep minutes of its meetings and records of any action
taken in writing. No member of the Committee shall be liable, in the absence of
bad faith, for any act or omission with respect to his service on the
Committee.
5. ELIGIBILITY TO PARTICIPATE IN OFFERINGS. All Employees shall be
eligible to participate in, and shall receive timely notice of, any offering of
Shares made under the Plan; provided, however, that the Committee may exclude
all, but not less than all, of the Employees of any specified Subsidiary from
any offering made under the Plan; and provided further, however, that the
Committee may determine that any offering of Shares made under the Plan will
not be extended to highly compensated Employees (within the meaning of Section
414(q) of the Code). Notice of any offering of Shares pursuant to the Plan
shall specify the Subscription Period and the Purchase Period of such offering
and shall be accompanied by a written form on which an Employee may elect to
participate in such offering. In order to participate in any offering of Shares
made pursuant to the Plan, an Employee must sign an election to participate in
such offering on the form provided by the Company for such purpose stating the
Employee's desire to purchase Shares under the Plan and showing the amount
which the Employee elects to have withheld from his pay for each payroll
4
<PAGE>
period during the Purchase Period. The election to participate in any such
offering must be delivered on or before the last day of the Subscription Period
to the Chief Financial Officer of the Company.
6. GRANT OF OPTIONS. Subject to the limitations set forth in Section 7
of the Plan, each Employee who elects during the Subscription Period of any
offering made under the Plan to purchase Shares in such offering shall
automatically be granted an Option to purchase a fixed maximum number of Shares
determined by the following procedure:
Step 1 -- Determine the aggregate amount which will be
withheld (based on the Employee's election form) from the Employees
pay during the Purchase Period;
Step 2 -- Divide the amount determined in Step 1 by the
exercise price of the Option and round down the quotient to the
nearest whole number. This figure shall be the fixed maximum number of
Shares for which the Employee may be granted an Option to purchase.
The date on which the Option is granted to each participating Employee
shall be the first day of the Purchase Period of such offering. Notice that an
Option has been granted shall be given to each participating Employee and shall
show the maximum number of Shares subject to the Option and the amount to be
withheld from his pay for each payroll period during the Purchase Period of
such offering.
In the event the total maximum number of Shares resulting from all
elections to purchase under any offering of Shares made under the Plan exceeds
the number of Shares offered, the Company reserves the right to reduce the
maximum number of Shares which Employees may purchase pursuant to their
elections to purchase, to allot the Shares available in such manner as it shall
determine, but generally pro rata to subscriptions received, and to grant
Options to purchase only for such reduced number of Shares.
In the event an Employee's election to purchase Shares pursuant to an
offering made under the Plan is canceled, in whole or in part, pursuant to the
provisions of the Plan, a proportionate portion of the Option granted to such
Employee shall automatically terminate.
7. LIMITATIONS OF NUMBER OF SHARES WHICH MAY BE PURCHASED. The
following limitations shall apply with respect to the number of Shares which
may be purchased by each Employee who elects to participate in an offering
made under the Plan:
(a) No Employee may purchase, or elect to purchase, Shares
during any one offering pursuant to the Plan for an aggregate purchase
price in excess of the lesser of (i) the percentage of the Annual
Compensation applicable to such offering as determined by the
Committee, or (ii) twenty percent (20%) of his Annual Compensation (in
each event, which amount shall be prorated in the event the Purchase
Period is less, or more, than twelve (12) months).
5
<PAGE>
(b) No Employee shall be granted an Option to purchase Shares
under the Plan if such Employee, immediately after such Option is
granted, owns stock, within the meaning of Section 424(d) of the Code,
and including stock subject to purchase under any outstanding options,
possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or, if
applicable, any Subsidiary or, if applicable, a Parent.
(c) No Employee shall be granted an Option to purchase Shares
which permits his right to purchase stock under the Plan and all other
employee stock purchase plans of the Company and, if applicable, a
Subsidiary, and, if applicable, a Parent, to accrue (as determined
under Section 423(b)(8) of the Code) at a rate which exceeds
twenty-five thousand dollars ($25,000) of the Fair Market Value of
such stock (determined on the date the option to purchase is granted)
for each calendar year in which such Option is outstanding at any
time.
An Employee may elect to purchase less than the number of Shares which
he is entitled to elect to purchase.
8. EXERCISE PRICE. The per Share exercise price for Shares subject to
purchase under Options granted pursuant to an offering made under the Plan
shall be eighty-five percent (85%) of the Fair Market Value of the Shares on
the first day of the Purchase Period of such offering, unless the Committee, in
its discretion, determines that the per Share exercise price applicable to such
offering will be greater than eighty-five percent (85%), but not more than one
hundred percent (100%), of the Fair Market Value of the Shares on the first day
of the Purchase Period of such offering.
9. METHOD OF PAYMENT. Payment of the exercise price of any Option
granted pursuant to the Plan shall be made in installments through payroll
deductions, with no right of prepayment. Each Employee electing to participate
in an offering of Shares made under the Plan shall authorize the Company to
withhold a designated amount from his regular weekly, biweekly, semimonthly or
monthly pay for each payroll period during the Purchase Period. All such
payroll deductions made for an Employee shall be credited to his Account. No
interest shall accrue on the amounts credited to an Employee's Account pursuant
to this Section 9.
10. EXERCISE OF OPTIONS. As of the close of business on the last
business day of the Purchase Period of any offering of Shares made under the
Plan, each outstanding Option shall automatically be exercised. Upon the
exercise of an Option, the aggregate amount of the payroll deductions credited
to the Account of each Employee as of that date will automatically be applied
to the exercise price for the purchase of that number of Shares, rounded to the
nearest whole share, equal to the Account balance divided by the exercise
price, not to exceed the maximum number of Shares issuable under the Option. A
certificate representing the Shares so purchased shall be delivered to the
Employee or the Employee's Successor as soon as reasonably practicable after
the exercise of the Option. The remainder of the Account balance not applied to
purchase Shares shall
6
<PAGE>
be paid in cash to the Employee or the Employee's Successor as soon as
reasonably practicable after the exercise of the Option.
11. RIGHTS AS STOCKHOLDER. An Employee will become a stockholder of
the Company with respect to Shares for which payment has been completed at the
close of business on the last business day of the Purchase Period. An Employee
will have no rights as a stockholder with respect to Shares under an election
to purchase Shares until he has become a stockholder as provided above.
12. CANCELLATION OF ELECTION TO PURCHASE. An Employee who has elected
to purchase Shares during the Subscription Period of any offering made under
the Plan may cancel his election in its entirety or may partially cancel his
election by reducing the amount which he has authorized the Company to withhold
from his pay for each payroll period during the Purchase Period. Any such full
or partial cancellation shall be effective upon the delivery by the Employee of
written notice of cancellation to the Chief Financial Officer of the Company.
Such notice of cancellation must be so delivered before the close of business
on the last business day of the Purchase Period. If an Employee partially
cancels his original election by reducing the amount authorized to be withheld
from his pay, he shall continue to make installment payments at the reduced
rate for the remainder of the Purchase Period. Only one partial cancellation
may be made during a Purchase Period.
An Employee's rights upon the full or partial cancellation of his election to
purchase Shares shall be limited to the following:
(i) He may receive in cash, as soon as practicable after
delivery of the notice of cancellation, the amount then credited to
his Account, except that, in the case of a partial cancellation, he
must retain in his Account an amount equal to the amount of his new
payroll deduction times the number of payroll periods in the Purchase
Period through the date of cancellation, or
(ii) He may have the amount credited to his Account at the
time the cancellation becomes effective applied to the purchase of the
number of Shares such amount will then purchase.
If option (ii) is elected, installment payments must be continued for the month
in which the notice of cancellation is given. The cancellation and purchase of
Shares will become effective at the close of business on the last business day
of the Purchase Period.
13. LEAVE OF ABSENCE OR LAYOFF. An Employee purchasing Shares
under the Plan who is granted a leave of absence (including a military leave)
or is laid off during the Purchase Period may at that time (on a form provided
by the Company) elect one of the following:
7
<PAGE>
(i) He may suspend payments during the leave of absence, or,
in the case of a layoff, he may suspend payments for not more than
ninety (90) days, but not in either case beyond the last month of the
Purchase Period, or
(ii) He may make his installment payments in cash but not, in
case of a leave of absence, for longer than his leave nor more than
ninety (90) days in case of a layoff, and in any event no later than
the end of the Purchase Period.
If option (i) is elected, the Employee at the end of the suspension period must
make up the deficiency in his Account either by immediate lump sum payment or
with increased installment payments so that payment for the maximum number of
Shares covered by his Option will be completed in the last month of the
Purchase Period. If the Employee elects to make increased installment payments,
he may, nevertheless, at any time before the end of the Purchase Period make up
his remaining deficiency by a lump sum payment.
If an Employee who has elected either of option (i) or (ii) does not return to
active service upon the expiration of his leave of absence or within ninety
(90) days from the date of his layoff, his election to purchase shall be deemed
to have been canceled at that time, and the Employee's only right will be to
receive in cash the amount credited to his Account.
14. EFFECT OF FAILURE TO MAKE PAYMENTS WHEN DUE. If in any payroll
period for any reason not set forth in Section 13, an Employee who has filed an
election to purchase Shares under the Plan has no pay, or his pay is
insufficient (after other authorized deductions) in any payroll period to
permit deduction of his installment payment, such payment may be made in cash
at the time. If not so made, the Company shall have the right, as set forth
below, to treat such failure as a cancellation of the Employee's election to
purchase Shares. If the Company does not treat such failure as a cancellation
of the Employee's election to purchase Shares, the Employee, when his pay is
again sufficient to permit the resumption of installment payments, must pay in
cash the amount of the deficiency in his Account or arrange for uniformly
increased installment payments so that payment for the maximum number of Shares
covered by his Option will be completed in the last month of the Purchase
Period. If the Employee elects to make increased installment payments, he may,
nevertheless, at any time prior to the end of the Purchase Period make up the
remaining deficiency by a lump sum payment.
Subject to the above and other provisions of the Plan permitting postponement,
the Company may treat the failure by an Employee to make any payment as a
cancellation of his election to purchase Shares. Such cancellation will be
affected by mailing notice to him at his last known business or home address.
Upon such mailing, the Employee's only right will be to receive in cash the
amount credited to his Account.
15. RETIREMENT. If an Employee who retires in a manner entitling him
to early, normal or late retirement benefits under the provisions of any
retirement plan of the Company or a Subsidiary in which the Employee
participates (or if no such plan then exists, at or after age sixty-
8
<PAGE>
five (65)) has an election to purchase Shares in effect at the time of his
retirement, he may, within three (3) months after the date of his retirement
(but in no event later than the end of the Purchase Period), by delivering
written notice to the Chief Financial Officer of the Company, elect to:
(i) Complete the remaining installment payments in cash,
(ii) Make a lump sum payment in the amount of any
deficiency for the remaining portion of the Purchase Period, or
(iii) Cancel his election to purchase Shares in accordance
with the provisions of Section 12.
If no such notice is given within such period, the election will be deemed
canceled as of the date of retirement and the only right of the Employee will
be to receive in cash the amount credited to his Account.
16. DEATH. If an Employee, including a retired Employee, dies and has
an election to purchase Shares in effect at the time of his death, the
Employee's Successor may, within three (3) months from the date of death (but
in no event later than the end of the Purchase Period), by delivering written
notice to the Chief Financial Officer of the Company, elect to:
(i) Complete the remaining installment payments in cash,
(ii) Make a lump sum payment in the amount of any
deficiency for the remaining portion of the Purchase Period, or
(iii) Cancel the election to purchase Shares in accordance
with the provisions of Section 12.
If no such notice is given within such period, the election will be deemed
canceled as of the date of death, and the only right of such Successor will be
to receive in cash the amount credited to the Employee's Account.
17. TERMINATION OF EMPLOYMENT OTHER THAN FOR RETIREMENT OR
DEATH. If an Employee's employment is terminated for any reason other than
retirement or death prior to the end of the Purchase Period, his election to
purchase shall thereupon be deemed canceled as of the date on which his
employment terminated. In such an event, no further payments under such
election will be permitted, and the Employee's only right will be to receive in
cash the amount credited to his Account.
18. NONTRANSFERABILITY OF OPTIONS. An Option, or an Employee's
right to any amounts held for his Account under the Plan, shall not be
transferable, other than (i) by will or the laws of descent and distribution,
and an Option may be exercised, during the lifetime of the
9
<PAGE>
holder of the Option, only by the holder or, in the event of death, the
holder's Successor or (ii) if permitted pursuant to the Code and the
Regulations thereunder without affecting the Option's or the Plan's
qualification under Section 423 of the Code, pursuant to a qualified domestic
relations order.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of
changes in all of the outstanding Shares by reason of stock dividends, stock
splits, recapitalizations, mergers, consolidations, combinations, or exchanges
of shares, separations, reorganizations or liquidations, or similar events, or
in the event of extraordinary cash or non-cash dividends being declared with
respect to the Shares, or similar transactions or events, the number and class
of Shares available under the Plan in the aggregate, the number and class of
Shares subject to Options theretofore granted, applicable purchase prices and
all other applicable provisions, shall, subject to the provisions of the Plan,
be equitably adjusted by the Committee to prevent expansion or dilution of such
Options. The foregoing adjustment and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional Share which might otherwise become subject to an Option.
20. UNUSUAL CORPORATE EVENT. Notwithstanding anything to the contrary,
in the case of an unusual corporate event such as a liquidation, merger,
reorganization (other than a reorganization defined in Code Section
368(a)(1)(F)), or other business combination, acquisition or change in control
of the Company through a tender offer or otherwise, the Committee may, in its
sole discretion, elect to terminate the Purchase Period of any offering then in
effect as of the last day of the month during which the unusual corporate event
occurs. In the event of any such termination, an Option holder shall have the
right, commencing at least five (5) days prior to such unusual corporate event,
to either make a lump sum payment in the amount equal to the remaining
installment payments to be made pursuant to his election to purchase Shares, or
to cancel his election to purchase Shares in the manner set forth in Section
12.
21. TAXES. The Employee, or his Successor, shall promptly notify the
Company of any disposition of Shares acquired pursuant to the exercise of an
Option under the Plan and the Company shall have the right to deduct any taxes
required by Law to be withheld as a result of such disposition from any amounts
otherwise payable then or at any time thereafter to the Employee. The Company
shall also have the right to require an Employee, or a Successor, entitled to
receive Shares pursuant to the exercise of an Option to pay the Company the
amount of any taxes which the Company is or will be required to withhold with
respect to the Shares before the certificate for such Shares is delivered
pursuant to the Plan.
22. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years
from the date hereof, and an Option shall not be granted under the Plan after
that date although the terms of any Options may be amended at any date prior to
the end of its term in accordance with the Plan (including Section 23 of the
Plan). Any Options outstanding at the time of termination of the Plan shall
continue in full force and effect according to the terms and conditions of the
Option and this Plan.
10
<PAGE>
23. AMENDMENT OF THE PLAN. The Plan may be amended at any time and
from time to time by the Board, but no amendment without the approval of the
stockholders of the Company shall be made if stockholder approval under Section
423 of the Code or Rule 16b-3 would be required. Notwithstanding the
discretionary authority granted to the Committee in Section 4 of the Plan, no
amendment of the Plan or any Option granted under the Plan shall impair any of
the rights of any holder, without the holder's consent, under any Option
theretofore granted under the Plan.
24. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for
Shares pursuant to the exercise of an Option may be postponed by the Company
for such period as may be required for it to comply with any applicable
requirements of any federal, state or local law or regulation or any
administrative or quasi-administrative requirement applicable to the sale,
issuance, distribution or delivery of such Shares. The Committee may, in its
sole discretion, require an Employee to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the delivery of any Shares pursuant to the exercise of an Option.
25. FEES AND COSTS. The Company shall pay all original issue
taxes on the exercise of any Option granted under the Plan and all other fees
and expenses necessarily incurred by the Company in connection therewith.
26. NO CONTRACT OF EMPLOYMENT. Neither the adoption of this
Plan nor the grant of any Option shall be deemed to obligate the Company or any
Subsidiary to continue the employment of any Employee.
27. EFFECTIVENESS OF THE PLAN. The Plan shall become effective as of
the date of its adoption by the Board. The Plan shall thereafter be submitted
to the Company's stockholders for approval and, unless the Plan is approved by
the affirmative votes of the holders of Shares having a majority of the voting
power of the Shares represented at a meeting duly held in accordance with
Delaware General Corporation Law within twelve (12) months after being approved
by the Board, the Plan and all Options granted under it shall be null and void,
and of no force and effect.
28. OTHER PROVISIONS. As used in the Plan, and in other documents
prepared in implementation of the Plan, references to the masculine pronoun
shall be deemed to refer to the feminine or neuter, and references in the
singular or the plural shall refer to the plural or the singular, as the
identity of the person or persons or entity or entities being referred to may
require. The captions used in the Plan and in such other documents prepared in
implementation of the Plan are for convenience only and shall not affect the
meaning of any provision hereof or thereof.
11
<PAGE>
10.53
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT ("Agreement") is made and
entered into as of February __, 1998 by and among Healthcare Imaging Services,
Inc., a Delaware corporation (the "Company"), the Stephanie Loewenstern
Irrevocable Trust, the Brett Loewenstern Irrevocable Trust, the Victoria
Loewenstern Irrevocable Trust (each of the aforementioned trusts are referred
to herein collectively as the "Loewenstern Trusts"), the Richard B. Bronson
Revocable Trust (the "Bronson Trust", the Bronson Trust and the Loewenstern
Trusts are referred to herein collectively as the "Trusts"), and the Reiter
Family Partnership (the "Partnership", the Partnership and the Trusts are
referred to herein collectively as the "Sellers").
WHEREAS, the Company and Biltmore Securities ("Biltmore") entered into
a Consulting Agreement, dated January 30, 1996, as amended on January 30, 1997
and November 3, 1997, respectively, (the "Consulting Agreement");
WHEREAS, pursuant to Section 4(a) of the Consulting Agreement, the
Company granted Biltmore options (the "Options") to purchase 750,000 shares
(the "Option Shares") of the Company's common stock, par value $.01 per share
("Common Stock"), at an exercise price of $0.75 per share (the Options and the
Option Shares are referred to collectively herein as the "Biltmore Options");
WHEREAS, pursuant to Section 4(b) of the Consulting Agreement, the
Company granted Biltmore the right to receive 750,000 shares of Common Stock
("Restricted Stock") simultaneously with the Company's acquisition, during the
term of the Consulting Agreement, of one or more businesses which in the
aggregate have assets of not less than $2,500,000;
<PAGE>
WHEREAS, on September 30, 1997, Biltmore distributed the Biltmore
Options on an equal basis to its two (2) stockholders, Richard B. Bronson and
Elliott Loewenstern, who in turn gifted the Biltmore Options to the Trusts in
the amounts set forth in Annex A attached hereto;
WHEREAS, on September 30, 1997, Biltmore assigned its right to receive
the Restricted Stock to the Trusts in the same respective amounts as the
Biltmore Options were gifted to the Trusts pursuant to the preceding clause;
WHEREAS, on February 17, 1998, each of the Loewenstern Trusts
acknowledged that their rights to receive the Restricted Stock were erroneously
assigned to them by Elliott Loewenstern, and, with the consent of Elliott
Loewenstern, on February 17, 1998, each of the Loewenstern Trusts assigned any
and all of their rights to receive the Restricted Stock to the Partnership, the
intended distributee of the Restricted Stock;
WHEREAS, upon the terms and subject to the conditions set forth in
this Agreement, the Company desires to purchase the Biltmore Options and the
Restricted Stock from the Sellers, and the Sellers desire to sell the Biltmore
Options and the Restricted Stock to the Company, in consideration for the
payments from the Company as set forth herein.
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual obligations hereinafter set forth, and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company and the Sellers hereby agree as follows:
1. Sale and Purchase of Biltmore Options and Restricted Stock -
Upon the terms and subject to the conditions set forth in this Agreement, the
Company agrees to purchase the Biltmore Options and the Restricted Stock from
the Sellers, and the Sellers agree to
2
<PAGE>
sell their respective Biltmore Options and Restricted Stock to the Company, for
the Purchase Price as set forth in Section 2 herein.
2. Purchase Price- The aggregate purchase price for the Biltmore
Options and the Restricted Stock is $3,500,000 (the "Purchase Price"). At the
Closing, as defined in Section 3 herein, the Company shall pay to each Seller
their respective portion of the Purchase Price, as set forth in Annex A
attached hereto, by check made payable to such Seller or by wire transfer of
immediately funds to the respective account designated by such Seller, against
delivery by such Seller to the Company of its Biltmore Options and Restricted
Stock.
3. Closing Date- The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place on a date and at a
location to be selected by the Company; provided, however, that in no event
will the Closing occur later than the ninetieth day following the earlier to
occur of (i) the consummation of all the transactions necessary to acquire
substantially all of the assets or capital stock, by merger or otherwise, of
Jersey Integrated HealthPractice, Inc., as contemplated by the letter of intent
(the "LOI") by and between the Company and Pavonia Medical Associates, P.A.,
dated January 28, 1998 or (ii) the Company raising aggregate gross proceeds of
at least $60 million from one or more debt and/or equity financings (the
earlier to occur of such events being referred to herein as the "Trigger
Event"). In the event that the Trigger Event has not occurred by June 30, 1998,
then this Agreement shall terminate and be of no further force or effect.
4. Representations and Warranties of the Sellers. Each Seller
hereby represents and warrants to, and agrees with, the Company as follows:
(a) Each Seller has all necessary power and authority,
and has
3
<PAGE>
taken all necessary action, to execute and deliver this Agreement. This
Agreement has been duly executed and delivered by each Seller and, assuming due
authorization, execution and delivery of the Agreement by the Company, this
Agreement constitutes a legal, valid and binding obligation of each Seller
enforceable against the Seller in accordance with its terms.
(b) Each Seller has good and marketable title to the
Biltmore Options and Restricted Stock set forth opposite its name in Annex A
attached hereto and owns such securities free and clear of all liens, claims
and encumbrances and will not encumber or otherwise subject to any adverse
interest either its Biltmore Options or its Restricted Stock in any way prior
to the Closing.
5. Irrevocable Proxy. Each of the Sellers does hereby grant
to the Board of Directors of the Company an irrevocable proxy to vote
any shares of Common Stock acquired upon the exercise of the Biltmore Options
and any shares of Restricted Stock issued to the Sellers; provided, however,
that such irrevocable proxy shall terminate and be of no further force or
effect upon the termination of this Agreement.
6. Further Assurances. From time to time, whether before or
after the date hereof, without further consideration, the Sellers
shall execute and deliver such documents to the Company as the Company may
reasonably request in order to effect the consummation of the transactions
contemplated by this Agreement.
7. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New Jersey, without
giving effect to the principles of conflicts of law thereof.
8. Successors and Assigns. This Agreement shall be binding
upon
4
<PAGE>
and inure to the benefit of the parties hereto and their respective successors
and assigns. The Company may assign its rights and remedies under this
Agreement without the consent of the Sellers or any other party.
9. Communication. Any notice or other communication under
this Agreement shall be in writing and shall be deemed to have been
duly given on the date of service if personally served or sent by telecopy, on
the business day after notice is delivered to a courier or mailed by express
mail if sent by courier delivery service or express mail for next day delivery
and on the third day after mailing if mailed to the party to whom notice is to
be given, by first class mail, registered, return receipt requested, postage
prepaid and addressed to:
(a) if to the Company, to Elliott H. Vernon, c/o
Healthcare Imaging Services, Inc., 200 Schulz Drive, Red Bank, NJ
07701, fax: 732-224-9362, or such other address as the Company has designated
in writing to the Sellers, or
(b) if to the Sellers, to the address set forth in
Annex A directly below each Seller's name, or such other address as such Seller
has designated in writing to the Company.
10. Counterparts. This Agreement may be executed in one or
more counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement.
11. Headings. The headings of this Option have been inserted
as a matter of convenience and shall not affect the construction hereof.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott Vernon
------------------------------------
Name: Elliott Vernon
Title: Chairman/CEO
RICHARD B. BRONSON REVOCABLE TRUST
By: /s/ Richard B. Bronson
------------------------------------
Name: Richard B. Bronson
Title: Trustee
STEPHANIE LOEWENSTERN IRREVOCABLE TRUST
By: /s/ Elliott Loewenstern
------------------------------------
Name: Elliott Loewenstern
Title: Trustee
BRETT LOEWENSTERN IRREVOCABLE
TRUST
By: /s/ Elliott Loewenstern
------------------------------------
Name: Elliott Loewenstern
Title: Trustee
VICTORIA LOEWENSTERN IRREVOCABLE TRUST
By: /s/ Elliott Loewenstern
------------------------------------
Name: Elliott Loewenstern
Title: Trustee
REITER FAMILY PARTNERSHIP
By: /s/ Elliott Loewenstern
------------------------------------
Name: Elliott Loewenstern
Title:
6
<PAGE>
ANNEX A
-------
<TABLE>
<CAPTION>
CASH SELLER'S
PAYMENTS TOTAL
BILTMORE FOR BILTMORE RESTRICTED CASH PAYMENTS CASH
SELLER OPTIONS OPTIONS STOCK FOR RESTRICTED STOCK PAYMENTS
- ------ ------- ------------ ---------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Richard B. Bronson
Revocable Trust
451 Ocean Boulevard 375,000 $734,374.98 375,000 $1,015,625.00 $1,749,999.98
Golden Beach, Fl 33160
Attn: Richard B. Bronson
Fax: (954)351-4205
Stephanie Loewenstern
Irrevocable Trust
17308 Whitehaven Drive 125,000 244,791.66 - - 244,791.66
Boca Raton, Fl 33496
Attn: Elliott Loewenstern
Fax: (954)351-4205
Brett Loewenstern
Irrevocable Trust
17308 Whitehaven Drive 125,000 244,791.66 - - 244,791.66
Boca Raton, Fl 33496
Attn: Elliott Loewenstern
Fax: (954)351-4205
Victoria Loewenstern
Irrevocable Trust
17308 Whitehaven Drive 125,000 244,791.66 - - 244,791.66
Boca Raton, Fl 33496
Attn: Elliott Loewenstern
Fax: (954)351-4205
Reiter Family Partnership
3 Regency Plaza
Providence, RI 02903 - - 375,000 1,015,625.00 1,015,625.00
Attn: Joel Loewenstern
Fax: (954)351-4205
--------- --------- -------- ------------ -------------
750,000 $1,468,750* 750,000 $2,031,250* $3,500,000*
* Amount rounded to nearest dollar.
7
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-42091, No. 33-72876 and No. 33-86214 on Form S-3 and Registration
Statements No. 33-86872 and No. 333-8699 on Form S-8 of Healthcare
Imaging Services, Inc. (the "Company") of our report dated March 24, 1998,
appearing in this Annual Report on Form 10-K of the Company for the year ended
December 31, 1997.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 70,626
<SECURITIES> 0
<RECEIVABLES> 5,375,351
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,632,059
<PP&E> 11,149,716
<DEPRECIATION> 5,630,944
<TOTAL-ASSETS> 13,540,635
<CURRENT-LIABILITIES> 4,479,392
<BONDS> 0
0
18,500
<COMMON> 92,870
<OTHER-SE> 5,301,528
<TOTAL-LIABILITY-AND-EQUITY> 13,540,635
<SALES> 0
<TOTAL-REVENUES> 10,247,940
<CGS> 0
<TOTAL-COSTS> 10,579,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (761,266)
<INCOME-TAX> 43,039
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (804,305)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
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