<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------
Commission
For the fiscal year ended December 31, 1998 File Number: 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3119929
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Red Bank, New Jersey 07701
-------------------------------------- -----
(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
--------------------------------------
(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
26, 1999 was approximately $12,513,000. As of March 26, 1999 there were
11,356,974 shares of Common Stock outstanding.
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
1998 Annual Report on Form 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K 61
Signatures 71
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Since its formation in 1991, HealthCare Imaging Services, Inc. and its
subsidiaries (hereinafter referred to collectively as the "Company," unless the
context indicates otherwise) have been principally engaged in the business of
establishing and operating fixed-site diagnostic imaging facilities. As of
December 31, 1998, the Company operated 11 fixed-site diagnostic imaging
facilities. Almost all of the Company's facilities provide magnetic resonance
imaging ("MRI") which 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.
Five of the Company's facilities also provide additional imaging technologies,
including computerized axial tomography ("CAT"), nuclear medicine, bone
densitometry, mammography, ultrasound and x-ray/fluoroscopy services (each of
these facilities is hereinafter referred to as a "Multi-Modality" facility and
each of the facilities which only provide MRI is hereinafter referred to as an
"MRI" facility). See "--The Facilities."
The Company has decided to expand its strategic focus into the area of
physician practice management and, in connection therewith, the Company has
entered into 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 ("MSO") formed and owned by Pavonia Medical
Associates, P.A. ("PMA") and Liberty HealthCare Systems, Inc. ("Liberty"). JIHP
provides management services to PMA. PMA, one of the largest independent,
multi-specialty practices in New Jersey, is comprised of over 55 physicians
servicing over 75,000 patients in 5 locations in New Jersey. In consideration
for the acquisition, the related letters of intent provide, among other things,
that the Company will pay and/or issue to PMA and Liberty, in the aggregate, (i)
$7.0 million in cash, (ii) 5.5 million shares of the Company's common stock,
$.01 par value per share ("Common Stock") (500,000 shares of which may be
subject to certain post-closing adjustments), and (iii) convertible redeemable
preferred stock of the Company having an aggregate liquidation preference of
$5.0 million. 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 transaction is subject to several material conditions
including, among others, the receipt of necessary financing, the approval of the
issuance of the stock by 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 completed, the Company expects, subject to the satisfaction
of all conditions, to consummate the acquisition during 1999. A merger agreement
with PMA (the "PMA Merger Agreement") was executed as of January 29, 1999
(subject to the approval
3
<PAGE>
of its physician stockholders), and the Company hopes to execute a merger
agreement with Liberty within the next several weeks.
In furtherance of its objective of establishing physician practice
management operations in New Jersey, New York and Philadelphia, Pennsylvania,
the Company is assessing additional affiliations with several primary care and
multi-specialty physician practices, as well as the faculty practices of certain
hospitals. Although the Company has entered into various letters of intent, the
Company has not entered into any definitive acquisition agreements (other than
the PMA Merger Agreement) with respect to its physician practice management
operations. Given the significant declines in the financial performance of many
of the leading publicly-traded physician practice management companies during
the past year, the availability of financing for these ventures has been
extremely limited. This constriction in the financing market has had, and is
likely to continue to have, an adverse impact on the Company's ability to effect
its physician practice management acquisitions.
The Company's 11 fixed-site facilities are as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
COMMENCEMENT
OF OPERATIONS
NAME LOCATION BY THE COMPANY SERVICES
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kings Medical Diagnostic 2095 Flatbush Avenue October 1991 MRI
Imaging, P.C. Brooklyn, NY
(the "Brooklyn Facility")
- - -----------------------------------------------------------------------------------------------------------------------
Edgewater Diagnostic Imaging, 725 River Road July 1991 MRI, X-ray
P.A. Suite 103
(the "Edgewater Facility") Edgewater, NJ
(Northern NJ)
- - -----------------------------------------------------------------------------------------------------------------------
Wayne MRI, P.A.* 516 Hamburg Turnpike April 1992 MRI
(the "Wayne Facility") Suite 6
Wayne, NJ
(Northern, NJ)
- - -----------------------------------------------------------------------------------------------------------------------
Rittenhouse Square Imaging 1705 Rittenhouse Square November 1992 MRI
Associates, L.P. * Philadelphia, PA
(the "Philadelphia Facility")
- - -----------------------------------------------------------------------------------------------------------------------
Monmouth Diagnostic Imaging, 733 Route 35 December 1993 MRI,
P.A. Ocean Township, NJ Mammography,
(the "Ocean Township" Facility) Ultrasound, CAT
Scan, X-ray -
Fluoroscopy and
Bone Densitometer
- - -----------------------------------------------------------------------------------------------------------------------
4
<PAGE>
- - -----------------------------------------------------------------------------------------------------------------------
M.R. Radiology Imaging of 45 Beekman Street November 1997 MRI and
Lower Manhattan, P.C. New York, NY Ultrasound
(the "New York City Facility")
- - -----------------------------------------------------------------------------------------------------------------------
Bloomfield Diagnostic Imaging 350 Bloomfield Avenue October 1998 MRI, X-ray,
(the "Bloomfield Facility") Bloomfield, NJ Ultrasound and
(Northern, NJ) CAT Scan
- - -----------------------------------------------------------------------------------------------------------------------
Echelon Diagnostic Imaging 108 Somerdale Road October 1998 MRI
(the "Voorhees Facility") Voorhees, NJ
(Southern, NJ)
- - -----------------------------------------------------------------------------------------------------------------------
Echelon Diagnostic Imaging 600 Somerdale Road October 1998 Mammography,
(the "Voorhees Multi-Modality Voorhees, NJ Ultrasound, X-ray
Facility"} (Southern, NJ) - Fluoroscopy,
Nuclear Medicine
and CAT Scan
- - -----------------------------------------------------------------------------------------------------------------------
Mainland Diagnostic Imaging 1418 New Road October 1998 MRI, X-ray,
(the "Mainland Facility") Northfield, NJ Mammography,
(Southern, NJ) Bone
Densitometry,
Ultrasound and
CAT Scan
- - -----------------------------------------------------------------------------------------------------------------------
Monroe Diagnostic Imaging 640 Black Horse Pike October 1998 Mammography, X-
(the "Williamstown Facility") Williamstown, NJ ray, Ultrasound
(Southern, NJ) and CAT Scan
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Denotes facility operated as a joint venture with the Company acting as the
general partner. The Company owns 51% and 60%, respectively, of the Wayne
Facility and Philadelphia Facility.
In the operation of its facilities, the Company generally licenses use
of its diagnostic imaging equipment to health care providers, consisting
primarily of individual physicians and private group medical practices ("Medical
Licensees"), in New Jersey, New York and Pennsylvania who, in turn, use the
equipment to provide diagnostic imaging services to their patients or patients
of other health care providers with whom they or the Company have contractual
relationships. The Company provides administrative, management and billing and
collection services, as well as equipment and real property, to the Medical
Licensees, and they typically pay the Company a flat fee on a monthly, daily or
per scan basis for the use of the equipment and property, and an administrative
charge for these support services. The Medical Licensees utilizing the Company's
services have a need for diagnostic imaging 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. For certain licensed facilities in New Jersey owned by the Company, the
Company
5
<PAGE>
is itself the provider of the diagnostic imaging services and, as such, directly
bills and collects from patients and third party payors for such services. In
such facilities, qualified radiologists are either employed by the Company or
are retained and compensated by the Company as independent contractors.
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 HMOs ("Health
Maintenance Organizations") has resulted in lower reimbursement rates for
medical procedures and an increased demand for lower overall health care costs.
The Company is addressing this trend by actively pursuing contracts that contain
favorable reimbursement rates and eliminating agreements with payors who have
reduced reimbursement rates significantly below the current Medicare fee
schedule. See "--Managed Care."
MRI TECHNOLOGY
MRI, which was first introduced for medical imaging in 1983, uses radio
frequencies and high strength magnetic field technology to produce images in all
anatomic planes and of varying thin sections or slices. Once acquired, these
images are viewed on video screens and stored on x-ray film and optical disc
storage for long term retention. MRI has become a powerful tool for diagnostic
imaging because it does not use harmful ionizing radiation to provide images
(unlike CAT scans and conventional X-ray studies) and it permits visualization
of small, similar structures without surgical intervention. It has also proven
to be superior in certain circumstances to other diagnostic imaging procedures
for diagnosing many medical problems by providing superior contrast resolution
between normal/abnormal structures and has become the modality of choice for the
diagnosis of lesions and tumors of the central nervous system and muscular
system, as well as for orthopedic applications such as tears of structures in
the joints. Among other things, it is also being used to monitor brain activity
(e.g., magnetic resonance spectroscopic imaging) with the hope of gaining
greater insight into abnormalities such as epilepsy, AIDS, brain tumors and
Alzheimer's disease, and in the diagnosis of gynecologic disorders, such as
recurring endometriosis, liver metastases, pelvic diseases and certain vascular
abnormalities through the use of magnetic resonance angiography.
As new uses of MRI are being discovered (including breast imaging for
implants and carcinomas, as well as abdominal and cardiac imaging),improvements
also are being made to existing MRI equipment in order to support such new uses
as well as enhance current applications. Fast spin echo ("FSE")has been
developed to increase the speed at which a scan may be performed without
compromising quality, thereby increasing patient comfort, patient throughput and
the ability to visualize pathology more effectively. In addition, the surface
coils which act as an antenna to the MRI system have been improved, and
quadrature surface coils have been developed which increase the signal produced
by the system and help provide better image quality, faster scantimes and
greater information available to the radiologist for interpretation."Open" MRI
systems are now being provided for large and claustrophobic patients and
additional improvements are being made to the surface coils to provide even
higher quality scans.
6
<PAGE>
The Company upgrades its equipment as new improvements are offered in
order to provide state-of-the-art diagnostic imaging 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. These systems also have been
upgraded to include quadrature surface coils to provide superior image quality.
In addition, the Company has installed new Hitachi Airis MRI units at its Ocean
Township Facility and Edgewater Facility which are "open" to help eliminate
patient claustrophobia and facilitates performing procedures on large patients.
The magnet used in these units is 1.5 times stronger than most other
open-air-type MRIs, resulting in greater image detail, comparable to that of
tunnel-type "closed" units. The Company plans to continue to provide the medical
community with state-of-the-art diagnostic imaging equipment.
7
<PAGE>
THE FACILITIES
Brooklyn Facility
The Company's longest operating facility is the Brooklyn Facility. The
Company leased the facility from DMR Associates, L.P., a limited partnership
("DMR"), until September 1998. DMR is owned by MR General Associates, L.P., as
the general partner ("MR Associates"), and DVI Financial Services Inc. ("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. DFS is a former significant stockholder of the Company.
See "Item 13. Certain Relationships and Related Transactions." In September
1998, DMR sold the facility to an affiliate of DFS, and in turn such DFS
affiliate entered into a lease agreement with the Company. In addition, the
Company leases the MRI equipment at such facility from DFS. The Company
subleases the premises and the necessary MRI equipment to Kings Medical
Diagnostic Imaging, P.C. ("Kings Medical"), one of the Company's Medical
Licensees. 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 Beran Facilities
On October 2, 1998 (effective October 1, 1998), HIS Imaging Co., a
wholly-owned subsidiary of the Company, acquired (the "Beran Acquisition") all
of the assets and business of, and assumed certain liabilities relating to (i)
Echelon MRI, P.C., which operated the Voorhees Facility, (ii) Mainland Imaging
Center, P.C., which operated the Mainland Facility and a radiology facility in
Ocean City, New Jersey, (iii) Bloomfield Imaging Associates, P.A., which
operated the Bloomfield Facility, (iv) North Jersey Imaging Management
Associates, L.P., which managed the Bloomfield Facility and (v) Irving N. Beran,
M.D., P.A., which operated the Voorhees Multi-Modality Facility and the
Williamstown Facility and a radiology facility in each of Atco and Williamstown,
New Jersey (collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (x) the assumption of certain obligations
and liabilities of the Beran Entities, (y) cash in the amount of $11.5 million
and (z) the issuance of 887.385 shares of Series D Cumulative Accelerating
Redeemable Preferred Stock of the Company (the "Series D Stock") having an
aggregate liquidation preference of $9,317,542.50 (i.e., $10,500 per share
liquidation preference). The purchase price was subject to an adjustment based
on the value of the Beran Entities' accounts receivable as of the closing date
and, in accordance therewith, 15.642 shares of Series D Stock having an
aggregate liquidation preference of $164,241 were transferred back to the
Company and canceled. The Company also assumed certain contractual obligations
of the Beran Entities on a going-forward basis under the contracts assigned to
the Company in the Beran Acquisition (including operating leases and equipment
maintenance agreements). The Company also loaned the Beran Entities an aggregate
of $2.5 million, which loan bears interest at 8% per annum and matures upon the
terms and conditions contained in the related promissory notes, but in no event
later then December 31, 1999. The Company used the proceeds of a $14.0 bridge
loan from DFS to pay the cash portion of the purchase price and to fund the loan
to the Beran Entities (the
8
<PAGE>
"DFS Bridge Loan"). The Series D Stock accrues dividends at the rate of 8% of
the liquidation preference and increases by an additional 2% upon each three
month anniversary of the date of issuance; provided, however, that in no event
will the dividend rate be in excess of 15% of the liquidation preference. All
accrued and unpaid dividends are payable quarterly in cash commencing January
10, 1999. After March 1, 1999, the holders of the Series D Stock became entitled
to convert the Series D Stock into Common Stock equal to the quotient obtained
by dividing (A) the aggregate liquidation preference of the Series D Stock being
converted by (B) $1.049 (subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the conversion of
all outstanding shares of Series D Stock); provided that until the Company
obtains stockholder approval of the issuance of the Series D Stock, the holders
of the Series D Stock only will be able to convert into Common Stock
representing in the aggregate 19.9% of the outstanding Common Stock as of
October 2, 1998 (i.e., approximately 2,094,768 shares). The holders of the
Series D Stock are entitled to vote, on an as-converted basis, with the holders
of the Common Stock as one class on all matters submitted to a vote of the
Company stockholders; provided that until the Company obtains stockholder
approval of the issuance of the Series D Stock, the holders of the Series D
Stock will not be able to exercise their aggregate voting rights in excess of
19.9% of the outstanding Common Stock as of October 2, 1998 (i.e., approximately
2,094,768 shares). The Company may redeem the Series D Stock, in whole but not
in part, at any time at its liquidation preference plus all accrued and unpaid
dividends to the date of redemption. The Company expects to solicit stockholder
approval of the issuance of the Series D Stock during the second quarter of
fiscal 1999.
The Company has recorded the Beran Acquisition in accordance with the
purchase method of accounting whereby assets acquired and liabilities assumed
were recorded at their fair values. The fair value of accounts receivable
acquired in the Beran Acquisition have been recorded at their estimated net
collectible value based upon the Company's analysis of the number of open
accounts at that date, the past collection experience of the Beran Entities, the
Company's experience in collecting similar accounts, and actual collections
subsequent to October 1, 1998. As collections are made on these acquired
accounts receivable, the carrying value thereof is reduced. If the Company's
actual experience in collecting these receivables differs significantly from the
Company's estimates, the Company will adjust the estimated net collectible value
of the acquired accounts receivable through an adjustment to goodwill. The
excess of the cost of the acquisition (including transaction costs) over the
fair value of net assets acquired is reflected as goodwill in the accompanying
balance sheet of the Company as of December 31, 1998 and is being amortized over
a period of 20 years.
New York City Facility
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 operated the 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 1.0 million shares of Common
9
<PAGE>
Stock, and (iv) the issuance of a $300,000 promissory note that was due and paid
on December 31, 1997. The Company also assumed certain contractual obligations
of NYC MRI on a going-forward basis under the contracts assigned to the Company
in the acquisition (including operating leases and equipment maintenance
agreements). The Company allocated the total purchase price for the acquisition
of the New York City Facility 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 with NYC MRI which, among other things, provides that Dr.
Braff will continue to provide all medical services at the New York City
Facility. Dr. Braff is a former director of the Company and currently is the
Medical Director of the Company and the supervising radiologist, majority
shareholder and officer of three of the Company's Medical Licensees: Monmouth
Diagnostic Imaging, P.A. ("Monmouth"), Kings Medical and NYC MRI. See "Item 13.
Certain Relationships and Related Transactions."
Philadelphia Facility
The Philadelphia Facility, which has been operating since November
1992, continues to operate at a loss resulting in negative cash flows. The
overall operating results of the Company were affected during the years ended
December 31, 1998, 1997 and 1996 due to the operational results of the
Philadelphia Facility which incurred losses of $54,064, $175,247 and $374,969,
respectively. 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's expanded advertising and marketing efforts on
behalf of the Philadelphia Facility has resulted in a significantly reduced
loss for the years ended December 31, 1998 and 1997 as compared to December 31,
1996. The Company is negotiating the purchase of the present limited partners'
interests in such joint venture which it expects to consummate during the
second quarter of fiscal 1999. However, there can be no assurance that these
negotiations will be successfully concluded.
Catonsville Facility
In July 1994, the Company's MRI facility in Catonsville, Maryland (the
"Catonsville Facility") ceased operations. This facility was operated by a joint
venture in which the Company owned 60% and the limited partners owned the
remaining 40%. The Company entered into a sublease arrangement with a radiology
group, of which one of the members was among the limited partners in this joint
venture, to sublease the medical equipment and facility from the Company. This
sublease arrangement commenced April 1, 1995 and provided for 60 monthly
payments of $10,000 commencing on June 15, 1995. In addition, the sublessee was
responsible for paying the rent for the office space and for all future
operating costs incurred. In December 1998, the Company
10
<PAGE>
terminated the sublease arrangement and sold the medical equipment to the
sublessee for an aggregate of $189,000, representing: (i) a payment for the
Company's agreement to terminate the sublease agreement ($116,400), (ii)
reimbursement for personal property tax payments made by the Company on the
sublessee's behalf ($42,600) and (iii) the purchase price for the medical
equipment ($30,000). As a result of the cessation of the sublease arrangement
and sale of the equipment, the Company recorded a gain on sale of property,
plant and equipment of $166,170 in December 1998, which primarily is due to a
reversal of an early sublease termination reserve established in 1994 and the
recoupment of taxes paid by the Company on the sublessee's behalf.
Secaucus Facility
In November 1996, the Company, with Practice Management Corporation
("PMC"), formed a limited liability company, of which the Company owned 60% and
PMC owned 40% , to provide on-site diagnostic imaging services to Meadowlands
Hospital Medical Center (the "Secaucus Facility") located in Secaucus, New
Jersey. In forming this joint venture, the parties agreed that the Company would
fund the working capital of the joint venture and PMC would provide marketing
services. The facility commenced operations on May 8, 1997 utilizing one of the
Company's mobile MRI units. Based upon losses sustained at such site and the
expectation of continuing losses, the Company decided to sell the mobile MRI
unit and to close the Secaucus Facility. In order to facilitate the wind-down of
operations, in March 1998, an agreement was reached whereby the Company acquired
(for nominal consideration) the 40% joint venture interest owned by PMC
effective as of December 31, 1997. In May 1998, the Company sold this mobile MRI
unit to an unaffiliated third party. As a result of the sale of the mobile MRI
unit, the Company recorded a gain on sale of property, plant and equipment of
$151,767, which was recorded in the second quarter of fiscal 1998.
MOBILE MRI DIVISION
Prior to September 1994, the Company operated four mobile MRI units in
addition to its fixed-site facilities. Effective September 1, 1994, the Company
entered into an arrangement 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 such sublessee, Omni
Medical Imaging, Inc. (the "sublessee"), has been an officer of the Company
since April 1997 and is the brother of 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 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 arrangement, the Company recorded a reserve for
subleased equipment in fiscal 1994 in the amount of $2,375,000. At December 31,
1994, the sublessee was current with its monthly payment obligations. During
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. Due to the
sublessee's failure to remain current
11
<PAGE>
with its 1995 monthly payment obligations in December 1995, the Company
repossessed and sold one of its mobile MRI units for $625,000. 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
attributable to such mobile MRI unit and the sale proceeds received. 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. At such time, the sublessee owed the Company
approximately $456,000. In an attempt to satisfy the past due amounts, the
sublessee and its customers provided the Company with cash (aggregating
approximately $75,000) and additional patient receivable claims (aggregating
approximately $504,000) 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. At such
time, the sublessee owed the Company approximately $532,000. In August 1996, the
Company sold another one of its mobile MRI units. There was no significant gain
or loss resulting from such disposition. In October 1996, the Company entered
into an agreement with certain other creditors of the sublessee (the "Creditors
Agreement") with respect to the collection and application of the sublessee's
receivables. At December 31, 1996, in connection with collection efforts on
behalf of the parties to the Creditors Agreement, together with the Company's
intended use of one of its two remaining mobile MRI units at the Secaucus
Facility, the Company recorded a recovery on accounts receivable (approximately
$392,000) relating to a provision for bad debts that had been recorded at the
time of the restructuring of the Company's mobile MRI operations. In May 1997,
the Company sold one of its two remaining mobile MRI units to an unaffiliated
third party for $105,000. As of December 31, 1997 and 1998, the amount of the
sublessee's past due indebtedness was approximately $347,000 and $257,000,
respectively (which amount has been fully reserved for by the Company in its
financial statements). As previously discussed, in May 1998 the Company sold its
remaining mobile MRI unit to an unaffiliated third party. See "Item 1. Business
- - - The Facilities - Secaucus Facility." At December 31, 1998, the Company
reevaluated its future obligations under a note payable which was due (and paid)
in February 1999 relating to this mobile equipment and concluded that the
remaining reserve at December 31, 1998 was adequate.
RELATIONSHIP WITH MEDICAL LICENSEES
As previously noted, the Company generally leases its medical equipment
and premises (directly or through joint ventures) to Medical Licensees primarily
located in New Jersey, New York and Pennsylvania who, in turn, use the equipment
to provide services to their patients and patients of 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 years ended December 31, 1998, 1997 and 1996, the Company had five Medical
Licensees which accounted for more than 5% of its total revenues: Monmouth,
which accounted for 27%, 30% and 30% of total revenues in fiscal 1998, 1997
12
<PAGE>
and 1996, respectively; Edgewater Diagnostic Imaging, P.A. ("Edgewater"), which
accounted for 14%, 18% and 19% of total revenues in fiscal 1998, 1997 and 1996,
respectively; Wayne MRI, P.A. ("Wayne"), which accounted for 14%, 17% and 21% of
total revenues in fiscal 1998, 1997 and 1996, respectively; Rittenhouse Square
Imaging Associates, L.P. ("Rittenhouse"), which accounted for 9%, 15% and 12% of
total revenues in fiscal 1998, 1997 and 1996, respectively; and Kings Medical,
which accounted for 6%, 12% and 18% of total revenues in fiscal 1998, 1997 and
1996, respectively. To the extent the Company were to lose any of its existing
Medical Licensees, the impact on revenues and operations would not be materially
affected because the Company believes it will be readily able to replace any
such Medical Licensee.
Many health care providers do not own MRI or other diagnostic imaging
technology equipment because of insufficient patient volume to justify the costs
associated with the acquisition and operation of the technology, 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 patient
volume and resources to purchase an in-house MRI unit or other diagnostic
imaging technology may still contract for the use of the Company's services.
Among the reasons for such use of the Company's MRI units and other technologies
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 MRI unit or other technology
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
As the number of managed healthcare enrollees continues to proliferate
in the New Jersey Tri-State region, radiology providers face new opportunities
and challenges as they negotiate and manage various contractual relationships.
In the past few years, consolidation and integration among hospitals and health
systems has accelerated, as with traditional insurers and HMOs. In heavily
concentrated markets, some radiology practices have received more than 20% to
30% of their patient volume from capitated managed care contracts.
What the future holds for health care reform is uncertain. However,
many imaging centers have tried to prepare themselves for anticipated reforms.
Many are focusing on forming alliances with insurance companies and health care
networks in order to be assured a steady patient base. In an effort to form
these alliances, these imaging centers are trying to cut their costs and offer
the highest quality of care available.
13
<PAGE>
With its extensive experience of negotiating over 150 managed care
contracts, the Company believes it is better positioned than most of its
competitors to compete in the fast growing managed care market. In 1998, over
27% of the Company's total revenue was derived from its managed care contracts.
In addition, the Company has gained a significant market share at the Ocean
Township Facility through its capitated agreement with Aetna U.S. Healthcare. To
date, this facility has provided services to nearly 17,000 of the 40,000 Aetna
U.S. Healthcare members in the county in which it is located. Although the payor
mix varies with each of the Company's facilities, managed care revenue as a
percentage of total revenue has increased each year. The Company is in the
process of negotiating additional capitated arrangements with several major
HMOs, as well as aggressively pursuing direct fee-for-service contracts with
self-insured employers and unions. The Company believes it is poised for long
term success and growth in the managed care industry by continuing to maintain
and adapt to the changing health care market place.
MARKETING/SALES
As of December 31, 1998, the Company employed one full-time marketing
and managed care executive, one part-time assistant director of marketing and
nine full-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
enters into excess capacity arrangements whereby the Company provides, during
"off-hours", the use of certain of its facilities and all ancillary services
with respect to such facilities to various licensees. The Company recognizes
revenue on a fixed fee per procedure basis from these arrangements.
A significant resource for the Company has been existing customer
referrals. Based on historical data, there are approximately over 13,000
physicians who have referred patients to the Company's 11 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 advertisements, as a
marketing tool to attract not only physicians, but the patient population as
well.
COMPETITION
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 diagnostic imaging 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 and other multi-modality
facilities in New Jersey, New York and Pennsylvania, the Company's service
areas. Moreover, certain of these competitors have substantially greater
financial resources than those of the Company, which may
14
<PAGE>
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 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 satisfaction of certain licensure and
certification requirements with the state/local health departments, which are
not necessarily easily obtained. 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 licensure and
certification requirements and other regulatory or legislative constraints.
EQUIPMENT
The diagnostic imaging equipment currently operated by the Company is
located in fixed-site facilities, is technologically sophisticated and complex,
requires regular maintenance and is subject to unpredictable malfunctions and
breakdowns. The Company contracts with equipment manufacturers for comprehensive
maintenance programs for its equipment 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,
medical 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 equipment. However, these guarantees are not expected to
substantially compensate the Company for loss of revenue for downtime, scheduled
maintenance and software updates (upgrading of the computer program which aids
the generation of the scanned image). The Company carries business interruption
insurance which provides for $750,000 of coverage for each fixed-site facility,
after five days of downtime, to help protect itself from unexpected long-term
equipment failures.
15
<PAGE>
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 in-patients 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 diagnostic imaging facilities 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 MRI scans generally range between $482 and $1,212,
depending on the type of scan performed. Because Medicare reimbursement for
diagnostic imaging 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 facilities may be prevented, to the
extent they rely on Medicare reimbursement, from using diagnostic imaging
equipment 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, and revenues associated with Medicare claims
accounted for less than 8% of the Company's revenues for the year ended December
31, 1998.
Currently, DRGs are not applicable to out-patient services that a
physician may provide to non-Medicare patients at a diagnostic imaging facility.
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 diagnostic imaging services 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." Some insurers have adopted DRG-type
reimbursement schedules and others may be investigating the possibility of
implementing such schedules, however, 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 a Medical 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.
GOVERNMENT REGULATION
Licensing and Certification Law
All states in which the Company currently operates have laws that may
require licensing of facilities and personnel, compliance with standards of
testing and obtainment of Certificates of Need ("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
diagnostic imaging
16
<PAGE>
equipment. At the present time, the licensing and certification laws of New
Jersey, New York and Pennsylvania 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 law 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 acquisition of MRI
equipment to be placed outside of a hospital or other licensed health care
facility which is leased and operated by an independent physician or group of
physicians (such as the New York City Facility) 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. In New Jersey, CON approval formerly
required for MRI equipment has been eliminated; however instead New Jersey has
implemented licensure requirements for most facilities offering MRI services.
The licensure requirements include standards for building compliance, equipment
compliance and certain operational standards. The Company believes it is in
compliance with these standards at all sites it operates in New Jersey. The
certification and licensure requirements of these states can serve as a barrier
to entry 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 certain federal certification
requirements. For example, the Ocean Township Facility, which offers
mammography, must be certified by the federal government, which certification
has been received. Further, additional certification requirements may affect the
Company's facilities, but such certifications generally will follow specific
standards and requirements set forth in public documents.
Although the Company believes that currently it has obtained all
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 all of the states in which the
Company currently 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 interpreted by both the courts and regulatory authorities. The
Company's strategy in its expansion into physician practice management is to
acquire certain assets and assume certain
17
<PAGE>
liabilities of, and to enter into service agreements with, affiliated physicians
and other health care practitioners. Pursuant to these 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
corporate 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 the 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.
Several of the diagnostic imaging facilities in New Jersey owned by the
Company have sought and been granted a license to operate MRI and other
diagnostic imaging modalities by the State. At such facilities, for billing
purposes the service provider is deemed to be the facility owner and bills are
issued in the name of such owner. Irrespective of these billing arrangements,
the radiologists or other licensed physicians who furnish professional services
at the facility exercise complete independence in medical decisions and medical
oversight of the facility.
DRG Method of Reimbursement
At present, the Company receives little reimbursement for MRI and other
radiology services provided on behalf of hospital inpatients. As such, little of
its reimbursement comes from a DRG-type system. The Company does not anticipate
that there will be an appreciable increase in hospital inpatient imaging
services provided by the Company or any other imaging services that would come
under a DRG-type reimbursement system. No insurers or other payors with which
the Company does business has adopted DRG-type reimbursement. The Company has
relationships with several hospitals for inpatient services where the hospital
is reimbursed under the DRG system, but the Company receives payment on a
discounted fee for service basis, not under a DRG. It is impossible for the
Company to estimate the impact on the Company if payors try to implement a
DRG-type system, as radiology is only one component of a bundle of services that
would likely be covered. See "--Reimbursement."
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 patient
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.
18
<PAGE>
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
U.S. Department of Health and Human Services ("HHS") 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 facilities qualify for protection under the applicable safe harbor
protections, given the complexity of these regulations there can be no assurance
that all applicable provisions are being satisfied. 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,
prohibit physicians (including medical doctors, osteopaths, dentists,
chiropractors and podiatrists) from referring their patients for the provision
of "designated health services" (including diagnostic imaging, clinical
laboratory, 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 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
affiliated 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 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
19
<PAGE>
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 a qui tam suit) and such private citizens could receive up
to 30% 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 taken steps to
insure 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 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 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.
20
<PAGE>
Insurance Laws and Regulations
Certain states have enacted statutes or adopted laws and 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. If these Laws were applicable to the Company, failure to comply
with them could have a material adverse effect on the Company's business,
financial condition and results of operations. However, the states in which the
Company operates provide exemptions from applicable insurance Law requirements
where partial (and in certain instances, full) risk is borne by a licensed
medical provider. In New Jersey, where the Company conducts the majority of its
operations, state law specifically permits a licensed medical provider to assume
financial risk as part of his/her provision of medical services. If these
arrangements were to become a larger part of the Company's reimbursement for
health care services, state laws currently in place in jurisdictions where the
Company conducts business generally provide significant latitude from insurance
requirements.
EMPLOYEES
As of December 31, 1998, the Company had 136 full-time employees,
including four radiologists, 33 trained diagnostic imaging technologists, one
marketing and managed care executive, nine sales representatives, and 87
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 does not own any real property but leases space for its
corporate offices in Red Bank, New Jersey, and its 11 facilities (one of which
contains the Company's billing office). The addresses of these offices and
facilities are as follows:
Corporate Offices
- - -----------------
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, NJ 07701 (approximately 7,400 square feet)
Facilities
- - ----------
Brooklyn Facility
2095 Flatbush Avenue
Brooklyn, New York 11234 (approximately 5,000 square feet)
Edgewater Facility
725 River Road, Suite 103
21
<PAGE>
Edgewater, NJ 07020 (approximately 2,000 square feet)
Wayne Facility
516 Hamburg Turnpike
Wayne, NJ 07470 (approximately 700 square feet)
Philadelphia Facility
1705 Rittenhouse Square
Philadelphia, PA 19103 (approximately 4,500 square feet)
Ocean Township Facility (which contains the billing office)
733 Highway 35
Ocean Township, NJ 07712 (approximately 9,200 square feet)
New York City Facility
45 Beekman Street
New York, NY 10038 (approximately 4,000 square feet)
Bloomfield Facility
350 Bloomfield Avenue
Bloomfield, NJ 07003 (approximately 5,500 square feet)
Voorhees Facility
108 Somerdale Road
Voorhees, NJ 08043 (approximately 7,700 square feet)
Voorhees Multi-Modality Facility
600 Somerdale Road
Voorhees, NJ 08043 (approximately 2,400 square feet)
Mainland Facility
1418 New Road
Northfield, NJ 08225 (approximately 10,100 square feet)
Williamstown Facility
640 North Black Horse Pike
Williamstown, NJ 08094 (approximately 2,700 square feet)
Management believes that its offices and facilities are suitable for the
purposes for which they are used.
22
<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
The Company's 1998 Annual Meeting of Stockholders was held on December
22, 1998. At the meeting, the following directors were elected for a one year
term and until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
NAME FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- - ---- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Shawn A. Friedkin 12,414,183 84,700 0 0 0
Manmohan A. Patel 12,301,183 197,700 0 0 0
Joseph J. Raymond 12,420,183 78,700 0 0 0
Michael S. Weiss 12,414,183 84,700 0 0 0
Elliott H. Vernon 12,418,283 80,600 0 0 0
</TABLE>
The following additional matters were voted upon at the Annual Meeting:
The ratification and approval of an option award to an executive officer
of HIS PPM Co., a wholly-owned subsidiary of the Company ("HIS PPM"), was
approved by the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- - --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
7,000,723 399,682 0 31,309 5,067,169
</TABLE>
The approval of an amendment to the Company's 1997 Omnibus Incentive
Plan (the "Omnibus Plan") increasing the maximum number of shares of Common
Stock that may be issued pursuant to awards to any participant under such plan
from 500,000 shares to 600,000 shares in any given fiscal year was approved by
the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- - --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
12,017,842 439,341 0 41,700 0
</TABLE>
The approval of certain amendments to the Company's 1996 Stock Option
Plan for Non-Employee Directors (the "Directors Plan"), among other things,
increasing the maximum number
23
<PAGE>
of shares of Common Stock that may be subject to options under such plan during
its term from 250,000 shares to 750,000 shares, was approved by the following
vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- - --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
6,996,323 402,691 0 32,700 5,067,169
</TABLE>
The ratification and approval of an option award to a director of the
Company was approved by the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- - --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
6,645,273 564,141 0 222,300 5,067,169
</TABLE>
24
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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, 1997 through March 26, 1999 based on
transaction data as reported by The Nasdaq National Market.
High Low
---- ---
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 $ 1-31/32 $ 31/32
Second Quarter $ 1-23/32 $ 1
Third Quarter $ 1-23/32 $ 5/8
Fourth Quarter $ 1-5/16 $ 23/32
Year Ending December 31, 1999
-----------------------------
First Quarter (through March 26, 1999) $1-3/8 $ 31/32
As of March 26, 1999, there were 73 holders of record of the Common
Stock. The Company believes that there were approximately 1,200 beneficial
holders of the Common Stock as of such date.
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.
As previously noted, the Company issued an aggregate of 887.385 shares
of Series D Stock having an aggregate liquidation preference of $9,317,542.50
(i.e., $10,500 per share liquidation
25
<PAGE>
preference) in October 1998 in connection with the Beran Acquisition. See "Item
1. Business - The Facilities - The Beran Facilities." In addition, upon
consummation of the Beran Acquisition, certain transferees of Biltmore
Securities, Inc. ("Biltmore") were issued 750,000 shares of Common Stock under a
consulting agreement between Biltmore and the Company (see "Item 13. Certain
Relationships and Related Transactions") and a restricted stock award to the CEO
of 250,000 shares of Common Stock vested (see "Item 11. Executive
Compensation"). Moreover, in connection with the bridge financing provided by
DVI Financial Services Inc. ("DFS") with respect to the Beran Acquisition, the
Company entered into a consulting agreement with DFS and issued DFS stock
options to purchase an aggregate of 500,000 shares of Common Stock. See "Item
13. Certain Relationships and Related Transactions." Each of these issuances
were deemed to be exempt from registration under the Securities Act of 1933 in
reliance of Section 4(2) of such Act as a transaction by an issuer not involving
any public offering.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is provided
for the Company.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998(A) 1997(B) 1996 1995 1994
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
- - ---------------
Revenues $ 16,451,057 $ 10,247,940 $ 9,787,591 $ 9,249,284 $ 11,398,794
Income/(loss) before minority
interests and income taxes $ 2,738,600 $ (331,094) $ (396,256) $ 33,227 $ (5,769,180)
Net income/(loss) available to
common shareholders $ 1,978,703 $ (804,305) $ (861,796) $ (118,430) $ (6,053,612)
Income/(loss) per common share -
basic $ 0.19 $ (0.13) $ (0.18) $ (0.03) $ (1.35)
Income/(loss) per common share -
diluted $ 0.10 $ (0.13) $ (0.18) $ (0.03) $ (1.35)
BALANCE SHEET DATA:
- - -------------------
Working capital (deficit) surplus $ (2,059,665) $ 1,152,667 $ 2,943,313 $ 1,160,247 $ 658,828
Total assets $ 42,954,653 $ 13,540,635 $ 10,566,732 $ 10,006,699 $ 13,800,753
Current portion of long-term debt,
reserves for subleased equipment
and capital lease obligations $ 15,800,300 $ 1,647,148 $ 1,252,613 $ 2,287,204 $ 4,214,804
Long-term debt, reserves for
subleased equipment and capital
lease obligations less current $ 3,440,890 $ 3,101,912 $ 2,717,216 $ 3,275,445 $ 4,778,306
portion
Stockholders' equity $ 17,749,286 $ 5,412,898 $ 5,004,807 $ 3,222,876 $ 3,341,306
</TABLE>
(A) The data relating to the year ended December 31, 1998 includes the
acquisition of the Beran Entities on October 2, 1998 (effective October 1,
1998). See "Item 1. Business - The Facilities."
(B) The data relating to the year ended December 31, 1997 includes the
acquisition of the New York City Facility on November 4, 1997. See "Item 1.
Business - The Facilities."
27
<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 FACTS
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ANY STATEMENTS
CONTAINED HEREIN WHICH ARE NOT HISTORICAL FACTS OR WHICH CONTAIN THE WORDS
"ANTICIPATE," "BELIEVE," "CONTINUE," "ESTIMATE," "EXPECT," "INTEND," "MAY,"
"SHOULD," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEW OF THE COMPANY WITH RESPECT
TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS, INCLUDING, BUT NOT LIMITED TO, THE RISK THAT THE COMPANY MAY NOT BE
ABLE TO IMPLEMENT ITS GROWTH STRATEGY IN THE INTENDED MANNER INCLUDING THE
INTEGRATION OF ACQUISITIONS, RISKS ASSOCIATED WITH THE COMPANY'S NEED TO
REFINANCE CERTAIN NEAR-TERM DEBT MATURITIES, RISKS REGARDING CURRENTLY
UNFORESEEN COMPETITIVE PRESSURES AFFECTING PARTICIPANTS IN THE HEALTH CARE
MARKET AND RISKS AFFECTING THE COMPANY'S INDUSTRY, SUCH AS INCREASED REGULATORY
COMPLIANCE, CHANGES IN PAYOR REIMBURSEMENT LEVELS AND TECHNOLOGICAL CHANGES. IN
ADDITION, THE COMPANY'S BUSINESS, OPERATIONS AND FINANCIAL CONDITIONS ARE
SUBJECT TO THE RISKS, UNCERTAINTIES AND ASSUMPTIONS WHICH ARE DESCRIBED IN THE
COMPANY'S REPORTS AND STATEMENTS FILED FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC").
For the Year Ended December 31, 1998 vs. December 31, 1997
For the year ended December 31, 1998, revenues were $16,451,057 as
compared to $10,247,940 for the year ended December 31, 1997, an increase of
approximately $6,203,000 or 61%. This increase was primarily due to (i) revenues
associated with the operation of the Beran Facilities acquired effective as of
October 1, 1998 (approximately $3,049,000), (ii) an increase in same facility
revenue (approximately $2,033,000) for facilities that were operated by the
Company for all of 1998 and 1997, (iii) revenues associated with the operation
of the New York City Facility acquired in November 1997 (approximately $805,000)
and (iv) revenues associated with its physician practice management operations
(approximately $585,000), all of which were partially offset by (x) decreased
revenues at the Brooklyn Facility (approximately $159,000) and (y) the closure
of the Secaucus Facility (approximately $151,000).
For the year ended December 31, 1998, operating expenses were
$13,712,457 as compared to $10,579,034 for the year ended December 31, 1997, an
increase of approximately $3,133,000 or 30%. This increase was primarily due to
(i) expenses incurred in connection with the operation of the Beran Facilities
acquired in October 1998 (approximately $2,070,000), (ii) increased expenses
associated with facilities that were operated by the Company for all of 1998 and
1997 (approximately $817,000) relating to an increase in the number of
procedures being performed, (iii) expenses incurred in connection with the
operation of the New York City Facility acquired in November 1997 (approximately
$610,000), (iv) expenses relating to its physician practice
28
<PAGE>
management operations (approximately $223,000), all of which were partially
offset by (x) the closure of the Secaucus Facility in May 1998 (approximately
$692,000) and (y) a decrease in non-cash compensation charges in fiscal 1998
(approximately $136,000) as compared to fiscal 1997 (approximately $399,000).
The fiscal 1998 non-cash compensation charges resulted from the grant of stock
options to (A) a director of the Company as consideration for his agreement, in
his capacity as a partner in MR Associates, to sell the Brooklyn Facility
(approximately $88,000) (see "Item 1. Business - The Facilities - Brooklyn
Facility") and (B) DFS, in its capacity as financial advisor, pursuant to a five
year consulting agreement (approximately $47,000) (see "Liquidity and Capital
Resources").
The operating results for the Company have been negatively impacted by
the Brooklyn Facility, the Philadelphia Facility and at the Secaucus Facility.
In connection with the Company's review of the viability of the Brooklyn
Facility, among other things, the Company has entered into a new lease
arrangement with respect to the lease of this facility. See "-- Liquidity and
Capital Resources of the Company." The Company is negotiating the purchase of
the limited partners' interests 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 the second quarter of fiscal 1999. See "Item 1. Business
- - - The Facilities - Philadelphia Facility." However, notwithstanding the
foregoing efforts, there can be no assurance that the purchase of the limited
partners' interests in the Philadelphia Facility or the implementation of other
revenue enhancement measures, to include expanded advertising and marketing
will be successfully concluded or that the procedures generated at the Brooklyn
Facility will be sufficient to better support the operations of the Brooklyn
Facility. In May 1998, based upon losses already sustained and the expectation
of continuing losses, the Company decided to close the Secaucus Facility and
sell the mobile MRI unit it was using at such facility. The sale enabled the
Company to substantially eliminate the overhead costs associated with the
operations of the Secaucus Facility, including the related debt service. See
"Item 1. Business - The Facilities - Secaucus Facility."
During the year ended December 31, 1997, as a corporate general partner
the Company recorded $21,626 of losses attributable to the limited partnership
interests in the Philadelphia Facility in excess of the limited partners'
capital accounts.
In furtherance of the Company's previously announced expanded strategic
focus into the area of establishing physician practice management operations in
New Jersey, New York and Philadelphia, Pennsylvania, the Company is assessing
affiliations with several primary care and multi-specialty physician practices
(including PMA), as well as the faculty practices of certain hospitals. Although
the Company has entered into various letters of intent, the Company has not
entered into any definitive acquisition agreements (other than the PMA Merger
Agreement) or administrative service agreements with respect to its physician
practice management operations. Given the significant declines in the financial
performance of many of the leading publicly-traded physician practice management
companies during the past year, the availability of financing for these ventures
has been extremely limited. This constriction in the financing market has had,
and is likely to continue to have, an adverse impact on the Company's ability to
effect its physician practice management acquisitions. See "Item 1. Business -
Introduction."
29
<PAGE>
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 facilities, as well as the commencement, through a
joint venture, of MRI services in May 1997 at the Secaucus Facility and the
acquisition of the New York City Facility 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) operating costs associated with the newly-acquired 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 with respect to an increased marketing effort
by the Company on behalf of its facilities (including the newly-acquired New
York City Facility and newly-formed Secaucus Facility) deemed to be in its
strategic interest and (iv) increased equipment operating lease expense
(approximately $192,000), all of which were partially offset by (x) 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 (y) a gain on the sale of one of the Company's mobile MRI units
to an unaffiliated third party (approximately $105,000). The fiscal 1997
non-cash compensation charges primarily resulted from the grant of (A) stock
options and a restricted stock award to the CEO in connection with an amendment
to his employment agreement which extended the term of his employment and
reduced his base salary (approximately $307,000) (see "Item 11. Executive
Compensation - Employment Contracts and Termination of Employment and Change in
Control Arrangements") and (B) stock options to Biltmore Securities, Inc.
("Biltmore") pursuant to a consulting agreement which vested upon the sale of
preferred stock in February 1996 (approximately $57,000) (see "Item 13. Certain
Relationships and Related Transactions").
During the year ended December 31, 1997, as a corporate general partner
the Company recorded $70,099 of losses attributable to the limited partnership
interests in the 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 interests in
the Philadelphia Facility not currently owned by it (i.e., the limited partners'
interests) and it expects to consummate such purchase by the second quarter of
fiscal 1999. See "Item 1. Business - The
30
<PAGE>
Facilities - Philadelphia Facility." However, there can be no assurance that
these negotiations will be successfully concluded. In addition, the operating
results for the year ended December 31, 1997 were adversely effected by
decreasing margins at the Brooklyn Facility resulting from competitive
pressures, as well as by the funding of the expenses associated with the
Secaucus Facility during its start-up phase.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
As of December 31, 1998, the Company had a cash balance of $1,506,123,
current assets of $18,808,408 and a working capital deficit of $2,059,665. The
working capital deficiency is a result of the short-term $14.0 million DFS
Bridge Loan. The DFS Bridge Loan was funded in October 1998 in connection with
the Beran Acquisition and provides for interest at 12% per annum with no payment
due in month one (i.e., November 1998), interest only payments of $140,000 in
each of months two through four (i.e., December 1998, January 1999 and February
1999), principal and interest payments of approximately $308,000 in each of
months five and six (i.e., March 1999 and April 1999) with a balloon payment of
$13,951,804 due in month seven (i.e., May 1999). The DFS Bridge Loan is expected
to be repaid from the long term financing to be obtained in connection with the
proposed acquisition of JIHP. In the event the acquisition of JIHP is not
consummated on or prior to May 1, 1999, management believes (based on
discussions to date with several financing sources) that the DFS Bridge Loan can
be refinanced on a longer term basis. Cash flows provided by operating
activities were $1,457,563 for the year ended December 31, 1998, which consisted
of (i) depreciation and amortization of $2,029,723 primarily related to
equipment acquired in the Beran Acquisition in October 1998 and in the
acquisition of the New York City Facility in November 1997 and certain new
equipment installed in the Company's existing facilities, (ii) an increase in
the allowance for doubtful accounts receivable of $1,140,000 primarily related
to the aging of accounts receivables at certain of the Company's facilities and
(iii) minority interests in joint ventures of $479,170, all of which were
partially offset by a gain on sale of property, plant and equipment of $317,937
related to the closure of the Secaucus Facility and sale of the mobile MRI unit
used at such facility in May 1998, and the termination of the Catonsville
Facility sublease and sale of the related MRI equipment in December 1998. Other
significant components of cash flows provided by operating activities include
(x) an increase in accounts receivable of $3,703,492 due to an increase in the
number of procedures being performed at the Company's facilities, as well as
those performed at the Beran Facilities acquired October 1998, and (y) an
increase in deferred transaction and financing costs of $1,069,503 due to costs
incurred in connection with the Company's expanded strategic focus into the area
of physician practice management, both of which were partially offset by an
increase in accounts payable and accrued expenses of $768,716.
Cash flows provided by investing activities were $13,311,379, which
related to the payment of the $11.5 million cash portion of the purchase price
in the Beran Acquisition and a $2.5 million loan to the Beran Entities,
partially offset by proceeds of $655,000 from the sale of the mobile MRI unit in
May 1998 which had been utilized at the Secaucus Facility and $189,000 from the
sale of previously subleased equipment at the Catonsville Facility to the
sublessee in December 1998. The
31
<PAGE>
loan to the Beran Entities bears interest at 8% per annum and matures upon the
terms and conditions contained in the related promissory notes, but in no event
later then December 31, 1999.
Cash flows provided by financing activities were $13,289,313, which
consisted primarily of borrowings of $14,000,000 and $1,376,275 under the DFS
Bridge Loan and revolving line of credit, respectively, mainly in connection
with the Beran Acquisition in October 1998, and which was partially offset by
payments on capital lease obligations of $1,908,258, payments on obligations
related to restructured operations of $49,505 and distributions to limited
partners of joint ventures of $129,199.
The Philadelphia Facility, which has been operating since November
1992, continues to operate at a loss resulting in negative cash flows. The
overall operating results of the Company were affected during the years ended
December 31, 1998, 1997 and 1996 due to the operational results of the
Philadelphia Facility which incurred losses of $54,064, $175,247 and $374,969,
respectively. 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's expanded advertising and marketing efforts on
behalf of the Philadelphia Facility has resulted in a significantly reduced
loss for the years ended December 31, 1998 and 1997 as compared to December 31,
1996. The Company is negotiating the purchase of the present limited partners'
interests in such joint venture which it expects to consummate during the
second quarter of fiscal 1999. However, there can be no assurance that these
negotiations will be successfully concluded.
In December 1997, the Company agreed to guarantee a loan $1,000,000
from DFS to JIHP (the "JIHP Loan"). This loan was funded by DFS to JIHP on
January 8, 1998 and bears interest at 12% per annum and is repayable over 48
months commencing in February 1998 at $26,330 per month. At December 31, 1998,
approximately $810,000 of the loan was outstanding. PMA and each physician
stockholder of PMA 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 PMA or
JIHP, and the acquisition by the Company of 100% of the outstanding capital
stock of JIHP is not consummated, then PMA and each physician stockholder of PMA
agree to indemnify and hold the Company harmless from and against any and all
such liabilities and obligations.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit Corporation ("DVIBC") an affiliate
of DFS, to provide a revolving line of credit to the Company. The maximum amount
available under such credit facility initially was $2,000,000, which amount
increased to $3,000,000 in October 1998 in connection with the Beran
Acquisition, with advances limited to 75% of eligible accounts receivable, as
determined by DVIBC.
32
<PAGE>
Borrowings under the line of credit bear interest at the rate of 3% over the
prime lending rate and are repayable on May 1, 1999. This revolving line of
credit is expected to be repaid from the longer-term financing to be obtained in
connection with the proposed acquisition of JIHP. In the event that this
transaction is not consummated on or prior to May 1, 1999, management believes
that the revolving line of credit can be refinanced on a longer-term basis or
the repayment due date extended. 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 are used to fund working capital needs as well as acquiring
businesses which are complementary to the Company. At December 31, 1998 and
1997, respectively, the Company had $2,838,275 and $1,462,000, respectively, of
borrowings under this credit facility.
Prior to September 1998, the Company leased the Brooklyn Facility from
DMR. For fiscal 1997 and the nine months ended September 30, 1998, the Company
paid DMR an aggregate of approximately $407,000 and $208,000, respectively, in
lease payments for the Brooklyn Facility. The Company's lease payments to DMR
were 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 an approximately $250,000 loan
(the "DFS Loan") from DFS to DMR in connection with DMR's refinancing of an
equipment lease related to this Brooklyn facility. This loan bore interest at
12% per annum and was repayable over 34 months commencing February 15, 1997. The
outstanding balance of this loan was approximately $145,000 at September 16,
1998. In September 1998, DMR sold its interest in the Brooklyn Facility to an
affiliate of DFS and used all of the proceeds of the sale to pay the mortgages
on the property. Simultaneously with, and as a condition to, such sale, such
affiliate of DFS entered into a lease arrangement with the Company for the
Brooklyn Facility providing for monthly lease payments of approximately $21,000.
As a result of such transaction, the Company has reduced its monthly lease
payments for the Brooklyn Facility by approximately $13,500 per month. See "Item
13. Certain Relationships and Related Transactions."
The Company does not expect the adoption of recently issued accounting
pronouncements to have a material effect, if any, on its financial condition or
results of operations. See Note 1 of the Notes to the Consolidated Financial
Statements of the Company and its Subsidiaries.
The nature of the Company's operations require significant capital
expenditures which generally have been financed through the issuance of debt and
capital leases and proceeds received from the sale of equity securities,
including the Company's initial public offering of Common Stock and redeemable
warrants in November 1991, the subsequent exercise of such redeemable warrants
and the sale of Series C Convertible Preferred Stock in February 1996. Continued
expansion of the Company's business, including the establishment of physician
practice management operations, will require substantial cash resources and will
have an impact on the Company's liquidity. The Company believes that cash to be
provided by the Company's operating activities together with borrowings
available from the Company's revolving line of credit will enable the Company to
meet
33
<PAGE>
its anticipated cash requirements for its present operations for the next twelve
months. Continued expansion of the Company's business, including the
establishment of physician practice management operations, will require
additional sources of financing. Both the DFS Bridge Loan and the revolving line
of credit have maturity dates of May 1, 1999. These loans are expected to be
repaid from the longer-term financing to be obtained in connection with the
proposed acquisition of JIHP. In the event that this acquisition is not
consummated on or prior to May 1, 1999, management believes that the DFS Bridge
Loan and revolving line of credit can be refinanced on a longer-term basis (and
in the case of the revolving line of credit, such repayment due date could be
further extended).
Effect of Year 2000 Issue
The "Year 2000 issue" is a result of computer programs written using
two digits instead of four digits to refer to a particular year. Therefore,
these computer programs may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activity.
The Company is currently assessing the impact of the Year 2000 issue on
its computer systems and technology, including (i) information technology such
as software and hardware relating to its medical billing systems,
accounting/finance systems, payroll systems, desktop applications and servers,
and (ii) non-information systems or embedded technology such as micro
controllers contained in various medical equipment, safety systems, facilities
and utilities (including telephones, facsimile machines, time clocks and postage
meters). The Company is evaluating its state of readiness through surveys of its
sites as well as through discussions with its significant vendors to determine
the readiness of those vendors whose failure to correct year 2000 issues would
materially impact the Company. The Company has completed its site assessments
and hopes to complete its assessment of the state of readiness of its
significant vendors by the end of the second quarter of fiscal 1999.
The cost to the Company to correct its internal Year 2000 issues is
estimated to be $88,500, consisting of $30,500 related to the upgrading of its
corporate server, $54,500 relating to the upgrading of personal computers and
$3,500 related to the upgrading of medical equipment. The Company has not yet
incurred any costs related to the Year 2000 compliance issue (other than costs
of, and time associated with, the site assessments and interfacing with vendors,
which costs are not significant and are not separately identifiable) but expects
to expense as incurred all such costs. The Company anticipates that these costs
will be funded through operating cash flows except as hereinafter described. The
Company expects to complete these upgrades by the end of the third quarter of
fiscal 1999.
In connection with the Company's strategic expansion into providing
physician practice management services, the Company has identified a state of
the art information system that is represented by the service provider to be
Year 2000 compliant which the Company intends to
34
<PAGE>
purchase and utilize in a wide area network setting upon consummation of its
acquisition of JIHP. The costs related to such purchase and the integration of
such new system are expected to be funded with the proceeds of the financing to
be obtained in connection with the acquisition of JIHP.
While the Company believes its efforts are adequate to attain internal
Year 2000 compliance, the Year 2000 readiness of its vendors may lag behind the
Company's efforts and it has not yet determined the extent to which the Company
is vulnerable to the failure of its vendors to remediate their own Year 2000
issues. There can be no guarantee that the systems of these third parties will
be timely converted or that a failure to convert will not have a material impact
on the Company's business, financial condition or results of operations. The
Company is not yet in a position to assess any such third party's compliance
efforts or the impact on the Company if any such efforts fail.
The Company's current estimates of the amount of time and costs
necessary to modify and test its computer systems and technology and determine
its state of readiness are based on management's best estimates including
assumptions regarding future events, including the continued availability of
certain resources, Year 2000 modification plans and other factors. New
developments may occur that could affect the Company's estimates of the amount
of time and costs necessary to modify and test its systems for Year 2000
compliance, including, but not limited to (i) the availability and cost of
personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the Year 2000 compliance
attained by its significant vendors. The Company has not developed, nor does it
plan to develop, any contingency plans for any unplanned noncompliance issues
from internal or external sources. There can be no guarantee any unplanned
noncompliance issues from internal or external sources will not have a material
impact on the Company's business, financial condition or results of operations.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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,
1998 and 1997 F-2
Consolidated statements of operations -
For the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31,
1998, 1997 and 1996 F-4
Consolidated statements of cash flows - For the years ended
December 31, 1998, 1997 and 1996 F-5
Notes to consolidated financial statements F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
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:
PERIOD DURING
NAME AGE WHICH A DIRECTOR
---- --- ----------------
Shawn A. Friedkin 34 May 1996 - Present
Manmohan A. Patel 49 December 1998 - Present
Joseph J. Raymond 63 December 1995 - Present
Michael S. Weiss 32 July 1998 - Present
Elliott H. Vernon 56 July 1991 - Present
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.
Manmohan A. Patel, M.D. has been the Chairman of Jersey Integrated
HealthPractice, Inc. a privately-held management services organization ("Jersey
Integrated") which provides management services to Pavonia Medical Associates,
P.A. ("Pavonia"), since August 1995. Dr. Patel was one of the founders of
Pavonia, which is the largest independent multi-specialty medical group in New
Jersey, and currently is its President. Dr. Patel is a practicing internist
specializing in pulmonary diseases and critical care and has received board
certifications in the following five specialties: internal medicine, pulmonary
diseases, critical care, emergency medicine and geriatric medicine. Dr. Patel
received his M.D. from Mahatma Gandhi Medical College in India in 1973. He was
an intern at the M.M. Medical College in India, at West Middlesex Hospital in
Britain, at Loyola University, at the Stitch Medical School in Chicago, Illinois
and at the Catholic Medical Center of Brooklyn and Queens in New York and had
fellowships with Bellevue Hospital and New York University Medical Center. Since
1994, Dr. Patel has been a member of the Board of Trustees of the Meadowlands
Hospital Medical Center in Secaucus, New Jersey, and since 1995, Dr. Patel has
been a member of the Board of Trustees of Liberty HealthCare System, Inc. which
is a New Jersey-based teaching hospital system that is affiliated with Mt.
Sinai Health System in New York.
37
<PAGE>
Joseph J. Raymond has been the Chairman, Chief Executive Officer and
President of Stratus Services Group, Inc., a staffing company, since September
1997. From July 1992 through August 1996, Mr. Raymond was the Chairman of the
Board, Chief Executive Officer and President of Transworld Home HealthCare, Inc.
("THH"), 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.
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. Mr. Raymond received an M.S. degree in management from
the New Jersey Institute of Technology ("NJIT") in 1968 and received a B.S.
degree in electrical engineering from NJIT in 1961.
Michael S. Weiss, Esq. has been a Senior Managing Director of Paramount
Capital, Inc. (a private investment banking firm) ("Paramount") and has held
various other positions with Paramount and certain of its affiliates since
November 1993. Mr. Weiss is also the Vice Chairman of Genta Incorporated and
Chairman of Procept, Inc., both of which are publicly-traded biotechnology
companies. In addition, Mr. Weiss is also a member of the Board of Directors of
AVAX Technologies, Inc., Pacific Pharmaceuticals, Inc. and Palatin Technologies,
Inc. and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a
publicly-traded biotechnology company. Additionally, Mr. Weiss is a member of
the Board of Directors of several privately-held biotechnology companies. Prior
to joining Paramount, Mr. Weiss was an attorney with the law firm of Cravath,
Swaine & Moore. Mr. Weiss received his J.D. from Columbia University School of
Law and his B.S. in Finance from the State University of New York at Albany.
Elliott H. Vernon, Esq. 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 "Item 13. 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 development 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 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,
38
<PAGE>
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
The names of the current executive officers of the Company and certain
of its subsidiaries, and certain information about them, are set forth below.
Name Age Position
---- --- --------
Elliott H. Vernon 56 Chairman of the Board, President and
Chief Executive Officer
Robert D. Baca 42 President and Chief Operating Officer
of HIS PPM Co.
Scott P. McGrory 34 Vice President, Controller
See above for information regarding Mr. Vernon.
Robert D. Baca, C.P.A., is the President and Chief Operating Officer of
HIS PPM Co., a Delaware corporation and wholly-owned subsidiary of the Company
formed to engage in the physician practice management business ("HIS PPM"). Mr.
Baca has been the President and Chief Operating Officer of HIS PPM since April
1998. From May 1997 to March 1998, Mr. Baca was the Senior Vice President of
Corporate Development for Medical Resources, Inc. ("Medical Resources"), a
publicly-held diagnostic imaging company. Mr. Baca was a founder of Capstone
Management, Inc. ("Capstone"), a diagnostic imaging company which was acquired
by Medical Resources in May 1997, and was, from June 1993 to May 1997, the Chief
Executive Officer and Chief Financial Officer of Capstone. Mr. Baca received a
M.S. in Taxation from Villanova Law School in 1985 and received a B.S. in
Accounting from the University of Delaware in 1978. Mr. Baca is a licensed
certified public accountant in the State of Pennsylvania.
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. 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
39
<PAGE>
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 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 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 1998, 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 (i) each of Michael S.
Weiss and Manmohan A. Patel did not timely file a Form 3 with respect to his
becoming a member of the Board of Directors, (ii) each of Joseph J. Raymond, a
director of the Company, and Scott P. McGrory, an executive officer of the
Company, did not timely file a Form 4 with respect to one transaction, and (iii)
Shawn A. Friedkin, Joseph J. Raymond, Manmohan A. Patel and Michael S. Weiss,
directors of the Company, did not timely file a Form 5 with respect to two
transactions each for Messrs. Friedkin, Raymond and Weiss and one transaction
for Mr. Patel.
40
<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 and its subsidiaries (whose total annual salary and bonus exceed
$100,000) for services rendered in all capacities to the Company and its
subsidiaries during fiscal 1998, 1997 and 1996 (the "named executive officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------
-------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING OTHER
POSITION YEAR SALARY ($) BONUS ($) ($)1 AWARD(S)($) OPTIONS (#) COMPENSATION
- - -------- ---- ---------- --------- ---- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ELLIOTT H.
VERNON................ 1998 $244,272 $328,829 $19,249(2) -- -- --
(Chairman of the
Board, President 1997 $100,415 -- $29,359(2) -- 500,000 $88,076(4)
and Chief Executive
Officer) 1996 $181,923 $111,710 $28,121(2) $468,750(3) 500,000 --
ROBERT D.
BACA .................... 1998 $165,808(5) $32,588 -- -- 350,000 --
(President and Chief
Operating Officer of
HIS PPM)
</TABLE>
(1) Unless noted, the value of prerequisites 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) This restricted stock award vested on October 2, 1998 upon consummation by
the Company of the Beran Acquisition. At December 31, 1998, the restricted
stock award had a value of $281,250 and at October 2, 1998, the restricted
stock award had a value of $226,563.
(4) Represents a non-interest bearing advance made to Mr. Vernon during fiscal
1997. See "Item 13. Certain Relationships and Related Transactions."
(5) Represent compensation beginning on April 13, 1998, the commencement date
of Mr. Baca's employment with HIS PPM.
41
<PAGE>
Compensation of Directors
The Company does not presently pay non-employee directors any cash fees
in connection with their services as such; however, the Company reimburses them
for all costs and expenses incident to their participation in meetings of the
Board of Directors of the Company (the "Board") and its committees. In addition,
non-employee directors are entitled to participate in the Directors Plan and the
Omnibus Plan (other than members of the Stock Option Committee). Pursuant to the
Directors Plan, stock options exercisable to purchase an aggregate of 25,000
shares of Common Stock automatically are granted to newly-elected or appointed
non-employee directors of the Company. In addition, as approved by the
stockholders at the 1998 annual meeting of stockholders, the Directors Plan
further provides that non-employee directors are entitled to receive stock
options to purchase 5,000 shares of Common Stock (the "Fee Options") for a Plan
Year (as defined in the plan) in the event no annual cash director's fees are
paid by the Company for such Plan Year and may also elect to receive the Fee
Options in lieu of any cash director's fee otherwise payable by the Company to
such director for such Plan Year. The Company has determined that no cash
director's fees will be paid for the 1999 Plan Year, and, therefore, Fee Options
have been issued to each of the current non-employee directors.
The purchase price of the shares of Common Stock subject to stock
options issued under the Directors Plan is equal to the fair market value of
such shares on the date of the grant, as determined in accordance with the plan.
Stock options awarded under the 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 first anniversary of such date (unless
such options expire earlier in accordance with their terms); provided that if
such termination is a result of such director's removal from the Board other
than due to his death or disability, all stock options will terminate
immediately.
At the 1998 annual meeting of stockholders, the stockholders also
approved an amendment to the Directors Plan providing for an additional
automatic grant of stock options to purchase 25,000 shares of Common Stock in
accordance with the terms and provisions of the Plan to the then non-employee
directors of the Company (i.e., Messrs. Friedkin, Raymond and Weiss).
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 Elliott H. Vernon, pursuant to which Mr. Vernon 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 provided
that if a "constructive termination of employment" would occur, Mr. Vernon would
be entitled to a continuation of full salary and bonus compensation for a period
equal to the
42
<PAGE>
remainder of the term. "Constructive termination of employment" was defined in
the employment agreement to include a material change in Mr. Vernon's
responsibilities, removal of Mr. Vernon from his position as the Company's
Chairman of the Board, President and Chief Executive Officer (other then for
"Cause," as defined in the employment agreement) or a "Change in Control." A
"Change in Control" was defined to include a change in the majority of the Board
which was not approved by the incumbent directors or an accumulation by any
person or group, other than Mr. Vernon, of in excess of 30% of the outstanding
voting securities of the Company. The employment agreement further provided that
a constructive termination of employment would 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 Mr. Vernon's title and/or the person or persons to whom Mr. Vernon
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.
Mr. Vernon's employment agreement provided for annual profit sharing
with other executive level employees of a bonus pool consisting of 15% of the
Company's consolidated income before taxes, determined in accordance with
generally accepted accounting principles (the "Bonus Pool"). During the first
year of the term, Mr. Vernon was entitled to not less than two-thirds of the
first $300,000 of the Bonus Pool and one-third of the next $300,000 of the Bonus
Pool, and, for the remainder of the term, he was entitled to not less than 50%
of the Bonus Pool. Mr. Vernon was entitled to monthly bonus payments, based upon
an estimate of his full years' entitlement, subject to adjustment at the end of
each fiscal quarter and at the end of each fiscal year. The entitlement of Mr.
Vernon and the other officers of the Company to the remainder of the Bonus Pool
was made by Mr. Vernon as the Chairman of the Board, President and Chief
Executive Officer of the Company, subject to any applicable employment
agreements.
As of February 1, 1996, the Company amended its then current employment
agreement with Mr. Vernon. 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 Mr. Vernon's annual base compensation was
reduced from $200,000 to $100,000. In addition, upon execution of such
amendment, options that Mr. Vernon held as of such date exercisable to purchase
an aggregate of 270,000 shares of Common Stock under the Company's 1991 Stock
Option Plan (the "1991 Plan") (at exercise prices ranging from $1.50 to $5.00
per share) were terminated and the Company granted him options exercisable to
purchase an aggregate of 500,000 shares of Common Stock at a cash exercise price
of $0.75 per share (the "Vernon New Options"). Furthermore, as additional
incentive compensation, upon execution of such amendment, Mr. Vernon received
from the Company a restricted stock award of 250,000 shares of Common Stock. The
restrictions thereon lapsed upon consummation by the Company of the Beran
Acquisition on October 2, 1998. Mr. Vernon 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 Vernon New Options.
At any time commencing April 16, 1996 and ending April 16, 2000, Mr. Vernon has
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 such shares. The Company is be obligated to file one
43
<PAGE>
such registration statement for which all expenses (other than fees of counsel
for such holders and underwriting discounts) will be payable by the Company.
Effective in November 1997, the Company entered into a new three year
employment agreement with Mr. Vernon. Pursuant to such new employment agreement,
Mr. Vernon has agreed to continue to serve as the Chairman of the Board,
President and Chief Executive Officer of the Company at an annual base of
$250,000, subject to annual increases equal to the greater of (a) 10% or (b) the
same percentage as the increase during the immediately preceding calendar year
in the United States Department of Labor, Bureau of Labor Statistics, Consumer
Price Index for All Urban Consumers (1962-1984=100) (the "CPI") or (c) such
greater amount as may be determined by the Board. The employment agreement
provides that, upon the consummation by the Company of the proposed acquisition
of JIHP, Mr. Vernon will receive (i) a cash bonus of $250,000 and (ii) stock
options to purchase 250,000 shares of Common Stock at an exercise price equal to
the average of the fair market value (as defined in the Omnibus Plan) of the
Common Stock for the ten consecutive trading days immediately preceding the
closing date of such acquisition (which stock options will vest in 25%
increments over four years from the date of grant). The employment agreement is
subject to successive one year renewal periods. The employment agreement also
provides that if Mr. Vernon resigns for "Good Reason" (as defined in the
employment agreement), Mr. Vernon will be entitled to receive a payment of 2.99
times his highest annual salary and bonus pursuant to the employment agreement.
In the event Mr. Vernon's employment is terminated for "Disability" (as defined
in the employment agreement), Mr. Vernon will continue to be paid his base
salary for a period of six months after such date (which amount will be reduced
by any disability payments received by him). Mr. Vernon's employment agreement
also provides that in the event his employment is terminated for "Cause" or
because of his death, Mr. Vernon or his designated beneficiaries, as the case
may be, shall only be entitled to be paid his base salary through the month in
which such termination occurred.
Mr. Vernon's new employment agreement also provides for annual profit
sharing with other executive level employees of a bonus pool consisting of 15%
of the Company's consolidated income before taxes. Mr. Vernon is entitled to not
less than 50% of such bonus pool, and the Board or a duly constituted committee
thereof may allocate additional amounts of the bonus pool to Mr. Vernon. It is
expected that the entitlement of the other officers of the Company to the
remainder of such bonus pool (if any) will be made by Mr. Vernon in his capacity
as the Chairman of the Board, President and Chief Executive Officer of the
Company, subject to the contractual rights of other persons entitled to
participate in such bonus pool, and to the concurrence of the Board or a duly
constituted committee thereof. In addition, the employment agreement provides
for certain insurance and automobile benefits for Mr. Vernon and his
participation in the Company's other benefit plans. The employment agreement
provides that Mr. Vernon will be entitled to reimbursement of up to $10,000 per
annum for medical expenses not covered by insurance for himself and his
immediate family. In connection with the Board's approval in November 1997 of
the material terms of this new employment agreement, Mr. Vernon was granted
stock options to purchase 471,200 shares of Common Stock under the 1991 Plan and
28,800 shares of Common Stock under the Omnibus Plan at an exercise price of
$1.0625 per share. Such options vest in 25%
44
<PAGE>
increments upon the Common Stock attaining, for a period of 20 consecutive
trading days, a fair market value (as defined in the applicable plan) of $2.50,
$5.00, $7.50 and $10.00, respectively. Notwithstanding the foregoing, each such
option shall become fully vested upon the earlier to occur of (x) the fifth
anniversary of the grant date of such option and (y) a "Change in Control" (as
defined in the Omnibus Plan).
As of April 13, 1998, HIS PPM entered into a three year employment
agreement with Robert D. Baca, pursuant to which Mr. Baca agreed to serve as its
President and Chief Operating Officer at an annual base salary of $225,000
(subject to annual increases by the same percentage as the increase during the
immediately preceding calendar year in the CPI or such greater amount as may be
determined by the Board). The employment agreement is subject to successive one
year renewal periods and provides for Mr. Baca's participation in the employee
benefit programs and plans of HIS PPM as well as a monthly automobile allowance.
As incentive compensation, in connection with the execution of the employment
agreement, Mr. Baca received (i) a stock option under the Omnibus Plan to
purchase 200,000 shares of Common Stock at an exercise price of $1.3125 per
share (which option vested 50% on the date of grant and the remaining 100,000
shares will vest in increments of one-third upon the Common Stock attaining,
during the Term (as defined in the employment agreement), an average Fair Market
Value (as defined in the Omnibus Plan) for a period of 20 consecutive trading
days, and a Fair Market Value on the last day of such 20 day period, of $5.00,
$8.00 and $12.00 per share, respectively; provided, however, that in any event
the remaining 100,000 shares shall vest in increments of one-third on each
subsequent anniversary of the grant date of the option, and the option will
become fully vested immediately upon a Change in Control (as defined in the
Omnibus Plan)) and (ii) subject to ratification and approval of the Company's
stockholders, a stock option, not issued under the Omnibus Plan (since at the
time of grant there were not enough shares available for issuance under the
Omnibus Plan to allow for such issuance thereunder) but which shall,
nonetheless, be subject to the terms and conditions of the Omnibus Plan, to
purchase 150,000 shares of Common Stock at an exercise price of $7.50 per share
(with respect to 50,000 of the shares subject to the options), $10.00 per share
(with respect to 50,000 of the shares subject to the option) and $12.50 per
share (with respect to 50,000 of the shares subject to the option) (which option
will vest upon the attainment of any two of the three following objectives: (a)
the Company achieving gross revenues of $100.0 million in any fiscal year during
the Term, (b) the Company achieving net income of $12.0 million in any fiscal
year during the Term or (3) the Common Stock attaining, during the Term, an
average Fair Market Value (as defined in the option) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of such 20 day
period, of $20.00 per share; provided, however, that in any event the option
will vest on the third anniversary of the grant date of the option, and the
option will become fully vested immediately upon a Change in Control of HIS PPM
(as defined in the option)). Stockholder ratification and approval of such stock
option was obtained at the 1998 annual meeting of stockholders. See "-- Option
Grants in Fiscal 1998."
The employment agreement provides that if Mr. Baca resigns for "Good
Reason" (as defined in the employment agreement) or if HIS PPM terminates his
employment other than as provided in the employment agreement, Mr. Baca will be
entitled to receive his full base salary through the date
45
<PAGE>
of termination, as well as all accrued incentive compensation through the date
of termination, plus an amount (payable over a period of months equal to the
lesser of the number of months remaining in the Term and 18) equal to the
product of (a) the sum of (i) the base salary in effect as of the date of
termination and (ii) the average of the bonus compensation paid or payable to
Mr. Baca with respect to the three years preceding the year in which the date of
termination occurs (or such lesser period as he may have been employed) and (b)
the lesser of (i) the number of months remaining in the Term divided by 12 and
(ii) one and one-half (the "Severance Amount"). In the event that, within one
year after the occurrence of a Change of Control (as defined in the employment
agreement), HIS PPM terminates Mr. Baca's employment other than as provided in
the employment agreement or Mr. Baca resigns for "Good Reason," Mr. Baca will be
entitled to receive his full base salary through the date of termination, as
well as all accrued incentive compensation through the date of termination, plus
the present value (as defined in the employment agreement) of the Severance
Amount on or before the tenth day following the date of termination.
The employment agreement further provides that in the event HIS PPM
terminates Mr. Baca's employment because of his death, Mr. Baca (or his
designated beneficiary, estate or other legal representative, as applicable,
(the "Estate")) will be entitled to be paid his base salary through the month in
which such termination occurred, as well as all unpaid and accrued incentive
compensation through the date of termination, and the Estate shall be entitled
to continue to participate (to the extent permissible under the terms and
provisions of such programs and plans) in HIS PPM's benefit programs and plans
until the end of the Term on the same terms and conditions as Mr. Baca
participated immediately prior to the date of termination. If Mr. Baca's
employment is terminated for Disability (as defined in the employment
agreement), Mr. Baca will continue to be paid his base salary for a period of
six months after such date (which amount will be reduced by any disability
benefits received by him from disability policies paid for by HIS PPM).
Upon termination of Mr. Baca's employment for Cause (as defined in the
employment agreement) or in the event Mr. Baca's employment is terminated
because of a court order restricting his employment by HIS PPM, Mr. Baca only
will be entitled to be paid his base salary through the date the Notice of
Termination (as defined in the employment agreement) is given, as well as all
accrued and unpaid incentive compensation through the date the Notice of
Termination is given.
Option Grants in Fiscal 1998
The following table sets forth each grant of stock options made by the
Company during fiscal 1998 to each of the named executive officers:
46
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE PRICE OPTION TERM 3
NAME OPTIONS EMPLOYEE IN ($/SHARE) EXPIRATION DATE -----------------------------
- - ---- GRANTED($) FISCAL YEAR RANGE RANGE 5%($) 10%($)
---------- ----------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Baca 200,000(1) 47.9% $1.3125 Apr. 2008 $165,085 $418,357
150,000(2) 35.9% (3) Dec. 2008 $ -0- $ -0-
</TABLE>
- - ---------
(1) This option vested 50% (i.e., 100,000 shares) on the initial date of grant
and the remaining 100,000 shares will vest in increments of one-third
(i.e., 33,333 shares) upon the Common Stock attaining, during the Term (as
defined in Mr. Baca's employment agreement with HIS PPM), an average Fair
Market Value (as defined in the Omnibus Plan) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of such
20 day period, of $5.00, $8.00 and $12.00 per share, respectively;
provided, however, that in any event the remaining 100,000 shares shall
vest in increments of one-third (i.e., 33,333 shares) on each subsequent
anniversary of the grant date of the option, and the option will become
fully vested immediately upon a Change in Control (as defined in the
Omnibus Plan).
(2) The exercise price of this option is as follows: $7.50 per share (with
respect to 50,000 of the shares subject to the option), $10.00 per share
(with respect to 50,000 of the shares subject to the option) and $12.50
per share (with respect to 50,000 of the shares subject to the option).
This option will vest upon the attainment of any two of the three
following objectives: (a) the Company achieving gross revenues of $100.0
million in any fiscal year during the Term, (b) the Company achieving net
income of $12.0 million in any fiscal year during the Term or (c) the
Common Stock attaining, during the Term, an average Fair Market Value (as
defined in the option) for a period of 20 consecutive trading days, and a
Fair Market Value on the last day of such 20 day period, of $20.00 per
share; provided, however, that in any event the option will vest on the
third anniversary of the grant date of the option and the option will
become fully vested immediately upon a Change in Control of HIS PPM (as
defined in the option).
(3) The potential realizable values represent future opportunity and have not
been reduced to present value in 1998 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by
the SEC 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 1998 and 1998 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, 1998 and the
aggregate dollar value of in-the-money, unexercised options held at December 31,
1998. No options were exercised by such persons during fiscal 1998. 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, 1998 (the
last trading day in fiscal 1998), which was $1.1250 per share. These values,
unlike the amounts set forth in the column headed "Value Realized," have not
been, and may never be, realized. The stock options have not been, and may never
be, exercised; and actual gains, if any, on exercise will depend on
47
<PAGE>
the value of the Common Stock on the date of exercise. There can be no assurance
that these values will be realized.
The Company does not have any stock appreciation rights ("SARs")
outstanding.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
--------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Elliott H.
Vernon -0- N/A 500,000/500,000 $187,500/$31,250
Robert D.
Baca -0- N/A 100,000/250,000 $0/$0
</TABLE>
48
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock Ownership
The table below sets forth the beneficial ownership of the shares of
Common Stock as of March 26, 1999 of (i) each person known by the Company to
beneficially own 5% or more of the 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 shares of Common Stock.
AS OF MARCH 26, 1999
--------------------
Number Percent
of Shares (1) of Class
------------- --------
Beran Entities (2) 2,094,768 15.57%
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Elliott H. Vernon (3) 1,330,500 11.22%
c/o Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, New Jersey 07701
George Braff, M.D. 1,000,000 8.81%
43 West 13th Street
New York, New York 10011
Elliot Loewenstern (4) 868,000 7.39%
6700 North Andrews Avenue
Suite 401
Fort Lauderdale, FL 33309
Ulises C. Sabato, M.D. (5) 732,365 6.42%
106 Grand Avenue
Englewood, NJ 07631
Shawn A. Friedkin (6) 25,000 *
Manmohan A. Patel, M.D.(7) 300,000 *
49
<PAGE>
Joseph J. Raymond (6)(8) 245,000 *
Michael S. Weiss (6) 10,000 *
Robert D. Baca (9) 183,333 *
All directors and 2,131,683 17.42%
executive officers
as a group (7 persons)
(3)(6)(7)(8)(9)(10)
- - --------------
(1) In no case was voting and investment power shared with others, other than
as expressly set forth herein. The information set forth in this table
regarding a person's/entity's beneficial ownership has been derived from
information provided by such person/entity (including, in some instances,
from information set forth in a Schedule 13D filed with the SEC).
(2) Such shares represent beneficial ownership of shares of Common Stock
issuable upon conversion of all outstanding shares of Series D Stock held
by the liquidating trusts of the Beran Entities. See "-Series D Stock
Ownership" for additional information regarding these shares as well as a
listing of each entity's individual holdings. Samuel J. Beran, M.D. and
Phyllis Beran are the co-trustees of the liquidating trusts and may be
deemed to be the beneficial owners of the shares owned by the trusts. The
address of Dr. Beran is Department of Plastic Surgery, 5323 Harry Hines
Boulevard, Dallas, TX 75235-9132 and the address of Mrs. Beran is 10 Grove
Street, Cherry Hill, NJ 08002.
(3) Includes beneficial ownership of an aggregate of 500,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. 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 60 days of March 26, 1999. See "Item 11. Executive
Compensation -- Employment Contracts and Termination of Employment and
Change in Control Arrangements."
(4) Includes beneficial ownership of an aggregate of (i) 184,000 shares of
Common Stock owned by the Stephanie Loewenstern Irrevocable Trust, (ii)
184,000 shares of Common Stock owned by the Brett Loewenstern Irrevocable
Trust, (iii) 125,000 shares of Common Stock owned by the Victoria
Loewenstern Irrevocable Trust, (iv) 125,000 shares of Common Stock
issuable upon the exercise of certain currently exercisable stock options
owned by the Stephanie Loewenstern Irrevocable Trust, (v) 125,000 shares
of Common Stock issuable upon the exercise of certain currently
exercisable stock options held by the Brett Loewenstern Irrevocable Trust,
and (vi) 125,000 shares of Common Stock issuable upon the exercise of
certain currently exercisable stock options held by the Victoria
Loewenstern Irrevocable Trust. Mr. Loewenstern is the trustee of each of
the aforementioned trusts.
(5) Includes beneficial ownership of an aggregate 50,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. See "Item 13. Certain Relationships and Related Transactions."
(6) Such shares represent shares of Common Stock issuable upon exercise of
certain currently exercisable stock options granted pursuant to the
Directors Plan.
50
<PAGE>
(7) Does not include an aggregate of 300,000 shares of Common Stock issuable
upon the exercise of certain stock options which are not exercisable
within 60 days of March 26, 1999. See "Item 13. Certain Relationships and
Related Transactions."
(8) Includes an aggregate of 150,000 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options. See "Item 13.
Certain Relationships and Related Transactions."
(9) Includes an aggregate of 133,333 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options. Does not include
an aggregate of 216,667 shares of Common Stock issuable upon the exercise
of stock options which are not exercisable within 60 days of March 26,
1999. See "Item 11. Executive Compensation -- Employment Contracts and
Termination of Employment and Change in Control Arrangements."
(10) Includes an aggregate of 875,183 shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of March 26, 1999.
See footnotes (3), (6) and (8) above. Does not include an aggregate of
1,155,417 shares of Common Stock issuable upon the exercise of stock
options which are not exercisable within 60 days of March 26, 1999. See
footnotes (3) and (7) above.
Series D Stock Ownership
The table below sets forth the beneficial ownership of the outstanding
shares of Series D Stock (and the beneficial ownership of Common Stock issuable
upon conversion of the Series D Stock) as of March 26, 1999. None of the
Company's directors or executive officers own any shares of Series D Stock. An
asterisk indicates beneficial ownership of less than 1% of the shares.
An aggregate of 871.743 shares of Series D Stock having an aggregate
liquidation preference of $9,153,301.50 (i.e., $10,500 per share liquidation
preference) were issued by the Company (the "Beran Issuance") to the Beran
Entities in connection with the Beran Acquisition. The Beran Entities are in the
process of being dissolved and liquidating their assets, and the shares of
Series D Stock are currently held by their respective liquidating trusts.
The holders of the Series D Stock are entitled to convert the Series D
Stock into that number of shares of Common Stock equal to the quotient obtained
by dividing (i) the aggregate liquidation preference of the Series D Stock being
converted by (ii) $1.049 (subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the conversion of
all outstanding shares of Series D Stock); provided that until the Company
obtains stockholder approval of the Beran Issuance (as required by the rules of
the Nasdaq National Market, the exchange upon which the Company's securities are
included), the holders of the Series D Stock only will be able to convert such
shares into Common Stock representing in the aggregate 19.9% of the outstanding
Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). The holders of the Series D Stock are entitled
to vote, on an as-converted basis, with the holders of the Common Stock as one
class on all matters submitted to a vote of Company stockholders; provided that
until the Company obtains stockholder approval of the Beran Issuance (as
required by the rules of the Nasdaq National Market, the exchange upon which the
Company's securities are included), the aggregate voting
51
<PAGE>
rights of the holders of the Series D Stock shall not exceed 19.9% of the
outstanding Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). Due to timing constraints, stockholder approval
of the Beran Issuance was not solicited prior to the consummation of the Beran
Acquisition and such issuance of stock in October 1998. The Company expects to
solicit stockholder approval of the Beran Issuance during the second quarter of
fiscal 1999.
Upon certain events (as described more fully in the certificate of
designations, preferences and rights of the Series D Stock), including the
Company's failure to redeem the Series D Stock prior to March 1, 1999, the
holders of the Series D Stock have the right to cause the Company to call a
special meeting of stockholders for the purpose of electing directors. Upon
stockholder ratification and approval of the Beran Issuance, assuming the
holders of the Series D Stock were to act collectively, such holders would be in
a position to influence the election of the Company's directors and other
matters requiring stockholder approval. Dr. Samuel J. Beran and his mother,
Phyllis Beran, are currently the co-trustees of each of the holders of the
Series D Stock. The information set forth in the following table regarding a
person's/entity's beneficial ownership has been derived from a Schedule 13D
filed by such person/entity with the SEC.
52
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 26, 1999
-------------------------------------------
Number of Percent Number of Percent
Shares of of Shares of of
Series D Stock Class Common Stock (1) Class (1)
-------------- ----- ---------------- ---------
<S> <C> <C> <C> <C>
Beran/Bloomfield IV 61.022 7% 146,633.76 1%
Shareholders Trust (2)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Echelon I 453.306 52% 1,089,279.36 9%
Shareholders Trust (3)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/INB V 26.153 3% 62,843.04 *
Shareholders Trust (4)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Mainland II 95.891 11% 230,424.48 2%
Shareholders Trust (5)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Management III 235.371 27% 565,587.36 4%
Shareholders Trust
Associates, L.P. (6)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
</TABLE>
- - --------------
(1) Does not take into account stockholder approval of the Beran Issuance
which will increase the number of shares of Common Stock issuable upon
conversion of the Series D Stock and the voting rights thereof. Percent of
Class calculated based upon 11,356,974 shares of Common Stock outstanding
as of March 26, 1999 and 2,094,768 shares of Common Stock issuable upon
conversion of all outstanding shares of Series D Stock (assuming no
stockholder approval of the Beran Issuance).
(2) Includes 18 shares of Series D Stock pledged to the Company as collateral
to secure repayment of a $175,000 promissory note issued by Bloomfield
Imaging Associates, P.A. to the Company and 1.145 shares of Series D Stock
held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the right
to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
53
<PAGE>
(3) Includes 133.7 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $1.3 million promissory note issued by
Echelon MRI, P.C. to the Company and 8.508 shares of Series D Stock held
in escrow in respect of certain post-closing adjustments in connection
with the Beran Acquisition. The holder currently has the right to vote
such shares. Samuel J. Beran, M.D. and Phyllis Beran, the co-trustees of
the holder, may be deemed to be the beneficial owners of the shares owned
by the holder.
(4) Includes 7.7 shares of Series D Stock pledged to the Company as collateral
to secure repayment of a $75,000 promissory note issued by Irving N.
Beran, M.D., P.A. to the Company and 0.491 shares of Series D Stock held
in escrow in respect of certain post-closing adjustments in connection
with the Beran Acquisition. The holder currently has the right to vote
such shares. Samuel J. Beran, M.D. and Phyllis Beran, the co-trustees of
the holder, may be deemed to be the beneficial owners of the shares owned
by the holder.
(5) Includes 28.3 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $275,000 promissory note issued by
Mainland Imaging Center, P.C. to the Company and 1.8 shares of Series D
Stock held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the right
to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
(6) Includes 69.4 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $675,000 promissory note issued by
North Jersey Imaging Management Associates, L.P. to the Company and 4.418
shares of Series D Stock hold in escrow in respect of certain post-closing
adjustments in connection with the Beran Acquisition. The holder currently
has the right to vote such shares. Samuel J. Beran, M.D. and Phyllis
Beran, the co-trustees of the holder, may be deemed to be the beneficial
owners of the shares owned by the holder.
54
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998 and 1997, Elliott H. Vernon (the Company's
Chairman of the Board, President and Chief Executive Officer) (the "CEO") owed
the Company $264,125 in connection with certain non-interest bearing advances
under the Company's bonus plan. In accordance with this bonus plan and Mr.
Vernon's employment agreement with the Company, Mr. Vernon is entitled to
monthly bonus payments based upon an estimate of his full years' bonus
entitlement, subject to adjustment. These advances represent such payments which
were determined not to have been earned by Mr. Vernon under the terms of the
bonus plan and are repayable to the Company.
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
mobile MRI units rather than as an operator of such equipment. Mark R. Vernon,
the brother of the CEO and an officer 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 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 months and $115,000 per month for the next 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 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 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 attributable to such mobile MRI unit and the sale
proceeds received. In February 1996, the Company terminated the 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 its customers to
satisfy their obligations thereunder to the Company. At such time, the sublessee
owed the Company approximately $456,000. In an attempt to satisfy the past due
amounts owed to the Company, the sublessee and its customers provided the
Company with cash (aggregating approximately $75,000) and additional patient
55
<PAGE>
receivable claims (aggregating approximately $504,000) to partially offset the
amounts they 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 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. At such
time, the sublessee owed the Company approximately $532,000. 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, 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 December 31, 1998, the amount
of the sublessee's past due indebtedness was approximately $257,000 (which
amount has been fully reserved for by the Company in its financial statements).
See "Item 1. Business - Mobile MRI Division."
As of January 30, 1996, the Company entered into a one year consulting
agreement (the "Consulting Agreement") with Biltmore Securities, Inc.
("Biltmore"). In January 1997, the Company extended the term of the Consulting
Agreement for an additional year, and in November 1997, the Company further
extended the term of the Consulting Agreement for an additional year, through
January 1999. Pursuant to the Consulting Agreement, Biltmore agreed to act as a
consultant to the Company in connection with, among other things, corporate
finance and evaluations of possible business partners and seek to find business
partners suitable for the Company and assist in the structuring, negotiating and
financing of such transactions. During fiscal 1996, Biltmore was issued options
(the "Biltmore Options") exercisable to purchase 750,000 shares of Common Stock
at a cash exercise price of $0.75 per share under the Consulting Agreement and
during fiscal 1998, upon consummation of the Beran Acquisition, certain
transferees of Biltmore were issued 750,000 shares (the Biltmore Fee Shares") of
Common Stock under the Consulting Agreement. The holders of the Biltmore Options
and the Biltmore Fee Shares are 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 sale of
the Company's Series C Convertible Preferred Stock in February 1996, the Company
issued Biltmore 60,000 shares of Series C Convertible Preferred Stock at such
time.
During fiscal 1998, Dr. George Braff, a director of the Company from
December 1995 until April 1997, the Company's Medical Director since October
1997 and the supervising radiologist at three of the Company's MRI facilities,
was the majority shareholder and officer of three of the Company's Medical
Licensees: NYC MRI, Monmouth and Kings Medical. For fiscal 1998, NYC MRI,
Monmouth and Kings Medical paid the Company approximately $753,290, $3,869,117
and $1,306,254, respectively, in fees for services previously rendered. In
addition, revenues generated to the Company by NYC MRI, Monmouth and Kings
Medical accounted for 6%, 27%, and 6%, respectively, of the Company's total
revenues in fiscal 1998. For fiscal 1998,
56
<PAGE>
NYC MRI, Monmouth and Kings Medical paid Dr. Braff approximately $53,865,
$442,026 and $119,150, respectively, in fees for professional services rendered
by him on their behalf. Such entities have continued to be Medical Licensees of
the Company in fiscal 1999. Prior to October 1997, Dr. Braff was also a majority
shareholder and officer of another of the Company's Medical Licensees, Edgewater
Diagnostic Imaging, P.A., which paid the Company approximately $1,400,000 in
fees during fiscal 1997 and generated revenues to the Company in fiscal 1997
representing 18% of the Company's total revenues for such fiscal year.
On November 4, 1997, the Company acquired substantially all of the
assets of NYC MRI which operated the 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 certain capital
lease of up to approximately $300,000, (ii) cash in the amount of $900,000,
(iii) the issuance of 1.0 million 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 also assumed certain contractual obligations of NYC MRI on a
going-forward basis under the contracts assigned to the Company in the
acquisition (including operating leases and equipment maintenance agreements).
In connection with the acquisition, the Company also entered into a consulting
services agreement with NYC MRI, which, among other things, provides that Dr.
Braff will continue to provide all medical services at the New York City
Facility.
Prior to September 1998, the Company leased the Brooklyn Facility from
DMR. The Company leases the MRI equipment at such facility from DFS. DMR is
owned by MR Associates, as the general partner, and DFS, as a limited partner.
MR Associates is in turn owned by Elliott H. Vernon, the Company's Chairman of
the Board, President and Chief Executive Officer, and Joseph J. Raymond, another
director of the Company. For fiscal 1997 and the nine months ended September 30,
1998, the Company paid DMR an aggregate of approximately $407,000 and $208,000,
respectively, in lease payments for the Brooklyn Facility. The Company's lease
payments to DMR were structured to fully satisfy DMR's costs and expenses
related to the facility, including mortgage payments, taxes and other related
costs. However, Messrs. Vernon and Raymond were still required to pay taxes in
respect of these lease payments even though they did not recognize any profit
from such arrangement and participated in such arrangement as an accommodation
to the Company without any reimbursement therefor. Effective December 1996, the
Company agreed to guarantee an approximately $250,000 loan (the "DFS Loan") from
DFS to DMR in connection with DMR's refinancing of an equipment lease related to
this Brooklyn facility. This loan bore interest at 12% per annum and was
repayable over 34 months commencing February 15, 1997. The outstanding balance
of this loan was approximately $178,000 at December 31, 1997.
In September 1998, DMR sold its interest in the Brooklyn Facility to an
affiliate of DFS, which, in turn, has entered into a lease arrangement (the "DFS
Lease") with the Company in respect of this facility. All of the proceeds from
such sale were used to repay the outstanding balance of the DFS Loan which was
$145,174.43. In consideration for Mr. Raymond's agreement to such sale (as well
as in appreciation of his participation in the original lease transaction), the
57
<PAGE>
Company granted Mr. Raymond (subject to stockholder ratification and approval) a
ten year stock option to purchase 150,000 shares of Common Stock at an exercise
price per share equal to $1.00 (the closing sales price of the Common Stock on
The Nasdaq National Market on December 22, 1998, the date of stockholder
ratification and approval of such stock option grant), which option is 100%
exercisable. In addition, the Company has agreed that, to the extent the Company
exercises its purchase option under the DFS Lease and sells such facility to an
unrelated third party (other than in connection with a merger, consolidation,
sale of substantially all of the assets of the Company or similar transaction),
Mr. Raymond will be entitled to receive an amount equal to 60% of any "profits"
realized by the Company upon such sale (i.e., the net proceeds received by the
Company upon such sale less the Company's depreciated basis in the property).
In addition to the DFS Lease, the Company has numerous other financing
arrangements with DFS and its affiliates relating to equipment financing, as
well as the DFS Bridge Loan provided in connection with the Beran Acquisition
and the Company's $3.0 million secured revolving line of credit provided by
another affiliate of DFS. DFS was a significant stockholder of the Company from
its inception until April 1996 and is a leading provider of medical equipment
financing. In October 1998, in connection with the DFS Bridge Loan the Company
entered into a five-year financial advisory and consulting services agreement
with DFS. In accordance with the terms of such agreement, the Company granted
DFS stock options immediately exercisable for a five-year period (subject to
certain prescribed restrictions) to purchase an aggregate of 500,000 shares of
Common Stock at an exercise price of $0.90625 per share (with respect to 50,000
of the shares subject to the options), $1.03125 per share (with respect to
400,000 of the shares subject to the options), $1.28125 per share (with respect
to 20,000 of the shares subject to the options), $1.25 per share (with respect
to 10,000 of the shares subject to the options) and $1.46875 (with respect to
20,000 shares subject to the options). The Company is also a guarantor of the
JIHP Loan (as hereinafter defined). All of the Company's arrangements with DFS
and its affiliates are on an arms'-length basis.
In May 1997, the Company entered into a consulting agreement with Munr
Kazmir, M.D., a former 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 as of January 1,
1998. Pursuant to such agreement, Dr. Kazmir agreed to 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 also provided assistance to the Company
in the expansion of its business into physician practice management. Dr. Kazmir
was entitled to an annual consulting fee of $72,000 under such consulting
agreement. The consulting agreement was terminated in October 1998. During
fiscal 1997 and 1998, Dr. Kazmir was paid an aggregate of $35,000 and $54,000,
respectively, in consulting fees under the consulting agreement.
58
<PAGE>
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
agreed to provide such consultation and advice as the Company may reasonable
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. Sabato also
provided assistance to the Company in the expansion of its business into
physician practice management. Pursuant to such agreement, Dr. Sabato was
entitled to an annual consulting fee of $48,000. In addition, upon execution of
such agreement, the Company granted 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 term of the consulting agreement was extended until October 16, 1998
at which time it expired. During fiscal 1997 and 1998, Dr. Sabato was paid an
aggregate of $44,000 and $48,000, respectively, in consulting fees under the
consulting agreement. Dr. Sabato also was a limited partner in Edgewater Imaging
Associates, L.P., which leased real estate and equipment to the Company in
respect of its fixed-site MRI facility in Edgewater, New Jersey. The Edgewater
Imaging Associates, L.P. was dissolved as of January 1, 1998.
In February 1998, the Company entered into a consulting agreement with
Dr. Manmohan A. Patel, a director of the Company since December 1998, for a one
year term commencing February 27, 1998. Such agreement, upon expiration of its
initial one year term, was extended for an additional six month period. Pursuant
to such agreement, Dr. Patel will provide such consultation and advice as the
Company may reasonably request, including advice in respect of the Company's
development of its physician management operations. Such agreement shall be
terminated upon the earlier to occur of (i) the negotiation and execution of an
employment agreement between the Company and Dr. Patel on terms and conditions
satisfactory to the parties thereto (the "Patel Employment Agreement"), or (ii)
the expiration or termination of such agreement pursuant to the terms thereof.
Pursuant to such agreement, and in contemplation of the services to be rendered
pursuant to the Patel Employment Agreement, the Company granted Dr. Patel stock
options exercisable to purchase an aggregate of 300,000 shares of Common Stock
under the terms and conditions of the Omnibus Plan. Such stock options are
exercisable at $1.71875 per share, the closing sales price of the Common Stock
on The Nasdaq National Market on the date of grant, and vest in increments of
25% (i.e., 75,000 shares) upon the Common Stock attaining , for a period of 20
consecutive trading days, a fair market value (as defined in the Omnibus Plan)
of $2.50, $5.00, $7.50 and $10.00, respectively. Notwithstanding the foregoing,
such stock options shall become fully vested upon the earlier to occur of (x)
the fifth anniversary of the grant date of the stock options and (y) a "Change
in Control" as defined in the Omnibus Plan: provided however, that in no event
shall any shares be purchasable under such stock options unless and until Dr.
Patel has become a full-time employee of the Company.
59
<PAGE>
In January 1998, the Company and PMA and its physician stockholders
(including Dr. Patel, a director of the Company who owns an aggregate of 11,500
shares of PMA's common stock, representing 20.44% of such outstanding common
stock) signed a non-binding letter of intent with respect to the Company's
acquisition of all of the capital stock of JIHP held by PMA. The terms of this
acquisition were a result of arm's-length negotiations among the parties. A
merger agreement between the Company and PMA was executed effective January 29,
1999 (subject to the approval of the physician stockholders of PMA). Such letter
(as well as the merger agreement) states that the Company intends to appoint Dr.
Patel to the Board upon consummation of such acquisition. Notwithstanding the
foregoing, the election of Dr. Patel as a director was not made in connection
with such provision. See "Item l. Business - Introduction."
In December 1997, the Company agreed to guarantee a loan of $1.0
million from DFS to JIHP (the "JIHP Loan"). This loan was funded by DFS to JIHP
on January 8, 1998 and the loan bears interest at 12% per annum and is repayable
over 48 months commencing in February 1998 at $26,330 per month. At December 31,
1998, approximately $810,000 of the loan was outstanding. PMA and each physician
stockholders of PMA 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 PMA or
JIHP, and the acquisition by the Company of 100% of the outstanding capital
stock of JIHP is not consummated, then PMA and each physician stockholder of PMA
agree to indemnify and hold the Company harmless from and against any and all
such liabilities and obligations.
60
<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:
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1998 and 1997 F-2
Consolidated statements of operations -
For the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated statements of cash flows - For the
years ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996 F-27
3. EXHIBITS
2.1 Agreement and Plan of Merger, dated as of January 29, 1999, among
HealthCare Imaging Services, Inc., HIS PPM Co., Jersey Integrated
HealthPractice, Inc., Pavonia Medical Associates, P.A. and the
physician stockholders of Pavonia Medical Associates, P.A.
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
61
<PAGE>
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)
3.5 Certificate of Designations, Preferences and Rights of Series D
Cumulative Accelerating Redeemable Preferred Stock of HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 16, 1998)
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 [INTENTIONALLY OMITTED]
10.3 [INTENTIONALLY OMITTED]
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)
62
<PAGE>
10.6 [INTENTIONALLY OMITTED]
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 Kings 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 [INTENTIONALLY OMITTED]
10.11 [INTENTIONALLY OMITTED]
10.12 [INTENTIONALLY OMITTED]
10.13 [INTENTIONALLY OMITTED]
10.14 [INTENTIONALLY OMITTED]
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 [INTENTIONALLY OMITTED]
10.17 [INTENTIONALLY OMITTED]
10.18 [INTENTIONALLY OMITTED]
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)*
63
<PAGE>
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 [INTENTIONALLY OMITTED]
10.22 [INTENTIONALLY OMITTED]
10.23 [INTENTIONALLY OMITTED]
10.24 [INTENTIONALLY OMITTED]
10.25 [INTENTIONALLY OMITTED]
10.26 [INTENTIONALLY OMITTED]
10.27 [INTENTIONALLY OMITTED]
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)
64
<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 [INTENTIONALLY OMITTED]
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)*
65
<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 (Incorporated by reference to
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)*
66
<PAGE>
10.49 Agreement, dated as of November 3, 1997, between HealthCare Imaging
Services, Inc. and Biltmore Securities, Inc. (Incorporated by reference
to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
10.50 Agreement, dated as of November 3, 1997, between HealthCare Imaging
Services, Inc. and Elliott H. Vernon (Incorporated by reference to
Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)*
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan
(Incorporated by reference to Exhibit 10.51 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.52 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)*
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 (Incorporated by
reference to Exhibit 10.53 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)
10.54 Employment Agreement dated April 13, 1998 between Robert D. Baca and
HIS PPM Co. (Incorporated by reference to Exhibit 10.54 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998)*
10.55 Amendment to Stock Purchase Agreement, dated as of May 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 (Incorporated by
reference to Exhibit 10.55 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998)
10.56 Consulting Agreement, dated as of February 27, 1998, by and between
Manmohan A. Patel, M.D. and HealthCare Imaging Services, Inc.*
10.57 Asset Purchase Agreement, dated as of September 16, 1998, among
HealthCare Imaging Services, Inc., Echelon MRI, P.C., Mainland Imaging
Center, P.C., North Jersey Imaging Management Associates, L.P.,
Bloomfield Imaging Associates, P.A., Irving N. Beran, M.D., P.A., the
Estate of Irving N. Beran, Deceased, Mrs. Phyllis Beran and Sam Beran,
67
<PAGE>
M.D. (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
October 16, 1998)
10.58 Amendment No. 1 to the HealthCare Imaging Services, Inc. 1997 Omnibus
Incentive Plan*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996 Stock
Option Plan for Non-Employee Directors*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D. Baca
and HealthCare Imaging Services, Inc.*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph J.
Raymond and HealthCare Imaging Services, Inc.
10.62 Agreement, dated as of October 1, 1998 between Joseph J. Raymond and
HealthCare Imaging Services, Inc.
10.63 Employment Agreement, dated as of October 1, 1998, between Elliott H.
Vernon and HealthCare Imaging Services, Inc.*
10.64 Consulting Services Agreement, dated as of November 4, 1997, by and
between HealthCare Imaging Services, Inc. and M.R. Radiology Imaging of
Lower Manhattan, P.C.
10.65 Consulting Agreement, dated as of December 31, 1997, between Dr. Ulises
C. Sabato and HealthCare Imaging Services, Inc.
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr. Munr
Kazmir and HealthCare Imaging Services, Inc.*
10.67 Financial and Consulting Services Agreement dated as of October 1, 1998
by and between HealthCare Imaging Services, Inc. and DVI Financial
Services Inc.
10.68 DVI Bridge Loan and Security Agreement No. 1969 executed September 30,
1998, to become effective as of October 1, 1998, by and between DVI
Financial Services, Inc. and HealthCare Imaging Services, Inc.
10.69 Loan Modification Agreement dated December 31, 1998, by and between
HealthCare Imaging Services, Inc. and DVI Financial Services Inc.
68
<PAGE>
10.70 Amendment No. 1 to Loan and Security Agreement 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
10.71 Amendment No. 2 to Loan and Security Agreement 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
10.72 Amendment No. 3 to Loan and Security Agreement between HealthCare
Imaging Services, Inc., Edgewater Imaging Associates, L.P., Wayne
Imaging Associates, L.P., Rittenhouse Square Imaging Associates, L.P.,
Meadowlands MRI, LLC and DVI Business Credit Corporation
22.1 Subsidiaries of the Registrant
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.
- - --------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission during the fourth quarter of fiscal
1998:
(i) Current Report on Form 8-K (the "Beran 8-K") filed with the
Securities and Exchange Commission on October 16, 1998 regarding
the acquisition on October 2, 1998 (effective October 1, 1998) by
a wholly-owned subsidiary of the Company of five multi-modality
diagnostic imaging centers located in Voorhees (two centers),
Bloomfield, Northfield and Williamstown, New Jersey. The
following financial statements were filed with such report:
Audited Combined Financial Statements of the Beran Entities
for the years ended December 31, 1997 and 1996
Unaudited Combined Financial Statements of the Beran Entities
for the six months ended June 30, 1998
69
<PAGE>
(ii) Amendment No. 1 to the Beran 8-K filed with the Securities and
Exchange Commission on November 11, 1998 including the following
pro forma financial information:
Pro Forma Consolidated Condensed Balance Sheets as of June
30, 1998
Pro Forma Consolidated Condensed Statements of Operations as
of June 30, 1998
Pro Forma Consolidated Condensed Statements of Operations for
the year ended December 31, 1997
Notes to Pro Forma Consolidated Condensed Financial
Statements
(iii) Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 7, 1998 including the following financial
statements:
Unaudited Consolidated Balance Sheet of HealthCare Imaging
Services, Inc. as of October 31, 1998
Unaudited Consolidated Statements of Income of HealthCare
Imaging Services, Inc for the one month and ten month periods
ended October 31, 1998.
70
<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 30, 1999 By: /s/ Elliott H. Vernon
--------------------------
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:
Name Title Date
- - ---- ----- ----
/s/ Elliott H. Vernon Chairman of the March 30, 1999
- - ------------------------ Board, President and
Elliott H. Vernon Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/ Scott P. McGrory Vice President, March 30, 1999
- - ------------------------ Controller
Scott P. McGrory (Principal
Financial and
Accounting Officer)
/s/ Shawn A. Friedkin Director March 30, 1999
- - ------------------------
Shawn A. Friedkin
/s/ Manmohan A. Patel Director March 30, 1999
- - ------------------------
Manmohan A. Patel
/s/ Joseph J. Raymond Director March 30, 1999
- - ------------------------
Joseph J. Raymond
71
<PAGE>
/s/ Michael S. Weiss Director March 30, 1999
- - ------------------------
Michael S. Weiss
72
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
---------
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
---------
INDEX TO EXHIBITS
Number Page
- - ------ ----
2.1 Agreement and Plan of Merger, dated as of January 29, 1999,
among HealthCare Imaging Services, Inc., HIS PPM Co., Jersey
Integrated HealthPractice, Inc., Pavonia Medical Associates,
P.A. and the physician stockholders of Pavonia Medical
Associates, P.A.
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)
3.5 Certificate of Designations, Preferences and Rights of Series D
Cumulative Accelerating Redeemable Preferred Stock of
HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 16,
1998)
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
73
<PAGE>
Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13,
1991)
10.2 [INTENTIONALLY OMITTED]
10.3 [INTENTIONALLY OMITTED]
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)
10.6 [INTENTIONALLY OMITTED]
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 Kings 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 [INTENTIONALLY OMITTED]
74
<PAGE>
10.11 [INTENTIONALLY OMITTED]
10.12 [INTENTIONALLY OMITTED]
10.13 [INTENTIONALLY OMITTED]
10.14 [INTENTIONALLY OMITTED]
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 [INTENTIONALLY OMITTED]
10.17 [INTENTIONALLY OMITTED]
10.18 [INTENTIONALLY OMITTED]
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 [INTENTIONALLY OMITTED]
10.22 [INTENTIONALLY OMITTED]
10.23 [INTENTIONALLY OMITTED]
10.24 [INTENTIONALLY OMITTED]
10.25 [INTENTIONALLY OMITTED]
10.26 [INTENTIONALLY OMITTED]
10.27 [INTENTIONALLY OMITTED]
75
<PAGE>
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)
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 [INTENTIONALLY OMITTED]
10.35 Consulting Agreement dated as of January 30, 1996 by and
between Biltmore Securities, Inc. and HealthCare Imaging
Services, Inc.
76
<PAGE>
(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)*
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)*
77
<PAGE>
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 (Incoporated by reference
to Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)*
10.49 Agreement, dated as of November 3, 1997, between HealthCare
Imaging Services, Inc. and Biltmore Securities, Inc.
(Incorporated by reference to Exhibit 10.49 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)
10.50 Agreement, dated as of November 3, 1997, between HealthCare
Imaging Services, Inc. and Elliott H. Vernon (Incorporated by
reference to Exhibit 10.50 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)*
78
<PAGE>
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan
(Incorporated by reference to Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase
Plan (Incorporated by reference to Exhibit 10.52 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997)*
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 (Incorporated by reference to Exhibit 10.53 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.54 Employment Agreement dated April 13, 1998 between Robert D.
Baca and HIS PPM Co. (Incorporated by reference to Exhibit
10.54 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998)*
10.55 Amendment to Stock Purchase Agreement, dated as of May 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 (Incorporated by reference to Exhibit 10.55 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998)
10.56 Consulting Agreement, dated as of February 27, 1998, by and
between Manmohan A. Patel, M.D. and HealthCare Imaging
Services, Inc.*
10.57 Asset Purchase Agreement, dated as of September 16, 1998, among
HealthCare Imaging Services, Inc., Echelon MRI, P.C., Mainland
Imaging Center, P.C., North Jersey Imaging Management
Associates, L.P., Bloomfield Imaging Associates, P.A., Irving
N. Beran, M.D., P.A., the Estate of Irving N. Beran, Deceased,
Mrs. Phyllis Beran and Sam Beran, M.D. (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
October 16, 1998)
79
<PAGE>
10.58 Amendment No. 1 to the HealthCare Imaging Services, Inc. 1997
Omnibus Incentive Plan*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee Directors*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D.
Baca and HealthCare Imaging Services, Inc.*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph
J. Raymond and HealthCare Imaging Services, Inc.
10.62 Agreement, dated as of October 1, 1998 between Joseph J.
Raymond and HealthCare Imaging Services, Inc.
10.63 Employment Agreement, dated as of October 1, 1998, between
Elliott H. Vernon and HealthCare Imaging Services, Inc.*
10.64 Consulting Services Agreement, dated as of November 4, 1997, by
and between HealthCare Imaging Services, Inc. and M.R.
Radiology Imaging of Lower Manhattan, P.C.
10.65 Consulting Agreement, dated as of December 31, 1997, between
Dr. Ulises C. Sabato and HealthCare Imaging Services, Inc.
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr.
Munr Kazmir and HealthCare Imaging Services, Inc.*
10.67 Financial and Consulting Services Agreement dated as of October
1, 1998 by and between HealthCare Imaging Services, Inc. and
DVI Financial Services Inc.
10.68 DVI Bridge Loan and Security Agreement No. 1969 executed
September 30, 1998, to become effective as of October 1, 1998,
by and between DVI Financial Services, Inc. and HealthCare
Imaging Services, Inc.
10.69 Loan Modification Agreement dated December 31, 1998, by and
between HealthCare Imaging Services, Inc. and DVI Financial
Services Inc.
10.70 Amendment No. 1 to Loan and Security Agreement between
HealthCare Imaging Services, Inc., Edgewater Imaging
Associates,
80
<PAGE>
L.P., Wayne Imaging Associates, L.P., Rittenhouse Square
Imaging Associates, L.P. and DVI Business Credit Corporation
10.71 Amendment No. 2 to Loan and Security Agreement 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
10.72 Amendment No. 3 to Loan and Security Agreement between
HealthCare Imaging Services, Inc., Edgewater Imaging
Associates, L.P., Wayne Imaging Associates, L.P., Rittenhouse
Square Imaging Associates, L.P., Meadowlands MRI, LLC and DVI
Business Credit Corporation
22.1 Subsidiaries of the Registrant
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.
- - --------------------------------------------------------------------------------
81
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. 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 2, 1999
F-1
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,506,123 $ 70,626
Accounts receivable - net of allowances for doubtful accounts of $6,180,000 and
$4,977,000 in 1998 and 1997, respectively 9,869,696 5,375,351
Accounts receivable acquired in the Beran Acquisition 4,653,831 --
Loan receivable 2,550,000 --
Prepaid expenses and other 228,758 186,082
------------ ------------
Total current assets 18,808,408 5,632,059
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 9,578,807 5,518,772
DEFERRED TAX ASSET -NET 48,325 --
OTHER ASSETS:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,215,364 232,810
Other 180,786 197,815
Goodwill - net of accumulated amortization of $317,939 and $78,011 in 1998 and
1997, respectively 12,858,838 1,695,054
------------ ------------
Total other assets 14,519,113 2,389,804
------------ ------------
TOTAL ASSETS $ 42,954,653 $ 13,540,635
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under revolving line of credit $ 2,838,275 $ 1,462,000
Accounts payable and accrued expenses 2,122,916 1,354,200
Current portion of capital lease obligations 1,505,510 1,647,148
Bridge financing 14,000,000 --
Reserve for subleased equipment 294,790 321,465
Income taxes payable 106,582 16,044
------------ ------------
Total current liabilities 20,868,073 4,800,857
------------ ------------
NONCURRENT LIABILITIES:
Capital lease obligations 3,440,890 2,780,447
------------ ------------
MINORITY INTERESTS 896,404 546,433
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 1,000,000 shares authorized: Series C
convertible preferred stock, none and 185,000 shares outstanding at
December 31, 1998 and 1997, respectively (Each convertible into seven shares -- 18,500
of common stock)
Series D 8% cumulative accelerating redeemable preferred stock, 871.743
and no shares outstanding at December 31, 1998 and 1997,
respectively ($10,500 per
share liquidation preference) 87 --
Common stock, $.01 par value: 50,000,000 shares authorized: 11,356,974
and 9,286,974 shares outstanding at December 31, 1998 and 1997, respectively 113,570 92,870
Additional paid-in capital 23,050,076 12,694,678
Accumulated deficit (5,414,447) (7,393,150)
------------ ------------
Total stockholders' equity 17,749,286 5,412,898
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,954,653 $ 13,540,635
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES: $ 16,451,057 $ 10,247,940 $ 9,787,591
OPERATING EXPENSES:
Salaries 4,547,363 2,819,601 2,838,739
Operating expenses 4,587,734 4,294,407 3,842,573
Provision/(recovery) of bad debts 148,269 -- (392,286)
Consulting and marketing fees 620,361 582,687 72,344
Professional fees 534,060 538,392 457,797
Depreciation and amortization 2,029,723 1,509,649 1,450,074
Interest 1,427,267 540,652 469,133
Gain on sale of property, plant and equipment (317,937) (105,000) --
Non-cash compensation charge 135,617 398,646 1,445,473
------------ ------------ ------------
13,712,457 10,579,034 10,183,847
------------ ------------ ------------
INCOME/(LOSS) BEFORE MINORITY INTERESTS IN
JOINT VENTURES AND INCOME TAXES 2,738,600 (331,094) (396,256)
MINORITY INTERESTS IN JOINT VENTURES (479,170) (430,172) (416,192)
------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES 2,259,430 (761,266) (812,448)
INCOME TAX PROVISION 97,661 43,039 49,348
------------ ------------ ------------
NET INCOME/(LOSS) 2,161,769 (804,305) (861,796)
PREFERRED DIVIDENDS 183,066 -- --
------------ ------------ ------------
NET INCOME/(LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,978,703 $ (804,305) $ (861,796)
============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE - BASIC $ .19 $ (0.13) $ (0.18)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 10,511,893 6,187,822 4,711,974
============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED $ .10 $ (0.13) $ (0.18)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 21,461,901 6,187,822 4,711,974
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
- - --------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES D SERIES C COMMON STOCK
---------------- ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 -- -- -- -- 4,711,974 $ 47,120
Proceeds from sale of Series C Preferred
Stock (each convertible into seven
shares of common stock), net of expenses
of $151,746 -- -- 660,000 $ 66,000 -- --
Issuance of restricted stock to CEO -- -- -- -- 250,000 2,500
Unearned compensation in connection
with stock option grant -- -- -- -- -- --
Amortization of unearned
compensation for stock option
and restricted stock grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- -- 660,000 66,000 4,961,974 49,620
--------------------------------------------------------------------------
Conversion of Series C Preferred Stock -- -- (475,000) (47,500) 3,325,000 33,250
Amortization of unearned
compensation for stock option and
restricted stock grants -- -- -- -- -- --
Purchase of assets of M.R. Radiology
Imaging of Lower Manhattan, P.C -- -- -- -- 1,000,000 10,000
Net loss -- -- -- -- -- --
Other -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- -- 185,000 18,500 9,286,974 92,870
--------------------------------------------------------------------------
Conversion of Series C Preferred Stock -- -- (185,000) (18,500) 1,295,000 12,950
Beran Acquisition Issuance 872 $ 87 -- -- -- --
Issuance of stock to financial advisor -- -- -- -- 750,000 7,500
Compensation in connection with stock
option grants -- -- -- -- -- --
Record cashless exercise of stock options -- -- -- -- 25,000 250
Net income -- -- -- -- -- --
Other -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 872 $ 87 -- $ -- 11,356,974 $ 113,570
==========================================================================
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED UNEARNED STOCKHOLDERS'
CAPITAL DEFICIT COMPENSATION EQUITY
------- ------- ------------ ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 8,902,805 ($ 5,727,049) -- $ 3,222,876
Proceeds from sale of Series C Preferred
Stock (each convertible into seven
shares of common stock), net of expenses
of $151,746 1,132,254 -- -- 1,198,254
Issuance of restricted stock to CEO 466,244 -- (468,744) --
Unearned compensation in connection
with stock option grant 1,375,375 -- (1,375,375) --
Amortization of unearned
compensation for stock option
and restricted stock grants -- -- 1,445,473 1,445,473
Net loss -- (861,796) -- (861,796)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,876,678 (6,588,845) (398,646) 5,004,807
-------------------------------------------------------------
Conversion of Series C Preferred Stock 14,250 -- -- --
Amortization of unearned
compensation for stock option and
restricted stock grants -- -- 398,646 398,646
Purchase of assets of M.R. Radiology
Imaging of Lower Manhattan, P.C 821,250 -- -- 831,250
Net loss -- (804,305) -- (804,305)
Other (17,500) -- -- (17,500)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 12,694,678 (7,393,150) -- 5,412,898
-------------------------------------------------------------
Conversion of Series C Preferred Stock 5,550 -- -- --
Beran Acquisition Issuance 9,153,210 -- -- 9,153,297
Issuance of stock to financial advisor 695,625 -- -- 703,125
Compensation in connection with stock
option grants 490,689 -- -- 490,689
Record cashless exercise of stock options (250) --
Net income -- 1,978,703 -- 1,978,703
Other 10,574 -- -- 10,574
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 23,050,076 ($ 5,414,447) $ -- $ 17,749,286
=============================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 1,978,703 $ (804,305) $ (861,796)
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities
Depreciation and amortization 2,029,723 1,509,649 1,450,074
Amortization of non-cash compensation 135,617 398,646 1,445,473
Gain on sale of property, plant and equipment (317,937) (105,000) --
Minority interests in joint ventures 479,170 430,172 416,192
Allowance for doubtful accounts 1,140,000 659,000 17,000
Changes in assets and liabilities, exclusive of changes resulting
from acquisitions:
Accounts receivable (3,703,492) (1,258,052) (632,022)
Prepaid expenses and other (42,676) (26,061) 57,741
Deferred taxes (48,325) -- --
Due from officer -- (88,076) 55,855
Deferred costs -- -- (4,767)
Other 17,029 153,586 (351,401)
Accounts payable and accrued expenses 768,716 160,977 317,965
Income taxes payable 90,538 7,740 8,304
Deferred transaction and financing costs (1,069,503) 7,605 (156,762)
------------ ------------ ------------
Net cash provided by operating activities 1,457,563 1,045,881 1,761,856
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Beran Acquisition (11,500,000) -- --
Loan to the Beran Entities (2,550,000) -- --
Purchase of assets of M.R. Radiology Imaging of Lower
Manhattan,
P.C -- (1,203,721) --
Purchases of property, plant and equipment (105,379) (120,169) (171,654)
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 844,000 105,000 --
------------ ------------ ------------
Net cash used in investing activities (13,311,379) (593,890) (796,654)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from the sale of Series C Preferred Stock -- -- 1,198,254
Borrowings pursuant to bridge financing 14,000,000 -- --
Borrowings under the revolving line of credit 1,376,275 1,462,000 --
Payments on capital lease obligations (1,908,258) (1,363,860) (1,037,614)
Payments on reserved subleased equipment (49,505) (251,576) (861,840)
Distributions to limited partners of joint ventures (129,199) (384,308) (371,539)
Other -- (17,500) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 13,289,313 (555,244) (1,072,739)
------------ ------------ ------------
INCREASE/(DECREASE) IN CASH 1,435,497 (103,253) (107,537)
CASH:
Beginning of the year 70,626 173,879 281,416
------------ ------------ ------------
End of the year $ 1,506,123 $ 70,626 $ 173,879
============ ============ ============
</TABLE>
F-5
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $1,272,446 $ 535,784 $ 477,196
========== ========== ==========
Income taxes paid $ 31,558 $ 35,300 $ 53,756
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital leases principally for property, plant and equipment $2,427,063 $2,221,584 $ 306,634
========== ========== ==========
Preferred stock issued as partial consideration for the Beran Acquisition
(See Note 2) $9,153,297
==========
Stock issued as partial consideration for the purchase of assets 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
==========
</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, 1998, 1997 AND 1996
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - The Company is principally engaged in the business
of establishing and operating fixed-site diagnostic imaging ("MRI")
centers.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include HealthCare Imaging Services, Inc. (together with its
subsidiaries and majority-owned joint ventures hereinafter referred to
as the "Company" unless the context indicates otherwise) and its
wholly-owned subsidiaries, which include corporations 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 intercompany balances and transactions
(including management fees paid by the joint ventures to the Company)
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly
liquid, short-term investments purchased with original maturities of
three months or less, which are maintained primarily with several
regional banks.
REVENUES - The Company provides administrative, management and billing
and collections services, as well as equipment and real property, to
health care providers, consisting primarily of individual physicians
and private group medical practices. Generally, the Company licenses
use of its diagnostic imaging equipment to professional practice groups
("Medical Licensees") in New Jersey, New York and Pennsylvania who, in
turn, use the equipment to provide diagnostic imaging services to their
patients or patients of other health care providers with whom they or
the Company have contractual relationships. A Medical Licensee
typically pays the Company a flat fee on a monthly, daily or per scan
basis for the use of the equipment and property, 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
other associated nonmedical functions. Such fees, under certain
arrangements, are received by the Company following the receipt of
payment by the Medical Licensee from either the patients or third party
payors. Under other arrangements and pursuant to the laws of certain
states in which the Company does business, the Medical Licensee pay
such fees to the Company following the conduct of the procedure or
passage of the applicable payment period irrespective of whether the
patients or third party payors have reimbursed the Medical Licensee for
the respective procedures. Where the Company has entered into written
agreements with Medical Licensees, such agreements typically have been
for terms ranging from five to ten years.
For certain licensed facilities in New Jersey owned by the Company, the
Company is itself the provider of the diagnostic imaging services and,
as such, directly bills and collects from patients and third party
payors for such services. In such facilities, qualified radiologists
are either employed by the Company or are retained and compensated by
the Company as independent contractors.
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:
Office and computer equipment
and furniture and fixtures 5-8 years
Medical equipment 5-8 years
Leasehold improvements 6-8 years
GOODWILL - Goodwill is being amortized on a straight-line basis over
ten to twenty years.
DEFERRED TRANSACTION AND FINANCING COSTS - Deferred transaction and
financing costs relate to expenses incurred in connection with the
financing of the Beran Acquisition (See Notes 2 and 4) and in
connection with the Company's proposed acquisition of a management
services organization ("MSO") (See Note 2). Deferred financing costs
are being expensed over the applicable agreement term. In the event
such proposed acquisition is not consummated, the related deferred
transaction costs will be expensed.
NET INCOME/(LOSS) PER COMMON SHARE - In accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," basic
earnings (loss) per common share are computed by dividing net income
(loss) by the number of weighted average common shares outstanding for
the years ended December 31, 1998, 1997 and 1996, as applicable.
Diluted earnings (loss) per common share are computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the years ended December 31, 1998, 1997 and 1996, as
applicable, plus the incremental shares that would have been
outstanding upon the assumed exercise of dilutive stock option awards
and conversion of the preferred shares.
INCOME TAXES - Deferred tax assets and liabilities are determined based
on the difference between the financial statement basis 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 fair values of the Company's long-term debt
and capital lease obligations were 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 were $18,946,400 and $19,187,886, respectively, at December
31, 1998, and $4,427,595 and $4,478,970, respectively, at December 31,
1997.
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 receivable. As described under "Revenues," the Company
furnishes services to Medical Licensees, which in turn provide
diagnostic imaging services to their patients and the patients of
individual physicians, physicians' groups and other health care
providers. The Company also directly provides diagnostic imaging
services at certain of its New Jersey facilities. Although the
Company's right to payment for services rendered to Medical Licensees
is not dependent upon payments received by the Medical Licensees, as
part of its arrangements with certain Medical Licensees, the Company
does not seek payment from the Medical
F-8
<PAGE>
Licensee until the Medical Licensee has been paid for the medical
services it has provided. Therefore, the Company bears the risk of
delayed payment. However, most amounts due to the Medical Licensees (as
well as to the Company for diagnostic imaging services it directly
provides) 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 Licensees, the Company is contractually entitled to
seek payment from such Medical Licensees for all services provided,
including those with respect to which the Medical Licensees have not
been paid. However, the Company generally does not seek to recover
unpaid claims from Medical Licensees. The Company's accounts receivable
consist of the Company's proportionate share of Medical Licensees'
procedure fees as well as administrative fees payable by Medical
Licensees and accounts receivable for diagnostic imaging services
provided directly by the Company. 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 - 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 - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies 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 (loss) 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.
NEW ACCOUNTING PRONOUNCEMENTS - During 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS No. 134, "Accounting for Mortgage-Backed
Securities". The Company does not expect adoption of these new
accounting pronouncements to have a material effect, if any, on its
financial condition or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the
prior year's financial statements to conform with the current year's
presentation.
2. ACQUISITIONS, PROPOSED ACQUISITION AND OTHER MATTERS
ACQUISITIONS - On October 2, 1998 (effective October 1, 1998), HIS
Imaging Co., a wholly-owned subsidiary of the Company, acquired (the
"Beran Acquisition") all of the assets and business of, and assumed
certain liabilities relating to (i) Echelon MRI, P.C., which operated a
fixed-site MRI facility in Voorhees, New Jersey, (ii) Mainland Imaging
Center, P.C., which operated a multi-modality diagnostic imaging
facility in Northfield, New Jersey and a radiology facility in Ocean
City, New Jersey, (iii) Bloomfield Imaging Associates, P.A., which
operated a multi-modality diagnostic imaging facility in Bloomfield,
New Jersey, (iv) North Jersey Imaging Management Associates, L.P.,
which managed the Bloomfield, New Jersey facility and (v) Irving N.
Beran, M.D., P.A., which operated a multi-modality diagnostic imaging
facility in each of Voorhees and Williamstown, New Jersey and a
radiology facility in each of Atco and Williamstown, New Jersey
(collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (A) the assumption of certain
obligations and liabilities of the Beran Entities, (B) cash in the
amount of $11,500,000 and (C) the issuance of 887.385 shares of Series
D Cumulative Accelerating Redeemable Preferred Stock of the Company
(the "Series D Stock") having an aggregate liquidation preference of
$9,317,542.50 (i.e., $10,500 per share liquidation preference) (See
Note 8). The purchase price was subject to an adjustment based on the
value of the Beran
F-9
<PAGE>
Entities' accounts receivable as of the closing date and, in accordance
therewith, 15.642 shares of Series D Stock having an aggregate
liquidation preference of $164,241 were transferred back to the Company
and canceled. The Company also assumed certain contractual obligations
of the Beran Entities on a going-forward basis under the contracts
assigned to the Company in the Beran Acquisition (including operating
leases and equipment maintenance agreements). The Company also loaned
the Beran Entities an aggregate of $2,500,000, which loan bears
interest at 8% per annum and matures upon the terms and conditions
contained in the related promissory notes, but in no event later then
December 31, 1999. The Company used the proceeds of a $14,000,000
bridge loan from DVI Financial Services Inc. ("DFS") to pay the cash
portion of the purchase price and to fund the loan to the Beran
Entities (the "DFS Loan") (See Note 4).
The acquisition of the assets of the Beran Entities has been recorded
in accordance with the purchase method of accounting whereby assets
acquired and liabilities assumed were recorded at their fair values.
The fair value of accounts receivable acquired in the Beran Acquisition
have been recorded at their estimated net collectible value based upon
the Company's analysis of the number of open accounts at that date, the
past collection experience of the Beran Entities, the Company's
experience in collecting similar accounts, and actual collections
subsequent to October 1, 1998. As collections are made on these
acquired accounts receivable, the carrying value thereof is reduced. If
the Company's actual experience in collecting these receivables differs
significantly from the Company's estimates, the Company will adjust the
estimated net collectible value of the acquired accounts receivable
through an adjustment to goodwill. The excess of the cost of the
acquisition (including transaction costs) over the fair value of net
assets acquired is reflected as goodwill in the accompanying balance
sheet and is being amortized over a period of 20 years.
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 operated a fixed-site MRI facility, with
ultrasound, located at 45 Beekman Street in New York City (the "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
1,000,000 shares of the Company's common stock (the "Common Stock"),
and (iv) the issuance of a $300,000 promissory note that was due and
paid on December 31, 1997. The Company also assumed certain contractual
obligations of NYC MRI on a going-forward basis under the contracts
assigned to the Company in the acquisition (including operating leases
and equipment maintenance agreements). 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 with NYC MRI which, among other things,
provides that Dr. Braff will continue to provide all medical services
at the New York City Facility. Dr. Braff is the Medical Director of the
Company and the supervising radiologist, majority shareholder and
officer of three of the Medical Licensees: Monmouth Diagnostic Imaging,
P.A., Kings Medical Diagnostic Imaging, P.C. and M.R. Radiology Imaging
of Lower Manhattan, P.C. Dr. Braff was a director of the Company from
December 1995 until April 1997.
The following table presents the Company's unaudited pro forma results
of operations, as if the Beran Acquisition and the acquisition of NYC
MRI occurred on January 1, 1997:
F-10
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues $24,134,670 $22,357,639
=========== ===========
Net income/(loss) $1,772,828 $(150,019)
========== ==========
Net income/(loss) per common
share - basic $0.16 $(0.02)
===== =======
Net income/(loss) per common
share - diluted $0.13 $(0.02)
===== =======
</TABLE>
PROPOSED ACQUISITION - The Company has decided to expand its strategic
focus into the area of physician practice management and, in connection
therewith, the Company has entered into letters of intent with respect
to the acquisition of all of the outstanding capital stock of Jersey
Integrated HealthPractice, Inc. ("JIHP"), a MSO formed and owned by
Pavonia Medical Associates, P.A. ("PMA") and Liberty Health Care
Systems, Inc. ("Liberty") of Jersey City, New Jersey. JIHP provides
management services to PMA. PMA is comprised of over 55 physicians
servicing over 75,000 patients in five locations in New Jersey. In
consideration for the acquisition, the letters of intent provides,
among other things, that the Company will pay and/or issue to PMA and
Liberty, in the aggregate, (i) $7,000,000 in cash, (ii) 5,500,000
shares of Common Stock (500,000 shares of which may be subject to
certain post-closing adjustments), and (iii) convertible redeemable
preferred stock of the Company having an aggregate liquidation
preference of $5,000,000. 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 transaction
is subject to several material conditions including among others, the
receipt of necessary financing, the approval of the issuance of the
stock by 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 completed, the Company expects, subject to the
satisfaction of all conditions, to consummate it during 1999. A merger
agreement with PMA was executed as of January 29, 1999 (subject to the
approval of its physician stockholders), and the Company hopes to
execute a merger agreement with Liberty within the next several weeks.
In December 1997, the Company agreed to guarantee a loan of $1,000,000
from DFS to JIHP. This loan was funded by DFS to JIHP on January 8,
1998 and bears interest at 12% per annum and is repayable over 48
months commencing in February 1998 at $26,330 per month. At December
31, 1998, approximately $810,000 of the loan was outstanding. PMA and
each physician stockholders of PMA 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 PMA or JIHP,
and the acquisition by the Company of 100% of the outstanding capital
stock of JIHP is not consummated, then PMA and each physician
stockholder of PMA agree to indemnify and hold the Company harmless
from and against any and all such liabilities and obligations.
OTHER MATTERS - In July 1994, the Company's MRI facility located in
Catonsville, Maryland ceased operations. This facility was operated by
a joint venture in which the Company owned 60% and the limited partners
owned the remaining 40%. The Company entered into a sublease
arrangement with a radiology group, of which one of the members was
among the limited partners in this joint venture, to sublease the
medical equipment and facility from the Company. This sublease
arrangement commenced April 1, 1995 and provided for 60 monthly
payments of $10,000 commencing on June 15, 1995. In addition, the
sublessee was responsible for paying the rent for the office space and
for all future operating costs incurred. At September 30, 1998 the
sublessee was
F-11
<PAGE>
current with its monthly payment obligations to the Company. In
December 1998, the Company terminated the sublease agreement and sold
the medical equipment to the sublessee for an aggregate of $189,000
representing: (i) a payment for the Company's agreement to terminate
the sublease agreement ($116,400), (ii) reimbursement for personal
property tax payments made by the Company on the sublessee's behalf
($42,600) and (iii) the purchase price for the medical equipment
($30,000). As a result of the cessation of the sublease arrangement and
sale of the equipment, the Company recorded a gain on sale of property,
plant and equipment of $166,170 in December 1998, which primarily is
due to a reversal of an early sublease termination reserve established
in 1994 and the recoupment of taxes paid by the Company on the
sublessee's behalf.
In November 1996, the Company, with Practice Management Corporation
("PMC"), formed a limited liability company, of which the Company owned
60% and PMC owned 40%, to provide on-site diagnostic imaging services
to Meadowlands Hospital Medical Center (the "Meadowlands MRI Facility")
located in Secaucus, New Jersey. The site commenced operations on May
8, 1997 utilizing one of the Company's mobile MRI units. Based upon
losses sustained at such site and the expectation of continuing losses,
the Company decided to sell the mobile MRI unit and to close the
Meadowlands MRI Facility. In order to facilitate the wind-down of
operations, in March 1998, an agreement was reached whereby the Company
acquired (for nominal consideration) the 40% joint venture interest
owned by PMC effective as of December 31, 1997. In May 1998, the
Company sold this mobile MRI unit to an unaffiliated third party. As a
result of the sale of the mobile MRI unit, the Company recorded a gain
on sale of property, plant and equipment of $151,767, which was
recorded in the second quarter of fiscal 1998.
Prior to September 1994, the Company operated four mobile MRI units in
addition to its fixed-site facilities. 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"), has been an officer of the Company since April 1997 and
is 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 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 arrangement, the Company recorded a restructuring charge in fiscal
1994 in the amount of $2,375,000. At December 31, 1994, the sublessee
was current with its monthly payment obligations. During fiscal 1995,
the Company was entitled to receive from this sublessee approximately
$1,047,000 in rental income of which it received approximately
$685,000, resulting in past due amounts of approximately $362,000. 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. 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 attributable to such
mobile MRI unit and the sale proceeds received. 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. At such time, the
sublessee owed the Company approximately $456,000. In an attempt to
satisfy the past due amounts, the sublessee and its customers provided
the Company with cash (aggregating approximately $75,000) and
additional patient receivable claims (aggregating approximately
$504,000) 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. At such
time, the sublessee owed the Company approximately $532,000. In August
1996, the Company sold another one of its mobile MRI units. There was
no significant gain or loss resulting from such disposition. In October
1996, the Company entered into an agreement with certain other
creditors of the sublessee with respect to the collection and
application of the sublessee's receivables. The Company's collection
efforts on behalf of the parties to this agreement, together with the
F-12
<PAGE>
Company's intended use of one of its two remaining mobile MRI unit at
the Meadowlands MRI Facility, resulted in the Company recording a
recovery on accounts receivable (approximately $392,000) relating to a
provision for bad debts that had been recorded at the time of the
restructuring of the Company's mobile MRI operations. In May 1997, the
Company sold one of its two remaining mobile MRI units to an
unaffiliated party for $105,000. As of December 31, 1997 and 1998, the
amount of the sublessee's past due indebtedness was approximately
$347,000 and $257,000, respectively (which amount has been fully
reserved for by the Company in its financial statements). In May 1998,
the Company sold its remaining mobile MRI unit that had been used at
the Meadowlands MRI Facility to an unaffiliated party.
At December 31, 1998, the Company reevaluated its future obligations
under a note payable which was due (and paid) in February 1998 relating
to this mobile equipment and concluded that the remaining reserve at
December 31, 1998 was adequate.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Medical equipment under capital leases $7,499,049 $7,179,680
Medical equipment 3,707,250 540,771
Office equipment under capital leases 45,466 45,466
Office equipment 122,300 106,039
Furniture and fixtures under capital leases 88,959 88,959
Furniture and fixtures 383,563 354,040
Computer equipment under capital leases 16,880 16,880
Computer equipment 242,085 366,309
Leasehold improvements under capital lease 1,161,381 1,231,655
Leasehold improvements 1,512,543 1,219,917
Building/Land 1,535,336 -
Automobiles 15,400 -
---------- ----------
16,330,212 11,149,716
Less accumulated depreciation and
amortization 6,751,405 5,630,944
--------- ---------
$9,578,807 $5,518,772
========== ==========
</TABLE>
4. BORROWINGS
LINE OF CREDIT
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit Corporation ("DVIBC"), an
affiliate of DFS, to provide a revolving line of credit to the Company.
The maximum amount available under such credit facility initially was
$2,000,000, which amount increased to $3,000,000 in October 1998 in
connection with the Beran Acquisition, with advances limited to 75% of
eligible accounts receivable, as determined by DVIBC. Borrowings under
the line of credit bear interest at the rate of 3% over the prime
lending rate and are repayable on May 1, 1999. This credit facility is
expected to be repaid from the longer-term financing to be obtained in
connection with the proposed acquisition of JIHP. In the event that
this transaction is not consummated on or prior to May 1, 1999,
management believes that the credit facility can be refinanced on a
longer-term basis or the repayment due date extended. 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
F-13
<PAGE>
Company to maintain certain financial ratios and minimum levels of
working capital. Borrowings under this credit facility are used to fund
working capital needs as well as acquiring businesses which are
complementary to the Company. At December 31, 1998 and 1997, the
Company had $2,838,275 and $1,462,000, respectively, of borrowings
under this credit facility. The Company believes that cash to be
provided by operating activities together with borrowings available
from this credit facility will provide adequate financing to maintain
its normal operations for the next twelve months.
BRIDGE FINANCING
In October 1998, the Company used the proceeds of a $14,000,000 bridge
loan from DFS to pay the cash portion of the purchase price in the
Beran Acquisition and to fund the $2,500,000 loan to the Beran
Entities. The terms of the DFS Loan provide for interest at 12% per
annum with no payment due in month one (i.e., November 1998), interest
only payments of $140,000 in each of months two through four (i.e.,
December 1998, January 1999 and February 1999), principal and interest
payments of approximately $308,000 in each of months five and six
(i.e., March 1999 and April 1999) with a balloon payment of $13,951,804
due in month seven (i.e., May 1999). This bridge loan is expected to be
repaid from the longer-term financing to be obtained in connection with
the proposed acquisition of JIHP. In the event that this transaction is
not consummated on or prior to May 1, 1999, management believes that
the bridge loan can be refinanced on a longer-term basis. Options to
purchase 50,000 and 400,000 shares of Common Stock at exercise prices
of $.90625 and $1.03125 per share, respectively, were issued to DFS for
providing the DFS Loan. The value of these options will be expensed
over the term of the DFS Loan (See Note 8).
5. LEASE OBLIGATIONS
The Company leases various pieces of medical equipment (primarily from
DFS), at interest rates ranging from 11.5% to 15.5% due through
September 2008. 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, 1998 (excluding
amounts relating to subleased equipment) are:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL LEASE
DECEMBER 31, OBLIGATIONS OPERATING LEASES
<S> <C> <C>
1999 $1,984,117 $565,159
2000 1,093,767 538,555
2001 1,064,409 516,669
2002 930,955 510,811
2003 324,382 363,842
Thereafter 1,205,508 -
---------- ----------
Total minimum lease/debt payments 6,603,138 $2,495,036
==========
Less amounts representing interest 1,656,738
----------
Present value of minimum capital
lease payments 4,946,400
Less current portion of obligations 1,505,510
----------
$3,440,890
==========
</TABLE>
The carrying value of property, plant and equipment under capital lease
obligations was $5,397,235 and $4,550,208 at December 31, 1998 and
1997, respectively.
F-14
<PAGE>
Rent expense was $678,858, $723,136 and $711,188 for 1998, 1997 and
1996, respectively.
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL TOTAL
<S> <C> <C> <C>
December 31, 1998:
Current $ - $ 97,661 $ 97,661
Deferred - - -
------------- ------------- -------------
$ - $ 97,661 $ 97,661
============= ============= =============
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
============= ============= =============
</TABLE>
The difference between the income tax provision/(benefit) and the tax
provision/(benefit) computed by applying the statutory Federal income
tax rate to the income/(loss) before taxes is attributable to the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C>
Statutory Federal income tax rate $768,206 34.0 $(258,830) (34.0) $(276,232) (34.0)
State income taxes -
net of Federal benefit $64,456 2.9 28,406 3.7 32,570 4.0
Other - net $50,351 2.2 (242,474) (31.9) (146,173) (18.0)
Valuation allowance (785,352) (34.8) 515,937 67.9 439,183 54.1
-------- ---- --------- ---- --------- ----
Actual income tax $ 97,661 4.3 $ 43,039 5.7 $ 49,348 6.1
======== ==== ========= ==== ========= ====
</TABLE>
F-15
<PAGE>
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Difference between financial reporting and tax
basis of property, plant and equipment $ 211,737 $ 321,396
Restructuring charges 15,187 -
----------- -----------
226,924 321,396
----------- -----------
Deferred tax assets:
Federal and State tax NOL carryforwards 1,707,639 2,510,004
Non cash compensation 792,947 756,088
Provision for bad debts 145,345 172,774
Restructuring charges 9,881 43,183
Federal AMT tax credit carryforward 48,325 -
Other - 53,587
----------- -----------
2,704,137 3,535,636
Valuation allowances (2,428,888) (3,214,240)
----------- -----------
Total deferred tax assets - net 275,249 321,396
----------- -----------
Net deferred tax asset $ 48,325 $ -
=========== ===========
</TABLE>
At December 31, 1998 and 1997, in view of operating losses in prior
years, the limited period of ownership of the Beran facilities, and the
uncertainties inherent in the planned acquisition of JIHP, the Company
has provided valuation allowances of $2,105,149 and $2,830,294,
respectively, against Federal deferred tax assets and $323,739 and
$383,946, respectively, against state deferred tax assets. Management
will continue to evaluate the need for these valuation allowances until
the Beran facilities have been managed by the Company for a longer
period and after the JIHP transaction has been consummated or
terminated.
The Company has net operating loss ("NOLs") carryforwards of
approximately $4,432,000 for Federal income tax purposes which expire
in varying amounts from December 31, 2006 through December 31, 2013.
F-16
<PAGE>
7. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings (loss) per share computations: For the
Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Per- Per- Per-
Income Shares Share Loss Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income (Loss) $1,978,703 10,511,893 $.19 $(804,305) 6,187,822 $(.13) $(861,796) 4,711,974 $(.18)
ADD:
PREFERRED DIVIDENDS 183,066 - - - - -
EFFECT OF DILUTIVE
SECURITIES
Series D Stock - 10,031,010 - - - -
Stock Options - 638,163 - - - -
Series C Stock - 280,835 - - - -
-------------------------- ----------- -------------------
DILUTED EPS
Net Income (Loss) $2,161,769 21,461,901 $.10 $(804,305) 6,187,822 $(.13) $(861,796) 4,711,974 $(.18)
================================== ================================== =================================
</TABLE>
8. STOCK OPTIONS AND OTHER EQUITY TRANSACTIONS
The following is a summary of the number of options outstanding under
each of the Company's employee benefit plans and otherwise:
<TABLE>
<CAPTION>
1997
Omnibus
Plan and
Employee
1996 Stock
1991 Directors' Purchase Other
Plan Plans Plan Options
---- ----- ---- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 419,400 24,000 - -
Options granted at exercise prices
ranging from $.75 to $2.09 per share 15,000 150,000 - 1,400,000
Options forfeited at exercise prices
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 exercise prices
ranging from $.75 to $1.09 per share 648,600 25,000 28,800 -
Options forfeited at exercise prices
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
======= ======= ======= =========
F-17
<PAGE>
Options granted at exercise prices
ranging from $.91 to $12.50 per share - 145,000 867,500 850,000
Options exercised - - - (50,000)
Options forfeited at exercise prices
ranging from $1.06 to $5.00 per share (40,275) (90,000) - -
------- ------- ------- ---------
Balance at December 31, 1998 608,175 205,000 896,300 2,200,000
======= ======= ======= =========
Options exercisable at December 31,
1998 (exercisable at prices ranging
from $.75 to $5.00 per share) 57,244 60,000 100,000 2,000,000
======= ======= ======= =========
</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, the pro forma impact of following
the provisions of SFAS Statement No. 123 on the Company's operations
and net income/(loss) per share would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
Net income (loss) available to
common shareholders - as reported $1,978,703 $(804,305)
========== ==========
- pro forma $1,908,106 $(970,051)
========== ==========
Net income (loss) per
common share - Basic - as reported $ .19 $ (.13)
========== ==========
- pro forma $ .18 $ (.16)
========== ==========
Net income (loss) per
common share - Diluted -as reported $ .10 $ (.13)
========== ===========
-pro forma $ .10 $ (.16)
========== ===========
</TABLE>
As of December 31, 1998, the Company has reserved Common Stock for
issuance upon conversion of the Series D Stock and exercise of stock
options as follows:
Series D Stock (*) 2,094,768
1991 Plan 608,175
1996 Directors' Plan 750,000
1997 Omnibus Plan and Employee Stock Purchase Plan 5,000,000
Other Options 2,200,000
----------
10,652,943
==========
(*) The Series D Stock accrues dividends at the rate of 8% of the
liquidation preference and increases by an additional 2% upon each
three month anniversary of the date of issuance; provided,
however, that in no event will the dividend rate be in excess of
15% of the liquidation preference. All accrued and unpaid
dividends are payable quarterly in cash commencing January 10,
1999.
F-18
<PAGE>
After March 1, 1999, the holders of the Series D Stock became
entitled to convert the Series D Stock into Common Stock equal to
the quotient obtained by dividing (x) the aggregate liquidation
preference of the Series D Stock being converted by (y) $1.049
(subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the
conversion of all outstanding shares of Series D Stock); provided
that until the Company obtains stockholder approval of the
issuance of the Series D Stock, the holders of the Series D Stock
only will be able to convert into Common Stock representing in the
aggregate 19.9% of the outstanding Common Stock as of October 2,
1998 (i.e., approximately 2,094,768 shares). The holders of the
Series D Stock will be entitled to vote, on an as-converted basis,
with the holders of the Common Stock as one class on all matters
submitted to a vote of the Company stockholders; provided that
unless the Company obtains stockholder approval of the issuance of
the Series D Stock, the holders of the Series D Stock will not be
able to exercise their aggregate voting rights in excess of 19.9%
of the outstanding Common Stock as of October 2, 1998. The Company
may redeem the Series D Stock, in whole but not in part, at any
time at its liquidation preference plus all accrued and unpaid
dividends to the date of redemption. The Company expects to
solicit stockholder approval of the issuance of the Series D Stock
during the second quarter of fiscal 1999.
1991 PLAN
The 1991 Stock Option Plan (the "1991 Plan") provided for the issuance
of stock options exercisable to purchase up to 700,000 shares of Common
Stock (subject to appropriate adjustments in the event of stock splits,
stock dividends and similar dilutive events) to key employees
(including officers who may also be directors) of the Company and its
subsidiaries, as selected by the Stock Option Committee of the Board of
Directors. The 1991 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 was exercisable was
determined by the Stock Option Committee, but the term of a
nonqualified stock option generally could not exceed ten years from the
date of grant and the term of an incentive stock option could in no
event be more than ten years from the date of grant (and otherwise be
consistent with the Internal Revenue Code of 1986 (the "Code")). The
stock options granted under the 1991 Plan are non-transferable during
the life of the option holder except as otherwise provided in the 1991
Plan.
1996 DIRECTORS' PLAN
The 1996 Stock Option Plan for Non-Employee Directors (the "1996
Directors' Plan") also is administered by the Stock Option Committee.
Up to an aggregate of 750,000 shares of Common Stock may be issued to
non-employee directors pursuant to stock options awarded under the 1996
Directors' Plan. The 1996 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. This plan replaced
the 1991 Directors' Stock Option Plan for Non-Employee Directors.
Under the 1996 Director's Plan, nonqualified stock options exercisable
to purchase an aggregate of 25,000 shares of Common Stock are granted
to each non-employee director upon his initial appointment to the
Board. In addition, each non-employee director has the right, prior to
each annual organizational meeting of the Board, to elect to receive
nonqualified stock options under the 1996 Directors' Plan exercisable
to purchase an aggregate of 5,000 shares of Common Stock in lieu of the
annual cash director's fee expected to be earned by such non-employee
director for the upcoming fiscal year of the Company. In the event that
the Board decides that no annual cash director's fee will be
F-19
<PAGE>
paid in any year, these stock options will, nonetheless, be granted to
each non-employee director for his services for such year. The purchase
price of the shares of Common Stock subject to such stock options equal
the fair market value of such shares on the date of the grant. 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 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.
In December 1998, the three non-employee directors were granted under
the 1996 Directors' Plan additional nonqualified stock options
exercisable to purchase an aggregate of 25,000 shares of Common Stock
subject to the same terms and provisions as other options granted under
the plan as described above.
1997 OMNIBUS INCENTIVE PLAN
In November 1997, the 1997 Omnibus Incentive Plan (the "Omnibus Plan")
was adopted to replace the 1991 Plan under which there will be no
further grants of awards. 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 under the Omnibus 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 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. No participant may
receive stock awards or stock-based awards to acquire more than 600,000
shares in any fiscal year. The Stock Option Committee administers the
Omnibus Plan and has 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 of the Stock Option
Committee are not eligible to receive awards under the Omnibus Plan.
The Omnibus Plan will terminate on November 3, 2007, unless earlier
terminated by the Board..
In February 1998, the Company entered into a consulting agreement with
Dr. Manmohan A. Patel, a director of the Company since December 1998,
for a one-year term commencing February 27, 1998. Such agreement, upon
its expiration of its initial one year term, was extended for an
additional six month period. Pursuant to such agreement, Dr. Patel will
provide such consultation and advice as the Company may reasonable
request, including advice in respect of the Company's development of
its physician practice management operations. Such agreement shall be
terminated upon the earlier to occur of (i) the negotiation and
execution of an employment agreement between the Company and Dr. Patel
on terms and conditions satisfactory to the parties thereto (the
"Employment Agreement"), or (ii) the expiration or termination of such
agreement pursuant to the terms thereof. Pursuant to such agreement,
and in contemplation of the services to be rendered pursuant to the
Employment Agreement, the Company granted Dr. Patel stock options
exercisable to purchase an aggregate of 300,000 shares of Common Stock
under the terms and conditions of the Omnibus Plan. Such stock options
are exercisable at $1.71875 per share, the closing sales price of the
Common Stock on The Nasdaq National Market on the date of grant, and
vest in increments of 25% (i.e., 75,000 shares) upon the Common Stock
attaining, for a period of 20 consecutive trading days, a fair market
value (as defined in the Omnibus Plan) of $2.50, $5.00, $7.50 and
$10.00, respectively. Notwithstanding the foregoing, such stock options
shall become fully vested upon the earlier to occur of (x) the fifth
anniversary of the grant date of the stock options and (y) a "Change in
Control" as defined in the Omnibus Plan; provided however, that in no
event shall any shares be
F-20
<PAGE>
purchasable under such stock options unless and until Dr. Patel has
become a full-time employee of the Company. Dr. Patel is also a
stockholder of PMA and an executive officer of JIHP.
1997 STOCK PURCHASE PLAN
In November 1997, the Company adopted the 1997 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is
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. Subject to certain prescribed restrictions, the Stock Option
Committee has the discretion to determine when offerings will be made
under the Stock Purchase Plan, the number of shares of Common Stock to
be made available in any such offering, the length of the period
pursuant to which employees can elect to participate in any offering
and the period pursuant to which installment payments of the option
price must be paid.
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.
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 Codes and the
regulations thereunder, without affecting the options 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 November 3, 2007, and an option
shall not be granted under the Stock Purchase Plan after such date.
OTHER OPTIONS
In consideration for the execution by Biltmore Securities Inc.
("Biltmore") of a consulting agreement with the Company, the Company
granted Biltmore, as of January 30, 1996, stock 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 connection
with the issuance of these options, the Company recorded a non-cash
compensation charge of $685,800 amortized over the initial one year
term of the consulting agreement. In addition, during fiscal 1998, upon
consummation of the Beran Acquisition, certain transferees of Biltmore
were issued 750,000 shares of Common Stock.
As of January 30, 1996, the Company granted stock 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. These options were granted in
consideration of certain past services to the Company including
services rendered to the Company in connection with the refinancing of
certain leases. In connection with the issuance of these options, the
Company recorded a non-cash compensation charge of $91,441 in the
quarter ended March 31, 1996. In February 1998 one of the two directors
exercised his options.
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
F-21
<PAGE>
aggregate of 270,000 shares of Common Stock under the 1991 Plan were
terminated, and the Company granted 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. In connection
with the issuance of these options, the Company recorded a non-cash
compensation charge of $562,506 which was amortized over the 21 months
ending October 31, 1997. Furthermore, as incentive compensation the CEO
received a restricted stock grant of 250,000 shares of Common Stock.
The restrictions related to this restricted stock grant lapsed upon
consummation of the Beran Acquisition. In connection with the issuance
of this 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.
As consideration for the execution of a one-year consulting agreement,
as of October 15, 1996, the Company granted to a consultant stock
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. These options vested quarterly in equal installments over the
one-year term of the consulting agreement term. In connection with the
issuance of these options, the Company recorded a non-cash compensation
charge of $35,628 which was amortized over the one year term of the
consulting agreement. (See Note 10).
As of April 13, 1998, the Company granted to an officer of a
subsidiary, subject to stockholder ratification and approval (which was
obtained in December 1998), stock options, not issued under the Omnibus
Plan but nonetheless subject to the terms and conditions of the Omnibus
Plan, exercisable to purchase an aggregate of 150,000 shares of Common
Stock at an exercise price of $7.50 per share (with respect to 50,000
of the shares subject to the options), $10.00 per share (with respect
to 50,000 of the shares subject to the options), and $12.50 per share
(with respect to 50,000 of the shares subject to the options). These
options were granted in connection with such officers's execution of an
employment agreement with the subsidiary and vest upon the earlier of
(i) the third anniversary of the grant date, (ii) attainment of certain
performance objectives and (iii) a "Change in Control" of the
subsidiary (as defined in the option).
In October 1998, upon execution of a consulting agreement with DFS (the
"DFS Consulting Agreement"), the Company granted DFS stock options
immediately exercisable for a five-year period (subject to certain
prescribed restrictions) to purchase an aggregate of 500,000 shares of
Common Stock, at an exercise price of $0.90625 per share (with respect
to 50,000 of the shares subject to the options), $1.03125 per share
(with respect to 400,000 of the shares subject to the options),
$1.28125 per share (with respect to 20,000 of the shares subject to the
options), $1.25 per share (with respect to 10,000 of the shares subject
to the options) and $1.46875 (with respect to 20,000 shares subject to
the options). In connection with the issuance of the 50,000 and 400,000
options, the Company will expense in the aggregate $320,111 over the
term of the DFS Loan (See Note 4) and in the case of the 20,000, 10,000
and 20,000 options, the Company recorded a non-cash compensation charge
of $47,197 in October 1998.
During fiscal 1998, a director was granted stock options immediately
exercisable for a ten-year period to purchase an aggregate of 150,000
shares of Common Stock at an exercise price of $1.00 per share. These
options were granted in consideration for his agreement, in his
individual capacity and not as a director, to sell the Company's
Brooklyn facility (See Note 10). In addition, during fiscal 1998 a
consultant to the Company was granted stock options exercisable for a
five-year period to purchase an aggregate of 50,000 shares of Common
Stock at an exercise price of $0.96875 per share. These options vest
quarterly, in equal installments over a one year period commencing
August 15, 1998. In connection with the issuance of these options to
such director and consultant, the Company recorded a non-cash
compensation charge of $88,420 and $34,961 respectively. These amounts
were amortized into expense in December 1998 and July 1998,
respectively.
9. 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 years ended December 31, 1998 and
1997, matching contributions were made by the Company in the amount of
$16,994 and $17,163, respectively. During the year ended
F-22
<PAGE>
December 31, 1996, no matching contributions were made by the Company.
10. RELATED PARTY AND CERTAIN OTHER TRANSACTIONS
DUE FROM OFFICER - At December 31, 1998 and 1997, Elliott H. Vernon
(the CEO) owed the Company $264,125 in connection with certain
non-interest bearing advances under the Company's bonus plan. In
accordance with this bonus plan and Mr. Vernon's employment agreement
with the Company, Mr. Vernon is entitled to monthly bonus payments
based upon an estimate of his full years' bonus entitlement, subject to
adjustment. These advances represent such payments which were
determined not to have been earned by Mr. Vernon under the terms of the
bonus plan and are repayable to the Company.
BROOKLYN, NEW YORK MRI FACILITY - Prior to September 1998, the Company
leased its Brooklyn, New York fixed-site MRI facility (the "Brooklyn
Facility") from DMR Associates, L.P. ("DMR"). The Company leases the
MRI equipment at such facility from DFS. DMR is owned by MR General
Associates, 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 and the nine months ended
September 30, 1998, the Company paid DMR an aggregate of approximately
$407,000 and $208,000, respectively, in lease payments for the Brooklyn
Facility. The Company's lease payments to DMR were 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 an approximately $250,000 loan
(the "DMR Loan") from DFS to DMR in connection with DMR's refinancing
of an equipment lease related to the Brooklyn Facility. This loan bore
interest at 12% per annum and was repayable over 34 months commencing
February 15, 1997. The outstanding balance of this loan was
approximately $145,000 at September 16, 1998. In September 1998, DMR
sold its interest in the Brooklyn Facility to an affiliate of DFS,
which in turn, has entered into a lease arrangement (the "DVI Lease")
with the Company in respect of this facility. A portion of the proceeds
from such sale were used to repay the outstanding balance of the DMR
Loan. In consideration for the director's agreement to such sale (as
well as in appreciation of his participation in the original lease
transaction), the Company granted the director (subject to stockholder
ratification and approval) a ten year stock option to purchase 150,000
shares of Common Stock at an exercise price per share equal to $1.00
(the closing sales price of the Common Stock on The Nasdaq National
Market on December 22, 1998, the date of stockholder ratification and
approval of such stock option grant), which option is 100% exercisable.
In addition, the Company has agreed that, to the extent the Company
exercises its purchase option under the DVI Lease and sells such
facility to an unrelated third party (other than in connection with a
merger, consolidation, sale of substantially all of the assets of the
Company or similar transaction), the director will be entitled to
receive an amount equal to 60% of any "profits" realized by the Company
upon such sale (i.e., the net proceeds received by the Company upon
such sale less the Company's depreciated basis in the property.
DVI FINANCIAL SERVICES, INC.- The Company has numerous financing
arrangements with DFS and its affiliates relating to equipment
financing, as well as the DVI Lease, the DFS Bridge Loan provided in
connection with the Beran Acquisition in October 1998 and the Company's
$3.0 million secured revolving line of credit provided by another
affiliate of DFS. DFS was a significant stockholder of the Company from
its inception until April 1996 and is a leading provider of medical
equipment financing. In addition, the Company entered into the DFS
Consulting Agreement in October 1998 in connection with the DFS Bridge
Loan, and in December 1997 the Company agreed to guarantee a $1,000,000
loan from DFS to JIHP (See Note 2).
During fiscal 1998 Dr. George Braff, a director of the Company from
December 1995 until April 1997, the Company's Medical Director since
October 1997 and the supervising radiologist at three of the Company's
MRI facilities, was the majority shareholder and officer of three of
the Company's Medical Licensees: 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 1998,
MRILM, MDI and KMDI paid the Company approximately $753,290, $3,869,117
and $1,306,254, respectively, in fees for services previously rendered.
In addition, revenues generated to the Company by MRILM, MDI and KMDI
accounted for approximately 6%, 27% and 6%, respectively, of the
Company's total
F-23
<PAGE>
revenues in fiscal 1998. For fiscal 1998, MRILM, MDI and KMDI paid Dr.
Braff approximately $53,865, $442,026 and $119,150, respectively, in
fees for professional services rendered by him on their behalf. Such
entities have continued to be Medical Licensees of the Company's in
fiscal 1999. Prior to October 1997, Dr. Braff was also a majority
shareholder and officer of another of the Company's Medical Licensees,
Edgewater Diagnostic Imaging, P.A., which paid the Company
approximately $1.4 million in fees during fiscal 1997 and generated
revenue to the Company in fiscal 1997 representing 18% of the Company's
total revenues for such fiscal year. (See Notes 2 and 11).
In May 1997, the Company entered into a consulting agreement with Munr
Kazmir, M.D., a director of the Company from November 1997 until
October 1998, 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 as of January 1, 1998. Pursuant to
such agreement, Dr. Kazmir agreed to provide such consultation and
advise as the Company may reasonably request, including advice in
respect to 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 also provided assistance to the Company in the expansion of its
business into physician practice management. Dr. Kazmir was entitled to
an annual consulting fee of $72,000 under such consulting agreement.
The consulting agreement was terminated in October 1998. During fiscal
1997 and 1998, Dr. Kazmir was paid an aggregate of $35,000 and $54,000
in consulting fees under the consulting agreement.
In October 1996, the Company entered into a consulting agreement with
Dr. Ulises C. Sabato, a significant stockholder of the Company, for a
one year term which commenced on October 15, 1996. Pursuant to such
agreement, Dr. Sabato agreed to provide such consultation and advice as
the Company may reasonable 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.
Sabato also provided assistance to the Company in the expansion of its
business into physician practice management. Pursuant to such agreement
Dr. Sabato was entitled to an annual consulting fee of $48,000. In
addition, upon execution of such agreement, the Company granted 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. (See Note 8). In
December 1997, the term of the consulting agreement was extended until
October 16, 1998, at which time it expired. During fiscal 1997 and
1998, Dr. Sabato was paid an aggregate of $44,000 and $48,000 in
consulting fees under the consulting agreement. Dr. Sabato also was a
limited partner in Edgewater Imaging Associates, L.P., which leased
real estate and equipment to the Company in respect of its fixed-site
MRI facility in Edgewater, New Jersey. Edgewater Imaging Associates,
L.P. was dissolved as of January 1, 1998.
11. CONCENTRATION OF REVENUES
For the years ended December 31, 1998, 1997 and 1996, the Company had
five Medical Licensees (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 27%, 14%, 14%, 9% and 6% of total revenues,
respectively; 30%, 18%, 17%, 15% and 12% of total revenues,
respectively; and 30%, 19%, 21%, 12% and 18% of total revenues,
respectively. To the extent the Company were to lose any of its
existing Medical Licensees, the impact on revenues and operations would
not be materially affected because the Company believes it will be
readily able to replace any such Medical Licensee.
F-24
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
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, 1998, 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-25
<PAGE>
13. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial information
for the years ended December 31, 1998 and 1997:
NET EARNINGS (LOSS)
<TABLE>
<CAPTION>
QUARTER NET BASIC DILUTED
ENDED REVENUES AMOUNT PER SHARE PER SHARE
----- -------- ------ --------- ---------
<S> <C> <C> <C> <C>
3-31-98 $ 3,198,641 $ 305,840 $ .03 $ .03
6-30-98 3,304,013 509,292 .05 .04
9-30-98 3,257,547 392,430 .04 .04
12-31-98 6,690,856 771,141 .07 $ .04
----------- ---------- ----- -----
$16,451,057 $1,978,703 $ .19 $ .10
=========== ========== ===== =====
3-31-97 $ 2,680,450 $ 2,812 $ .00 $ .00
6-30-97 2,425,181 (51,154) (.01) (.01)
9-30-97 2,566,669 (287,993) (.04) (.04)
12-31-97 2,575,640 (467,970) (.06) (.06)
----------- ---------- ----- -----
$10,247,940 $ (804,305) $(.13) $(.13)
=========== ========== ===== =====
</TABLE>
F-26
<PAGE>
SCHEDULE II
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - --------------------------------------------------------------------------------
<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 1998 Expenses Deductions 1998 (C)
----------- ---- -------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - $ 421,400 $ 148,269 $ 67,042(A) $502,627
========== ========= ======== ========
<CAPTION>
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
receivable - $ 471,150 $ - $ 49,750(A) $421,400
========== ========= ======== ========
<CAPTION>
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1996 Expenses Deductions 1996(C)
----------- ---- -------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - $1,082,000 $ - $610,850(B) $471,150
========== ========= ======== ========
</TABLE>
Notes:
- - ------
(A) Represents recoveries of accounts receivable of $67,042 and $49,750 for
December 31, 1998 and 1997, respectively.
(B) Represents recoveries and write-offs of accounts receivable of $392,286
and $218,564, respectively 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 Licensee's allowance of
approximately $5,677,833 and $4,555,584 in 1998 and 1997, respectively.
F-27
<PAGE>
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 29, 1999
AMONG
HEALTHCARE IMAGING SERVICES, INC.,
HIS PPM CO.,
JERSEY INTEGRATED HEALTHPRACTICE, INC.,
PAVONIA MEDICAL ASSOCIATES, P.A.
AND
THE PHYSICIAN STOCKHOLDERS OF PAVONIA MEDICAL ASSOCIATES, P.A.
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
DEFINITIONS............................................................1
Section 1.01 Definitions...............................................1
Section 1.02 Rules of Construction....................................10
ARTICLE II.
THE MERGER AND THE SURVIVING CORPORATION..............................11
Section 2.01 Effective Time of the Merger.............................11
Section 2.02 Surviving Corporation....................................12
Section 2.03 Exchange of Consideration................................12
Section 2.04 Status of Company Shares After Effective Date............12
Section 2.05 Name.....................................................12
Section 2.06 Certificate of Incorporation.............................12
Section 2.07 Bylaws...................................................13
Section 2.08 Directors and Officers...................................13
Section 2.09 Risk of Loss.............................................13
Section 2.10 Closing Date Financial Statements........................13
ARTICLE III.
THE CLOSING...........................................................13
Section 3.01 Closing Date.............................................13
Section 3.02 Deliveries at Closing....................................13
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF THE SELLER AND THE COMPANY.........................................15
Section 4.01 Organization and Qualification...........................16
Section 4.02 Authority................................................16
Section 4.03 Consents and Approvals; No Violations....................16
Section 4.04 Capitalization...........................................16
Section 4.05 Subsidiaries.............................................17
Section 4.06 Articles of Incorporation and By-laws....................17
Section 4.07 Compliance With Laws; Licenses...........................17
Section 4.08 Litigation; Investigations...............................18
Section 4.09 Taxes....................................................18
Section 4.10 Employee Benefit Plans; ERISA............................20
i
<PAGE>
Section 4.11 Labor Relations..........................................22
Section 4.12 Insurance Policies.......................................23
Section 4.13 Financial Statements and Books and Records...............23
Section 4.14 No Material Adverse Change...............................24
Section 4.15 Absence of Liabilities...................................24
Section 4.16 Absence of Specified Changes.............................24
Section 4.17 Corporate Names..........................................26
Section 4.18 Real Property; Leases....................................26
Section 4.19 Equipment and Personal Property..........................27
Section 4.20 Intellectual Property....................................27
Section 4.21 Software.................................................28
Section 4.22 Contracts................................................28
Section 4.23 Inventory................................................29
Section 4.24 Directors, Officers and Employees........................29
Section 4.25 Title to Properties; Liens...............................29
Section 4.26 Condition of Assets......................................29
Section 4.27 Transactions with Affiliates.............................29
Section 4.28 Valid Transfer...........................................29
Section 4.29 Absence of Certain Practices.............................29
Section 4.30 Accounts Payable.........................................30
Section 4.31 Accounts Receivable......................................30
Section 4.32 Identification of Depositories and Authority.............30
Section 4.33 WARN Act.................................................30
Section 4.34 Records..................................................30
Section 4.35 Medicine.................................................30
Section 4.36 Fraud and Abuse..........................................31
Section 4.37 Third-Party Payors.......................................31
Section 4.38 Compliance with Medicare and Medicaid Programs...........31
Section 4.39 Rate Limitations and Rates...............................32
Section 4.40 Participation in Audits..................................32
Section 4.41 Reimbursement Documentation..............................32
Section 4.42 DVI Term Loan............................................32
Section 4.43 Environmental Laws.......................................32
Section 4.44 Patients.................................................32
Section 4.45 Medical Waste............................................33
Section 4.46 Patient Referrals........................................33
Section 4.47 Physician Self-Referral..................................33
Section 4.48 Disclosure...............................................33
Section 4.49 Investment Intent of the Seller..........................33
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER AND THE MERGER SUB......................................34
Section 5.01 Organization and Qualification...........................34
Section 5.02 Authority................................................34
Section 5.03 Consents and Approvals; No Violations....................35
Section 5.04 Capitalization...........................................36
Section 5.05 Commission Filings.......................................36
Section 5.06 No Material Adverse Change...............................36
Section 5.07 Absence of Liabilities...................................36
Section 5.08 Litigation...............................................37
Section 5.09 Taxes....................................................37
ARTICLE VI.
CERTAIN COVENANTS.....................................................37
Section 6.01 Access to Information....................................37
Section 6.02 Conduct of Business in Normal Course.....................37
Section 6.03 Consent..................................................40
Section 6.04 Further Assurances.......................................40
Section 6.05 No Solicitation..........................................40
Section 6.06 Notification of Certain Matters..........................40
Section 6.07 Supplements to Schedules.................................40
Section 6.08 Confidentiality..........................................41
Section 6.09 Independent Appraisal....................................42
Section 6.10 Fees and Expenses........................................42
Section 6.11 DVI Term Loan............................................43
Section 6.12 Proxy Statement..........................................43
ARTICLE VII.
CONDITIONS TO EACH PARTY'S OBLIGATIONS................................44
Section 7.01 Governmental Authorizations; Consents....................44
Section 7.02 Absence of Litigation....................................44
Section 7.03 No Injunction............................................44
ARTICLE VIII.
CONDITIONS PRECEDENT TO THE PURCHASER'S
AND THE MERGER SUB'S OBLIGATION.......................................44
Section 8.01 Accuracy of Representations and Warranties...............45
Section 8.02 Performance by the Seller, the Company and the
Physician Stockholders................................................45
Section 8.03 Investigations...........................................45
ii
<PAGE>
Section 8.04 Casualty Losses; Material Change.........................45
Section 8.05 Stock....................................................45
Section 8.06 Board of Directors.......................................45
Section 8.07 Investment Representations...............................45
Section 8.08 CLIA.....................................................45
Section 8.09 Employment Agreements....................................46
Section 8.10 Leases...................................................46
Section 8.11 Agreements with Stockholders of the Seller...............46
Section 8.12 Liberty HealthCare System, Inc...........................46
Section 8.13 Financing................................................46
Section 8.14 Audited Financial Statements.............................46
Section 8.15 Unaudited Financial Statements...........................46
Section 8.16 FIRPTA Certificate.......................................47
Section 8.17 Consents.................................................47
Section 8.18 Administrative Services Agreement........................47
[Section 8.19 IPA Agreement............................................47
Section 8.20 Compliance with Laws.....................................47
Section 8.21 Opinions of Counsel......................................47
Section 8.22 Voting Agreement.........................................47
ARTICLE IX.
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS......................47
Section 9.01 Accuracy of Representations and Warranties...............47
Section 9.02 Performance by Purchaser.................................47
Section 9.03 Board Representation.....................................48
Section 9.04 Liberty HealthCare System, Inc...........................48
Section 9.05 Consents.................................................48
Section 9.06 Compliance with Laws.....................................48
ARTICLE X.
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS...................................48
ARTICLE XI.
INDEMNIFICATION.......................................................49
Section 11.01 General Indemnity.......................................49
Section 11.02 Indemnification Procedure...............................50
iii
<PAGE>
ARTICLE XII.
TERMINATION...........................................................52
Section 12.01 Right to Terminate......................................52
Section 12.02 Obligations to Cease....................................52
ARTICLE XIII.
OBLIGATIONS AFTER THE CLOSING.........................................53
Section 13.01 Tax Returns.............................................53
Section 13.02 Employees and Employee Benefits.........................53
Section 13.03 Tax Audits..............................................54
Section 13.04 Certain Contracts.......................................54
Section 13.05 Further Assurances......................................54
Section 13.06 Board Representation....................................54
Section 13.07 Seller's Indebtedness to the Company....................54
Section 13.08 Line of Credit..........................................55
ARTICLE XIV.
MISCELLANEOUS.........................................................55
Section 14.01 Publicity...............................................55
Section 14.02 Costs...................................................56
Section 14.03 Headings................................................56
Section 14.04 Notices.................................................56
Section 14.05 Assignment and Successors...............................58
Section 14.06 Binding Effect..........................................58
Section 14.07 Governing Law; Forum; Process...........................58
Section 14.08 Entire Agreement........................................58
Section 14.09 Counterparts............................................59
Section 14.10 Severability............................................59
Section 14.11 No Prejudice............................................59
Section 14.12 Words in Singular and Plural Form.......................59
Section 14.13 Parties in Interest.....................................59
Section 14.14 Amendment and Modification..............................59
Section 14.15 Waiver..................................................59
Section 14.16 Knowledge...............................................59
iv
<PAGE>
SCHEDULES
Schedule 4.03 Consents
Schedule 4.04 Capitalization
Schedule 4.05 Subsidiaries
Schedule 4.07 Permits
Schedule 4.08 Litigation
Schedule 4.09 Taxes
Schedule 4.10 Employee Benefit Plans
Schedule 4.12 Insurance Policies
Schedule 4.14 Material Adverse Changes
Schedule 4.15 Liabilities
Schedule 4.16 Specified Changes
Schedule 4.17 Corporate Names
Schedule 4.18 Real Property/Leases
Schedule 4.19 Equipment and Personal Property
Schedule 4.20 Intellectual Property
Schedule 4.21 Software
Schedule 4.22 Contracts
Schedule 4.23 Inventory
Schedule 4.24 Directors, Officers and Employees
Schedule 4.25 Liens
Schedule 4.27 Transactions with Affiliates
Schedule 4.32 Depositories
Schedule 4.37 Third Party Payor Contracts
Schedule 4.39 Standard, Medicare and Medicaid Rates
Schedule 4.44 Adverse Relationships with Patients
Schedule 5.06 Purchaser/No Material Adverse Change
Schedule 5.07 Purchaser/Absence of Liabilities
Schedule 5.0 Purchaser/Litigation
Schedule 5.09 Purchaser/Taxes
Schedule 13. Certain Contracts
Schedule 13.07(a) Seller's Operational Costs
Schedule 13.07(b) Physician Employee Compensation
v
<PAGE>
EXHIBITS
Exhibit 1 Form of Administrative Services Agreement
Exhibit 2 Form of Delaware Certificate of Merger
[Exhibit Form of IPA Agreement]
Exhibit 4 Form of Line of Credit Security Agreement
Exhibit 5 Form of Loan Agreement
Exhibit 6 Form of New Jersey Certificate of Merger
Exhibit 7 Form of Promissory Note
Exhibit 8 Form of Security Agreement
Exhibit 9 Form of Voting Agreement
Exhibit 1 Form of Certificate of Designations for Series E Preferred Stock
Exhibit 1 Opinion of Counsel to the Seller
Exhibit 1 Form of FIRPTA Certificate
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 29, 1999 (this
"Agreement"), by and among HealthCare Imaging Services, Inc., a Delaware
corporation (the "Purchaser"), HIS PPM Co., a Delaware corporation (the "Merger
Sub"), Jersey Integrated HealthPractice, Inc., a New Jersey corporation (the
"Company"), Pavonia Medical Associates, P.A., a New Jersey professional
corporation (the "Seller"), and the physician stockholders of the Seller, all of
whom are listed on the signature pages hereto (the "Physician Stockholders").
WHEREAS, the Board of Directors of the Purchaser and the Board of
Directors and the stockholders of the Company have each determined that a
business combination between the Purchaser and the Company is in the best
interests of their respective companies and stockholders, and accordingly have
agreed to effect the Merger provided for herein upon the terms and subject to
the conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
contemplated herein shall qualify as a reorganization within the meaning of
Section 368(a) of the Code, and that this Agreement together with that certain
Agreement and Plan of Merger by and among the Purchaser, the Merger Sub, Liberty
and the Company constitute a plan of reorganization, within the meaning of
Treasury Regulation Section 1.368-2(g) promulgated under the Code; and
WHEREAS, the Company, the Seller, the Physician Stockholders, the
Purchaser and the Merger Sub desire to make certain representations, warranties
and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements contained herein, intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01 Definitions. As used throughout this Agreement, the following
terms have the following meanings:
"Accountants" means Coopers & Lybrand, LLP.
"Administrative Services Agreement" means the Administrative
Services Agreement entered into between the Company and the Seller,
substantially in the form of Exhibit 1 hereto, dated on or prior to the date
hereof and effective as of the Closing Date, as amended,
1
<PAGE>
modified or supplemented from time to time in accordance with the terms thereof,
together with any exhibits, schedules or other attachments thereto.
"Affiliate" means a Person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, a specified Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of Capital Stock,
by contract or otherwise.
"Affiliated Group" has the meaning ascribed thereto in Section
11.01(a).
"Agreement" means this Agreement, as amended, modified or
supplemented from time to time in accordance with the terms hereof, together
with any exhibits, schedules or other attachments thereto.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated and whether voting or non-voting) of such Person's capital stock or
any form of membership interests, as applicable, whether outstanding on the
Closing Date or issued after the Closing Date and any and all rights, warrants
or options exercisable or exchangeable for or convertible into such capital
stock.
"CERCLA" means the Comprehensive Environmental Response Compensation
and Liability Act of 1980.
"CLIA" means the Clinical Laboratories Improvement Act.
"Closing" has the meaning ascribed thereto in Section 3.01.
"Closing Date" has the meaning ascribed thereto in Section 3.01.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985.
"Code" means the Internal Revenue Code of 1986 (or any successor
statute thereto), as amended from time to time.
"Commission" means the Securities and Exchange Commission.
"Commission Filings" has the meaning ascribed thereto in Section
5.05.
"Common Stock" has the meaning ascribed thereto in Section 2.03.
"Common Stock Consideration" has the meaning ascribed thereto in
Section 2.03.
2
<PAGE>
"Company" means Jersey Integrated HealthPractice, Inc. or any
predecessor.
"Company's Financial Statements" means the 1998 Company Financial
Statements, the 1997 Company Financial Statements, the 1996 Company Financial
Statements and the Interim 1998 Company Financial Statements.
"1998 Company Financial Statements" means the audited financial
statements of the Company for the fiscal year ended September 30, 1998,
including the balance sheet as at September 30, 1998 and the related statements
of operations, stockholders' equity and changes in financial position for the
year ended September 30, 1998, prepared on an accrual basis in accordance with
GAAP, together with the audit opinion of the Accountants thereon.
"1997 Company Financial Statements" means the audited financial
statements of the Company for the fiscal year ended September 30, 1997,
including the balance sheet as at September 30, 1997 and the related statements
of operations, stockholders' equity and changes in financial position for the
year ended September 30, 1997, prepared on an accrual basis in accordance with
GAAP, together with the audit opinion of the Accountants thereon.
"1996 Company Financial Statements" means the audited financial
statements of the Company for the fiscal year ended September 30, 1996,
including the balance sheet as at September 30, 1996 and the related statements
of operations, stockholders' equity and changes in financial position for the
year ended September 30, 1996, prepared on an accrual basis in accordance with
GAAP, together with the audit opinion of the Accountants thereon.
"Confidential Information" means all non-public information and
records, including the existence and terms of this Agreement, whether written or
oral, concerning the business of any other party hereto; provided, however, that
the term Confidential Information shall not include information or data which
(i) at the time of disclosure is generally available to and known by the public
other than as a result of disclosure in violation of clause (a) or (b) of
Section 6.08, (ii) was or becomes available to a party on a non-confidential
basis from a source other than the other party or its agents or advisors;
provided, however, that such source is not bound by a confidentiality agreement
or obligation of secrecy in respect thereof or (iii) may be disclosed by the
Purchaser pursuant to Section 14.01 hereof.
"Consents" means governmental and third party consents, permits,
approvals, orders, authorizations, qualifications, and waivers necessary for the
consummation of the transactions contemplated hereby or that thereafter may be
necessary to effectuate the transfer or renewal of any other license, approval
or authorization.
"Contracts" has the meaning ascribed thereto in Section 4.22.
"Conversion Shares" has the meaning ascribed thereto in Section
5.02.
3
<PAGE>
"Delaware Certificate" means the certificate of merger substantially
in the Form of Exhibit 2 hereto, together with any exhibits, schedules or other
attachments thereto.
"DGCL" means the Delaware General Corporation Law.
"Disclosing Party" has the meaning ascribed thereto in Section
6.08(b).
"Dr. Patel" means Dr. Manmohan A. Patel.
"Dr. Sklower" means Dr. Jay Sklower.
"DVI Term Loan" means the $1.0 million term loan funded to the
Company by DVI Financial Services, Inc. on January 8, 1998.
"Effective Time" has the meaning ascribed thereto in Section 2.01.
"Environmental Laws" means any applicable federal, state, local or
foreign laws, statutes, rules, regulations, orders, consent decrees, judgments,
permits or licenses, relating to prevention, remediation, reduction or control
of pollution, or protection of the environment, natural resources and/or human
health and safety, including, without limitation, such applicable Laws or
Licenses relating to (a) solid waste and/or Hazardous Materials generation,
handling, transportation, use, treatment, storage or disposal, (b) air, water,
and noise pollution, (c) soil, ground, water or groundwater contamination, (d)
the manufacture, generation, processing, handling, distribution, use, treatment,
storage, transportation or release, emission or discharge into the environment
of Hazardous Materials, (e) regulation of underground and above ground storage
tanks, (f) the obtaining, sale, use, storage, disposal or testing of any human
blood or blood product and (g) the disposal of medical waste.
"ERISA" means the Employee Retirement Income Security Act of 1974,
and the rules and regulations thereunder, as amended from time to time.
"Excess Cash Flow" has the meaning ascribed thereto in Section
13.07.
"FDA" means the Food and Drug Administration.
"FIRPTA Certificate" has the meaning ascribed thereto in Section
8.16.
"GAAP" means generally accepted accounting principles and practices
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession that are applicable to the circumstances as of the
date of determination.
4
<PAGE>
"Governmental Authority" means any governmental or
quasi-governmental authority including, without limitation, any federal, state,
territorial, county, municipal or other governmental or quasi-governmental
agency, board, branch, bureau, commission, court, arbitration panel, department,
authority, body or other instrumentality or political unit or subdivision or
official thereof, whether federal, state, local, domestic or foreign.
"Hazardous Materials" means and includes any pollutants, hazardous
or toxic materials, substances or wastes, including: petroleum and petroleum
products and derivatives; asbestos; radon; polychlorinated bi-phenyls;
urea-formaldehyde foam insulation; explosives; radioactive materials; laboratory
wastes and medical wastes (including contaminated clothing, body fluids,
contaminated medical instruments and equipment, catheters, used bandages,
gauzes, needles or other sharp instruments); and any chemicals, materials or
substances designated or regulated as hazardous or as toxic substances,
materials, or wastes, or otherwise regulated, under any Environmental Law;
hazardous waste, hazardous material, hazardous substance, petroleum product,
oil, toxic substance, pollutant, contaminant, or other human health or safety,
as defined or regulated under any Environmental Law.
"HCFA" means the Health Care Financing Administration.
"Indemnitee" has the meaning ascribed thereto in Section 11.01(a).
"Indemnitor" has the meaning ascribed thereto in Section 11.01(a).
"Intangible Property" has the meaning ascribed thereto in Section
4.20.
"Interim 1998 Company Financial Statements" means the unaudited
financial statements of the Company for the nine month period ended September
30, 1998, including the balance sheet as at September 30, 1998, and the related
statements of operations, stockholder's equity and changes in financial position
for the nine months ended September 30, 1998, prepared on an accrual basis in
accordance with GAAP.
"Interim 1998 Seller Financial Statements" means the unaudited
financial statements of the Seller for the nine month period ended September 30,
1998, including the balance sheet as at September 30, 1998, and the related
statements of operations, stockholder's equity and changes in financial position
for the nine months ended September 30, 1998, prepared on an accrual basis in
accordance with GAAP.
"IPA" means the Independent Practice Association established by the
Purchaser.
"IPA Agreement" means the Independent Practice Association Agreement
entered into between the Seller and the IPA, substantially in the form of
Exhibit 3 hereto, dated on or prior to the date hereof and effective as of the
Closing Date, as amended, modified or
5
<PAGE>
supplemented from time to time in accordance with the terms thereof, together
with any exhibits, schedules or other attachments thereto.
"IRS" means the Internal Revenue Service or any successor agency.
"Law" means any statute, ordinance, code, rule, regulation or order
enacted, adopted, promulgated, applied or followed by any Governmental
Authority.
"Leased Premises" means any real property which either the Company
or the Seller leases or subleases.
"Liberty" means Liberty HealthCare System, Inc.
"Licenses" means all licenses, permits, consents, authorizations,
registrations and approvals of, with or from Governmental Authorities and
industry trade associations, including all occupancy, fire, business and other
permits from local officials, required for the conduct of the business of the
Company or the Seller as now being conducted.
"Lien" means any security agreement, financing statement (whether or
not filed), mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, lien, charge, restrictive
agreement, mortgage, deed of trust, indenture, pledge, option, limitation,
exception to or other title defect in or on any interest or title of any vendor,
lessor, lender or other secured party to or of such Person under any conditional
sale, lease, consignment, or bailment given for security purposes, trust receipt
or other title retention agreement with respect to any Property or asset of such
Person, whether direct, indirect, accrued or contingent.
"Line of Credit" has the meaning ascribed thereto in Section 13.08.
"Line of Credit Security Agreement" means the Security Agreement
entered into between the Purchaser and the Seller, substantially in the form of
Exhibit 4 hereto, as amended, modified or supplemented from time to time in
accordance with the terms thereof, together with any exhibits, schedules or
other attachments thereto.
"Loan Agreement" means the Loan Agreement entered into between the
Purchaser and the Seller, substantially in the Form of Exhibit 5 hereto, dated
on or prior to the date hereof and effective as of the Closing Date, as amended,
modified or supplemented from time to time in accordance with the terms thereof,
together with any exhibits, schedules or other attachments thereto.
"Losses" means any and all losses, claims, damages, liabilities (or
actions, suits or proceedings, including any inquiry or investigation with
respect thereto), costs (including the
6
<PAGE>
reasonable costs of preparation and attorneys' fees) and expenses (including
reasonable expenses of investigation).
"Material Adverse Effect" means any event, circumstance or condition
that, individually or when aggregated with all other similar events,
circumstances or conditions could reasonably be expected to have, or has had, a
material adverse effect on: (i) the business, property, operations, condition
(financial or otherwise), results of operations or prospects of the Company or
the Seller, (ii) the Capital Stock of the Company or the Seller, including,
without limitation, the Stock; (iii) the ability of the Company or the Seller to
consummate the transactions contemplated hereunder; or (iv) the ability of the
Purchaser to perform and conduct the operations of the Company after the
consummation of the transactions contemplated by this Agreement in the manner
conducted prior to the consummation of such transactions.
"Medical Waste" means (i) pathological waste, (ii) blood, (iii)
sharps, (iv) wastes from surgery or autopsy, (v) dialysis waste, including
contaminated disposable equipment and supplies, (vi) cultures and stocks of
infectious agents and associated biological agents, (vii) contaminated animals,
(viii) isolation wastes, (ix) contaminated equipment, (x) laboratory waste, (xi)
any substance, pollutant, material, or contaminant listed or regulated under any
Medical Waste Law, and (xii) other biological waste and discarded materials
contaminated with or exposed to blood, excretion, or secretions from human
beings or animals.
"Medical Waste Laws" means the following, including regulations
promulgated and orders issued thereunder, as in effect on the date hereof and
the Closing Date: (i) the Medical Waste Tracking Act of 1988, 42 USCA
ss.ss.6992, et seq., (ii) the U.S. Public Vessel Medical Waste Anti-Dumping Act
of 1988, 33 USCA ss.ss.2501 et seq., (iii) the Marine Protection, Research, and
Sanctuaries Act of 1972, 33 USCA ss.ss.1401 et seq., (iv) the Occupational
Safety and Health Act, 29 USCA ss.ss.651 et seq., (v) the United States
Department of Health and Human Services, National Institute for Occupational
Safety and Health, Infectious Waste Disposal Guidelines, Publication No. 88-119,
and (vi) and any Laws insofar as they are applicable to either the Company's or
the Seller's assets or operations and purport to regulate Medical Waste or
impose requirements relating to Medical Waste.
"Merger" has the meaning ascribed thereto in the preamble to Article
II.
"Merger Consideration" has the meaning ascribed thereto in Section
2.03.
"Merger Sub" means HIS PPM Co.
"New Jersey Certificate" means the certificate of merger
substantially in the form of Exhibit 6 hereto, together with any exhibits,
schedules or other attachments thereto.
"NJCBA" means the New Jersey Business Corporation Act.
7
<PAGE>
"Notice" has the meaning ascribed thereto in Section 11.02(a).
"Patients" means all patients who are currently or have been
patients of the Seller since the Seller's (or any predecessor's) inception.
"Patient Files" means all materials or information relating to the
Patients.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permits" has the meaning ascribed thereto in Section 4.07(b).
"Person" means any individual, entity or group, including, without
limitation, individual, corporation, limited liability company, limited or
general partnership, joint venture, association, joint stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"Physician Employees" means any physicians who have performed or
currently are performing services for or on behalf of the Seller.
"Physician Self-Referral Law" has the meaning ascribed thereto in
Section 4.47.
"Physician Stockholders" means the physician stockholders of the
Seller, all of whom are listed on the signature pages hereto.
"Plans" means all employee benefit plans, all employee welfare
benefit plans, all employee pension benefit plans, all multi-employer plans and
all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2),
(37) and (40), respectively, of ERISA), (including, without limitation, benefit
plans or arrangements that are not subject to ERISA, such as employment
agreements and any other agreements containing "golden parachute" provisions and
deferred compensation agreements), together with copies of any trusts related
thereto and a classification of employees covered thereby.
"Pre-Acquisition Liability" has the meaning ascribed thereto in
Section 6.11.
"Preferred Stock" has the meaning ascribed thereto in Section 2.03.
"Promissory Note" means the Promissory Note payable by the Seller to
the Purchaser, substantially in the form of Exhibit 7 hereto, as amended,
modified or supplemented from time to time in accordance with the terms thereof,
together with any exhibits, schedules or other statements thereto.
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
8
<PAGE>
"Proxy Statement" means the proxy statement of the Purchaser for the
Special Meeting.
"Purchaser" means HealthCare Imaging Services, Inc.
"Purchaser Financial Statements" has the meaning ascribed thereto in
Section 5.05.
"Purchaser Preferred Stock" has the meaning ascribed thereto in
Section 5.04.
"Qualified Plans" has the meaning ascribed thereto in Section
4.10(b).
"Recoupment Claim" means any recoupment or overpayment, set-off,
penalty or fine pending, or to the knowledge of the Company or the Seller
threatened, by any third-party payor or Governmental Authority having
jurisdiction over either the Company or the Seller for amounts arising from or
related to payments to either the Company or the Seller for services rendered by
the Seller prior to the Closing.
"Representative" has the meaning ascribed thereto in Section
6.08(b).
"Securities Act" means the Securities Act of 1933, and the rules and
regulations of the Commission promulgated thereunder, as amended.
"Security Agreement" means the Security Agreement entered into
between the Purchaser and the Seller, substantially in the form of Exhibit 8
hereto, as amended, modified or supplemented from time to time in accordance
with the terms thereof, together with any exhibits, schedules or other
statements thereto.
"Seller" means Pavonia Medical Associates, P.A. or any predecessor.
"Seller's Financial Statements" means the 1998 Seller Financial
Statements, the 1997 Seller Financial Statements, the 1996 Seller Financial
Statements and the Interim 1998 Seller Financial Statements.
"1998 Seller Financial Statements" means the audited financial
statements of the Seller for the fiscal year ended September 30, 1998, including
the balance sheet as at September 30, 1998 and the related statements of
operations, stockholders' equity and changes in financial position for the year
ended September 30, 1998, prepared on an accrual basis in accordance with GAAP,
together with the audit opinion of the Accountants thereon.
"1997 Seller Financial Statements" means the audited financial
statements of the Seller for the fiscal year ended September 30, 1997, including
the balance sheet as at September 30, 1997 and the related statements of
operations, stockholders' equity and changes in financial
9
<PAGE>
position for the year ended September 30, 1997, prepared on an accrual basis in
accordance with GAAP, together with the audit opinion of the Accountants
thereon.
"1996 Seller Financial Statements" means the audited financial
statements of the Seller for the fiscal year ended September 30, 1996, including
the balance sheet as at September 30, 1996 and the related statements of
operations, stockholder's equity and changes in financial position for the year
ended September 30, 1996, prepared on an accrual basis in accordance with GAAP,
together with the audit opinion of the Accountants thereon.
"Seller's Payable" has the meaning ascribed thereto in Section
13.07.
"Selling Group" has the meaning ascribed thereto in Section 6.08.
"Special Meeting" means the special meeting of the stockholders of
the Purchaser held for the purpose, among other things, of considering and
approving this Agreement and the transactions contemplated hereby.
"Stock" has the meaning ascribed thereto in Section 2.03.
"Subject Party" has the meaning ascribed thereto in 6.08(b).
"Surviving Corporation" has the meaning ascribed thereto in the
preamble to Article II.
"Tax" and "Taxes" means any and all taxes, charges, fees, levies or
other assessments, including, without limitation, all net income, gross income,
gross receipts, premium, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
estimated, severance, stamp, occupation, property or other taxes, fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties (including penalties for failure to file in accordance with
applicable information reporting requirements), and additions to tax by any
authority, whether federal, state, local, domestic or foreign.
"Tax Action" has the meaning ascribed thereto in Section 13.03.
"Taxpayers" has the meaning ascribed thereto in Section 4.09(a).
"Tax Return" means any report, return, form, declaration or other
document or information required to be supplied to any Governmental Authority in
connection with Taxes.
"Term" has the meaning ascribed thereto in Section 13.08.
10
<PAGE>
"Transaction Documents" means, collectively, this Agreement and any
and all agreements, exhibits, schedules, certificates, instruments and other
documents contemplated hereby or executed and delivered in connection herewith.
"Voting Agreement" means the Voting Agreement, entered into among
the Purchaser, the Seller and the Physician Stockholders, substantially in the
form of Exhibit 9 hereto, dated on or prior to the date hereof and effective as
of the Closing Date, as amended, modified or supplemented from time to time in
accordance with the terms thereof, together with any exhibits, schedules or
other attachments thereto.
Section 1.02 Rules of Construction.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and words in
the plural include the singular;
(e) provisions apply to successive events and transactions;
(f) the words "include" and "including" shall be deemed to
mean "include, without limitation," and "including, without limitation";
(g) "herein," "hereof," "hereto," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular article, section, paragraph or clause where such terms may
appear;
(h) references to sections or articles shall mean references
to such section or article in this Agreement, unless stated otherwise; and
(i) the use of any gender shall be applicable to all
genders.
11
<PAGE>
ARTICLE II.
THE MERGER AND THE SURVIVING CORPORATION
At the Effective Time, the Company shall merge with and into the Merger
Sub (the "Merger"), and the Merger Sub shall survive the Merger as the
"Surviving Corporation."
Section 2.01 Effective Time of the Merger. As soon as practicable after
the satisfaction or, to the extent permitted hereunder, waiver of all of the
conditions contained in this Agreement: (i) the Delaware Certificate shall be
duly prepared, executed and acknowledged by the Merger Sub and thereafter
delivered to the Secretary of State of the State of Delaware for filing as
provided in the DGCL simultaneously with the Closing; and (ii) the New Jersey
Certificate shall be duly prepared and shall be executed by each of the Merger
Sub and the Company and thereafter delivered for filing as provided in the NJBCA
simultaneously with the Closing. The Merger shall become effective upon the
later of the filing of the New Jersey Certificate with the Secretary of State of
the State of New Jersey or the filing of the Delaware Certificate with the
Secretary of State of the State of Delaware (the "Effective Time").
Section 2.02 Surviving Corporation. Following the Merger, the existence of
the Surviving Corporation shall continue unaffected and unimpaired by the
Merger, with all the rights, privileges, immunities and powers, and subject to
all the duties and liabilities, of a corporation organized under the laws of the
State of Delaware.
Section 2.03 Exchange of Consideration.
The Seller shall deliver to the Purchaser at the Closing
certificates representing all shares of common stock (the "Stock"), $0.01 par
value per share, of the Company owned by the Seller, which shares constitute
approximately 70.6% of the issued and outstanding common stock of the Company on
a fully diluted basis, and, in exchange therefor, the Purchaser shall deliver to
the Seller the following (the "Merger Consideration"):
(a) cash in the amount of $5.0 million (the "Cash
Consideration");
(b) stock certificates, containing appropriate restrictive
legends, representing 1,000 shares of Series E
redeemable convertible preferred stock of the Purchaser
(the "Preferred Stock"), with an aggregate liquidation
preference of $5.0 million; the form of the Certificate
of Designations for the Preferred Stock is attached
hereto as Exhibit 10; and
(c) stock certificates, containing appropriate restrictive
legends, representing 5.0 million shares of common
stock, $0.01 par value per share (the "Common Stock"),
of the Purchaser (the "Common Stock Consideration").
12
<PAGE>
The Common Stock Consideration shall be subject to the terms of the pledge
set forth in the Administrative Services Agreement.
Section 2.04 Status of Company Shares After Effective Date. On the
Effective Date, all outstanding certificates representing shares of Capital
Stock of the Company shall be cancelled and retired.
Section 2.05 Name. The corporate name of the Surviving Corporation shall
be the name of the Company.
Section 2.06 Certificate of Incorporation. The Certificate of
Incorporation of the Merger Sub in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation
until amended in accordance with applicable Law.
Section 2.07 Bylaws. The Bylaws of the Merger Sub in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until amended in accordance with applicable law.
Section 2.08 Directors and Officers. The members of the Board of Directors
and the officers of the Merger Sub in office on the Effective Date shall remain
the directors and officers of the Surviving Corporation.
Section 2.09 Risk of Loss. Risk of loss to the assets of the Company,
however caused (other than by Merger Sub or those duly authorized to act on
behalf of Merger Sub), from the date hereof through the Closing Date, shall
remain wholly upon the Company and the Seller. Such risk shall transfer to the
Surviving Corporation at the beginning of the day (12:00:01 a.m.)
immediately following the Closing Date.
Section 2.10 Closing Date Financial Statements. As promptly as practicable
after the Closing Date (but in no event later than thirty (30) days after the
Closing Date), the Seller shall prepare, in accordance with GAAP, (i) a
statement of operations of the Company for the period from October 1, 1998
through the Closing Date and (ii) the balance sheet of the Company as of the
Closing Date which shall fairly present the financial position of the Company as
of the Closing Date. If the Seller does not deliver such financial statements to
the Purchaser within thirty (30) days of the Closing Date, Deloitte & Touche LLP
shall prepare, at the sole cost of the Seller, the financial statements referred
to in the prior sentence.
13
<PAGE>
ARTICLE III.
THE CLOSING
Section 3.01 Closing Date. Upon the terms and subject to the satisfaction
or, to the extent permitted hereunder, waiver of all of the conditions contained
in this Agreement, at the Effective Time, the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, such date and time of the Closing is also referred to herein as the
"Closing Date."
Section 3.02 Deliveries at Closing.
(a) At the Closing, the Purchaser shall deliver to the Seller:
(i) the Cash Consideration;
(ii) certificates representing the Preferred Stock;
(iii) certificates representing the Common Stock
Consideration;
(iv) a certificate of an authorized officer of the Purchaser
certifying to the fulfillment of the conditions set
forth in Sections 9.01 and 9.02;
(v) a copy of the resolutions of the Purchaser's Board of
Directors, certified by an authorized officer,
authorizing the execution, delivery and performance of
this Agreement and the other Transaction Documents;
(vi) the Administrative Services Agreement duly executed by
the Company; and
(vii) such other instruments and certificates as may be
reasonably requested by the Seller.
(b) At the Closing, the Seller shall deliver to the Purchaser:
(i) certificates representing all of the Stock, duly
endorsed for transfer in blank or accompanied by a stock
power duly endorsed in blank by the Seller, with any
requisite documentary or stock transfer taxes affixed
thereto;
14
<PAGE>
(ii) recent good standing certificates and certified articles
of incorporation of the Company and the Seller;
(iii) all books and records relating to the Company and its
business which are not maintained at the Company,
including without limitation, the minute books, stock
books, stock ledger and corporate seals, corporate
operation manuals, policy manuals, insurance policies in
force, bank and checking account records, checks,
deposit slips and signature cards, copies of the
Company's Financial Statements, copies of the Seller's
Financial Statements and copies of the Tax Returns for
the Company and the Seller required to be filed for the
last five (5) years (if applicable);
(iv) such other bills of sale, instruments of assignment and
other documents as may be reasonably requested by the
Purchaser in order to effect or evidence the
transactions contemplated hereunder;
(v) an opinion of counsel to the Seller substantially in the
form of Exhibit 11 hereto;
(vi) a certificate of an authorized executive officer of the
Seller certifying to the fulfillment of the conditions
set forth in Sections 8.01 and 8.02;
(vii) a copy of the resolutions of (i) the Company's Board of
Directors and (ii) the Company's stockholders, certified
by its chief executive officer, authorizing the
execution, delivery and performance of this Agreement
and the other Transaction Documents;
(viii)copies of the Consents referred to in Section 8.17 to
be delivered by the Seller;
(ix) if applicable, payoff letters, UCC-3 termination
statements and other documentation relating to the
release of all security interests encumbering any of the
assets of the Company or the securities being acquired
pursuant to the Merger;
(x) the Administrative Services Agreement duly executed by
the Seller;
[(xi) the IPA Agreement duly executed by the Seller;]
15
<PAGE>
(xii) estoppel certificates, Lien waivers and consents of the
landlord(s) with respect to the properties listed on
Schedule 4.18 hereto;
(xiii)the FIRPTA Certificate duly executed by the Seller;
(xiv) the Voting Agreement duly executed by the Seller and the
Physician Stockholders; and
(xv) such other instruments and certificates as may be
reasonably requested by the Purchaser.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF THE SELLER AND THE COMPANY
As of the date hereof and as of the Closing Date, the Seller and the
Company, jointly and severally, represent and warrant to the Purchaser and the
Merger Sub, and the Physician Stockholders, jointly and severally, make the
representations set forth in Sections 4.02, 4.03, 4.08 and 4.29, as follows:
Section 4.01 Organization and Qualification. Each of the Company and the
Seller (i) is a corporation duly organized, validly existing and in good
standing as a business corporation under the laws of the State of New Jersey;
(ii) has all corporate power and authority to own, lease and operate its
Properties and to carry on its business as currently being conducted; and (iii)
is not required to be qualified or licensed to do business in any foreign
jurisdiction.
Section 4.02 Authority. The Company and the Seller have the requisite
corporate power and authority, and the Physician Stockholders have the requisite
capacity, to execute and deliver the Transaction Documents and all other
instruments or agreements to be executed in connection herewith or therewith,
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance of the Transaction Documents, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action on the part of the Company and the
Seller, and no other corporate proceedings on the part of either the Company or
the Seller are necessary to authorize the Transaction Documents or to consummate
the transactions contemplated hereby or thereby. The Transaction Documents have
been duly executed and delivered by the Company, the Seller and the Physician
Stockholders and, assuming the Transaction Documents constitute valid and
binding obligations of the Purchaser, constitute valid and binding obligations
of the Company, the Seller and the Physician Stockholders enforceable against
the Company, the Seller and the Physician Stockholders in accordance with their
respective terms.
16
<PAGE>
Section 4.03 Consents and Approvals; No Violations. Except as set forth on
Schedule 4.03, neither the execution, delivery or performance of this Agreement
or the other Transaction Documents by the Company, the Seller or the Physician
Stockholders, nor the consummation by such parties of the transactions
contemplated hereby or thereby nor compliance by such parties with any of the
provisions hereof or thereof will (i) conflict with or result in any breach of
any provision of the charter or by-laws of either the Company or the Seller,
(ii) require any filing with, or Consent of a Governmental Authority or other
Person by the Company, the Seller or any Physician Stockholder, (iii) (with or
without the giving or receipt of notice or passage of time or both) result in a
violation or breach of, or constitute a default or give rise to any right of
termination, amendment, cancellation or acceleration under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, License,
contract, agreement or other instrument or obligation to which the Company, the
Seller or any of the Physician Stockholders is a party or by which any of its or
their Properties may be bound or subject or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company, the
Seller or any of the Physician Stockholders or any of its or their Properties,
except, other than with respect to clause (i) above, where the failure to make
any such filing or to obtain any such Consent, or any such violation, breach,
default, termination, amendment, cancellation or acceleration would not have a
Material Adverse Effect.
Section 4.04 Capitalization. The authorized and outstanding Capital Stock
of each of the Company and the Seller as of the date hereof is as set forth on
Schedule 4.04 hereto. All of the outstanding shares of the Capital Stock of the
Company and the Seller are validly issued, fully paid and non-assessable, and
all of the Stock is owned by the Seller, and on the Closing Date, prior to
giving effect to the transactions hereunder, will be owned by the Seller, free
and clear of any Liens. Except as set forth on Schedule 4.04 there are no
outstanding (i) securities convertible into or exchangeable or exercisable for
Capital Stock of the Company or the Seller; (ii) options, warrants or other
rights to purchase or subscribe for Capital Stock of the Company or the Seller
or (iii) contracts, commitments, agreements, understandings or arrangements of
any kind relating to the issuance of any Capital Stock of the Company, any such
convertible, exercisable or exchangeable securities or any such options,
warrants or rights.
Section 4.05Subsidiaries. Except as set forth on Schedule 4.05, neither
the Company nor the Seller own, of record or beneficially, or control, directly
or indirectly, any Capital Stock of any corporation, association or business
entity nor is the Company or the Seller, directly or indirectly, a participant
in any joint venture, partnership or other non-corporate entity.
Section 4.06 Articles of Incorporation and By-laws. Each of the Company
and the Seller has heretofore delivered to the Purchaser true and complete
copies of its Articles of Incorporation and By-laws (or other applicable
organizational documents) as in effect on the date hereof.
Section 4.07 Compliance With Laws; Licenses.
17
<PAGE>
(a) The conduct of the operations of the Company and the Seller
(including the conduct of the Physician Employees) has not violated, and as
presently conducted does not violate, any Laws, including, but not limited to,
the Clinical Laboratories Improvements Act of 1988 ("CLIA"), or any other
promulgations, interpretative advice or guidance of any court or Governmental
Authority, including, but not limited to, the Occupational Safety and Health
Administration, the Department of Transportation, the HCFA and the FDA or any
medical industry standards, nor has the Company or the Seller received any
notice of any such violation which remains outstanding, except where any such
violation, individually or in the aggregate, would not have a Material Adverse
Effect.
(b) Permits. Set forth on Schedule 4.07 is a complete and accurate
list of all licenses, certificates, permits, approvals, franchises, notices and
authorizations issued by Governmental Authorities (collectively, the "Permits")
and currently held by the Company or the Seller as of the date hereof. To the
Company's and the Seller's knowledge, the Permits set forth in Schedule 4.07 are
all the Permits required for the conduct of the operations of the Seller and the
Company as currently conducted and, with respect to the Seller, as currently
proposed to be conducted after the Closing. To the Company's and the Seller's
knowledge, all of the Permits set forth in Schedule 4.07 are in full force and
effect, and the Seller and the Company have not engaged in any activity which
would cause or permit revocation, modification, cancellation or suspension of
any such Permit, and no action or proceeding looking to or contemplating the
revocation, modification, cancellation or suspension of any such Permit is
pending or threatened, except where any such revocation, modification,
cancellation or suspension, individually or in the aggregate, would not have a
Material Adverse Effect. Neither the Seller nor the Company has knowledge of any
default or claimed or purported or alleged default or state of facts which, with
or without the giving or receipt of notice or passage of time or both, would
constitute a default by any party, including the Company or the Seller, under,
or give rise to a right of revocation, modification, cancellation or suspension
of, any such Permit. The consummation of the transactions contemplated hereby
will in no way affect the continuation, validity or effectiveness of the Permits
set forth in Schedule 4.07 or require the consent of any Person except as set
forth in Schedule 4.07.
Section 4.08 Litigation; Investigations. Schedule 4.08 sets forth a
complete and accurate list of all suits, claims, proceedings, investigations or
reviews which are pending or, to the knowledge of the Company or the Seller,
threatened against or affecting the Physician Stockholders, the Physician
Employees, the Company, the Seller or directors or officers (in their capacity
as such) of the Company or the Seller or any Properties used by the Company or
the Seller in conducting their respective businesses. Except as disclosed in
Schedule 4.08, (i) to the knowledge of the Company or the Seller, no
investigation or review by any Governmental Authority or other regulatory body
(including trade associations) with respect to either the Company, the Seller or
the Physician Employees is pending or threatened or probable of initiation, nor
has any Governmental Authority or other regulatory body (including trade
associations) indicated to the Company or the Seller an intention to conduct the
same, and (ii) there is no action, suit or proceeding pending or, to the
knowledge of the Company or the Seller,
18
<PAGE>
threatened against or affecting the Company or the Seller, at law or in equity,
or before any Governmental Authority or other regulatory body (including trade
associations).
Section 4.09 Taxes.
(a) Except as set forth on Schedule 4.09, each of the Seller and the
Company (collectively, the "Taxpayers") (i) have filed all Tax Returns that were
required to be filed, (ii) all such Tax Returns were, when filed, and continue
to be, correct and complete in all respects, (iii) all Taxes owed by and of the
Taxpayers (whether or not shown on any Tax Return) have been timely paid, (iv)
none of the Taxpayers currently is the beneficiary of any extension of time
within which to file any Tax Return, (v) no claim has ever been made by an
authority in a jurisdiction where either of the Taxpayers do not file Tax
Returns that it is or may be subject to taxation by that jurisdiction, and (vi)
there are no Liens with respect to Taxes on the Stock or any of the assets or
property of the Company.
(b) Each of the Taxpayers has withheld or collected and paid all
Taxes required to have been withheld or collected and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, other third party, or otherwise.
(c) Except as set forth on Schedule 4.09, there is (i) no dispute or
claim concerning any Tax Liability of either of the Taxpayers either (A) claimed
or raised by any Governmental Authority in writing or (B) as to which either of
the Taxpayers or the directors and officers (and employees responsible for Tax
matters) of either Taxpayer has knowledge and, (ii) no proceeding with respect
to Taxes pending.
(d) Schedule 4.09 sets forth an accurate, correct and complete list
of all federal, state, local, and foreign Tax Returns filed with respect to any
of the Taxpayers or their respective Subsidiaries for taxable periods ended on
or after September 30, 1991, indicates those Tax Returns that have been audited
and indicates those Tax Returns that currently are the subject of audit. The
Seller has delivered to the Purchaser correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies assessed
against or agreed to by any of the Taxpayers and their subsidiaries since
January 1, 1992. To the knowledge of the Taxpayers and the directors and
officers (and employees responsible for Tax matters) of either of the Taxpayers,
no other audit or investigation with respect to Taxes has been threatened.
(e) Neither of the Taxpayers has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(f) None of the assets of the Company are assets that the Purchaser
is or shall be required to treat as being owned by another Person pursuant to
the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and in effect immediately before the
19
<PAGE>
enactment of the Tax Reform Act of 1986, or is "tax-exempt use property" within
the meaning of Section 168(h)(1) of the Code.
(g) Neither of the Taxpayers has agreed to make, nor is it required
to make, any adjustments under Section 481(a) of the Code by reason of a change
in accounting method or otherwise.
(h) The Company is not a party to any contract, arrangement or plan
that has resulted or would result, separately or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code.
(i) Neither of the Taxpayers is a foreign person within the meaning
of Section 1445 of the Code.
(j) The Company is not a party to any agreement, whether written or
unwritten, providing for the payment of Tax liabilities, payment for Tax losses,
entitlement to refunds or similar Tax matters.
(k) No ruling with respect to Taxes relating to the Company has been
requested by or on behalf of the Company.
(l) The Company (A) has never been a member of an affiliated group
(within the meaning of Section 1504 of the Code, or any similar group as defined
for state, local or foreign tax purposes) filing a consolidated federal (or
combined or unitary state, local or foreign) income Tax Return or (B) has no
liability for the taxes of any Person (other than the Company) under Reg. ss.
1.1502-6 (or any similar provision of state, local or foreign Law), as a
transferee or successor, by contract, or otherwise.
(m) The unpaid Taxes of the Taxpayers (A) did not, as of the most
recent fiscal month end, exceed the reserves for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) on the books thereof at such time and (B) do not exceed
that reserve as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the Taxpayers in filing their
Tax Returns.
(n) For purposes of this Section 4.09, references to the Taxpayers
shall also refer to any predecessor companies.
Section 4.10 Employee Benefit Plans; ERISA.
(a) Attached hereto as Schedule 4.10 are complete and accurate
copies of all Plans which are currently maintained and/or sponsored by the
Company or the Seller, or to which
20
<PAGE>
the Company or the Seller currently contributes, has an obligation to contribute
in the future or which have been terminated within the past three years.
(b) Except for the Plans, neither the Company nor the Seller
maintains or sponsors, nor is a contributing employer to, a pension,
profit-sharing, deferred compensation, stock option, employee stock purchase or
other employee benefit plan, employee welfare benefit plan, or any other
arrangement with its employees whether or not subject to ERISA. All Plans are in
compliance with all applicable provisions of ERISA and the regulations issued
thereunder, as well as with all other applicable Laws, and, in all material
respects, have been administered, operated and managed in accordance with the
governing documents. All Plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code are so qualified and have been
determined by the IRS to be so qualified (or applications for determination
letters have been timely submitted to the IRS), and copies of the current plan
determination letters, most recent actuarial valuation reports, if any, most
recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each
such Qualified Plan or employee welfare benefit plan and most recent trustee or
custodian report, are included as part of Schedule 4.10. To the extent that any
Qualified Plans have not been amended to comply with applicable Law, the
remedial amendment period permitting retroactive amendment of such Qualified
Plans has not expired and will not expire within 120 days after the Closing
Date. All reports and other documents required to be filed with any Governmental
Authority or distributed to plan participants or beneficiaries (including, but
not limited to, annual reports, summary annual reports, actuarial reports,
PBGC-1 forms, audits or Tax Returns) have been timely filed or distributed.
Neither any Plan, the Seller nor the Company has engaged in any transaction
prohibited under the provisions of Section 4975 of the Code or Section 406 of
ERISA. No Plan has incurred an accumulated funding deficiency (as defined in
Section 412(a) of the Code and Section 302(l) of ERISA); and no circumstances
exist pursuant to which the Company could have any direct or indirect liability
whatsoever (including being subject to any statutory Lien to secure payment of
any such liability), to the PBGC under Title IV of ERISA or to the IRS for any
excise tax or penalty with respect to any plan now or hereafter maintained or
contributed to by the Company, the Seller or any member of a "controlled group"
(as defined in Section 4001(a)(14) of ERISA) that includes the Company or the
Seller; and neither the Company nor the Seller or any member of a "controlled
group" (as defined above) that includes the Company or the Seller currently has
(or at the Closing Date will have) any obligation whatsoever to contribute to
any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor
has any withdrawal liability whatsoever (whether or not yet assessed) arising
under or capable of assertion under Title IV of ERISA (including, but not
limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by
any Plan. Further:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan
without a determination by the IRS that such action does
not adversely affect the tax-qualified status of such
Qualified Plan;
21
<PAGE>
(ii) no Plan which is subject to the provisions of Title IV
of ERISA, has been terminated;
(iii) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any
Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial
present value of all accrued pension benefits under any
such Qualified Plan in accordance with the assumptions
contained in the regulations of the PBGC governing the
funding of terminated defined benefit plans;
(v) with respect to Plans which qualified as "group health
plans" under Section 4980B of the Code and Section
607(1) of ERISA and related regulations (relating to
the benefit continuation rights imposed by "COBRA"),
the Company and the Seller have complied (and on the
Closing Date will have complied) in all respects with
all reporting, disclosure, notice, election and other
benefit continuation requirements imposed thereunder as
and when applicable to such plans, and the Company and
the Seller have not incurred (and will not incur) any
direct or indirect liability and is not (and will not
be) subject to any loss, assessment, excise tax
penalty, loss of federal income tax deduction or other
sanction, arising on account of or in respect to any
direct or indirect failure by the Company or the
Seller, at any time prior to the Closing Date, to
comply with any such federal or state benefit
continuation requirement, which is capable of being
assessed or is asserted before or after the Closing
Date directly or indirectly against the Company or the
Seller with respect to such group health plans;
(vi) neither the Company nor the Seller is currently or has
been within the past five years a member of a
"controlled group" as defined in ERISA Section
4001(a)(14);
(vii) there is no pending litigation, arbitration or disputed
claim, settlement or adjudication proceeding, and, to
the Company's and Seller's knowledge, there is no
threatened litigation, arbitration or disputed claim,
settlement or adjudication proceeding, or investigation
with respect to any Plan, or with respect to any
fiduciary, administrator or sponsor thereof (in their
capacities as such), or any party in interest thereof;
22
<PAGE>
(viii)the total pension, medical and other benefit expense for
all Plans are accurately reflected in the Company's
Financial Statements and the Seller's Financial
Statements, respectively, and no material funding
changes or irregularities are reflected thereon which
would cause such financial statements to be not
representative of prior periods; and
(ix) neither the Company nor the Seller has incurred
liability under Section 4062 of ERISA.
If reasonably requested by the Purchaser, the Company will terminate any Plan
identified on Schedule 4.10 as a "Pension or Profit Sharing Plan to be
Terminated" immediately prior to the Closing.
Section 4.11 Labor Relations. The Company and the Seller (i) have
performed all material obligations with respect to their respective employees,
independent sales representatives, consultants, agents, officers and directors,
(ii) have paid or properly accrued for in the Company's Financial Statements
and the Seller's Financial Statements, respectively, all wages, salaries,
commissions, bonuses, severance pay, vacation pay, sick pay, holiday pay,
benefits and other compensation for all services performed by such persons to
the date hereof and all amounts required to be paid or reimbursed to such
persons; (iii) are in compliance in all material respects with all Laws and
regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours; (iv) have no pending, or to the
knowledge of the Company or the Seller, threatened, charge, complaint,
allegation, application or other process against the Company or the Seller
before the National Labor Relations Board or any other Governmental Authority;
(v) have no labor strike, dispute, slowdown or work stoppage or other job
action pending, or to the knowledge of the Company or the Seller, threatened
against or otherwise affecting or involving the Company or the Seller; and (vi)
no employees covered by any collective bargaining agreements and, to the
knowledge of the Company or the Seller, no effort is being made by any union to
organize any employees of the Company or the Seller.
Section 4.12 Insurance Policies. Schedule 4.12 contains a complete and
accurate list of all insurance policies currently providing coverage and that
for the past five (5) years have been providing coverage in favor of the Company
and/or the Seller specifying (i) the insurer and type of insurance under each
policy and (ii) the claims history under each policy. Each current policy is in
full force and effect and all premiums are currently paid and no notice of
cancellation or termination has been received with respect to any such policy.
Such policies have been sufficient for compliance with all material requirements
of Law. Neither the Company nor the Seller has been refused any insurance with
respect to its assets and operations, nor has its coverage been limited by any
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance during the last five (5) years. The Company and the
Seller have insured by reputable insurers the assets used by the Company and the
Seller in the conduct of their
23
<PAGE>
respective businesses that are of an insurable character against risks of
liability, casualty and fire in adequate amounts and consistent with prudent
industry practice and all contractual requirements, and maintains such insurance
against hazards, risks and liability to Persons and property to the extent and
in the manner customary for companies in similar businesses, similarly situated,
and such insurance has been effective, in full force and effect, without
interruption since the date the Company or the Seller, as the case may be,
commenced business. Except as set forth on Schedule 4.12, neither the Company
nor the Seller has any outstanding claims, settlements or premiums owed with
respect to any insurance policy, and the Company and the Seller have given all
notices or have presented all potential or actual claims under any insurance
policy in due and timely fashion. Since January 1, 1995, neither the Company nor
the Seller has filed a written application for any professional liability
insurance coverage which has been denied by an insurance agency or carrier, and
each of the Company and the Seller have been continuously insured for
professional malpractice claims and errors and omissions claims for at least the
past seven years (or with respect to the Company, since it began conducting
business). The insurance specified on Schedule 4.12 has been effective, in full
force and effect, without interruption since the date specified on Schedule 4.12
as the initial date of coverage.
Section 4.13 Financial Statements and Books and Records. The Company has
previously delivered to the Purchaser a copy of the Company's Financial
Statements, and the Seller has previously delivered to the Purchaser a copy of
the Seller's Financial Statements. The 1998 Company Financial Statements, the
1997 Company Financial Statements, the 1996 Company Financial Statements, the
1998 Seller Financial Statements, the 1997 Seller Financial Statements and the
1996 Seller Financial Statements have been audited by the Accountants, and the
Interim 1998 Company Financial Statements and the Interim 1998 Seller Financial
Statements have been reviewed by the Accountants, and each of such Financial
Statements are true and accurate, are in accordance with the books and records
of the Company or the Seller, as the case may be, present fairly in all material
respects the financial position and related results of operations of the Company
and the Seller, respectively, as of the dates and for the periods referred to
therein, in accordance with GAAP. All of the financial books and records of the
Company and the Seller have been made available to the Purchaser and such books
and records completely and fairly record in all material respects the financial
affairs of the Company and the Seller, respectively, which should normally be
recorded in financial books and records.
Section 4.14 No Material Adverse Change. Since September 30, 1998, except
as set forth on Schedule 4.14 or as otherwise previously disclosed in writing to
Elliott H. Vernon and/or Robert Baca, there has been no material adverse change
in the business, operations, condition (financial or otherwise), liabilities or
assets of the Company or the Seller, and neither the Company nor the Seller
knows of any change that is threatened or pending or any facts or circumstances
which could give rise to or cause such a change (other than general conditions
affecting the industry as a whole), nor has there been any damage, destruction
or loss, whether or not covered by insurance, which could have a Material
Adverse Effect.
24
<PAGE>
Section 4.15 Absence of Liabilities. Except as described on Schedule 4.15,
neither the Company nor the Seller has any debt, liabilities or obligations of
any nature, whether accrued, absolute, contingent or otherwise, whether due or
to become due and whether or not the amount thereof is readily ascertainable,
that are not accurately reflected as a liability in the 1998 Company Financial
Statements or the 1998 Seller Financial Statements, as the case may be, except
for liabilities incurred by the Company or the Seller, as the case may be,
subsequent to September 30, 1998 and in the ordinary course of business
consistent with past practices which are not (i) otherwise prohibited by, in
violation of or which will result in a breach of the representations, warranties
or covenants of the Company or the Seller contained in this Agreement and (ii)
material, either individually or in the aggregate.
Section 4.16 Absence of Specified Changes. Except as disclosed on Schedule
4.16, since September 30, 1998, there has not been with respect to either the
Company or the Seller any:
(a) action, omission or other facts or circumstances which would
result in a material adverse change, whether direct or indirect, in the
business, operations, condition (financial or otherwise), prospects, liabilities
or assets of the Company or the Seller, whether or not insured;
(b) transaction not in the ordinary course of business, including,
without limitation, any sale of a material portion of the assets of the Company
or the Seller or any merger of the Company or the Seller and any other entity;
(c) individual unfulfilled commitment as of the date of this
Agreement requiring expenditures by the Company or the Seller exceeding $10,000
(excluding commitments expressly described elsewhere in this Agreement or the
Schedules hereto);
(d) material damage, destruction or loss, whether or not insured;
(e) failure to maintain in full force and effect substantially the
same level and types of insurance coverage as in effect on September 30, 1998 or
destruction, damage to, or loss of any asset of the Company or the Seller
(whether or not covered by insurance) that could have a Material Adverse Effect;
(f) change in accounting principles, methods or practices,
investment practices, claims, payment and processing practices or policies
regarding intercompany transactions;
(g) revaluation of any assets or material write down of the value of
any assets;
25
<PAGE>
(h) declaration, setting aside, or payment of a dividend or other
distribution in respect of the Capital Stock of the Company or the Seller, or
any direct or indirect redemption, purchase or other acquisition of any shares
of such Capital Stock;
(i) issuance or sale of any shares of any Capital Stock;
(j) amendment to its Articles of Incorporation or By-laws;
(k) sale, assignment or transfer of any tangible or intangible
asset, including any rights to intellectual property, except in the ordinary
course of business, consistent with past practice;
(l) disposition of or lapse of any patent, trademark, trade name,
service mark or copyright or any application for the foregoing, or disposition
of any technology, software or know-how, or any license, permit or authorization
to use any of the foregoing;
(m) mortgage, pledge or other encumbrance, including Liens and
security interests, of any tangible or intangible asset;
(n) discharge or satisfaction of any Lien or payment or cancellation
of any liability other than payment of current liabilities in the ordinary
course of business, consistent with past practice;
(o) cancellation of any debt or waiver or release of any material
contract, right or claim, except for cancellations, waivers and releases in the
ordinary course of business, consistent with past practice, which do not exceed
$10,000 in the aggregate;
(p) indebtedness incurred for borrowed money or any commitment to
borrow money, any capital expenditure or capital commitment requiring an
expenditure of monies in the future, any incurrence of a contingent liability or
any guaranty or commitment to guaranty the indebtedness of others entered into,
by the Company or the Seller, other than customary transactions in the ordinary
course of business not in excess of $10,000 in the aggregate;
(q) amendment, termination or revocation of (or notice of intent to
do so), or a failure to perform obligations or the occurrence of any default (or
other event which, with or without the giving or receipt of notice or the
passage of time or both, would result in a notice of cancellation, acceleration
or termination) under, any contract or agreement to which the Company, is, or as
of September 30, 1998 was, a party or of any license, permit or franchise
required for the continued operation of any business conducted by the Company or
the Seller on September 30, 1998;
(r) increase or commitment to the increase of the salary or other
compensation payable or to become payable to any of its officers, directors or
employees, agents
26
<PAGE>
or independent contractors, or the payment of any bonus to the foregoing persons
except in the ordinary course of business, consistent with past practice and
applicable policies and procedures of the Company; or
(s) agreement or understanding to take any of the actions described
above in this Section 4.16.
Section 4.17 Corporate Names. Schedule 4.17 sets forth a complete and
accurate list of names used by either the Company or the Seller in addition to
their respective corporate names.
Section 4.18 Real Property; Leases. Except as set forth on Schedule 4.18,
neither the Company nor the Seller owns, leases, or subleases any real property.
The Company and the Seller have heretofore delivered to the Purchaser a complete
and accurate copy of each such lease and sublease. Unless otherwise noted on
Schedule 4.18, the Company or the Seller, as the case may be, is the sole lessee
or sublessee under each of the leases and subleases listed on Schedule 4.18 and
each such lease and sublease is valid and in full force and effect and
enforceable in accordance with its terms and has not been further supplemented,
amended or modified. Unless otherwise noted on Schedule 4.18, there exists no
event of default or event, occurrence, condition or act, including without
limitation the execution and delivery of this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereunder and thereunder, which constitutes or would constitute (with or without
the giving or receipt of notice or the passage of time or both) a default in any
respect, or give rise to a right of acceleration, cancellation or termination,
under any of the leases or subleases on Schedule 4.18. Neither the Company nor
the Seller has received any notice of any event of default or event, occurrence,
condition or act, including without limitation the execution and delivery of
this Agreement and the other Transaction Documents and the consummation of the
transactions contemplated hereunder and thereunder, which constitutes or would
constitute (with or without the giving or receipt of notice or the passage of
time or both) a default in any respect, or give rise to a right of acceleration,
cancellation or termination, under any of the leases or subleases on Schedule
4.18. Each party to a lease or sublease listed on Schedule 4.18 has complied
with all commitments and obligations on its part to be performed or observed
under such lease or sublease. The Company or the Seller have been in peaceable
possession of the Leased Premises since the commencement of the original term of
each respective lease or sublease listed on Schedule 4.18. The Leased Premises
are structurally sound with no defects and are in good operating condition and
repair and are adequate to meet all present and reasonably anticipated future
requirements of the operations of the Company or the Seller, as the case may be,
as currently conducted or as proposed to be conducted; and none of such Leased
Premises are in need of maintenance or repairs except for ordinary, routine
maintenance and repairs which are not material in nature or cost. The real
property covered by any leasehold interests listed on Schedule 4.18, the
buildings, fixtures and improvements on such, and the present use thereof,
comply in all material respects with all restrictive covenants, deeds and other
restrictions and all Laws, including provisions relating to permissible
nonconforming uses, if any, and any such premises are not presently
27
<PAGE>
affected, nor to the knowledge of the Company or the Seller threatened, by any
condemnation or eminent domain proceeding or any proceeding by a mortgagee.
Section 4.19 Equipment and Personal Property. Schedule 4.19 sets forth a
complete and accurate description of all equipment and personal property owned
by the Company or the Seller as well as all capital leases and operating leases
pursuant to which the Company or the Seller leases property. Except as described
in Schedule 4.19, all equipment and tangible personal property used by the
Company is either owned, free and clear of all Liens or are (i) used under
capital leases and reflected as such in either the Company's Financial
Statements, the Seller's Financial Statements or Schedule 4.19 hereto, as the
case may be, or (ii) used under operating leases. All such leases are valid and
in full force and effect and enforceable in accordance with their terms and have
not been supplemented, amended or modified. Neither the Company nor the Seller
has received any notice of, and there exists no event of default, or event,
occurrence, condition or act, including, without limitation, the execution and
delivery of this Agreement and the other Transaction Documents, the consummation
of the transactions contemplated herein and therein, which constitutes or would
constitute (with or without the giving or receipt of notice or the passage of
time or both) a default in any respect, or give rise to a right of acceleration,
cancellation or termination, under any such lease. All of the equipment and
tangible personal property owned or leased by the Company or the Seller is in
good operating condition and repair, subject to normal wear and tear, none of
such assets is in need of maintenance or repairs except for ordinary, routine
maintenance and such assets are suitable for and operating according to their
intended use in accordance with industry standards.
Section 4.20 Intellectual Property. Schedule 4.20 contains a complete and
accurate schedule of all trade names, trademarks, service marks, patents and
copyrights (including any registrations or pending applications for registration
of any of the foregoing), trade secrets, inventions, processes, formulae,
technology, technical data, information and know-how, and all licenses or other
rights relating to any of the foregoing that are attributable to the conduct of,
used in, or related to, the operations of either the Company or the Seller
(collectively, the "Intangible Property"). Except as set forth on Schedule 4.20
and other than with respect to widely available "shrink wrap" software, to the
knowledge of the Company or the Seller, (i) either the Company or the Seller has
sole and exclusive good, valid and transferable title with respect to the
Intangible Property, (ii) no royalties or other consideration is required in
connection with the Company's or the Seller's use and enjoyment of the
Intangible Property and (iii) no claim has been asserted by any Person against
the Company or the Seller with respect to the ownership or use of any of the
Intangible Property by either the Company or the Seller nor has the Company or
the Seller asserted any similar claim against any Person, and, to the knowledge
of the Company or the Seller, there exists no valid basis for any such claim.
Section 4.21 Software. Schedule 4.21 contains a complete and accurate list
of all computer software, databases and programs utilized by either the Company
or the Seller, as the case may, in the conduct of the operations of either the
Company or the Seller. Except as set
28
<PAGE>
forth on Schedule 4.21, all such computer software, databases and programs are
owned by, or licensed to the Company or the Seller, without any restrictions
thereon.
Section 4.22 Contracts.
(a) Schedule 4.22 sets forth a complete and accurate list of all
material contracts, agreements, arrangements and other instruments to which the
Company or the Seller is a party or by which the Company or the Seller or any of
their respective properties or assets are bound (hereinafter referred to
collectively as the "Contracts"). Each of the Contracts is in full force and
effect and enforceable in accordance with its terms. Neither the Company nor the
Seller has received notice of cancellation of or intent to cancel, or notice to
make a material modification or intent to make a material modification in, any
of the Contracts. There exists no basis for the Seller or the Company to believe
that the consummation of the transactions hereunder would result in the early
termination of any of the Contracts or would have an adverse effect on either
the Company or the Seller. There exists no event of default or event,
occurrence, condition or act on the part of either the Company or the Seller or,
to the knowledge of the Company or the Seller, on the part of the other party to
such Contracts which constitutes or would constitute (with or without the giving
or receipt of notice or the passage of time or both) a breach under, or cause or
permit acceleration of, any obligation of the Company. Except as set forth on
Schedule 4.22, no consent of any other party to any of the Contracts is required
in connection with the execution, delivery and performance of this Agreement or
the other Transaction Documents by the Company or the Seller or the Physician
Stockholders.
(b) Neither the Company nor the Seller is a party to or bound by any
agreement which limits the freedom of either the Company or the Seller to
compete in any line of business or with any Person.
(c) As of the Closing, employees of the Company who continue their
employment with the Company shall not be restricted by the provisions of any
employment agreement or noncompetition agreement between any such employee and
the Seller, to the extent that such agreement would restrict such employees from
engaging in any business conducted by the Company.
(d) Neither the Company nor the Seller is a party to or bound by any
agreement (written or oral) requiring the payment of fees or other obligations
to any Person in connection with the sale of the Company's or the Seller's
services.
Section 4.23 Inventory. Schedule 4.23 sets forth a complete and accurate
list of all inventory of the Company and the Seller as of September 30, 1998.
All inventory of the Company and the Seller consists of a quality and quantity
usable in the ordinary course of business as currently labeled and classified in
the inventory records, except for items of obsolete materials and materials of
below-standard quality, all of which have been written off or down to fair
market value.
29
<PAGE>
Section 4.24 Directors, Officers and Employees. Schedule 4.24 sets forth a
complete and accurate list of the names, titles and compensation of all
directors, officers and employees of the Company and the Seller.
Section 4.25 Title to Properties; Liens. The Company and the Seller have
good, valid and marketable title to all of their respective assets, free and
clear of Liens, except for such Liens specifically set forth on Schedule 4.25.
Section 4.26 Condition of Assets. The assets of the Company and the Seller
are in good working order and condition, subject to normal wear and tear, and
have no defects which would materially interfere with the operation of each of
their respective businesses as presently conducted or to be conducted after the
Closing Date.
Section 4.27 Transactions with Affiliates. Except as set forth on Schedule
4.27, no officer, director, employee or stockholder of or consultant to the
Company or the Seller (a) has borrowed money from, or loaned money to, either
the Company or the Seller, (b) is a party to any material contract with either
the Company or the Seller, (c) has asserted or threatened to assert any claim
against either the Company or the Seller or (d) is engaged in any material
transaction with either the Company or the Seller.
Section 4.28 Valid Transfer. At the Closing, the Seller will convey to the
Purchaser good and marketable title to the Stock, free and clear of any Lien of
any nature whatsoever.
Section 4.29 Absence of Certain Practices. To the knowledge of the
Company, the Seller or any Physician Stockholder, neither the Company, the
Seller nor any director, officer, agent, employee or other Person acting on
behalf of either the Company or the Seller, has given or agreed to give any
gift or similar benefit of more than nominal value to any customer, supplier,
or employee or official of any Governmental Authority or any other Person who
is or may be in a position to help or hinder the Company or the Seller or
assist the Company or the Seller in connection with any proposed transaction
involving the Company or the Seller. To the knowledge of the Company or the
Seller, neither the Company, the Seller nor any director, officer, agent,
employee, or other Person acting on behalf of the Company or the Seller has (i)
used any corporate or other funds for unlawful contributions, payments, gifts,
or entertainment, or made any unlawful expenditures relating to political
activity to, or on behalf of, employees of any Governmental Authority or others
or (ii) accepted or received any unlawful contributions, payments, gifts or
expenditures.
Section 4.30 Accounts Payable. All accounts payable and accrued expenses
reflected in the Company's Financial Statements and the Seller's Financial
Statements arose from bona fide transactions in the ordinary course of business.
Section 4.31 Accounts Receivable. Each of the accounts receivable of
the Company and the Seller, whether or not sold to a factor, (a) arose from
bona fide sales in the ordinary
30
<PAGE>
course of business, (b) was entered into under circumstances and by methods
usual and customary in their respective businesses in the applicable state and
the collection practices used with respect thereto have been and are in all
respects legal and proper, (c) was entered into, and credit granted pursuant
thereto, consistent with the historical credit policies and practices of the
Company and the Seller, respectively, and (d) are good and fully collectible, in
each case at the aggregate recorded amounts thereto without right of recourse,
defense, deduction, counterclaim, off-set or set-off on the part of the obligor.
The books of the Company and the Seller, respectively, correctly record the
principal balance of all accounts receivable and amounts due from any factor,
and each of the security instruments securing any account receivable or amount
due from any factor, if any, constitutes a valid lien in favor of either the
Company or the Seller, as the case may be, upon the property which it describes,
and is enforceable by either the Company or the Seller, as the case may be.
Section 4.32 Identification of Depositories and Authority. Schedule 4.32
lists the names and addresses of all banks, trust companies, savings and loan
associations and other financial institutions in which the Company has accounts,
deposits or safe deposit boxes and the signatories thereunder.
Section 4.33 WARN Act. The Company has not violated the Worker Adjustment
and Retraining Notification Act of 1988 or any similar state Law.
Section 4.34 Records. All books and records relating to the operations of
the Company since inception, including, but not limited to, recruiting records,
Patient Files and other records required by Governmental Authorities or
otherwise, are true, accurate and complete and are kept at __________________.
Section 4.35 Medicine. The Company is not conducting a medical practice or
engaged in the practice of medicine.
Section 4.36 Fraud and Abuse. To the knowledge of the Company or the
Seller, the Company, the Seller and their respective officers, directors,
employees, stockholders and providers, have not engaged in any activities which
are prohibited under federal Medicare or Medicaid statutes, 42 U.S.C. Sections
1320a-7a and 7b, or the regulations promulgated pursuant to such statutes or
state or local healthcare or insurance Laws or which are prohibited by rules of
professional conduct or which otherwise could constitute fraud, including, but
not limited to, the following: (i) making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) making or causing to be made any false statement or
representation of a material fact for use in determining rights to any benefit
or payment; (iii) failing to disclose knowledge by a claimant of the occurrence
of any event affecting the initial or continued right to any benefit or payment
on its behalf or on behalf of another, with intent to secure such benefit or
payment fraudulently; and (iv) soliciting, paying or receiving any remuneration
(including any kickback, bribe, or rebate), directly or indirectly, overtly or
covertly, in cash or in kind or offering to pay such remuneration (a) in return
for
31
<PAGE>
referring an individual to the Seller for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid.
Section 4.37 Third-Party Payors. All contracts with third-party payors
were entered into by either the Company or the Seller in the ordinary course of
business. The Company and the Seller have made available to the Purchaser an
accurate and complete list of all third-party payors which have agreements with
either the Company or the Seller, and the Company or the Seller has provided to
the Purchaser accurate and complete copies of all such contracts. Except as set
forth on Schedule 4.37, the Company and the Seller are in compliance in all
material respects with each third-party payor's contract, and, to the Company's
and the Seller's knowledge, has properly charged and billed in accordance with
the terms of those contracts, including, where applicable, billing and
collection of all deductibles and co-payments.
Section 4.38 Compliance with Medicare and Medicaid Programs. The Company
and the Seller have timely and accurately filed all requisite claims and other
reports required to be filed in connection with all state and federal Medicare
and Medicaid programs in which either the Company or the Seller participate and
which were due on or before the Closing Date, except where the failure to so
timely and accurately file claims and reports would not have a Material Adverse
Effect. There are no Claims pending or, to the knowledge of the Company or the
Seller, threatened or scheduled before any Governmental Authority, including
without limitation, any intermediary, carrier, the HCFA or any other state or
federal agency with respect to any Medicare or Medicaid claim filed by the
Company or the Seller on or before the Closing Date. Except for routinely
scheduled reviews pursuant to the Medicare and Medicaid Contracts to which the
Company or the Seller are a party to, no valid review or program integrity
review related to either the Company or the Seller has been conducted by any
Governmental Authority or otherwise in connection with the Medicare or Medicaid
programs and no such review is scheduled, or to the knowledge of the Company or
the Seller, pending or threatened against or affecting the Company, the Seller,
or the business or assets of either the Company or the Seller, or the
consummation of the transactions contemplated hereby.
Section 4.39 Rate Limitations and Rates. To the Company's and the Seller's
knowledge, the Seller charges rates and accordingly bills for services which are
legal and proper.
Section 4.40 Participation in Audits. Except as previously disclosed in
writing to Elliott H. Vernon and/or Robert Baca, neither the Company nor the
Seller has been informed of any Recoupment Claims arising in connection with
audits or reviews conducted by Medicaid, Medicare or private insurance
companies. To the Company's and the Seller's knowledge, there is no basis for
any Recoupment Claims based upon cost reports, claims or bills submitted or to
be submitted in connection with services rendered by either the Company or the
Seller which, individually or in the aggregate, are material.
32
<PAGE>
Section 4.41 Reimbursement Documentation. The Company and the Seller have
filed when due any and all costs reports and other documentation and reports, if
any, required to be filed with third-party payors and Governmental Authorities
in compliance with applicable contractual provisions and Laws.
Section 4.42 DVI Term Loan. As of the date hereof and as of the Closing
Date, the Company is current with all of its obligations and liabilities in
connection with the DVI Term Loan and is not otherwise in default (with or
without the giving or receipt of notice or passage of time or both) under any
term of the DVI Term Loan.
Section 4.43 Environmental Laws. The Seller, the Company and all
properties owned or operated by the Seller or the Company have complied during
the time the Seller and the Company have operated their respective businesses
and currently comply with all Environmental Laws and neither the Seller nor the
Company has received any communication (whether from a Governmental Authority,
private party, employee or otherwise) that alleges that the Seller or the
Company is not in such compliance, and, to the knowledge of the Company or the
Seller, there are no circumstances that may prevent or interfere with such
compliance in the future or otherwise give rise to any liability or other loss
under such Environmental Laws. The Company and the Seller have all Licenses
required under the Environmental Laws in connection with the operations of
their respective businesses including any permits or licenses relating to
disposals or emissions. To the knowledge of the Company or the Seller, neither
the Seller nor the Company has been named or threatened to be named a
"potentially responsible party" within the meaning of CERCLA or any similar
Law.
Section 4.44 Patients. All materials relating to the Patients are complete
and accurate and have been maintained in accordance with all requirements of
Governmental Authorities and other bodies having jurisdiction over the Seller.
The Company and the Seller have no materials or information relating to the
Patients other than the Patient Files. To the knowledge of the Company or the
Seller, except as set forth in Schedule 4.44, there are no adverse relationships
between the Seller, or a Physician Employee, and any Patient that the Seller has
ever had that may have a Material Adverse Effect.
Section 4.45 Medical Waste. With respect to the generation,
transportation, treatment, storage, and disposal, or other handling of, Medical
Waste, the Seller has complied in all material respects with all Medical Waste
Laws.
Section 4.46 Patient Referrals. No Person having a "financial
relationship", as that term is defined in 42 U.S.C. Section 1395nn or New Jersey
Administrative Code 13:36-6.17, with the Company or the Seller directly or
indirectly refers patients or services to the Seller, which referral (to the
Company's and the Seller's knowledge) does not comply with the requirements of
42 U.S.C. Section 1395nn or New Jersey Statutes Annotated 45:9-22 et. seq. and
the regulations promulgated pursuant thereto.
33
<PAGE>
Section 4.47 Physician Self-Referral. The Company and the Seller and their
respective officers, directors, employees, stockholders and providers have not
engaged in any activities with the knowledge that such activities are prohibited
under the federal Physician Self-Referral Law (42.U.S.C. ss.1395nn) or the
regulations promulgated pursuant to such statutes or related state or local
statutes or regulations, including N.J. Rev. Stat. ss.45.9-22.5.
Section 4.48 Disclosure. No representation, warranty or statement made by
the Company, the Seller or the Physician Stockholders in (i) this Agreement,
(ii) the Schedules attached hereto, or (iii) any other Transaction Document or
other written material furnished (or to be furnished) and prepared by the
Company or the Seller to the Purchaser, the Merger Sub, or their respective
representatives, attorneys and accountants pursuant to this Agreement or any
other Transaction Document, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact required to be
stated herein or therein or necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
Section 4.49 Investment Intent of the Seller. The Seller represents that
(i) by reason of its business and financial experience, and the business and
financial experience of those persons, if any, retained by it to advise it with
respect to its acquisition of the Common Stock Consideration and the Preferred
Stock pursuant hereto, the Seller, together with such advisers, have such
knowledge, sophistication and experience in business and financial matters as to
be capable of evaluating the merits and risks of the prospective acquisition,
and that it is purchasing the Common Stock Consideration and the Preferred Stock
for its own account and not with a view to the distribution thereof or with any
present intention of distributing or selling any of the Common Stock
Consideration or the Preferred Stock except in compliance with the Securities
Act, (ii) it understands and agrees that the Purchaser's offer and sale of the
Common Stock Consideration and the Preferred Stock have not been registered
under the Securities Act and the Common Stock Consideration and the Preferred
Stock may be resold only if registered pursuant to the provisions thereunder or
if an exemption from registration is available and (iii) it has received all the
information it has requested from the Purchaser and has had the opportunity to
ask questions of the Purchaser and, relying on the completeness and accuracy of
such information, the Seller believes such information is sufficient to make an
informed decision with respect to its acquisition of the Common Stock
Consideration and the Preferred Stock.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER AND THE MERGER SUB
The Purchaser and the Merger Sub represent and warrant to the Seller as
follows:
Section 5.01 Organization and Qualification. Each of the Purchaser and the
Merger Sub (i) is a corporation duly organized, validly existing and in good
standing as a business
34
<PAGE>
corporation under the laws of the State of Delaware, (ii) has all corporate
power and authority to own, lease and operate its properties and to carry on its
business as currently being conducted, except where the failure to be so
organized, existing and in good standing or to have such power and authority
would not have a material adverse effect on it.
Section 5.02 Authority.
(a) The Purchaser and the Merger Sub have the requisite corporate
power and authority to execute and deliver the Transaction Documents and all
other instruments or agreements to be executed in connection herewith or
therewith, and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance of the Transaction Documents, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action on the part of the Purchaser and
the Merger Sub and no other corporate proceedings on the part of the Purchaser
or the Merger Sub are necessary to authorize the Transaction Documents or to
consummate the transactions contemplated hereby or thereby. The Transaction
Documents to which it is a party have been duly executed and delivered by the
Purchaser and the Merger Sub and, assuming the Transaction Documents constitute
valid and binding obligations of the Seller, the Company and the Physician
Stockholders, constitute valid and binding obligations of the Purchasers and the
Merger Sub, enforceable against the Purchaser and the Merger Sub in accordance
with their respective terms.
(b) When paid for by, and issued to, the Seller in accordance with
the terms hereof, the Common Stock Consideration will be duly authorized,
validly issued, fully paid and non-assessable and will not have been issued in
violation of any preemptive right of stockholders or rights of first refusal;
and the Seller will have good title to such Common Stock, free and clear of all
Liens (other than any created by the Seller or any Physician Stockholder or
applicable federal or state securities Laws relating to restrictions on the
transferability thereof and other than as provided in the Transaction Documents,
including the Administrative Services Agreement and Voting Agreement).
(c) The Preferred Stock that is being offered and sold to the Seller
at the Closing will have the voting powers, dividend rights, liquidation rights,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations and restrictions thereof, as set
forth in the Certificate of Designations attached hereto as Exhibit 10, which
will be filed with the Secretary of State of the State of Delaware prior to the
Closing. When paid for by, and issued to, the Seller in accordance with the
terms hereof, the Preferred Stock will be duly authorized, validly issued, fully
paid and non-assessable and will not have been issued in violation of any
preemptive right of stockholders or rights of first refusal; and the Seller will
have good title to such preferred stock, free and clear of all Liens (other than
any created by the Seller or any Physician Stockholder or applicable federal or
state securities Laws). On or prior to the Closing, the shares of Common Stock
(the "Conversion Shares") issuable upon conversion of the Preferred Stock will
have been reserved for issuance therefor by the Purchaser
35
<PAGE>
and, when converted by, and issued to, the Seller in accordance with the terms
of the Preferred Stock, the Conversion Shares will be duly authorized, validly
issued, fully paid and non-assessable and will not have been issued in violation
of any preemptive right of stockholders or rights of first refusal; and the
Seller will have good title to such stock, free and clear of all Liens (other
than any created by the Seller or any Physician Stockholder or other holder
thereof or applicable federal or state securities Laws relating to restrictions
on the transferability thereof and other than as provided in the Transaction
Documents, including the Administrative Services Agreement and Voting
Agreement).
Section 5.03 Consents and Approvals; No Violations. Neither the execution,
delivery or performance of this Agreement or the other Transaction Documents by
the Purchaser or the Merger Sub, nor the consummation by the Purchaser or the
Merger Sub of the transactions contemplated hereby or thereby nor compliance by
the Purchaser or the Merger Sub with any of the provisions hereof or thereof
will (i) conflict with or result in any breach of any provision of the charter
or by-laws of either the Purchaser or the Merger Sub, (ii) require any filing
with, or Consent of, any Governmental Authority or other Person by the Purchaser
or the Merger Sub, (iii) (with or without the giving or receipt of due notice or
the passage of time or both) result in a violation or breach of, or constitute a
default or give rise to any right of termination, amendment, cancellation or
acceleration under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, License, contract, agreement or other
instrument or obligation to which the Purchaser or the Merger Sub is a party or
by which any of its properties or assets may be bound or subject, or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Purchaser or the Merger Sub or any of their respective
properties or assets, except, other than with respect to clause (i) above, where
the failure to make any such filing or to obtain any such Consent, or any such
violation, breach, default, termination, amendment, cancellation or acceleration
would not have a material adverse effect on the Purchaser or the Merger Sub.
Section 5.04 Capitalization. The authorized capital stock of the Purchaser
consists of fifty million (50,000,000) shares of Common Stock and one million
(1,000,000) shares of preferred stock, par value $0.10 per share ("Purchaser
Preferred Stock"), of the Purchaser. As of ______, 1999, _______ shares of
Common Stock and _____ shares of Purchaser Preferred Stock were issued and
outstanding. As of ______, 1999, options and warrants exercisable to purchase an
aggregate of _____ shares of Common Stock from the Purchaser were outstanding.
Section 5.05 Commission Filings. The Purchaser has filed all required
forms, reports and other documents with the Commission for periods from and
after December 31, 1997 (collectively, the "Commission Filings"), each of which
has complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act. The Purchaser has heretofore made available
to the Seller all of the Commission Filings, including the Purchaser's (i)
Annual Report on Form 10-K for the year ended December 31, 1997; (ii) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998; (iii) Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998; (iv) Quarterly Report on Form
10-Q for the quarter ended
36
<PAGE>
September 30, 1998; and (v) proxy statement filed with the Commission relating
to the Purchaser's 1998 annual meeting of stockholders. As of their respective
dates, the Commission Filings (including all exhibits and schedules thereto and
documents incorporated by reference therein) did not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading. The audited financial statements and unaudited interim
financial statements of the Purchaser (the "Purchaser Financial Statements")
included or incorporated by reference in such Commission Filings have been
prepared in accordance with GAAP (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Form 10-Q),
complied as of their respective dates in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto, and fairly present the financial position of
the Purchaser as of the dates thereof and the income and retained earnings and
sources and applications of funds for the periods then ended (subject, in the
case of any unaudited interim financial statements, to the absence of footnotes
required by GAAP and normal year-end adjustments).
Section 5.06 No Material Adverse Change. Since September 30, 1998, except
as set forth on Schedule 5.06, there has been no material adverse change in the
business, operations, condition (financial or otherwise), liabilities or assets
of the Purchaser and, to the knowledge of the Purchaser, there are no changes
threatened or pending or any facts or circumstances which the Purchaser believes
are likely to give rise to or cause such a change (other than general conditions
affecting the industry as a whole), nor has there been any damage, destruction
or loss, whether or not covered by insurance, which could have a material
adverse effect on the Purchaser or the Merger Sub.
Section 5.07 Absence of Liabilities. Except as described on Schedule 5.07
or in any Commission Filing, the Purchaser has no debt, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due and whether or not the amount thereof is readily
ascertainable, that are not accurately reflected as a liability in the Purchaser
Financial Statements, except for liabilities incurred by the Purchaser,
subsequent to September 30, 1998 and in the ordinary course of business
consistent with past practices which are not (x) otherwise prohibited by, in
violation of or which will result in a breach of the representations, warranties
or covenants of the Purchaser contained in this Agreement and (y) material,
either individually or in the aggregate.
Section 5.08 Litigation. Schedule 5.08 sets forth a complete and accurate
list of all material suits, claims, proceedings, investigations or reviews which
are pending or, to the knowledge of the Purchaser, threatened against or
affecting the Purchaser or the Merger Sub or directors or officers (in their
capacity as such) of the Purchaser or the Merger Sub or any of their respective
assets and properties.
37
<PAGE>
Section 5.09 Taxes. Except as set forth on Schedule 5.09, the Purchaser
(i) has filed all Tax Returns that were required to be filed, (ii) all such Tax
Returns were, when filed, and continue to be, correct and complete in all
material respects, and (iii) all Taxes owed by the Purchaser have been timely
paid in all material respects.
ARTICLE VI.
CERTAIN COVENANTS
Section 6.01 Access to Information. From the date hereof until the
Effective Time, the Purchaser and its directors, officers, employees, agents,
attorneys, accountants and other representatives shall have full access, upon
reasonable notice and during normal business hours, to the employees and
financial, legal and other representatives of the Company and the Seller with
knowledge of the Company's and the Seller's business and operations, such
persons to be instructed by the Company and the Seller to make full and candid
disclosure of all information reasonably requested, and to the books, records
and properties relating to the Company's and the Seller's business and
operations (including obtaining copies thereof upon reasonable notice). The
Purchaser will use its best efforts not to disrupt the Company's and the
Seller's operations or impinge unnecessarily upon the time of the Company's or
the Seller's employees.
Section 6.02 Conduct of Business in Normal Course. The Seller, the Company
and the Physician Stockholders covenant and agree, except as otherwise expressly
contemplated by this Agreement or as specifically consented to in writing by the
Purchaser, from and after the date of this Agreement and until the Effective
Time, to use their respective best efforts consistent with good business
judgment to maintain the Company's and the Seller's present business
organizations intact, keep available the services of its present employees,
preserve its present relationships with Persons having business dealings with
them and generally operate its business in the ordinary and regular course
consistent with its prior practices, maintain its books and records in
accordance with good business practice, on a basis consistent with prior
practice and in accordance with GAAP, and maintain all certificates, licenses
and permits necessary for the conduct of their respective businesses as
currently conducted. The Seller, the Company and the Physician Stockholders
covenant and agree that, except as otherwise expressly contemplated by this
Agreement or as specifically consented to in writing by the Purchaser, from and
after the date of this Agreement and until the Closing Date, neither the Seller,
the Company nor the Physician Stockholders shall undertake or permit the
following to occur with respect to either the Seller or the Company, any:
(a) action or omission which would result in a material adverse
change, whether direct or indirect, in the business, operations, condition
(financial or otherwise), prospects, liabilities or assets, whether or not
insured;
38
<PAGE>
(b) transaction not in the ordinary course of business, including
without limitation any sale of all or substantially all of the assets (or any
merger, consolidation or other business combination with any other entity);
(c) material damage, destruction or loss, whether or not insured;
(d) individual unfulfilled commitment as of the date of this
Agreement requiring expenditures exceeding $10,000 in the aggregate (excluding
commitments expressly described elsewhere in this Agreement or the Schedules
hereto);
(e) failure to maintain in full force and effect substantially the
same level and types of insurance coverage as in effect on September 30, 1998,
or any destruction, damage to, or loss of any asset (whether or not covered by
insurance) that materially and adversely affects the business, operations,
condition (financial or otherwise), prospects, liabilities or assets;
(f) material change in accounting principles, methods or practices,
investment practices, claims, payment and processing practices or policies
regarding intercompany transactions;
(g) material revaluation of any assets or material write down of the
value of any inventory;
(h) declaration, setting aside, or payment of a dividend or other
distribution in respect of Capital Stock, or any direct or indirect redemption,
purchase or other acquisition of any shares of Capital Stock;
(i) issuance or sale or agreement to issue or sell any Capital Stock
except for shares issued upon exercise of options and warrants currently
outstanding;
(j) amendment to Articles of Incorporation or By-laws;
(k) sale, assignment or transfer of any tangible or intangible
asset, including any rights to intellectual property, except in the ordinary
course of business;
(l) disposition of or lapse of any patent, trademark, tradename,
servicemark or copyright or any application for the foregoing, or disposition of
any technology, software or know-how, or any license, permit or authorization to
use any of the foregoing;
(m) mortgage, pledge or other encumbrance, including Liens and
security interests, of any tangible or intangible asset;
(n) discharge or satisfaction of any Lien or payment or cancellation
of any liability other than payment of current liabilities in the ordinary
course of business;
39
<PAGE>
(o) entering into any agreement, whether written or oral, or
transaction to (i) waive, relinquish, terminate or forebear the enforcement of
any right (x) not in the ordinary course of business or (y) involving
consideration in excess of $10,000 (other than inventory acquisitions and
dispositions in the ordinary course of business) or (ii) for the sale or
acquisition or lease of any material assets;
(p) indebtedness incurred for borrowed money or any commitment to
borrow money, any capital expenditure or capital commitment requiring an
expenditure of monies in the future, any incurrence of a contingent liability or
any guaranty or commitment to guaranty the indebtedness of others entered into,
other than customary transactions in the ordinary course of business not in
excess of $10,000 in the aggregate;
(q) amendment, termination or revocation of (or notice of intent to
do so), or a failure in any material respect to perform obligations or the
occurrence of any default under, any material contract or agreement to which it
is, or as of September 30, 1998 was, a party or of any material license, permit
or franchise required for the continued operation of any business conducted by
it on September 30, 1998;
(r) increase or commitment to the increase of the salary or other
compensation payable or to become payable to any officers, directors or
employees, agent or independent contractors, the payment of any bonus to the
foregoing persons or entering into any employment, consulting or other service
agreements except in the ordinary course of business and consistent with past
practice and applicable policies and procedures;
(s) material agreement with any physician, insurance company,
managed care organization or other healthcare organization;
(t) agreement or understanding to take any of the actions described
above in this Section 6.02.
Section 6.03 Consent. Each of the parties hereto will use its best efforts
and shall fully cooperate with each other party to make promptly all
registrations, filings and applications, give all notices and obtain all
Consents.
Section 6.04 Further Assurances. Subject to the terms and conditions of
this Agreement, each of the parties hereto will use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Law to consummate and make
effective the transactions contemplated pursuant to this Agreement and the other
Transaction Documents.
Section 6.05 No Solicitation. From the date hereof to the Effective Time,
the Seller, the Company and the Physician Stockholder agree that neither they
nor any of their respective directors, officers, employees, representatives,
agents or stockholders, will, directly or indirectly,
40
<PAGE>
solicit or initiate any discussions or negotiations with, participate in any
negotiations with, provide any information to or otherwise cooperate in any
other way with, or facilitate or encourage any effort or attempt by, any Person
or other group, other than the Purchaser and its directors, officers, employees,
representatives and agents, concerning any merger, sale of substantial assets,
sale of shares of capital stock or similar transaction involving the Company or
the Seller. Each of the Company and the Seller will promptly advise the
Purchaser of any proposal or inquiry made to it or any of their respective
directors, officers, employees, representatives, agents or stockholders with
respect to any of the foregoing transactions.
Section 6.06 Notification of Certain Matters. Each party hereto agrees to
give prompt notice to the other of (i) the occurrence, or failure to occur, of
any event which occurrence or failure to occur would be likely to cause any of
its or his representations or warranties contained in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (ii) any material failure on its or his part to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of or the
failure to deliver any notice pursuant to this Section 6.06 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 6.07 Supplements to Schedules. Prior to the Effective Time, the
Seller, the Company and the Physician Stockholders will supplement or amend the
Schedules hereto with respect to any matter hereafter arising which, if existing
or occurring at the date of this Agreement, would have been required to be set
forth or described in such Schedules. No supplement or amendment of the
Schedules made pursuant to this Section shall be deemed to cure any breach of
any representation or warranty made in this Agreement unless the Purchaser
specifically agrees thereto in writing.
Section 6.08 Confidentiality.
(a) Except as otherwise provided in this Section 6.08, the
Purchaser, on the one hand, and the Seller, the Physician Stockholders and the
Company (the "Selling Group"), on the other hand, shall not disclose any
Confidential Information. Prior to the Effective Time, the Purchaser and the
Selling Group shall use the Confidential Information solely in connection with
its analysis and review of the transactions contemplated by this Agreement;
provided that upon and subsequent to the Effective Time all Confidential
Information provided to the Purchaser by the Selling Group shall become the
property of the Purchaser, and the Purchaser shall have no further obligations
pursuant to this Section 6.08. Subsequent to the Effective Time, the obligations
of the Selling Group under this Section 6.08 shall continue in effect and all
confidential information previously provided by the Selling Group to the
Purchaser will constitute Confidential Information which the Selling Group shall
keep confidential in accordance with the terms of this Section 6.08.
41
<PAGE>
(b) The Purchaser and the Selling Group may disclose Confidential
Information to any of their respective directors, officers, employees, agents,
financing sources, and advisors (each a "Representative" and, collectively, the
"Representatives") who need to know such Confidential Information, for the
purpose of assisting such party in connection with the transactions contemplated
by this Agreement. The Purchaser and the Selling Group (the "Disclosing Party")
may disclose Confidential Information if required (upon the receipt of an
opinion of counsel) by legal process or by operation of applicable Law;
provided, however, that the Disclosing Party shall first promptly advise and
consult with the other party (the "Subject Party") and its counsel concerning
the information the Disclosing Party proposes to disclose. The Subject Party
shall have the right to seek an appropriate protective order or other remedy
concerning the Confidential Information that the Disclosing Party proposes to
disclose, and the Disclosing Party will cooperate with the Subject Party to
obtain such protective order. In the event that such protective order or other
remedy is not obtained by the Subject Party, the Disclosing Party will disclose
only that portion of the Confidential Information which, in the written opinion
of the Disclosing Party's counsel, the Disclosing Party is legally required to
disclose, and the Disclosing Party will use its best efforts to obtain
assurances that confidential treatment will be accorded to such information.
(c) In the event that the transactions contemplated hereby are not
consummated, all Confidential Information whether or not then in each parties'
possession, and any copies thereof, or notes or extracts therefrom shall be
returned to the other party, without retaining any copies thereof, and each
party shall destroy, as soon as practicable, all copies of any analyses,
studies, compilations or other documents prepared by it or any of its
Representatives to the extent that they contain, reflect or are generated from
any Confidential Information.
(d) Each party acknowledges and agrees that any breach by it of the
provisions of this Section 6.08 will cause the other party irreparable injury
and damage, for which it cannot be adequately compensated in damages. Each
party, therefore, expressly agrees that the other party shall be entitled to
seek injunctive relief and/or other equitable relief to prevent any anticipatory
breach or continuing breach of the provisions of this Section 6.08, or any part
thereof, and to secure their enforcement. Nothing herein shall be construed as a
waiver by a party of any right it may now have or hereafter acquire to monetary
damages by reason of any injury to its property, business or reputation or
otherwise arising out of any wrongful act or omission of a party under the
provisions of this Section 6.08.
Section 6.09 Independent Appraisal. The Seller and the Purchaser agree that
they will engage, and equally share the costs of, an independent appraisal firm
to advise each of them with respect to the fair value of the Common Stock
Consideration.
42
<PAGE>
Section 6.10 Fees and Expenses.
(a) In the event that, from the date hereof to the Effective Time,
(i) the Purchaser is using its reasonable efforts in good faith to consummate
the transactions contemplated hereby (ii) no material adverse change in the
business or prospects, including but not limited to the financial or market
prospects, of the Purchaser shall have occurred since the date hereof, and (iii)
the transactions contemplated hereby are not consummated as a consequence of (A)
the Seller, the Physician Stockholders or the Company deciding not to proceed
with a transaction based substantially upon the same terms, conditions and
purchase price contemplated herein, (B) the Seller, the Physician Stockholders
or the Company breaching the provisions of this Agreement, or (C) the Seller,
the Physician Stockholders or the Company failing to use their reasonable
efforts in good faith to consummate the transactions contemplated hereby, each
of the Seller, the Physician Stockholders and the Company agree to reimburse the
Purchaser for its reasonable out of pocket expenses, including legal and
accounting fees, incurred relative to the transactions contemplated hereby;
provided, that the Seller, the Physician Stockholders and the Company's
aggregate reimbursement obligations, which shall be joint and several, shall not
exceed $150,000.
(b) In the event that, from the date hereof to the Effective Time,
(i) the Seller, the Physician Stockholders and the Company are using their
reasonable efforts in good faith to consummate the transactions contemplated
hereby and satisfy the conditions set forth in Section 8 herein, (ii) the
condition set forth in Section 8.14 herein has been satisfied, (iii) no material
adverse change in the business or prospects, including but not limited to the
financial or market prospects of the Company or the Seller shall have occurred
since the date hereof, and (iv) a transaction is not consummated as a
consequence of (A) the Purchaser deciding not to proceed with a transaction
based substantially upon the same terms, conditions and purchase price
contemplated herein, (B) the Purchaser breaching the provisions hereof, or (C)
the Purchaser failing to use its reasonable efforts in good faith to consummate
the transactions contemplated hereby, the Purchaser agrees to reimburse the
Company, the Seller and the Physician Stockholders for their reasonable out of
pocket expenses, including legal and accounting fees, incurred relative to the
transactions contemplated hereby; provided, that the Purchaser's aggregate
reimbursement obligations hereunder and in connection with the stock purchase
agreement between the Purchaser and Liberty shall not exceed $150,000.
Section 6.11 DVI Term Loan. The Company hereby acknowledges that it has
received the DVI Term Loan and that the Purchaser facilitated the Company's
efforts in obtaining the DVI Term Loan. The Seller and each Physician
Stockholder of the Practice (i) acknowledge that the DVI Term Loan is for their
benefit and (ii) agree that to the extent that the Purchaser (or any subsidiary
or affiliate of the Purchaser) is or becomes liable (whether contingently or
otherwise) in respect of any indebtedness or other liability or obligation of
either the Seller or the Company (the "Pre-Acquisition Liability") and the
transactions contemplated herein are not consummated on the terms set forth
herein, then the Seller and each Physician Stockholder hereby agrees, jointly
and severally, to indemnify, defend and hold the Purchaser, its subsidiaries and
affiliates
43
<PAGE>
and their respective officers, directors, representatives and agents and any
successors and assigns thereto harmless from and against any and all claims,
damages, injuries, liabilities, costs and expenses, including, without
limitation, reasonable fees and disbursements of counsel incurred by the
Indemnitee in any action or proceeding between the Indemnitor and the Indemnitee
or between the Indemnitee and any third party or otherwise, arising out of or in
any way related to the Pre-Acquisition Liability.
The Seller and each Physician Stockholder acknowledge that the
foregoing indemnification is and shall at all times continue to be absolute,
irrevocable and unconditional in all respects, irrespective of the value,
genuineness, validity, regularity, or enforceability of the Pre-Acquisition
Liability or any other provision of this Agreement, and irrespective of any Law,
now or hereafter in effect in any jurisdiction affecting the Pre-Acquisition
Liability or this Agreement. The liability of the Seller and each Physician
Stockholder under the provisions of this Section 6.11 is not, and will not be,
subject to any reduction, limitation, impairment, termination, defense, offset,
counterclaim or recoupment whatsoever, whether by reason of any claim of any
character whatsoever (including, without limitation, any claim of waiver,
release, surrender, alteration, or compromise), or by reason of any liability at
any time of the Purchaser to the Seller, the Company or any Physician
Stockholder or otherwise, or arising from default, willful misconduct,
negligence or otherwise. The provisions of this Section 6.11 (and the
obligations of the Seller and the Physician Stockholders hereunder) shall at all
times be valid and enforceable, irrespective of any other agreement or
circumstance of any nature whatsoever which might otherwise constitute a
defense, and the obligations of this Section 6.11 shall survive any termination
of this Agreement.
Section 6.12 Proxy Statement. The Seller and the Company covenant and agree
(i) to promptly furnish (and be responsible for) all information, and take such
other actions, as may be requested by the Purchaser in connection with the
preparation and filing of the Proxy Statement so that the Proxy Statement, on
the date filed with the Commission and on the date first published, sent or
given to the Purchaser's stockholders, shall not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) to promptly
correct any information supplied to the Purchaser specifically for use in the
Proxy Statement if and to the extent that it shall have become false or
misleading in any material respect.
ARTICLE VII.
CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party hereunder are subject to the
satisfaction, at or before the Effective Time, of the conditions set forth
below.
44
<PAGE>
Section 7.01 Governmental Authorizations; Consents. The Seller, the
Physician Stockholders, the Company, the Purchaser and the Merger Sub shall have
obtained all Consents which are required for the consummation of the Merger and
the transactions contemplated under this Agreement.
Section 7.02 Absence of Litigation. There shall not have been issued and be
in effect any order of any court or tribunal of competent jurisdiction which (i)
prohibits or makes illegal the purchase by the Purchaser of the Stock, (ii)
would require the divestiture by the Purchaser of all or a material portion of
the Stock or the assets of the Purchaser as a result of the transactions
contemplated hereby or (iii) would impose limitations on the ability of the
Purchaser to effectively execute full rights of ownership of the Stock as a
result of the transaction contemplated hereby.
Section 7.03 No Injunction. At the Effective Time there shall be no
effective injunction, writ, preliminary restraining order or any order of any
nature issued by a court of competent jurisdiction directing that the
transactions provided for herein or any of them not be consummated as so
provided or imposing any conditions on the consummation of the transactions
contemplated hereby which the Purchaser deems unacceptable in its sole
discretion.
ARTICLE VIII.
CONDITIONS PRECEDENT TO THE PURCHASER'S
AND THE MERGER SUB'S OBLIGATIONS
The obligation of the Purchaser and the Merger Sub to effect the Merger is
subject to the satisfaction, at or prior to the Effective Time, of the
conditions set forth below. The benefit of these conditions are for the
Purchaser and the Merger Sub only and may be waived in writing by the Purchaser
and the Merger Sub at any time in their sole discretion.
Section 8.01 Accuracy of Representations and Warranties. The
representations and warranties of the Seller, the Company and the Physician
Stockholders shall be true and correct in all material respects as of the date
when made and as of Closing Date as though made at that time, and the Purchaser
shall have received certificates attesting thereto from the Seller, the Company
and the Physician Stockholders signed by a duly authorized officer of each of
the Company and the Seller, and each Physician Stockholder, respectively.
Section 8.02 Performance by the Seller, the Company and the Physician
Stockholders. The Seller, the Company and the Physician Stockholders shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement, including, without
limitation, the deliveries required under Section 3.02(b), and the Purchaser
shall have received certificates attesting thereto from the Seller, the Company
and the
45
<PAGE>
Physician Stockholders signed by a duly authorized officer of each of the
Company and the Seller, and each Physician Stockholder, respectively.
Section 8.03 Investigations. No investigation of the Company by the
Purchaser nor any document delivered to the Purchaser as contemplated by this
Agreement, shall have revealed any facts or circumstances which, in the sole
judgement of the Purchaser, reflect in a material adverse way on the Company,
the Seller or the Stock.
Section 8.04 Casualty Losses; Material Change. Since September 30, 1998,
neither the Company nor the Seller shall have suffered (i) any material casualty
loss, (ii) any material business interruption, (iii) any material labor
difficulty or customer boycott or (iv) any material adverse change in its
business, operations, prospects or financial condition.
Section 8.05 Stock. The Stock shall be free and clear of Liens of any
nature whatsoever.
Section 8.06 Board of Directors. The Board of Directors and officers of the
Company shall have delivered resignations on or prior to the date hereof and
effective as of the Closing Date.
Section 8.07 Investment Representations. The Purchaser shall have received
investment representations satisfactory to the Purchaser from the Seller and
each Physician Stockholder and any other recipient of either the Common Stock
Consideration or the Preferred Stock, on or prior to the date hereof and
effective as of the Closing Date.
Section 8.08 CLIA. The Company shall have provided the Purchaser with
documentation, in form and substance acceptable to the Purchaser and as of a
date acceptable to the Purchaser, to the effect that the operations of the
Seller and the Company have complied with CLIA and all HCFA regulations.
Section 8.09 Employment Agreements. The Purchaser shall have entered into
an employment agreement with each of Dr. Sklower and Dr. Patel, dated on or
prior to the date hereof and effective as of the Closing Date, on terms and
conditions which are satisfactory to the parties thereto. The Seller shall have
entered into an employment agreement, dated on or prior to the date hereof and
effective as of the Closing Date, on terms and conditions satisfactory to the
parties thereto and the Purchaser, by and between the Company and those
Physician Stockholders and those other physicians employed by or who provide
services to the Seller as shall be mutually agreed upon by the Purchaser and the
Seller.
Section 8.10 Leases. The Company shall have entered into five year leases
(with two renewal periods of five years each) or assumed the existing leases,
with respect to each of the facilities in which the operations of the Seller are
currently conducted, on terms and conditions satisfactory to the Purchaser.
46
<PAGE>
Section 8.11 Agreements with Stockholders of the Seller The Seller shall
have entered into agreements with the holders of securities convertible into
Capital Stock of the Company, on terms satisfactory to the Purchaser, dated on
or prior to the date hereof and effective as of the Closing Date.
Section 8.12 Liberty HealthCare System, Inc. The Purchaser shall have
entered into an agreement with Liberty with respect to the sale, to be
consummated contemporaneously herewith, by Liberty to the Purchaser of its
interest in the Company, on terms satisfactory to the Purchaser.
Section 8.13 Financing. The Purchaser shall have obtained the financing
necessary to consummate the transactions contemplated hereby.
Section 8.14 Audited Financial Statements. The 1997 Company Financial
Statements, the 1996 Company Financial Statements, the 1997 Seller Financial
Statements and the 1996 Seller Financial Statements shall have been delivered to
the Purchaser and shall reflect that the Seller and the Company had aggregate
revenues of at least $7.9 million and $17.4 million, respectively, for fiscal
year 1997 and $8.1 million and $17.8 million, respectively, for fiscal 1996, and
a net loss of $6,000 and $1.48 million, respectively, for fiscal 1997 and
pre-tax profits of $149,000 and a net loss of $3,466,367, respectively, for
fiscal 1996, in each case, after deducting all business expenses including, but
not limited to, the annual compensation of Dr. Sklower and Patel.
Section 8.15 Unaudited Financial Statements. The Interim 1998 Company
Financial Statements and the Interim 1998 Seller Financial Statements shall have
been delivered to the Purchaser.
Section 8.16 FIRPTA Certificate. The Seller shall deliver to the Purchaser
a certificate (the "FIRPTA Certificate") in a form substantially identical to
the form attached hereto as Exhibit 12.
Section 8.17 Consents. The Purchaser, the Seller and the Company shall have
obtained all necessary Consents including, without limitation, any regulatory,
stock exchange or corporate approvals (including, without limitation, any
necessary approvals of the Board of Directors and stockholders of the
Purchaser).
Section 8.18 Administrative Services Agreement. The Company and the Seller
shall have entered into the Administrative Service Agreement, dated on or prior
to the date hereof and effective as of the Closing Date.
[Section 8.19 IPA Agreement. The Seller and the IPA shall have entered into
the IPA Agreement, dated on or prior to the date hereof and effective as of the
Closing Date.]
47
<PAGE>
Section 8.20 Compliance with Laws. Neither the Company nor the Seller shall
be in violation of any Laws, which violation may have a Material Adverse Effect.
Section 8.21 Opinions of Counsel. The Purchaser shall have received from
counsel to the Seller an opinion of counsel, dated as of the Closing Date and
addressed to the Purchaser, substantially in the form of Exhibit 11.
Section 8.22 Voting Agreement. The Seller and the Physician Stockholders
shall have entered into the Voting Agreement, dated on or prior to the date
hereof and effective as of the Closing Date.
ARTICLE IX.
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS.
The obligation of the Seller to effect the Merger is subject to the
satisfaction, at or prior to the Effective Time, of the conditions set forth
below. The benefit of these conditions are for the Seller only and may be waived
by the Seller in writing at any time in its sole discretion.
Section 9.01 Accuracy of Representations and Warranties. The
representations and warranties of the Purchaser shall be true and correct in all
respects as of the date when made and as of the Closing Date, as though made at
that time, and the Seller shall have received a certificate attesting thereto
signed by a duly authorized officer of the Purchaser.
Section 9.02 Performance by Purchaser. The Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement, including, without limitation, the
deliveries required under Section 3.02(a), and the Seller shall have received a
certificate from the Purchaser signed by a duly authorized officer of the
Purchaser to such effect.
Section 9.03 Board Representation. The Purchaser shall appoint Dr. Patel
(or such other person designated by the Seller and reasonably acceptable to the
Purchaser) to the Board of Directors of the Purchaser, effective as of the
Closing Date.
Section 9.04 Liberty HealthCare System, Inc. The Purchaser shall have
entered into an agreement with Liberty with respect to the sale, to be
consummated contemporaneously herewith, by Liberty to the Purchaser of its
interest in the Company.
Section 9.05 Consents. The Purchaser, the Seller and the Company shall have
obtained all necessary Consents including, without limitation, any regulatory,
stock exchange or corporate approvals (including, without limitation, any
necessary approvals of the Board of Directors and stockholders of the
Purchaser).
48
<PAGE>
Section 9.06 Compliance with Laws. Neither the Company nor the Seller shall
be in violation of any Laws, which violation may have a Material Adverse Effect.
Section 9.07 Consent of Seller Stockholders. The obligations of the Company
and the Seller are subject to the consent of the stockholders of the Seller,
which consent may be withheld in the sole and absolute discretion of the
stockholders.
ARTICLE X.
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS.
Except as otherwise specifically provided for herein, the representations,
warranties, covenants and agreements of the Purchaser, the Merger Sub, the
Seller, the Physician Stockholders and the Company included or provided for
herein, or in other instruments or agreements delivered or to be delivered at or
prior to Closing in connection herewith, including the representations and
warranties of all Persons made in the certificates to be delivered to the
Purchaser pursuant hereto, and the obligation of the Purchaser and the Seller to
indemnify on account of a breach or violation thereof shall survive for a period
of thirty-six (36) months following the Closing Date; provided, however, that
(x) there shall be no limit on the survival of the indemnification obligations
of the Seller for breaches of the representations or warranties made by the
Seller and the Company as to the transfer of legal and valid title to the Stock
and to environmental matters and (y) the indemnification obligations of the
Seller for breaches of the representations or warranties made by the Seller and
the Company with respect to Taxes or Tax matters shall survive until the
expiration of the applicable statute of limitations. Similarly, the obligation
of the Seller to indemnify the Purchaser, the Merger Sub and (after the
Effective Time) the Company with respect to any liability of the Company not
expressly assumed hereunder by the Purchaser, shall survive until such liability
or claim is fully paid and discharged. Notwithstanding anything herein to the
contrary, if, prior to the expiration of any indemnification period, the
Purchaser, or the Seller, as the case may be, shall have been notified of a
claim for indemnity hereunder and such claim shall not have been finally
resolved before the expiration of such period, any representation, warranty,
covenant or agreement that is the basis for such claim shall continue to survive
and shall remain a basis for indemnity as to such claim until such claim is
finally resolved. All statements contained herein and in the other Transaction
Documents, including the Schedules, the Company's Financial Statements and the
Seller's Financial Statements shall be deemed representations and warranties for
all purposes of this Agreement. The respective representations and warranties of
the Seller, the Company, Physician Stockholders, the Purchaser and the Merger
Sub contained herein or in any other documents covered in the preceding sentence
shall not be deemed waived or otherwise affected by any investigation made by
any party hereto or any amendment or supplement to the schedules or exhibits
hereto occurring after the signing of this Agreement.
49
<PAGE>
ARTICLE XI.
INDEMNIFICATION.
Section 11.0 General Indemnity.
(a) Subject to the limitations and other provisions of Article X and
this Article XI, the Seller and the Physician Stockholders agree to indemnify
and hold harmless the Purchaser, its respective Affiliates (including, after the
Effective Time, the Company) and the successors and assigns of all of them,
including Persons providing financing to the Purchaser in their capacity as
successors or assigns of the Purchaser, from, against and in respect of any and
all Losses resulting from, incurred in connection with or arising out of (i) any
breach or alleged breach of any representation, warranty, covenant or agreement
of the Seller, the Company or the Physician Stockholders contained herein or
made in the Transaction Documents and any actual or threatened action or
proceeding in connection with any breach or alleged breach, (ii) the conduct of
the conduct of the operations of the Company or the Seller on or prior to the
Effective Time, (iii) any liability for Taxes (x) of the Company, (y) incurred
by reason of the Company being severally liable (pursuant to Treasury Regulation
Section 1.1502-6, any analogous state, local, or foreign provision, or
otherwise), in whole or in part, for any Tax of any affiliated group (as defined
in Section 1504(a) of the Code or any analogous state, local or foreign
provision), with respect to which the Company or any predecessor thereof may be
or have been an includible corporation (as defined in Sections 1504(b) and (c)
of the Code or such analogous state, local or foreign provision) (an "Affiliated
Group"), (z) of any Person other than the Company for which the Company has
liability as a transferee or successor, by contract or otherwise; and (iv)
liabilities of the Company, the Seller or their respective subsidiaries and
related Liens not set forth on Schedule 4.15 or 4.25 or reflected in either the
Company's Financial Statements or the Seller's Financial Statements. The
indemnification obligations to be borne by a Physician Stockholder shall be
limited to his pro rata portion of such obligations based on his equity interest
in the Practice.
The Purchaser and the Merger Sub shall indemnify and hold
harmless the Physician Stockholders, the Seller, their Affiliates and their
successors and assigns from, against and in respect of any and all Losses
resulting from, incurred in connection with or arising out of any breach or
alleged breach of any representation, warranty, covenant or agreement of the
Purchaser and any actual or threatened action or proceeding in connection
therewith.
The party or parties being indemnified are referred to herein
as the "Indemnitee" and the indemnifying party is referred to herein as the
"Indemnitor".
(b) No claim for indemnification under Section 11.01(a) (other than
indemnification claims relating to Recoupment Claims payable to a Governmental
Authority) may be brought by the Purchaser unless and until the aggregate dollar
amount of all Losses sought by the Purchaser to be indemnified against under
such aforesaid Section equals or exceeds
50
<PAGE>
$50,000, in which event the Purchaser may assert all such claims and the Seller
and the Physician Stockholders shall be responsible for, and shall hold the
Purchaser harmless from, any and all such Losses; provided, further, however,
that the maximum liability that the Seller and the Physician Stockholders may
have with respect to claims for indemnification under Section 11.01(a) will be
an amount equal to the Merger Consideration, other than with respect to matters
involving fraud, willful misconduct or bad faith. In determining the amount of
the Merger Consideration, the Common Stock Consideration shall be valued based
on the closing sales price of the Common Stock on The Nasdaq National Market on
the trading day immediately preceding the Closing Date and the Preferred Stock
shall be valued based on its liquidation preference.
(c) Any Losses payable by the Seller and the Physician Stockholders
to the Purchaser pursuant to Section 11.01(a) may be payable, in the sole
discretion of the payor, (i) in cash in immediately available funds, (ii) in
shares of Common Stock valued based on the closing sales price of the Common
Stock on The Nasdaq National Market on the trading day immediately preceding the
Closing Date or (iii) in Preferred Stock valued at its liquidation preference.
Notwithstanding the foregoing, any Losses payable by the Seller and the
Physician Stockholders to the Purchaser in respect of which the Purchaser made
or otherwise incurred a cash expenditure shall be paid in cash in immediately
available funds by the Seller and the Physician Stockholders.
Section 11.0 Indemnification Procedure.
(a) Any party who receives notice of a potential claim that may, in
the judgment of such party, result in a Loss shall use all reasonable efforts to
provide the parties hereto notice thereof, provided that failure or delay or
alleged delay in providing such notice shall not adversely affect such party's
right to indemnification hereunder except to the extent that the Indemnitor
demonstrates that the defense of such action has been prejudiced by the
Indemnitee's failure to give such notice. In the event that any party shall
incur or suffer any Losses in respect of which indemnification may be sought by
such party hereunder, the Indemnitee shall assert a claim for indemnification by
written notice ("Notice") to the Indemnitor stating the nature and basis of such
claim. In the case of Losses arising by reason of any third party claim, the
Notice shall be given within 30 days of the filing or other written assertion of
any such claim against the Indemnitee, but the failure of the Indemnitee to give
the Notice within such time period shall not relieve the Indemnitor of any
liability that the Indemnitor may have to the Indemnitee.
(b) In the case of third party claims for which indemnification is
sought, the Indemnitor shall have the option (i) to conduct any proceedings or
negotiations in connection therewith, (ii) to take all other steps to settle or
defend any such claim (provided that the Indemnitor shall not settle any such
claim without the consent of the Indemnitee which consent shall not be
unreasonably withheld) and (iii) to employ counsel to contest any such claim or
liability in the name of the Indemnitee or otherwise. In any event, the
Indemnitee shall be entitled to participate at its own expense and by its own
counsel in any proceedings relating to
51
<PAGE>
any third party claim. The Indemnitor shall, within 20 days of receipt of the
Notice, notify the Indemnitee of its intention to assume the defense of such
claim. If (i) the Indemnitor shall decline to assume the defense of any such
claim, (ii) the Indemnitor shall fail to notify the Indemnitee within 20 days
after receipt of the Notice of the Indemnitor's election to defend such claim or
(iii) the Indemnitee shall have reasonably concluded that there may be defenses
available to it which are different from or in addition to those available to
the Indemnitor or a conflict exists between the Indemnitor and the Indemnitee
(in which case the Indemnitor shall not have the right to direct the defense of
such action on behalf of the Indemnitee), the Indemnitee shall defend against
such claim and the Indemnitee may settle such claim without the consent of the
Indemnitor, and Indemnitor may not challenge the reasonableness of any such
settlement. The expenses of all proceedings, contests or lawsuits in respect of
such claims shall be borne and paid by the Indemnitor, and the Indemnitor shall
pay the Indemnitee, in immediately available funds, as such Losses are incurred.
Regardless of which party shall assume the defense of the claim, the parties
agree to cooperate fully with one another in connection therewith. In the event
that any Losses incurred by the Indemnitee do not involve payment by the
Indemnitee of a third party claim, then the Indemnitor shall within ten (10)
days after agreement on the amount of Losses or the occurrence of a final
non-appealable determination of such amount pay to the Indemnitee, in
immediately available funds, the amount of such Losses. Anything in this Article
XI to the contrary notwithstanding, the Indemnitor shall not, without the
Indemnitee's prior written consent, settle or compromise any claim or consent to
entry of any judgment in respect thereof which imposes any future obligation on
the Indemnitee or which does not include, as an unconditional term thereof, the
giving by the claimant or plaintiff to the Indemnitee, a release from all
liability in respect of such claim.
(c) The remedies provided for in this Agreement shall not be
exclusive of any other rights or remedies available to one party against the
other, either at law or in equity.
ARTICLE XII.
TERMINATION.
Section 12.01 Right to Terminate. Notwithstanding anything to the contrary
set forth in this Agreement, this Agreement may be terminated and the Merger and
the transactions contemplated herein abandoned at any time prior to the
Effective Time:
(i) by mutual consent of the Purchaser, on the one hand,
and the Seller, on the other;
(ii) by the Purchaser or the Seller if the Closing shall not
have occurred by _________, 1999, provided, however,
that the right to terminate this Agreement under this
Section 12.01 shall not be available to any party whose
failure (and, in the case of the Seller,
52
<PAGE>
the failure of the Company or any Physician Stockholder)
to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing
to occur on or before such date;
(iii) by the Purchaser or the Seller if a court of competent
jurisdiction shall have issued an order, decree or
ruling permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable;
(iv) by the Seller if the Purchaser or the Merger Sub (x)
breaches its representations and warranties in any
material respect, or (y) fails to comply in any material
respect with any of its covenants or agreements
contained herein; or
(v) by the Purchaser if the Seller, the Company or any
Physician Stockholder (x) breaches its representations
and warranties in any material respect, or (y) fails to
comply in any material respect with any of its covenants
or agreements contained herein.
Section 12.0 Obligations to Cease. In the event that this Agreement shall
be terminated pursuant to Section 12.01 hereof, all obligations of the parties
hereto under this Agreement shall terminate and there shall be no liability of
any party hereto to any other party except for (i) the obligations with respect
to confidentiality contained in Section 6.08 hereof (ii) the obligations with
respect to fees and expenses contained in Sections 6.09 and 6.10, (iii) the
obligations of the Seller and the Physician Stockholders with respect to the DVI
Term Loan contained in Section 6.11 and (v) the obligations with respect to
costs contained in Section 14.02 hereof.
ARTICLE XIII.
OBLIGATIONS AFTER THE CLOSING.
Section 13.0 Tax Returns.
(a) Tax Periods Ending on or Before the Closing Date. Seller shall
prepare or cause to be prepared and file or cause to be filed (at its expense)
all Tax Returns for the Company for all periods ending on or prior to the
Closing Date which are filed after the Closing Date (including income Tax
Returns with respect to periods for which a unitary or combined income Tax
Return of Seller will include the operations of the Company). Such Tax Returns
shall be prepared in a manner consistent with the Tax Returns (including amended
Tax Returns) of the Company filed on or prior to the Closing Date for prior
fiscal periods. Seller shall pay, or cause to be paid, all Taxes shown as due
(or required to be shown as due) on such Tax Returns.
53
<PAGE>
(b) Tax Periods Beginning Before and Ending After the Closing Date.
The Purchaser shall prepare or cause to be prepared and file or cause to be
filed (at its expense) any Tax Returns of the Company for Tax periods which
begin before the Closing Date and end after the Closing Date. The Seller shall
pay to the Purchaser within fifteen days after the date on which Taxes are paid
with respect to such periods an amount equal to the Seller's portion of such
Taxes which relates to the portion of such Taxable period ending on the Closing
Date. For purposes of this Section 13.01, the Taxes which relate to the portion
of such Tax period ending on the Closing Date shall, to the extent practical, be
taken into account as though the relevant Tax period ended on the Closing Date
(and all income, gain, credits, deductions and losses shall be determined on
such basis). All determinations necessary to give effect to the foregoing
allocation shall be made in a manner consistent with prior practice of the
Taxpayers and their respective subsidiaries.
Section 13.0 Employees and Employee Benefits. The Seller shall use its best
efforts to make available to Purchaser all employees of the Company at the
Effective Time. The Purchaser shall have no obligations to hire or continue the
employment of any of the Company's employees. The Seller shall be solely
responsible for the satisfaction of all claims for benefits brought by or in
respect of any Person who was an employee of the Company immediately prior to
the Effective Time under any Plan or any government mandated benefits (worker's
compensation and unemployment compensation) or otherwise, which claims are based
on occurrences prior to the Effective Time, or as a result of the Merger and the
transactions contemplated herein, regardless of when notices of such claims were
filed. The Seller shall retain responsibility for and shall indemnify and hold
the Purchaser harmless with respect to all compensation payable, including with
respect to the benefits or other liabilities payable with respect to all Plans,
relating to employees of the Company or its subsidiaries who retired or
terminated employment prior to the Effective Time. The Seller shall have no
responsibility to provide benefits or government mandated benefits for claims
arising out of events that occurred after the Effective Time; provided, however,
the Seller shall remain liable for any claims arising out of events that
occurred prior to and at the Effective Time.
At the Effective Time, the Seller shall retain or assume all
liabilities of any kind or description (including, without limitation,
disability payments, workers compensation awards and health benefits) with
respect to any former employees (including, without limitation, retirees and
disabled Persons) as of the Effective Time.
Section 13.0 Tax Audits. Each party shall have the right, at its own
expense, to control any audit or determination by any authority, initiate any
claim for refund or amended return, and contest, resolve and defend against any
assessment, notice of deficiency, or other adjustment or proposed adjustment of
Taxes for any taxable period for which that party is charged with responsibility
for filing a Tax Return under this Agreement (collectively, "Tax Actions");
provided, however, that the Seller, on the one hand, or the Purchaser, on the
other, shall not have the right to agree to any assessment, deficiency,
settlement, or other adjustment or proposed adjustment of Taxes that would
adversely affect the interests of the other without such other
54
<PAGE>
party's written consent, which consent shall not be unreasonably withheld, and,
provided, further, that Purchaser shall have the right, at the expense of
Seller, to assume Tax Actions in the event Seller shall fail to take Tax Actions
reasonably available to it. The Seller shall notify the Purchaser, and the
Purchaser shall notify the Seller, as the case may be, if any taxing authority
shall, upon audit or otherwise, propose in writing an adjustment to tax items
which could give rise to a claim against or by the Purchaser.
Section 13.0 Certain Contracts. The Seller hereby assigns to the Company,
and will cause each other Physician Employee to assign, the rights to payments
and other financial interests of Seller or such Physician Employee, as the case
may be, under those Contracts listed on Schedule 13.04.
Section 13.0 Further Assurances. Subject to the terms and conditions
hereof, the Seller agrees that after the Effective Time it will execute and
deliver such documents to the Purchaser as the Purchaser may reasonably request
in order to consummate the transactions contemplated hereby.
Section 13.0 Board Representation. The Purchaser agrees that for so long as
the Common Stock Consideration is, and continues to be, owned by the Seller,
together with the Physician Stockholders, and represents in excess of 30% of the
outstanding Capital Stock of the Purchaser, then the Purchaser will use its
reasonable efforts to cause its Board of Directors, subject to their fiduciary
obligations, to nominate one individual designated by the Seller to be nominated
for election to the Purchaser's Board of Directors. The Seller hereby agrees
that Dr. Patel will be its nominee until he is unable to serve.
Section 13.0 Seller's Indebtedness to the Company. The Seller hereby agrees
to repay the net payable reflecting certain accrued expenses (the "Seller's
Payable") due from the Seller to the Company, the aggregate amount of which was
$________ as of _________ and $________ as of the Closing Date, on a monthly
basis, from any payments received by the Seller in respect of accounts
receivable which arose prior to the Closing Date. All amounts of the Seller's
Payable not previously paid out of such accounts receivable will be due and
payable on the third anniversary of the Closing Date pursuant to the Promissory
Note, a form of which is attached hereto as Exhibit 7, which also provides for
certain minimum payments to be received on the first and second anniversaries of
the Closing Date in the event that the payments out of such accounts receivable
do not reach certain thresholds and (b) the Seller's obligations with respect to
the Seller's Payable shall be secured by a first priority perfected security
interest in and to all of the accounts receivable of the Seller pursuant to the
Security Agreement, a form of which is attached hereto as Exhibit 8.
[Section 13. Line of Credit. The Purchaser hereby agrees to provide a line
of credit to the Seller (the "Line of Credit") of up to $1.5 million to assist
the Seller with respect to a potential shortfall in cash receipts during the
first year following the Closing Date; provided, however, that the Line of
Credit will be funded upon the terms and subject to the conditions set
55
<PAGE>
forth in the Loan Agreement attached hereto as Exhibit 5, including without
limitation, that the Line of Credit will (a) bear interest at the Purchaser's
cost of funds, (b) be secured by a perfected security interest in and to all of
the assets of the Seller (subordinate only to the security interest of the
Purchaser pursuant to the Security Agreement) pursuant to the Line of Credit
Security Agreement, a form of which is attached hereto as Exhibit 4, (c) be
guaranteed by the Seller and the Physician Stockholders on the same terms and
conditions as the DVI Term Loan, as set forth in Section 6.11, and (d) be repaid
by the Seller and the Physician Stockholders within thirty-six (36) months after
the Line of Credit is funded (the "Term"), with quarterly interest payments of
$______ only during the first twelve months of the Term, and quarterly payments
of principal and interest of $_____ during the final twenty-four (24) months of
the Term.]
ARTICLE XIV.
MISCELLANEOUS.
Section 14.0 Publicity. From the date hereof to the Closing Date, each of
the Purchaser, the Merger Sub, the Seller, the Physician Stockholders and the
Company agrees not to issue any announcement, press release, public statement or
other information to the press or any third party with respect to the Agreement
or the transactions contemplated hereby without obtaining the prior written
approval of the other parties hereto (which approval shall not be unreasonably
withheld); provided, however, that nothing contained herein shall prevent any
party hereto, at any time, from furnishing any required information to any
Governmental Authority or from issuing any announcement, press release, public
statement or other information to the press or any third party with respect to
the Agreement or the transaction contemplated hereby if required by Law.
Section 14.0 Costs. Except as expressly provided herein, including but not
limited to Section 6.10, each of the Purchaser, the Merger Sub, the Seller, the
Physician Stockholders and the Company shall pay their own costs and expenses,
including any accounting fees, legal fees, brokerage fees, commissions or
finder's fees incurred by such party, in connection with the negotiation and
preparation of this Agreement and in closing and carrying out the transactions
contemplated by this Agreement.
Section 14.0 Headings. Subject headings are included for convenience only
and shall not affect the interpretation of any provisions of this Agreement.
Section 14.0 Notices. Any notice, demand, request, waiver, 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 as follows:
56
<PAGE>
If to the Seller, to:
Pavonia Medical Associates, P.A.
600 Pavonia Avenue
Jersey City, New Jersey 07304
Attn: Manmohan Patel, M.D.
Fax:
with a copy to:
Witman, Stadtmauer & Michaels, P.A.
26 Columbia Turnpike
Florham Park, New Jersey 07932
Attn: Leonard J. Witman, Esq.
Fax: (973) 822-1188
If to the Purchaser, to:
c/o Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, New Jersey 07701
Attn: Elliott H. Vernon, Esq.
Fax: (732) 224-9362
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attn: Scott M. Zimmerman, Esq.
Fax: (212) 758-9526
If to the Merger Sub, to:
HIS PPM Co.
c/o Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, New Jersey 07701
Attn: Elliott H. Vernon, Esq.
Fax: (732) 224-9362
57
<PAGE>
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attn: Scott M. Zimmerman, Esq.
Fax: (212) 758-9526
If to the Company, to:
Jersey Integrated Health Practice, Inc.
600 Pavonia Avenue
Jersey City, New Jersey 07304
Attn: Manmohan A. Patel, M.D.
Fax:
with a copy to:
Witman, Stadtmauer & Michaels, P.A.
26 Columbia Turnpike
Florham Park, New Jersey 07932
Attn: Leonard J. Witman, Esq.
Fax: (973) 822-1188
If to the Physician Stockholders, to:
[
]
with a copy to:
[
]
Section 14.0 Assignment and Successors. Prior to the Effective Time,
neither the Purchaser, the Merger Sub, the Seller nor the Physician Stockholders
shall assign any rights or delegate any duties hereunder without the prior
written consent of the other. At or after the Effective Time, the Purchaser may
assign its rights under this Agreement to its lenders as security for its
obligations.
58
<PAGE>
Section 14.0 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the parties.
Section 14.0 Governing Law; Forum; Process. This Agreement shall be
construed in accordance with, and governed by, the Laws of the State of New
Jersey as applied to contracts made and to be performed entirely in the State of
New Jersey without regard to principles of conflicts of Law. Each of the parties
hereto hereby irrevocably and unconditionally submits to the exclusive
jurisdiction of any court of the State of New Jersey or any federal court
sitting in the State of New York for purposes of any suit, action or other
proceeding arising out of this Agreement (and agrees not to commence any action,
suit or proceedings relating hereto except in such courts). Each of the parties
hereto agrees that service of any process, summons, notice or document by U.S.
registered mail at its address set forth herein shall be effective service of
process for any action, suit or proceeding brought against it in any such court.
Each of the parties hereto hereby irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement, which is brought by or against it, in the courts of the State
of New Jersey or any federal court sitting in the State of New Jersey and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
Section 14.0 Entire Agreement. This Agreement, including the Schedules
hereto, sets forth the entire understanding and agreement and supersedes any and
all other understandings, negotiations or agreements between the Seller, the
Company, the Physician Stockholders, the Purchaser and the Merger Sub relating
to the Merger and the transactions contemplated herein.
Section 14.0 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute a single agreement.
Section 14.1 Severability. In the event that any one or more of the
immaterial provisions contained in this Agreement shall for any reason be held
to be invalid, illegal or unenforceable, the same shall not affect any other
provision of this Agreement, but this Agreement shall be construed in a manner
which, as nearly as possible, reflects the original intent of the parties.
Section 14.1 No Prejudice. This Agreement has been jointly prepared by the
parties hereto and the terms hereof shall not be construed in favor of or
against any party on account of its participation in such preparation.
Section 14.1 Words in Singular and Plural Form. Words used in the singular
form in this Agreement shall be deemed to import the plural, and vice versa, as
the sense may require.
Section 14.1 Parties in Interest. Nothing expressed or implied in this
Agreement is intended or shall be construed to confer upon or give to any Person
other than the parties hereto
59
<PAGE>
any rights or remedies under or by reason of this Agreement or any
transaction contemplated hereby.
Section 14.1 Amendment and Modification. This Agreement may be amended or
modified only by written agreement executed by all parties hereto.
Section 14.1 Waiver. At any time prior to the Effective Time, the Purchaser
on the one hand or the Seller on the other may (i) extend the time for the
performance of any of the obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any document delivered pursuant hereto, and (iii) waive compliance with
any of the agreements or conditions of the other contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by the party granting such
waiver but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or future failure.
Section 14.1 Knowledge. References herein to the Company's knowledge shall
include the knowledge and belief of the Seller and every officer of the Company,
and reference herein to the Seller's knowledge shall include the knowledge and
belief of the Physician Stockholders and every officer of the Seller, in each
case after due inquiry and consultation.
60
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title:Chairman of the Board, President and Chief
Executive Officer
HIS PPM CO.
By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title:Chief Executive Officer
PAVONIA MEDICAL ASSOCIATES, P.A.
By: /s/ Jay Sklower, D.O.
Name: Jay Sklower, D.O.
Title:Managing Director and Secretary-Treasurer
JERSEY INTEGRATED HEALTH PRACTICE, INC.
By: /s/ Manmohan A. Patel, M.D.
Name: Manmohan A. Patel, M.D.
Title:Chairman of the Board
61
<PAGE>
PHYSICIAN STOCKHOLDERS OF PAVONIA:
---------------------------------------
Manmohan Patel, M.D.
---------------------------------------
Bakul Desai, M.D.
---------------------------------------
Jay Sklower, D.O.
---------------------------------------
Frank Rotella, M.D.
---------------------------------------
George Ciechanowski, M.D.
---------------------------------------
Victor Marchione, M.D.
---------------------------------------
Nicholas Scarpa, M.D.
---------------------------------------
Eugene DeSimone, M.D.
---------------------------------------
Anthony Del Piano, M.D.
---------------------------------------
Anthony Raffaelli, M.D.
---------------------------------------
May Abed, M.D.
---------------------------------------
Paul Stoopack, M.D.
62
<PAGE>
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (this "Agreement"), dated as of February
27, 1998 by and between MANMOHAN PATEL, M.D. ("Consultant"), an individual
having an address at 5 Jennie Court, Cedar Grove, New Jersey 07060, and
HEALTHCARE IMAGING SERVICES, INC., a Delaware corporation (the "Company"), with
its principal place of business at Tri-Parkway Corporate Park, 200 Schulz Drive,
Red Bank, New Jersey 07701.
W I T N E S S E T H :
WHEREAS, the Company desires to become a leading provider of
physician practice management services to an integrated network of physicians in
New Jersey offering a comprehensive array of primary care, multi-specialty and
diagnostic imaging services;
WHEREAS, in furtherance of its strategy to establish physician
practice management operations the Company is contemporaneously herewith
entering into a letter of intent (the "LOI") with Pavonia Medical Associates,
P.A. ("Pavonia") which sets forth the principal terms and conditions upon which
the Company or a subsidiary will enter into an agreement to acquire the capital
stock of Jersey Integrated HealthPractice, Inc., a management service
organization established and owned principally by Pavonia; and
WHEREAS, the Company desires to engage Consultant to provide
consulting services and expertise to the Company in connection with the
Company's development of its physician practice management operations, and
Consultant desires to provide such services, upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Appointment as Consultant. The Company hereby appoints Consultant
as an independent contractor, and Consultant hereby accepts such appointment by
the Company, commencing on the date hereof (the "Effective Date"), for the Term
(as defined below), with the obligations set forth in Section 3 below, and upon
the other terms and subject to the conditions hereinafter stated.
2. Term. Except as otherwise specifically provided in Section 6
below, the term of the Agreement (the "Term") shall commence on the Effective
Date and shall continue until the first (1st) anniversary of the Effective Date,
subject to the terms and conditions of this Agreement; provided however, that
the Agreement shall terminate upon the earlier to occur of the following: (i)
the negotiation and execution of an employment agreement between the
-1-
<PAGE>
Company and Consultant on terms and conditions satisfactory to the parties
thereto (the "Employment Agreement") or (ii) the expiration or termination of
this Agreement pursuant to the terms hereof.
3. Obligations as Consultant. During the Term, (a) Consultant shall
provide to the Company such services as are reasonably requested by the Company
from time to time in connection with the Company's development and marketing of
its physician practice management operations, and (b) Consultant shall devote
such working time, attention and energies to the affairs of the Company during
the Term as shall be necessary to provide the consulting services set forth
herein; provided however, that the provision of such services shall not
materially interfere with Consultant's current responsibilities as the Chief
Executive Officer of Pavonia. Consultant shall be subject to the supervision of
the Company's Chairman of the Board, Chief Executive Officer and President. All
consulting activities under this Agreement shall be performed personally by
Consultant, and Consultant shall not engage any other person, entity or group to
perform such activities without the Company's prior written consent.
4. Compensation. In consideration for the services provided by
Consultant pursuant to this Agreement and contemplated to be rendered pursuant
to the Employment Agreement, the Company hereby agrees to grant to Consultant an
option to purchase 300,000 shares of common stock, par value of $.01 per share,
of the Company (the "Option") pursuant to the terms and conditions of the Stock
Option Agreement attached hereto as Exhibit A; provided however, that the Option
shall in no event be exercisable until Consultant has become a full-time
employee of the Company.
5. Expenses. During the Term, the Company shall reimburse Consultant
for any reasonable out-of-pocket expenses incurred by Consultant at the request
of the Company in connection with the consulting services provided under this
Agreement.
6. Termination. Either party may, upon 30 days prior written notice
to the other, terminate this Agreement.
7. Confidential Information.
(a) Consultant agrees not to use, disclose or make accessible
to any person, entity or group any Confidential Information (as defined below)
pertaining to the business of the Company and/or any of its affiliates, except
when required to do so by a court of competent jurisdiction, by any governmental
agency having supervisory authority over the business of the Company, or by any
administrative body or legislative body (including a committee thereof) with
jurisdiction to order Consultant to divulge, disclose or make accessible such
information. For purposes of this Agreement, "Confidential Information" means
any non-public information concerning the Company's and/or any of its
affiliates' financial data, statistical data, strategic business plans, pricing
or pricing strategies, customer and supplier lists, customer and supplier
information, information relating to governmental relations, practices,
processes,
-2-
<PAGE>
methods, trade secrets, marketing plans and other non-public, confidential
information of the Company and/or any of its affiliates, that, in any case, is
not otherwise generally available to the public.
(b) In the event this Agreement expires or is terminated,
Consultant shall immediately return to the Company all Confidential Information
in his possession.
(c) Consultant and the Company agree that the covenant
regarding Confidential Information contained in this Section 7 is a reasonable
covenant under the circumstances, and further agree that if, in the opinion of
any court of competent jurisdiction, such covenant is not reasonable in any
respect, such court shall have the right, power and authority to excise or
modify such provision or provisions of this covenant as to the court shall
appear not reasonable and to enforce the remainder of the covenant as so
amended.
(d) Consultant acknowledges that the consideration received,
and to be received, by him under this Agreement adequately and sufficiently
compensates him for the restrictions set forth in this Section 7.
(e) The provisions of this Section 7 shall extend for the Term
and shall survive the expiration or termination of the Agreement for a period of
three (3) years.
8. Remedy for Breach. Consultant hereby acknowledges that, in the
event of any breach of Section 7 of this Agreement, the Company would have no
adequate remedy at law and would suffer substantial and irreparable damage.
Accordingly, Consultant hereby agrees that, in such event, the Company shall be
entitled, without the necessity of proving damages or posting bond, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction (without proving a breach therefor) to
restrain any such breach or threatened breach or to obtain specific performance
of any such provisions, all without prejudice to any and all other remedies that
the Company may have at law or in equity.
9. Representations of Consultant. Consultant hereby represents and
warrants to the Company the following:
(i) neither the execution and delivery of this Agreement by
Consultant, the consummation of the transactions required of Consultant herein,
nor the fulfillment of, or compliance with, the terms and conditions of this
Agreement, will conflict with, or result in, with or without the giving of
notice or the passage of time or both, a breach of any of the terms, conditions
or provisions of any agreement or instrument to which Consultant is now a party
or by which he or his property is bound or subject or constitute a default or
result in an acceleration under any of the foregoing, or result in the creation
of any liens, claims or encumbrances on any assets of Consultant or the
violation of any law, rule, regulation, order, judgment or decree to which his
property is subject;
-3-
<PAGE>
(ii) Consultant is aware of the Anti-Fraud and Abuse
Amendments to the Social Security Act, the Medicare and Medicaid Program
Protection Act and the Federal Safe Harbor Regulations, and that, as a
consultant, he cannot knowingly or willfully offer, pay, solicit or receive
remuneration in order to induce business, and if he does so, he will be subject
to civil and/or criminal penalties;
(iii) Consultant has reviewed and executed the Company's
Statement of Policy for Contractors and Consultants attached hereto; and
(iv) Consultant will not enter into any contractual or other
arrangement, which is inconsistent with the performance of his obligations
pursuant to Section 3 herein.
10. Miscellaneous.
(a) Relationship of the Parties. In performing the services
provided for hereunder, Consultant is acting as an independent contractor, and
Consultant shall not be deemed by virtue of this Agreement to be the servant,
agent or employee of the Company for any purpose whatsoever. Consultant
understands that, as an independent contractor, he shall not be entitled, as a
result of the services to be provided by him hereunder, to receive any employee
benefits from, or participate in any employee benefit plans sponsored by, the
Company.
(b) Notices. Any notice or other communication permitted or
required to be given or made hereunder shall be in writing and shall be deemed
to be sufficiently and duly given or made if sent by hand delivery or by
telecopier (with confirmation of receipt) or if sent by registered or certified
mail (postage prepaid and return receipt requested), or if sent by reputable
overnight courier or express mail, to the addressee as follows:
If to the Company, to:
Healthcare Imaging Services, Inc.
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, New Jersey 07701
Attn: Elliott H. Vernon, Esq.
Tel: (732) 224-9292
Fax: (732) 224-9362
-4-
<PAGE>
If to Consultant, to:
Manmohan Patel, M.D.
c/o Pavonia Medical Associates, P.A.
600 Pavonia Ave.
Jersey City, New Jersey 07306
Tel: (201)216-3040
Fax: (201)418-3705
Notice shall be deemed effective when so personally delivered, telecopied, or if
mailed, 2 business days following the date the notice is mailed, or if sent by
overnight courier or express mail, the next business day following the date the
notice is sent. Any party may by notice given in accordance with this Section to
the other party designate another person or address for receipt of notices
hereunder.
(c) Entire Agreement; Amendment; Construction. This Agreement
constitutes the entire agreement and understanding between the parties
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings between the parties hereto with respect to the subject matter
hereof, whether oral or written. Any amendment to this Agreement shall be made
only upon the written consent of Consultant and a duly authorized officer of the
Company. The language used in this Agreement shall be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of
strict construction shall be applied against any party. Accordingly, the
language of all parts of this Agreement shall at all times be construed as a
whole, allowing for a fair reading, and not strictly construing such language
for or against any of the parties to this Agreement. Furthermore, it is
acknowledged and agreed by each of the parties to this Agreement that each of
the parties participated in the drafting of this Agreement, and any time any
claims arise concerning such language, such language shall not be construed for
or against the party alleged to be responsible for such drafting.
(d) No Waivers. No failure or delay by any party in exercising
any right, power or privilege under this Agreement shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies provided in this Agreement shall be cumulative and not
exclusive of any rights or remedies provided by any law, rule, regulation or
order.
(e) Severability. This Agreement shall be deemed to be
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. Furthermore, in lieu of any such invalid or unenforceable
provision, the parties hereto intend that there shall be added as a part of this
Agreement a provision as similar in terms to such invalid or unenforceable
provision as possible to be valid and enforceable.
-5-
<PAGE>
(f) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their permitted
successors and assigns. However, Consultant shall not assign any of its rights
or obligations under this Agreement (whether by operation of law or otherwise),
in whole or in part, without the prior written consent of the Company, which the
Company may grant or withhold in its sole discretion.
(g) Governing Law. This Agreement shall be construed and
governed in accordance with the laws of the State of New Jersey, without any
regard to the conflicts-of-law principles thereof.
(h) Titles. Titles contained in this Agreement are intended
solely for convenience of the parties hereto, and no provision of this Agreement
is to be construed by reference to any such Title.
(i) Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original,
but all of such counterparts shall together constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the date first written above.
HEALTHCARE IMAGING SERVICES, INC.
By:/s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title:Chairman of the Board, President
and Chief Executive Officer
/s/ Manmohan Patel
Manmohan Patel, M.D.
-6-
<PAGE>
AMENDMENT NO. 1 TO
HEALTHCARE IMAGING SERVICES, INC.
1997 OMNIBUS INCENTIVE PLAN
Section 4(a)(i) of the HealthCare Imaging Services, Inc. 1997
Omnibus Incentive Plan is hereby amended by deleting 500,000 in the first
sentence thereof and replacing such number with "600,000" so that the first
sentence reads in its entirety as follows:
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 600,000 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.
This Amendment No. 1 was approved by the Board of Directors and
Stockholders of HealthCare Imaging Services, Inc. effective December 22, 1998.
<PAGE>
EXHIBIT A
HEALTHCARE IMAGING SERVICES, INC.
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
(AS AMENDED AND RESTATED)
1. NAME.
The name of this plan is the Healthcare Imaging Services, Inc. 1996 Stock
Option Plan for Non-Employee Directors.
2. PURPOSE.
The purpose of the Plan is to enable the Company to secure non-employee
persons of requisite experience and ability to serve on the Board and to
motivate Non-Employee Directors to exert their best efforts on behalf of the
Company, thus enhancing the value of the Company for the benefit of the
Company's stockholders.
3. DEFINITIONS.
For the purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Annual Director Compensation" means the amount of fees which a
Non-Employee Director would be entitled to receive during a Plan Year for
serving as a Non-Employee Director or as a member of any committee of the Board
pursuant to the policy in effect for each Plan Year, including retainers paid
periodically and fees paid for attendance at or participation in meetings of
the Board or any committee thereof.
(b) "Award" means a grant of options to a Participant pursuant to
Section 8 of the Plan.
(c) "Award Agreement" means the written agreement between the
Company and the Participant that contains the terms and conditions pertaining to
the grant of options.
(d) "Board" means the Board of Directors of the Company.
(e) "Change in Control" means a change in control of the Company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act (as in effect
on the date the Plan is adopted by the Board), whether or not the Company is
then subject to such reporting requirement; provided, that, without limitation,
such a Change in Control shall be deemed to have occurred if:
-1-
<PAGE>
(i) any "person" (as defined in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding
securities; provided, however, that no Change of
Control shall be deemed to have occurred if prior to
the acquisition of such thirty percent (30%) of the
combined voting power of the Company's then outstanding
securities, a majority of the Continuing Directors
approves such acquisition; or
(ii) if there shall cease to be a majority of the Board
comprised of Continuing Directors; or
(iii) the stockholders of the Company 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 eighty percent (80%) of the combined
voting power of the voting securities of the Company or
such surviving entity outstanding immediately after
such merger or consolidation; or
(iv) the stockholders of the Company 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 the Company's assets.
Notwithstanding anything in this definition to the contrary, an
event or occurrence (or a series of events or occurrences) which would otherwise
constitute a Change in Control under the foregoing shall not constitute a Change
in Control for purposes of this Plan if the Board, by majority vote, determines
that a Change in Control does not result therefrom; but only if Continuing
Directors constitute a majority of the directors voting in favor of such
determination. Further, an event or occurrence (or a series of events or
occurrences) which would not otherwise constitute a Change in Control under the
foregoing shall be deemed to constitute a Change in Control for purposes of this
Plan if the Board, by majority vote, determines that a Change in Control does
result therefrom; but only if Continuing Directors constitute a majority of the
directors voting in favor of such determination. A determination by the Board
under the provisions of this paragraph shall be made solely for purposes of this
Plan and shall not directly or indirectly affect any determination or analysis
of whether a change in control results for any other purpose. Any determination
made with respect to whether a change in control results for purposes of any
other plan or agreement of the Company shall have no effect for purposes of this
Plan.
(f) "Chairman" means the individual appointed by the Committee to
serve as the chairman of the Committee.
A-2
<PAGE>
(g) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
(h) "Committee" means the Committee established pursuant to Section
4 of the Plan.
(i) "Common Stock" means the common stock, par value $0.01 per
share, of the Company or any security of the Company identified by the Committee
as having been issued in substitution or exchange therefor or in lieu thereof.
(j) "Company" means Healthcare Imaging Services, Inc.
(k) "Continuing Directors" mean individuals who at the end of any
period of two (2) consecutive years constitute the Board and any new director(s)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously approved.
(l) "Directors" mean the members of the Board.
(m) "Effective Date" means the date on which the Plan and an
increase in the authorized Common Stock is approved by the stockholders of the
Company, as provided in Section 5(a) hereof.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute.
(o) "Fair Market Value" means, with respect to the Shares, (a) if
the Common Stock is listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market,
the last reported sales price as reported on such exchange; (b) if the Common
Stock is not listed or admitted for trading on any national securities exchange
or included in The Nasdaq National Market or Nasdaq SmallCap Market, the average
of the last reported closing bid and asked quotation for the Common Stock as
reported on the Automated Quotation System of NASDAQ or a similar service if
NASDAQ is not reporting such information; (c) if the Common Stock is not listed
or admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market or quoted by NASDAQ or a
similar service, the average of the last reported bid and asked quotation for
the Common Stock as quoted by a market maker in the Common Stock (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 Common Stock is not listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market or
A-3
<PAGE>
quoted by NASDAQ and there is no market maker in the Common Stock, the fair
market value of the Shares as determined by the Committee in good faith.
(p) "Non-Employee Director" means an individual who: (i) is now, or
hereafter becomes, a member of the Board and (ii) is not an employee of the
Company on the date of the grant of an option.
(q) "NSO" means an option that does not meet the requirements of
Section 422(b) of the Code, which provides the right to purchase a Share at a
price and for a Term fixed in accordance with the Plan, and subject to such
other limitations and restrictions imposed by the Plan.
(r) "Participant" means a Non-Employee Director who has been granted
an NSO under the Plan.
(s) "Person" means any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
(t) "Plan" means this Healthcare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee Directors.
(u) "Plan Year" means the twelve-month period beginning on the first
day of the first fiscal quarter of the Company.
(v) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act, or any successor or replacement rule
or regulation thereto. Accordingly, all references in the Plan to a specific
paragraph of Rule 16b-3 shall be deemed to be references to such paragraph or to
the applicable successor or replacement paragraph thereto.
(w) "Share" or "Shares" means a share or shares of Common Stock,
adjusted in accordance with Section 9 hereof, as applicable.
(x) "Term" means the period during which a particular Award may be
exercised.
4. ADMINISTRATION.
(a) Generally.
Subject to Section 4(g), the Plan shall be administered by the Committee.
Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and
A-4
<PAGE>
other decisions under or with respect to the Plan or any NSO shall be within the
sole and absolute discretion of the Committee, may be made at any time, and
shall be final, conclusive and binding upon the Company, any Participant, any
holder or beneficiary of any NSO and any stockholder of the Company.
(b) Composition of the Committee.
The members of the Committee shall be appointed by the Board and
shall consist of no less than two members of the Board who are "disinterested
persons" as such term is used in Rule 16b-3. The Committee may from time to time
remove members from, or add members to, the Committee. Vacancies on the
Committee, however caused, shall be filled by the Board.
(c) Actions by the Committee.
The Committee shall hold meetings at such times and places as it may
determine. The Committee shall appoint one of its members as Chairman. Acts
approved by a majority of the members of the Committee present at a meeting at
which a quorum is present, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
(d) Powers of the Committee.
Subject to the terms of the Plan and applicable law, the Committee
shall have full power and authority to administer the Plan in its sole and
absolute discretion. To this end, the Committee is authorized to construe and
interpret the Plan and to make all other determinations necessary or advisable
for the administration of the Plan. Subject to the foregoing, any determination,
decision or action of the Committee in connection with the construction,
interpretation, administration, or application of the Plan shall be final,
conclusive and binding upon all Participants and any person claiming under or
through a Participant.
(e) Reliance and Indemnification of Committee Members.
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 or the Board shall be personally liable for
any action, determination or interpretation taken or made in good faith by the
Committee or the Board with respect to the Plan or any NSO granted thereunder,
and all members of the Committee and the Board shall be fully indemnified and
protected by the Company in respect of any such action, determination or
interpretation.
A-5
<PAGE>
(f) NSO Accounts.
The Committee shall maintain or cause to be maintained a journal or
other record in which a separate account for each Participant shall be
established. Whenever NSOs are granted to, or exercised by, a Participant, the
Participant's account shall reflect such grant or exercise and the Participant's
account shall be appropriately adjusted in the event of any change in
capitalization or transaction pursuant to Section 9 hereof.
(g) Administrator.
An Administrator of the Plan may from time to time be appointed by
the Committee. If appointed, such Administrator shall be responsible for the
general administration of the Plan under the policy guidance of the Committee.
The Administrator shall be in the employ of the Company and shall be compensated
for services and expenses by the Company according to its normal employment
policies without special or additional compensation, other than reimbursement of
expenses, if any, for his or her services as the Administrator.
5. APPROVAL OF THE PLAN; TERM OF THE PLAN.
(a) Approval of the Plan by Stockholders; Effective Date of the Plan.
The Plan was adopted by the Board on February 13, 1996. The Plan
will be submitted for the approval of the Company's stockholders within twelve
(12) months after such date. In addition, at such time an increase in the
authorized Common Stock to fifty million (50,000,000) shares will be submitted
for the approval of the Company's stockholders. The date of stockholder approval
of the Plan and such increase is the "Effective Date." Awards may be granted
prior to such stockholder approval; provided, however, that such Awards shall
not be exercisable prior to the Effective Date; provided, further, that if such
approval has not been obtained at the end of said twelve (12) month period, all
Awards previously granted under the Plan shall thereupon be cancelled and become
null and void.
(b) Term of Plan.
No NSO shall be granted pursuant to the Plan on or after the tenth
(10th) anniversary of the Effective Date, but NSOs theretofore granted may be
extended beyond that date and the Committee shall have the authority to amend,
alter, adjust, suspend, discontinue, or terminate any such NSO or to waive any
conditions or rights under any such NSO, and to amend the Plan, beyond that
date.
A-6
<PAGE>
6. SHARES SUBJECT TO THE PLAN.
(a) Limitation on Number of Shares.
The maximum aggregate number of Shares which may be subject to NSOs
granted to Participants pursuant to the Plan shall be seven hundred and fifty
thousand (750,000). The limitation on the number of Shares which may be subject
to NSOs under the Plan shall be subject to adjustment as provided in Section 9
hereof. If any NSO granted under the Plan expires or is terminated for any
reason without having been exercised in full, the Shares allocable to the
unexercised portion of such NSO shall again become available for grant pursuant
to the Plan. At all times during the term of the Plan, the Company shall reserve
and keep available for issuance such number of Shares as the Company is
obligated to issue upon the exercise of all then outstanding NSOs.
(b) Accounting for NSOs.
For purposes of this Section 6, the number of Shares covered by an
NSO, or to which an NSO relates, shall be counted on the date of grant of such
NSO against the aggregate number of Shares available for granting NSOs under the
Plan. Any Shares that are delivered by the Company pursuant to any NSO, and any
NSOs that are granted by, or become obligations of, the Company, shall be
counted against the Shares available for granting NSOs under the Plan.
7. SOURCE OF SHARES ISSUED UNDER THE PLAN.
Common Stock issued under the Plan may consist, in whole or in part, of
authorized and unissued Shares or treasury Shares, as determined in the sole and
absolute discretion of the Committee. No fractional Shares shall be issued under
the Plan.
8. NON-QUALIFIED STOCK OPTIONS.
(a) Grant of NSOs.
(i) Each person who was a Non-Employee Director on the date of the
Plan's adoption by the Board shall automatically be granted
NSOs to purchase twenty-five thousand (25,000) shares of
Common Stock, subject to all the provisions of the Plan.
(ii) Each person who is either elected or appointed a Non-Employee
Director, and who has not previously received a grant of NSOs
pursuant to clause (i) above, shall automatically be granted
NSOs to purchase twenty-five thousand (25,000) shares of
Common Stock on the date of their appointment or election,
subject to the provisions of the Plan.
A-7
<PAGE>
(b) Additional Grant of NSOs.
(i) In addition to the grant of NSOs pursuant to Section 8(a)
above, NSOs to purchase five thousand (5,000) shares of
Common Stock shall be granted, as of the date of the annual
organizational meeting of the Board which is held following
the Company's annual meeting of stockholders, to any
Non-Employee Director who, no later than the date of such
annual organizational meeting of the Board (and subject to
such other rules as the Committee may adopt from time to
time), has filed with the Company an irrevocable election to
receive an NSO in lieu of all, but not less than all, of the
Annual Director Compensation expected to be earned by such
Non-Employee Director for the upcoming Plan Year; provided,
however, that to the extent such Non-Employee Director
previously received a NSO pursuant to this Section 8(b)(i) or
Section 8(b)(ii) with respect to any Plan Year which would
coincide with any portion of such upcoming Plan Year, then
the number of shares of Common Stock subject to the NSO with
respect to such upcoming Plan Year will be reduced in
proportion to the number of days in such upcoming Plan Year
which overlap the prior Plan Year. A separate election must
be made for each Plan Year, although a Non-Employee Director
may specify that a particular election shall apply to future
Plan Years unless amended or revoked; provided, however, that
no amendment or revocation may be made during a Plan Year
with respect to such Plan Year.
In the event that at such annual organizational meeting of the
Board it is determined that no Annual Director Compensation
will be paid during the upcoming Plan Year, each Non-Employee
Director shall, nonetheless, be granted NSOs to purchase five
thousand (5,000) shares of Common Stock as of the date of such
meeting in respect of his service as a Non-Employee Director
during such Plan Year; subject to proportionate reduction in
accordance with the proviso contained in the penultimate
sentence of the first paragraph of this Section 8(b)(i).
(ii) Furthermore, each person who was a Non-Employee Director on
the date the addition of this Section 8(b) to the Plan is
approved by the Company's stockholders shall automatically be
granted NSOs to purchase twenty-five thousand (25,000) shares
of Common Stock, subject to all the provisions of the Plan.
(c) Exercise Price.
The price at which each Share covered by a NSO may be purchased
pursuant to this Plan shall be the Fair Market Value of a Share on the date of
the NSO grant.
A-8
<PAGE>
(d) Terms and Conditions.
All NSOs granted pursuant to the Plan shall be evidenced by an Award
Agreement, approved as to form by the Committee, which shall be subject to the
following express terms and conditions and to the other terms and conditions
specified in this Section 8, and to such other terms and conditions as shall be
determined by the Committee in its sole and absolute discretion which are not
inconsistent with the Plan:
(i) after six (6) months from the date of the Award, it may be
exercised as to not more than forty percent (40%) of the NSOs
granted under the Award;
(ii) after eighteen (18) months from the date of the Award, it may
be exercised as to not more than eighty percent (80%) of the
NSOs granted under the Award;
(iii) after thirty (30) months from the date of the Award, it may be
exercised as to any part or all of the NSOs granted under the
Award;
(iv) the failure of a NSO to vest for any reason whatsoever shall
cause the NSO to expire and be of no further force or effect;
(v) unless terminated earlier pursuant to Section 8(f) hereof, the
term of each NSO shall in no event be more than ten (10) years
from the date of the grant; and
(vi) no NSO or interest therein may be transferred, assigned,
pledged or hypothecated by a Participant during his lifetime
or be made subject to execution, attachment or similar
process, in each case except by will or by the laws of
descent and distribution. NSOs shall be exercised during the
lifetime of the Participant only by the Participant (or by
his personal representative in the event of his disability);
provided, however, that if so determined by the Committee, a
Participant, in the manner established by the Committee, may
designate a beneficiary or beneficiaries to exercise the
rights of the Participant and to receive any property
distributable with respect to any NSO upon the death or
permanent disability of the Participant. Notwithstanding
anything contained herein to the contrary, a Participant may
transfer a NSO (x) to the spouse of 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.
A-9
<PAGE>
(e) Exercise.
(i) Notice of Exercise. An NSO holder entitled to exercise a NSO
may do so by delivery of a written notice to that effect
specifying the number of Shares with respect to which the NSO
is being exercised. Except as provided in Section 8(e)(ii)
below, the notice shall be accompanied by payment in full of
the purchase price of any Shares to be purchased, which
payment may be made in cash or, with the Committee's approval
(and subject to the requirements of Rule 16b-3), in Shares
valued at Fair Market Value at the time of exercise or, with
the Committee's approval, a combination thereof. No Shares
shall be issued upon exercise of a NSO until full payment has
been made therefor. All notices, payments or requests
provided for herein shall be delivered to the Chief Financial
Officer of the Company.
(ii) Cashless Exercise Procedures. The Company, in its sole
discretion, may establish procedures whereby an NSO holder,
subject to the requirements of Rule 16b-3, Regulation T,
federal income tax laws and other federal, state and local
tax and securities laws, can exercise a NSO or a portion
thereof without making a direct payment of the option price
to the Company. If the Company so elects to establish a
cashless exercise program, the Company shall determine, in
its sole discretion, and from time to time, such
administrative procedures and policies as it deems
appropriate, and such procedures and policies shall be
binding on any NSO holder wishing to utilize the cashless
exercise program.
(f) Termination of NSOs.
NSOs granted under the Plan shall be subject to the following events
of termination:
(i) in the event a Participant is removed from the Board (other
than removal due to the death of a Participant or a
Participant being unable to perform his duties for the
Company because of a disability (as determined by the
Board)), all unexercised NSOs held by such Participant on the
date of such removal (whether or not vested) will expire
immediately; and
(ii) in the event a Participant is no longer a member of the Board
other than by reason of removal, or is removed due to his
death or his being unable to perform his duties for the
Company because of a disability (as determined by the Board),
all unexercised NSOs held by such Participant that shall have
not vested as of the date such Participant is no longer a
member of the Board (as determined in accordance with clauses
(i), (ii) and (iii) of Section 8(d)) shall terminate, and all
NSOs vested as of such date may be exercised by the
Participant at any time within one (1) year after such
Participant ceased to be a Director, but not beyond the
original
A-10
<PAGE>
term thereof; provided, however, that, unless otherwise
elected by the estate of the Participant, all such NSOs
that are not exercised prior to the first anniversary of
the Participant's death and have not otherwise been
terminated shall be deemed exercised on the first
anniversary of the date of the Participant's death to
the extent the then aggregate Fair Market Value of the
Shares subject to the NSOs exceeds the aggregate
exercise price of the NSOs and payment of such exercise
price shall be effected by withholding a number of
shares of Common Stock otherwise issuable pursuant to
the NSOs, the Fair Market Value of which on such
anniversary is equal to the exercise price. If the Fair
Market Value of the Common Stock on the first
anniversary of the Participant's death equals or is less
than the exercise price, then the NSOs shall be deemed
to have expired unexercised.
(g) Share Certificates.
All certificates for Shares delivered under the Plan pursuant to any
NSO 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.
(h) Stockholder Approval
Notwithstanding anything to the contrary contained herein (i) no
Award shall be exercisable prior to the Effective Date and (ii) if the approval
is not obtained as provided for in Section 5(a) hereof, all Awards previously
granted under the Plan shall thereupon be cancelled and become null and void.
9. 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, exchanges of shares, separations, reorganizations or liquidations
or similar events or in the event of extraordinary cash or noncash dividends
being declared with respect to outstanding Shares or other similar transactions,
the number and class of Shares available under the Plan in the aggregate, the
number and class of Shares subject to Awards theretofore granted, applicable
purchase prices and all other applicable provisions, shall, subject to the
provisions of the Plan, be equitably adjusted by the Committee, which adjustment
may, but need not, include payment to the holder of a NSO, in cash or in Shares,
in an amount equal to the difference between the then current Fair Market
A-11
<PAGE>
Value of the Shares subject to such Award, as equitably determined by the
Committee, and the option price of such NSO, as the case may be. 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 Award.
10. TERMINATION OF AWARDS UPON CHANGE IN CONTROL.
Notwithstanding anything to the contrary, in the case of a Change in
Control, each Award granted under the Plan shall terminate ninety (90) days
after the occurrence of such Change in Control, but, in the event of any such
termination the Award holder shall have the right, commencing at least five (5)
days prior to the Change in Control and subject to any other limitation on the
exercise of such Award in effect on the date of exercise to immediately exercise
any NSOs in full, without regard to any vesting limitations, to the extent they
shall not have been theretofore exercised.
11. AMENDMENT AND TERMINATION.
(a) Modifications to the Plan.
The Committee, insofar as permitted by law, may from time to time,
with respect to any Shares at the time not subject to NSOs, suspend, discontinue
or terminate the Plan or revise, alter or amend the Plan in any respect
whatsoever; provided, however, that no amendment of the Plan shall cause the
Plan to be in violation of Rule 16b-3.
(b) Rights of Participant.
No amendment, suspension or termination of the Plan that would
adversely affect the right of any Participant with respect to a NSO previously
granted under the Plan will be effective without the written consent of the
affected Participant.
(c) Correction of Defects, Omissions and Inconsistencies.
The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any NSO in the manner and to the
extent it shall deem desirable to carry the Plan into effect.
12. MISCELLANEOUS.
(a) Rights of Stockholder.
No Participant and no beneficiary or other person claiming under or
through such Participant shall acquire any rights as a stockholder of the
Company by virtue of such
A-12
<PAGE>
Participant's having been granted a NSO under the Plan. No Participant and no
beneficiary or other person claiming under or through such Participant will have
any right, title or interest in or to any Shares allocated or reserved under the
Plan or subject to any NSO except as to Shares, if any, that have been issued or
transferred to such Participant. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date of
exercise.
(b) Other Compensation Arrangements.
Nothing contained in the Plan shall prevent the Committee from
adopting other compensation arrangements for Non-Employee Directors, subject to
stockholder approval if such approval is required. Such other arrangements may
be either generally applicable or applicable only in specific cases.
(c) Treatment of Proceeds.
Proceeds realized from the exercise of NSOs under the Plan
constitute general funds of the Company.
(d) Withholding.
The Company shall be authorized to withhold from any NSO granted or
any payment due or transfer made under any NSO or under the Plan the amount of
withholding taxes due in respect of a NSO, its exercise, or any payment or
transfer under such NSO 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. Upon the exercise of a NSO, the Participant to whom such
NSO had been granted may be required to pay the Company the amount of any such
withholding taxes which is required to be withheld with respect to such Shares.
(e) Cost of the Plan.
The costs and expenses of administering the Plan shall be borne by
the Company.
(f) No Right to Continue as Director.
Nothing contained in the Plan or in any instrument executed pursuant
to the Plan will confer upon any Participant any right to continue as a member
of the Board or affect the right of the Company, the Committee or the
stockholders of the Company to terminate the directorship of any Participant at
any time with or without cause.
A-13
<PAGE>
(g) No Right to Participate as an Employee Director.
Subject to the other provisions of the Plan, including the
succeeding sentence, a Non-Employee Director's right to participate in the Plan
shall automatically terminate if and when he becomes an employee of the Company.
That portion of an NSO that is not vested as of the date that the Participant
becomes an employee of the Company shall automatically abate and be cancelled,
and that portion of an NSO that is vested as of such date may be exercised in
accordance with the terms of the Plan.
(h) Severability.
The provisions of the Plan shall be deemed severable and the
validity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
(i) Binding Effect of Plan.
The Plan shall inure to the benefit of the Company, its successors
and assigns.
(j) 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
internal laws of the State of Delaware, without regard to any principles of
conflicts of law, and applicable Federal law.
(k) No Waiver of Breach.
No waiver by any Person at any time or any breach by another Person
of, or compliance with, any condition or provision of the Plan to be performed
by such other Person shall be deemed a waiver of the same, any similar or any
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
(l) No Trust or Fund Created.
Neither the Plan nor any NSO shall create or be construed to create
a trust or separate fund of any kind or a fiduciary relationship between the
Company and a Participant or any other Person. To the extent that any Person
acquires a right to receive payments from the Company pursuant to an NSO, such
right shall be no greater than the right of any unsecured general creditor of
the Company.
A-14
<PAGE>
(m) Headings.
The headings contained herein are for references purposes only and
shall not affect in any way the meaning or interpretation of this Plan.
A-15
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR KEY EMPLOYEES
HEALTHCARE IMAGING SERVICES, INC.
1997 OMNIBUS INCENTIVE PLAN
Agreement, made as of the 13th day of April, 1998, between Healthcare
Imaging Services, Inc. (the "Company"), a Delaware corporation, and Robert D.
Baca (the "Optionee"), residing at 45 Eisenhard Drive, Ivyland, PA 18974.
The Company has an omnibus equity incentive plan entitled the "HealthCare
Imaging Services, Inc. 1997 Omnibus Incentive Plan" (the "Plan"). Although this
option is not being granted under the Plan, the Company and the Optionee agree
that this option shall nonetheless be subject to the terms and conditions of the
Plan. In the case of any conflict between the provisions hereof and those of the
Plan, the provisions of the Plan shall be controlling. A copy of the Plan is
available upon request by the Optionee from the Assistant Secretary of the
Company.
A Committee of the Board of Directors of the Company (the "Committee") has
adopted a resolution granting the Optionee a stock option (the "Option") to
purchase shares of the Company's Common Stock, $.01 par value per share
("Shares"), for the price and on the terms and conditions set forth in this
Agreement and in the Plan.
The Company makes no representations or warranties as to the income,
estate or other tax consequences to the Optionee of the grant or exercise of the
Option or the sale or other disposition of the Shares acquired pursuant to the
exercise thereof.
1. (a) The price at which the Optionee shall have the right to purchase
Shares under this Agreement is set forth on Schedule A hereto and is subject to
adjustment as provided in Paragraph 6.
(b) Unless the Option is previously terminated pursuant to the Plan
or this Agreement, the Option shall be exercisable during the period or periods
specified herein, including Schedule A hereto.
In no event shall any Shares be purchasable under this Agreement
after the respective expiration date or dates specified on Schedule A hereto
("Expiration Date"). Unless otherwise specified on Schedule A hereto, the
unexercised portion of the Option will terminate (i) immediately upon the
termination of the Optionee's employment or other retention (A) for Cause (as
defined in Section 7.3 of the Optionee's Employment Agreement with the Company,
dated as of the date hereof (the "Employment Agreement")), (B) pursuant to
Section 7.5 of the Employment Agreement or (C) by
1
<PAGE>
the Optionee other than for Good Reason (as defined in Section 7.4 of the
Employment Agreement); (ii) 6 months after the date on which the Optionee's
employment or other retention is terminated (A) by the Company other than for
Cause, death Disability (as defined in Section 7.2 of the Employment Agreement)
or (B) by Optionee for Good Reason (other than with respect to a Change of
Control as defined in the Employment Agreement) or (iii) 12 months after the
date on which the Optionee's employment or other retention is terminated by
reason of death or Disability.
If, at any time within eighteen (18) months after the termination of
the Optionee's employment or other retention, the Optionee engages in any
activity in competition with any activity of the Company or any of its
subsidiaries, or inimical, contrary or harmful to the interests of the Company
or any of its subsidiaries, including, but not limited to: (1) conduct related
to the Optionee's employment or other retention for which either criminal or
civil penalties against the Optionee may be sought, (2) violation of Company
policies, including, without limitation, the Company's insider trading policy,
(3) employing or recruiting any present, former or future employee of the
Company or any of its subsidiaries, (4) disclosing or misusing any confidential
information or material concerning the Company or any of its subsidiaries, (5)
participating in a hostile takeover attempt of the Company or (6) conduct which
violates the terms of any non-competition and/or confidentiality agreement
between the Optionee and the Company and/or any of its affiliates, then, unless
otherwise determined by the Committee, the Option shall terminate effective the
date on which the Optionee enters into such activity, unless terminated sooner
by operation of another term or condition of the Option or the Plan.
2. Nothing contained herein shall be construed to confer on the Optionee
any right to continue as an employee of (or in any other position with) the
Company or any subsidiary of the Company or to derogate from any right of the
Company or any subsidiary thereof to retire, request the resignation of or
discharge the Optionee, or to lay off or require a leave of absence of the
Optionee, with or without pay, at any time, with or without Cause. No person or
entity shall be entitled to vote, receive dividends or be deemed for any purpose
the holder of any Shares subject to the Option until the Option shall have been
duly exercised to purchase such Shares in accordance with the provisions of this
Agreement.
3. The Option shall not be assignable, alienable, saleable, or
transferable by the Optionee otherwise than (a) by will or by the laws of
descent and distribution, (b) to the spouse or any lineal ancestor or descendant
of the Optionee, (c) to a trust, the sole beneficiaries of which are any or all
of the Optionee or the spouse or any lineal ancestor or descendant of the
Optionee, or (d) with the consent of, or in accordance with rules and procedures
established by, the Committee. The Option may not 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 (as defined in the Plan).
4. The Option shall be exercisable during the Optionee's lifetime only by
the Optionee or, if permissible under applicable law, by his or her guardian or
legal representative, or, if the Option has been transferred in accordance with
the provisions of Paragraph 3 hereof, by the permitted transferee
2
<PAGE>
of the Option or such other person as may be entitled to exercise the Option on
behalf of such transferee.
The Option may only be exercised by the delivery to the Company of a
written notice of such exercise in the form of Annex I hereto (the "Exercise
Notice"), which notice shall specify the number of Shares to be purchased (the
"Purchased Shares") and the aggregate exercise price for such Shares, together
with payment in full of such aggregate exercise in price in cash or check
payable to the Company; provided, however, that payment of such aggregate
exercise price may instead be made, in whole or in part, with the consent of the
Committee, by one or more of the following means (a) delivering to the Company a
certificate or certificates representing Shares duly endorsed or accompanied by
a duly executed stock power(s), which delivery effectively transfers to the
Company good and valid title to such Shares, free and clear of any pledge,
commitment, lien, claim or other encumbrance (such shares to be valued on the
basis of the aggregate fair market value thereof on the date of such exercise,
which aggregate fair market value shall be applied against and used to pay the
aggregate exercise price for the portion of the Option being exercised); (b)
"pyramiding" of Shares issuable upon exercise of the Option, provided in each
case that the Company is not then prohibited from purchasing or acquiring such
Shares; and/or (c) surrendering options to the Company in lieu of cash as
provided herein. Upon receipt by the Company of a duly executed Exercise Notice
which states that the Optionee is paying the aggregate exercise price as
provided in clause (c) of the immediately preceding sentence, the Company shall
issue to the Optionee a number of Shares equal to (a) the amount by which the
Market Price (as hereafter defined) on the date of the Exercise Notice exceeds
the exercise price per share divided by (b) the Market Price on the date of
exercise, which fraction is then multiplied by (c) the number of Options
surrendered. "Market Price" per Share on any day shall equal Fair Market Value,
as defined in the Plan, of a Share. For example, if the exercise price per Share
is $4.00 and the Market Price per Share is $10.000, the difference is (i) $6.00
divided by (ii) $10.00 which is .60. This amount, .60, is multiplied by (iii)
the number of Options surrendered to determine the actual number of Shares to be
issued upon exercise thereof. Therefore, if 20,000 Options were surrendered,
12,000 Shares would be issued to the Optionee.
5. If the Company shall become obligated to withhold an amount on account
of any tax imposed as a result of the exercise of the Option, including, without
limitation, any federal, state, local or other income tax, or any F.I.C.A.,
state disability insurance tax or other employment tax (the "Withholding
Liability"), then the Optionee shall, on the date of exercise and as a condition
to the issuance of the Shares subject to the Option, pay the Withholding
Liability to the Company. Payment shall be by check payable to the Company;
provided, however, that, with the consent of the Committee, payment may instead
be made by delivery to the Company of a certificate or certificates representing
Shares duly endorsed or accompanied by a duly executed stock power(s), which
delivery effectively transfers to the Company good and valid title to such
Shares, free and clear of any pledge, commitment, lien, claim or other
encumbrance (such Shares to be valued on the basis of the Fair Market Value
thereof on the date of such payment); provided, further, that the Company is not
then prohibited from purchasing or acquiring Shares. The Optionee hereby
consents to the Company withholding the full amount of the Withholding Liability
from any compensation or other amounts
3
<PAGE>
otherwise payable to the Optionee if the Optionee does not pay the Withholding
Liability to the Company on the date of exercise of the Option, and the Optionee
agrees that the withholding and payment of any such amount by the Company to the
relevant taxing authority shall constitute full satisfaction of the Company's
obligation to pay such compensation or other amounts to Optionee.
6. (a) 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) promulgated under the Internal Revenue Code of 1986, as
amended, 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 Option,
then the Committee shall, in such manner as it may deem equitable, adjust any or
all of (1) the number and type of Shares (or other securities or property)
purchasable under the Option and (2) the exercise price of the Shares
purchasable under the Option or, if deemed appropriate, make provision for a
cash payment to the Optionee. Any determination made by the Committee under this
Paragraph shall be final, binding and conclusive. In computing any adjustment
under this Paragraph, any fractional share shall be eliminated. Nothing
contained in this Agreement shall be construed to affect in any way the right of
power of the Company to make any adjustment, reclassification, reorganization or
changes to its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or transfer all or any part of its business assets.
(b) Upon the occurrence of a Change of Control of the Company (as
defined in the Plan), the Optionee 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 the unexercised portion of the Option
without regard to the vesting provisions thereof. The Company will mail or cause
to be mailed to the Optionee 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 the Option is not exercised in its entirety on or prior to the date
specified therein, any and all remaining rights under the Option shall terminate
as of said date.
7. Anything in this Agreement to the contrary notwithstanding, in no event
may the Option be exercisable if the Company shall, at any time and in its sole
discretion, determine that (a) the listing, registration or qualification of any
Shares otherwise deliverable upon such exercise, upon any securities exchange or
under any state or federal law, or (b) the consent or approval of any regulatory
body or the satisfaction of withholding tax or other withholding liabilities, is
necessary or desirable in connection with such exercise. In such event, such
exercise shall be held in abeyance and shall not be effective
4
<PAGE>
unless and until such listing, registration, qualification, withholding or
approval shall have been affected or obtained free of any conditions not
acceptable to the Company.
8. Unless the issuance of the Shares upon the exercise of the Option has
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), the Committee may require as a condition to the right to exercise the
Option hereunder that the Company receive from the person exercising the Option
representations, warranties and agreements, at the time of any such exercise, to
the effect that the Shares are being purchased for investment only and without
any present intention to sell or otherwise distribute such Shares and that the
Shares will not be disposed of in transactions which, in the opinion of counsel
to the Company, would violate the registration provisions of the Securities Act
and the rules and regulations thereunder. The certificate issued to evidence
such Shares shall bear appropriate legends summarizing such restrictions on the
disposition thereof.
9. This Agreement shall be construed and enforced in accordance with the
laws of the State of Delaware, without reference to principles regarding
conflicts of law. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors or assigns, as the case may be.
5
<PAGE>
IN WITNESS WHEREOF, the parties have witnessed this Agreement to be duly
executed and delivered as of the date first above written.
OPTIONEE: HEALTHCARE IMAGING SERVICES, INC.
/s/ Robert D. Baca By: /s/ Elliott H. Vernon
Robert D. Baca Name: Elliott H. Vernon
Title:Chairman of the Board, President
and Chief Executive Officer
6
<PAGE>
SCHEDULE A
Name of Optionee: Robert D. Baca
Date of Grant: April 13, 1998
Option Exercise Price: (subject to Paragraph 6) $7.50 (with respect to 50,000 of
the shares subject to the Option), $10.00(with respect to 50,000 of the shares
subject to the Option) and $12.50 (with respect to 50,000 of the shares subject
to the Option) per share, respectively.
Market Price on Date of Grant: $1.3125
Number of Shares subject to Option: 150,000
Type of Option: Non-Qualified
Dated of Expiration: April 13, 2008, 5:00 p.m., NYC time
Terms of Exercisability:
Subject to the terms and conditions of the Plan and the Agreement to which
this Schedule is annexed, the Option shall vest upon the attainment of any two
of the three following objectives: (1) the Company achieving gross revenues of
$100 million in any fiscal year during the Term (as defined in the Optionee's
employment agreement with the Company), (2) the Company achieving net income of
$12 million in any fiscal year during the Term or (3) the common stock of the
Company attaining, during the Term, an average Fair Market Value (as defined in
the Plan) for a period of twenty (20) consecutive trading days, and a Fair
Market Value on the last day of such twenty (20) day period of $20.00; provided,
however, that in any event the Option shall vest on the third anniversary of the
grant date of the Option, and the Option shall become fully vested immediately
upon a Change in Control (as defined in the Plan). The Option shall be
exercisable, subject to paragraph 1 herein, until April 13, 2008.
Other exercisability features: Not Applicable
Date: April 13, 1998 HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
OPTIONEE:
/s/ Robert D. Baca
Robert D. Baca
7
<PAGE>
ANNEX I
FORM OF ELECTION TO EXERCISE
(To be executed upon exercise of Option)
The undersigned hereby elects to exercise the right pursuant to that
certain Stock Option Agreement dated as of _________________, 19__ by and
between Healthcare Imaging Services, Inc. (the "Company") and
_______________________ (the "Option Agreement"), to purchase _________________
shares of common stock, $.01 par value per share (the "Shares"), of the Company.
Choose one of the following options:
_____ (i) Payment for the Shares in the amount of $___________ is
enclosed. The undersigned requests that certificates for the Shares
be registered in the name of the undersigned.
_____ (ii) Cashless Exercise/Hold - Payment for the Shares should be made
by the surrender of ______________ shares of the Company's Common
Stock having an aggregate fair market value of $____________. The
undersigned requests that certificates for the Shares be registered
in the name of the undersigned.
_____ (iii) Cashless Exercise/Same Day Sale (Appropriate broker forms must
be completed; forms may be obtained from the Assistant Secretary).
Dated:
- - ------------------------- ---------------------------------
Optionee
------------------------
Social Security Number
Administrator Use Only
- - ------------------------------------------------------------------------------
Date of Grant: _________________________
--
Market Price on Date of Gran_________________________
--
Market Price on Date of Exer_________________________
--
Number of shares: _________________________
--
Type of Option: _________________________
--
Number of Shares Currently
Vested: _________________________
--
8
<PAGE>
Expiration Date: _________________________
--
Withholding Tax: _________________________
--
- - --------------------------------------------
Vice President, Controller Date
9
<PAGE>
EXHIBIT 10.61
OPTION AGREEMENT
This OPTION AGREEMENT ("Agreement") is made and entered into as of
December 22, 1998 by and between HEALTHCARE IMAGING SERVICES, INC., a
Delaware corporation (the "Company") located at 200 Schulz Drive, Red Bank,
NJ 07701, and Joseph J. Raymond (the "Grantee") residing at c/o Stratus
Services Group, 500 Craig Road, Manalapan, New Jersey 07726.
1. GRANT OF OPTION. The Company does hereby grant to the Grantee a
non-qualified stock option to purchase up to One Hundred and Fifty Thousand
(150,000) shares (the "Shares") of common stock, par value $0.01 per share,
of the Company (the "Common Stock") at an exercise price of $1.00 per share
(the "Option"). The Option is, in its entirety, intended to be a
non-qualified stock option.
2. TERM OF THE OPTION. The Option (to the extent not earlier exercised or
forfeited) will expire ten (10) years from the date hereof.
3. VESTING OF THE OPTION. The Option shall be fully vested on the date of
this Agreement.
4. MANNER OF EXERCISE. The Option may be exercised solely by delivery to
the secretary of the Company, or to his/her office, of all of the following
after the vesting thereof and prior to the expiration thereof:
(a) Notice in writing signed by the Grantee or any other person then
entitled to exercise the Option, stating that the Option, or a portion
thereof, is thereby exercised;
(b) Full payment (in cash or by check, or as otherwise permitted under
Section 5 of this Agreement) to the Company for the Shares with respect to
which the Option, or a portion thereof, is exercised;
(c) Such representations and documents as the Company deems reasonably
necessary or advisable to effect compliance with all applicable provisions
of the Securities Act of 1933, as amended (the "Act"), and any other
federal or state securities laws or regulations. (The Company may also
take whatever additional actions it deems reasonably appropriate to effect
such compliance including, without limitation, placing legends on the
certificate(s) evidencing the Shares and issuing stop transfer orders to
transfer agents and registrars);
(d) Promptly upon delivery of a written statement by the Company
describing in detail the withholding taxes due upon exercise of the
Option, full payment to the Company of all amounts which, under federal,
state or local tax laws, the Company is required to withhold upon exercise
of the Option as determined by the Company promptly upon the Grantee's
delivery of the notice described in Section 4(a); and
<PAGE>
(e) In the event the Option shall be exercised by any person or persons
other than the Grantee, appropriate proof of the right of such person or
persons to exercise the Option.
The date of exercise of the Option shall be deemed to be the date all of
the foregoing conditions have been satisfied.
5. CASHLESS EXERCISE PROCEDURES. The Company agrees, at the request of the
Grantee, to allow the cashless exercise of the Option, or a portion thereof,
through a brokerage firm acceptable to the Company whereby the Grantee (to the
extent permitted by, and subject to, applicable law) can exercise the Option,
or a portion thereof, without making a direct payment of the exercise price
thereof to the Company.
6. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Shares deliverable
upon exercise of the Option, or any portion thereof, may be either previously
authorized by unissued shares of Common Stock or issued shares of Common
Stock which have then been reacquired by the Company. Such Shares shall be
fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates evidencing the Shares purchased upon
the exercise of the Option, or a portion thereof, prior to fulfillment of all
of the following conditions (in addition to the conditions set forth in
Section 4 of this Agreement):
(a) The completion of any registration or other qualification of such
Shares under any state or federal law or under any ruling or regulation of
the Securities and Exchange Commission or of any other governmental
regulatory body, which the Company shall deem reasonably necessary or
advisable;
(b) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Company shall determine to be
reasonably necessary or advisable; or
(c) The lapse of such reasonable period of time following the exercise of
the Option as the Company may from time to time reasonably establish for
reasons of administrative convenience.
The Company agrees that to the extent its action is required to fulfill
the conditions set forth in Sections 4 and 6 hereof, the Company shall use
its reasonable efforts to promptly fulfill its obligations thereunder;
provided, however, that the foregoing shall in no event be deemed to require
the Company to register or otherwise qualify any Shares under any federal,
state or local law, rule or regulation or to obtain any approval or other
clearance from any federal, state or local governmental agency.
7. TRANSFER OF OPTION. The Option shall not be assignable, saleable, or
transferable by the Grantee without the consent of the Company. The Option
may not be pledged, alienated, attached or otherwise encumbered, and any
purported pledge, alienation, attachment, or encumbrance thereof shall
2
<PAGE>
be void and unenforceable against the Company or any affiliate.
8. RIGHTS OF STOCKHOLDER. The holder of the Option shall not be, nor have
any of the rights or privileges of, a stockholder of the Company in respect
of any Shares purchasable upon the exercise of any part of the Option unless
and until the conditions set forth in Sections 4 and 6 have been satisfied.
9. OTHER CONDITIONS AND LIMITATIONS.
(a) The Option is granted on the condition that the purchase of Shares
thereunder shall be for investment purposes and not with a view to resale
or distribution, except that such condition shall be inoperative if the
offering of Shares subject to the Option is registered under the Act or if
in the opinion of counsel for the Company such Shares may be resold
without registration. At the time of the exercise of the Option or any
portion thereof, the Grantee will execute such further agreements as the
Company may reasonably require to implement the foregoing condition and to
acknowledge the Grantee's familiarity with restrictions on the resale of
the Shares under applicable securities laws.
(b) The Company will furnish upon request of the Grantee copies of such
publicly available financial and other information concerning the Company
and its business and prospects as may be reasonably requested by the
Grantee in connection with the exercise of the Option, or a portion
thereof.
10. ADJUSTMENTS UPON CERTAIN EVENTS.
(a) In the event of any (i) subdivision or consolidation of the Common
Stock, (ii) dividend or other distribution (whether in the form of cash,
shares of Common Stock, other securities, or other property), (iii)
recapitalization or other capital adjustment of the Company or (iv)
merger, consolidation or other reorganization of the Company or other
similar corporate transaction or event that affects the Common Stock,
appropriate adjustments shall be made to prevent dilution of the Grantee's
interest in the Common Stock and to preserve the benefits or potential
benefits intended to be made available to the Grantee under this
Agreement; provided, however, that the number of shares of Common Stock
subject to the Option shall always be a whole number.
(b) No adjustment in the current exercise price per share (the "Per Share
Option Price") shall be required unless such adjustment would require an
increase or decrease of at least $0.10 in such price; provided, however,
that any adjustments which by reason of this clause (b) are not required
to be made shall be carried forward cumulatively and taken into account in
any subsequent calculation.
(c) In any case in which this Section 10 shall require that an adjustment
as a result of any event become effective from and after a record date,
the Company may elect to defer until the occurrence of such event (i) the
issuance to the Grantee exercised after such record date and before the
occurrence of such event of the additional shares of Common Stock issuable
upon such exercise over
3
<PAGE>
and above the shares issuable immediately prior to adjustment and (ii) the
payment to the Grantee of any amount in cash in lieu of a fractional share
of Common Stock; provided, however, that the Company shall deliver to the
Grantee a due bill or other appropriate instrument evidencing the
Grantee's right to receive such additional Common Stock or such payment in
lieu of such fractional shares.
(d) Whenever the Per Share Option Price is adjusted as provided in this
Section 10 and upon any modification of the rights of the holder in
accordance with this Section 10, the Company shall promptly prepare a
certificate of an officer of the Company setting forth the Per Share
Option Price and the number of shares of Common Stock issuable upon
exercise of the Option after such adjustment or modification, a brief
statement of the facts requiring such adjustment or modification and the
manner of computing the same and cause a copy of such certificate to be
mailed to the Grantee.
11. NOTICES. 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
delivery if personally delivered 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 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 as follows:
If to the Company to:
Healthcare Imaging Services, Inc.
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, NJ 07701
Attn: Elliott H. Vernon, Esq.
Fax: (732) 224-9362
If to the Grantee to:
Joseph J. Raymond
c/o Stratus Services Group
500 Craig Road
Manalapan, New Jersey 07726
Fax: (732) 294-1133
12. MISCELLANEOUS. This Agreement shall bind and inure to the benefit of
the parties hereto, the successors and assigns of the Company and the
permitted successors and assigns of the Grantee. 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. This Agreement may be executed in one
or more counterparts, which together shall constitute one agreement.
4
<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 H. Vernon
-------------------------
Elliott H. Vernon
Chairman of the Board,
President and
Chief Executive Officer
/s/ Joseph J. Raymond
--------------------------
JOSEPH J. RAYMOND
5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
October 1, 1998
Joseph J. Raymond
Address:______________________
Dear Joe:
Reference is made to the Lease, dated as of September 17, 1998 (the
"Lease"), between DVI Realty Company ("DVI Realty") and Healthcare Imaging
Services, Inc. ("HIS"). In consideration of your agreeing to the sale of the
property underlying the Lease (the "Property") to DVI Realty pursuant to that
certain Contract of Sale, dated as of September 17, 1998, between DMR
Associates, L.P. and DVI Realty (thereby permitting HIS to decrease its monthly
rental payments with respect to such property), HIS hereby agrees that, to the
extent HIS exercises the purchase option granted to it under Section 3 of the
Lease and thereafter sells the Property to an unrelated third party (other than
in connection with a merger, consolidation, sale of substantially all of the
assets of HIS or similar transaction), you will be entitled to receive an amount
equal to sixty percent (60%) of any and all "Profits" (as hereinafter defined)
realized by HIS upon such sale. For purposes hereof, "Profits" shall be defined
as the net proceeds received by HIS upon such sale less HIS's depreciated basis
in the Property at the time of such sale (as such basis is calculated by HIS'
accountants in accordance with generally accepted accounting principles and in a
manner consistent with HIS' then most recently audited financial statements).
Such amount shall be payable to you as soon as practicable after the closing of
such sale (but in any event within thirty (30) days).
Sincerely,
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
Elliott H. Vernon
Chairman, President and Chief Executive
Officer
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement"), effective as of the 1st day of
October, 1998, is made and entered into by and between Healthcare Imaging
Services, Inc., a Delaware corporation (the "Company"), and Elliott H. Vernon
("Executive").
W I T N E S S E T H :
WHEREAS, Executive has been employed by the Company for the past several
years and is currently the Chairman of the Board, President and Chief Executive
Officer of the Company;
WHEREAS, the Company desires to assure itself of Executive's continued
employment in an executive capacity and to compensate him for such employment;
and
WHEREAS, Executive is willing to continue to be employed by the Company
upon the terms and subject to the conditions contained in this Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the adequacy and
receipt of which are hereby acknowledged, the parties agree as follows:
1. Employment. The Company agrees to continue to employ Executive, and
Executive hereby agrees to continue to serve the Company, for the Term (as
defined in Section 2 below) of this Agreement, in the position and with the
duties and responsibilities set forth in Section 3 below, and upon the other
terms and subject to the conditions hereinafter stated.
2. Term. The initial term (the "Initial Term") of this Agreement
commenced on November 3, 1997 (the "Commencement Date") and shall continue until
the third anniversary of that date (the "Initial Expiration Date"); provided,
however, that this Agreement at all times shall be subject to earlier
termination in accordance with the provisions hereof. On each anniversary of the
Commencement Date, the term of this Agreement automatically shall be extended
for an additional one (1) year term (the "Extended Term") unless either party
gives written notice to the other not less than one hundred and eighty (180)
days prior to such anniversary that it does not desire to extend the Term. For
purposes of this Agreement, "Term" means the Initial Term and, as so extended,
the Extended Term.
3. Position, Duties and Responsibilities.
3.1 Position, Duties and Responsibilities. During the Term,
Executive shall serve as the Chairman of the Board, President and Chief
Executive Officer of the Company, and shall be responsible for the duties
attendant to such office, which duties will be generally consistent with his
position as an executive officer of the Company and which will generally utilize
his experience with the Company prior to the date hereof, and such other
managerial
- 1 -
<PAGE>
duties and responsibilities with the Company, its affiliates, subsidiaries or
divisions as may be assigned by the Board of Directors of the Company (the
"Board") and agreed to in writing by Executive. Executive will report directly
(and solely) to the Board. The Company intends that Executive will continue to
be elected to and serve as a member of the Board. Executive shall also serve as
an officer and/or member of the Board of Directors of any subsidiary or
affiliate of the Company, if the Board should so request. Executive's duties
shall be performed principally at the Company's executive offices which are
located in the New York City Metropolitan Area (as defined below), and Executive
shall not be required to perform duties which would necessitate changing his
present residence, unless Executive otherwise agrees in writing. For purposes of
this Agreement, the term "New York City Metropolitan Area" shall encompass the
City of New York and the territory within fifty miles from that city in any
direction. The Company will promptly pay (or reimburse Executive for) all
reasonable moving expenses incurred by Executive relating to a change of
Executive's residences in connection with any such relocation to which Executive
has consented. To the extent that any executive relocation benefit program
maintained by the Company, and in which Executive is entitled to participate, is
more favorable to Executive than the provisions of this Agreement with respect
to relocation, Executive shall be entitled to such additional relocation
benefits. Executive acknowledges and agrees that, in connection with his
employment hereunder, he may be required to travel on behalf of the Company.
3.2 Services to be Provided. During the Term, Executive shall
devote such time, attention and energies to the affairs of the Company and its
subsidiaries, affiliates and divisions as necessary to faithfully and diligently
perform his duties and responsibilities hereunder and use his best efforts in
the performance of his duties and responsibilities to promote its and their best
interests; provided, however, that nothing herein shall preclude Executive from
(a) serving on the boards of directors of a reasonable number of other
corporations, trade associations or charitable organizations, (b) engaging in
charitable activities and community affairs or (c) managing his personal
investments and affairs; provided, however, that such activities do not
materially interfere with the performance of Executive's duties and
responsibilities under the Agreement and subject in each case to the covenants
contained in Section 11. It is expressly understood and agreed that the
continued service by Executive on any boards and committees on which he is
serving or with which he is otherwise associated immediately preceding the date
hereof shall not be deemed to interfere with Executive's performance of his
duties and responsibilities hereunder.
4. Salary.
4.1 Base Salary. During the Term, Executive shall be paid a base
salary (the "Base Salary"), payable in equal installments at such intervals as
the other executive officers of the Company are paid but not less often than
bi-weekly, at an annual rate of two hundred-fifty thousand dollars ($250,000).
On each anniversary date of the Commencement Date during the Term, the annual
rate of the Base Salary shall be increased (but not decreased) by the greater of
(a) ten percent (10%) or (b) the same percentage as the increase during the
immediately
- 2 -
<PAGE>
preceding calendar year in the United States Department of Labor, Bureau of
Labor Statistics, Consumer Price Index for All Urban Consumers (1962-1984 = 100)
(the "CPI") or (c) such greater amount as may be determined by the Board.
4.2 Bonus Compensation.
(a) Executive shall be entitled to participate in the Company's profit
sharing program with other key employees of the Company. The program provides
for a profit pool (the "Bonus Pool") consisting of 15% of the Company's pre-tax
income for each fiscal year of the Company and its consolidated subsidiaries, as
determined by the Company's independent public accountants for financial
reporting purposes in accordance with generally accepted accounting principles,
practices and methods, consistently applied, as adjusted to eliminate any undue
distortions resulting from the pre-tax effects of any extraordinary corporate
transactions or other significant, non-recurring items or adjustments accounted
for during the applicable fiscal year. Executive shall be entitled to an
allocation of not less than 50% of the Bonus Pool (the "Annual Bonus Amount").
The Board, or a duly constituted committee thereof, may allocate additional
amounts of the Bonus Pool to Executive. Subject to the contractual rights of
other persons entitled to participate in the Bonus Pool, and to the concurrence
of the Board, or a duly constituted committee thereof, the entitlement of the
other officers of the Company to the remainder of the Bonus Pool will be made by
Executive. Except as otherwise provided herein, the Annual Bonus Amount shall be
due and payable as soon as practicable after the end of each fiscal year.
Executive shall be paid monthly bonus estimates (the "Monthly Estimates") on or
before the fifth day after the completion of each month during the Term. The
Monthly Estimates to be paid Executive during the Term shall be one-twelfth of
the annualized pre-tax income of the Company calculated in each fiscal year of
the Term based on the pre-tax income of the Company for the fiscal quarter or
quarters which have elapsed in each such fiscal year and for which financial
data is then available; provided, however, that the Monthly Estimates for the
first three (3) months of each fiscal year shall be based on the preliminary
estimate of the pre-tax income of the Company and its consolidated subsidiaries
for the preceding fiscal year. Within thirty (30) days of the end of each fiscal
quarter during the Term (the "Quarterly Adjustment Date"), Executive shall be
paid an amount equal to any shortfall between the aggregate of the Monthly
Estimates paid Executive in the prior fiscal quarter (the "Aggregate Monthly
Payments") and the then estimated annualized income (the "Latest Estimated
Annualized Income"). To the extent that the Aggregate Monthly Estimates exceed
the Latest Estimated Annualized Income, such excess shall be carried forward and
shall reduce equally the amount of each of the Monthly Estimates to be paid to
Executive during the following quarter. When audited financial statements become
available for a fiscal year during the Term, a reconciliation shall be made
between the Monthly Bonus Amounts paid in respect of such year and the Annual
Bonus Amount for such year. To the extent that the Aggregate Monthly Estimates
paid during such fiscal year are less than the Annual Bonus Amount, such
shortfall shall be paid to Executive. If such Aggregate Monthly Estimates
exceeded the Annual Bonus Amount, the excess shall be applied to reduce equally
the amount of each of the Monthly Estimates to be paid to Executive during the
following quarter. The bonus with respect to the first fiscal year shall be
- 3 -
<PAGE>
prorated in accordance with the number of days for which Executive was employed
during such year, commencing with the Commencement Date.
(b) Executive shall receive a cash bonus of $250,000 (the
"Bonus") concurrently with the Company consummating the acquisition of Jersey
Integrated HealthPractice, Inc., as contemplated by that certain Letter of
Intent dated January 28, 1998, as amended (the "JIH Acquisition").
4.3 Equity Opportunity.
(a) In addition to the stock option grants described in clauses (b) and (c)
below, during the Term, Executive shall be eligible to receive stock option
grants and similar awards under existing plans of the Company, and under any
future plans adopted and administered by the Board in which executive officers
of the Company are entitled to participate.
(b)Concurrently with the Commencement Date, the Company and
Executive entered into stock option agreements providing for the grant to
Executive (i) under the Company's 1991 Stock Option Plan, of stock options to
purchase an aggregate of four hundred seventy one thousand two hundred (471,200)
shares of common stock, par value $.01 per share, of the Company (the "Common
Stock"), at an exercise price equal to $1.0625 per share and (ii) under the
Company's 1997 Omnibus Incentive Plan (the "Omnibus Plan"), of stock options to
purchase an aggregate of twenty eight thousand eight hundred (28,800) shares of
Common Stock at an exercise price equal to $1.0625 per share (the "Omnibus
Option"). Each such stock option shall vest in 25% increments upon the Common
Stock attaining, for a period of twenty (20) consecutive trading days, a Fair
Market Value (as defined in the Omnibus Plan) of $2.50, $5.00, $7.50 and $10.00,
respectively. Notwithstanding the foregoing, each such stock option shall become
fully vested upon the earlier to occur of (x) the fifth anniversary of the grant
date of such stock option and (y) a "Change in Control" (as defined in the
Omnibus Plan).
(c) Concurrently with the consummation of the JIH Acquisition, the
Company and Executive shall enter into a stock option agreement providing for
the grant to Executive of stock options to purchase two hundred fifty (250,000)
shares of Common Stock, at an exercise price equal to the average of the Fair
Market Values (as defined in the Omnibus Plan) of the Common Stock for the ten
(10) consecutive trading days immediately preceding the closing date of the JIH
Acquisition. Each such stock option shall vest in 25% increments over four (4)
years from the date of grant.
4.4 Supplemental Executive Retirement Benefits. During the Term,
Executive shall be eligible to participate in any supplemental executive
retirement plan(s) available to executive officers of the Company.
- 4 -
<PAGE>
5. Employee Benefits.
5.1 Benefit Programs. In addition to the benefits expressly
provided for herein, during the Term, Executive shall participate with other
members of senior management of the Company in any pension, profit-sharing,
stock option or similar plan or program of the Company now existing or
established hereafter for the benefit of its employees or senior executives of
the Company or its subsidiaries generally, to the extent that he remains
eligible under the general provisions thereof. Executive shall also be entitled
to participate in any group insurance, hospitalization, medical, health and
accident, disability or similar or nonsimilar plan or program of the Company now
existing or established hereafter for the benefit of its employees or senior
executives of the Company and its subsidiaries generally, to the extent that he
is eligible under the general provisions thereof.
5.2 Automobile. In furtherance and not in limitation of Section
5.1 hereof, the Company shall lease an automobile, such automobile to be
mutually agreed upon by Executive and the Company, and shall bear the
responsibility of all expenses incurred in connection with Executive's use of
such automobile, including, but not limited to, lease payments, insurance
payments, gas, tolls, maintenance and repairs.
5.3 Insurance. In furtherance and not in limitation of Section
5.1 hereof, during the Term, the Company, at its sole expense, shall purchase
and maintain (a) a life insurance policy on the life of Executive in the amount
of two million dollars ($2,000,000), the beneficiary or beneficiaries of which
shall be designated by Executive, and (b) a long-term disability insurance
policy which shall provide that, upon the occurrence of a "disability" as
defined in such disability insurance policy, Executive shall be entitled to
long-term disability benefits each year thereafter in an amount not less than
the Base Salary plus the estimated Annual Bonus Amount for such year; provided,
however, that the Company shall not be required to expend more than twenty five
thousand dollars ($25,000) in annual premiums for the two policies referred to
in this Section 5.3.
5.4 Vacation; Personal Days. During the Term, Executive shall be
entitled to four (4) weeks annual vacation with pay during each year of his
employment hereunder provided that the vacation days taken do not materially
interfere with the operations of the Company. Such vacation may be taken, in
Executive's discretion, at such time or times as are not inconsistent with the
reasonable business needs of the Company. Executive shall not be entitled to
additional compensation in the event that Executive, due to the needs of the
Company, is unable to take such vacation during any year of his employment
hereunder. Executive shall also be entitled to all paid holidays and personal
days given by the Company to its executives.
5.5 Key-Man Insurance. Executive agrees that the Company may at
any time and for the Company's own benefit, apply for and take out life, health,
accident, and/or other insurance covering Executive either independently or
together with others in any amount which the Company deems to be in its best
interests and the Company may maintain any existing
- 5 -
<PAGE>
insurance policies on the life of Executive owned by the Company. The Company
shall own all rights in any such insurance policies and in the cash values and
proceeds thereof and, except as otherwise provided, Executive shall not have any
right, title or interest therein. Executive agrees to assist the Company at the
Company's expense in obtaining any such insurance by, among other things,
submitting to the customary examinations and correctly preparing, signing and
delivering such applications and other documents as may be required by insurers.
5.6 Medical Expense Reimbursement. During the Term, in addition
to the benefits to be provided to Executive pursuant to Section 5.1 hereof,
Executive shall be entitled to reimbursement for expenses not reimbursed by
insurance or otherwise for "medical care" (as such term in defined in Section
213 of the Internal Revenue Code of 1986, as amended) for himself and his
immediate family; provided, however, that such reimbursement shall not exceed
ten thousand ($10,000) per annum.
5.7 Office Space. The Company shall furnish Executive with a
private office suitable for a senior executive officer and full-time secretarial
assistance and such other office facilities and services as shall reasonably be
required by Executive to perform his duties hereunder.
6. Expenses. Executive is authorized to incur reasonable expenses in
connection with the promotion of the Company's business, including, but not
limited to, business entertainment expenses and expenses for Executive's travel
and similar items. To that end, the Company shall reimburse Executive, upon
presentation of appropriate vouchers or receipts and in accordance with the
Company's expense reimbursement policies, for all reasonable expenses incurred
by Executive in connection with the performance of his duties under this
Agreement.
7. Termination. Executive's employment under this Agreement may be
terminated without any breach of this Agreement only under the following
circumstances:
7.1 Death. Executive's employment shall terminate upon his death.
7.2 Disability. In the event Executive shall be unable to render
the services or perform his duties hereunder by reason of illness, injury or
incapacity (whether physical, mental, emotional or psychological) for a period
of either (a) one hundred eighty (180) consecutive days or (b) two hundred
seventy (270) days in any consecutive three hundred sixty-five (365) day period
(either of such events shall constitute a "Disability" for purposes of this
Agreement), the Company shall have the right to terminate this Agreement.
7.3 Termination of Employment of Executive by the Company for
Cause. The Company may terminate the employment of Executive for Cause (as
hereinafter defined). The term "Cause," as used herein, shall mean (a)
Executive's willful misconduct or gross neglect in the performance of his duties
hereunder which in either case has resulted, or is likely to result, in material
economic damage to the Company, (b) the material breach of this Agreement by
- 6 -
<PAGE>
Executive which has resulted, or is likely to result, in material economic
damage to the Company, (c) the final, non-appealable conviction of Executive of
a felony which constitutes a crime of moral turpitude or (d) habitual drug or
alcohol abuse or (e) the conviction of Executive of, or the entry of an order or
consent decree with respect to, a violation or purported violation of any state
or federal securities laws. For purposes of this Section 7.3(a), no act, or
failure to act, on Executive's part, will be considered "willful" unless done or
omitted to be done by him not in good faith and without a reasonable belief that
his action or omission was in furtherance of the Company's business.
Executive shall not be deemed to have been terminated for Cause unless
and until, after reasonable notice to Executive and an opportunity for him,
together with his counsel, to be heard before the Board, the Board has
determined (by affirmative vote of two-thirds of the full Board, excluding
Executive) based on clear and convincing evidence that Executive was guilty of
the conduct described in clause (a), (b) or (d) of the preceding paragraph, and
delivered to Executive a Notice of Termination (as defined below) stating such
determination and specifying the particulars thereof in detail.
7.4 Termination of Employment by Executive for Good Reason.
Executive may terminate his employment hereunder for Good Reason. For purposes
of this Agreement, "Good Reason" shall mean (i) a Change in Control (as defined
below), (ii) any assignment to Executive of any duties inconsistent with his
present duties as Chairman of the Board, President and Chief Executive Officer
of the Company or a change in his present position, duties, authority or
responsibilities without his express written consent or any other action by the
Company which results in a material diminution of the position, duties,
authority, or responsibility of Executive, which action is not consented to by
Executive, (iii) any removal of Executive from, or any failure to re-elect
Executive to, the office of Chairman of the Board, President and Chief Executive
Officer of the Company, except with Executive's consent or in connection with
termination of Executive's employment for Cause or as a result of his death or
disability or by him other than for Good Reason, (iv) a reduction in Executive's
Base Salary as in effect on the date of this Agreement or as the same may be
increased from time to time, or a reduction in Executive's other benefits
unless, with respect to a reduction of benefits, all members of senior
management of the Company are similarly affected, (v) the Company shall
materially breach any provision of this Agreement, which breach shall continue
unremedied for ten (10) days, (vi) failure of the Company to obtain from any
successor the assumption of or the agreement to perform this Agreement (as
contemplated in Section 15 hereof), or (vii) any purported termination of the
Executive's employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.5.
For purposes of this Agreement, a "Change in Control" of the Company
shall mean a change in control of a nature that would be required to be reported
in a current report on Form 8-K, as in effect on the date of this Agreement, or
pursuant to Section 13 or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); including, without limitation, (A) the acquisition
of beneficial ownership (as defined in Rule 13d-3 under the
- 7 -
<PAGE>
Exchange Act), directly or indirectly, by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than the Company or
Executive or an entity directly or indirectly controlled by Executive, of
securities of the Company representing 30% or more of the combined voting power
of the Company's then outstanding securities, (B) 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, (C) the stockholders of the Company approving 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 eighty percent (80%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (D) the stockholders of the
Company approving 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.
7.5 Notice of Termination. Any termination of Executive's
employment by the Company or by Executive (other than a termination pursuant to
Section 7.1 above) shall be communicated by written Notice of Termination to the
other party. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific provision in this Agreement
relied upon to effect such termination and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any purported
termination not satisfying the requirements of this Section 7.5 shall not be
effected.
7.6 Date of Termination. "Date of Termination" shall mean (a) if
Executive's employment is terminated by his death, the date of his death, and
(b) if Executive's employment is terminated pursuant to Section 7.5 above, the
date specified in the Notice of Termination; provided that if within thirty (30)
days after the Notice of Termination is given pursuant to Sections 7.3(a), (b)
or (d), the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal having expired and no appeal having been perfected); provided, further,
however that if the Company prevails in its determination to terminate Executive
for Cause in such arbitration or litigation, the Date of Termination shall be
the date specified in the Notice of Termination.
- 8 -
<PAGE>
8. Compensation Upon Termination.
8.1 Compensation Upon Termination Upon Death. In the event of the
death of Executive during the Term, Executive's designated beneficiary, or, in
the absence of such designation, the estate or other legal representative of
Executive (collectively, the "Estate"), shall be paid within thirty (30) days of
Executive's death, an amount equal to the sum of Executive's unpaid Base Salary
through the month in which Executive's death occurred, as well as all unpaid and
accrued bonus compensation (including Annual Bonus Amount) through the Date of
Termination. Executive's entitlement to the Annual Bonus Amount under the Bonus
Pool shall be pro-rated for any fiscal year which has commenced but not ended
prior to the Date of Termination and be otherwise payable in accordance with
Section 4.2. The Estate shall be entitled to other death benefits in accordance
with the terms of the Company's benefit programs and plans and the other
provisions of this Agreement, and the Estate shall be entitled to continue to
participate in such benefit programs and plans until the next anniversary of the
Commencement Date on the same terms and conditions as the Executive participated
immediately prior to the Date of Termination to the extent permissible under the
general terms and provisions of such programs and plans.
8.2 Compensation Upon Termination for Disability. If Executive's
employment hereunder is terminated for Disability, Executive shall be paid,
within thirty (30) days of the Date of Termination, an amount equal to the sum
of Executive's unpaid Base Salary through the month in which such date occurred,
as well as all unpaid and accrued bonus compensation (including Annual Bonus
Amount) through the Date of Termination. Executive's entitlement to the Annual
Bonus Amount under the Bonus Pool shall be pro-rated for any fiscal year which
has commenced but not ended prior to the Date of Termination and be otherwise
payable in accordance with Section 4.2. The Company shall continue to pay
Executive the Base Salary (as and when such Base Salary would have been paid had
such termination not taken place) for a period of six (6) months after the month
in which such Date of Termination occurred. The amounts provided for above shall
be reduced by any disability benefits received by Executive. Executive shall be
entitled to other disability compensation and benefits in accordance with the
Company's benefit programs and plans and the other provisions of this Agreement.
8.3 Compensation Upon Termination for Cause. If Executive's
employment is terminated by the Company for Cause, the Company shall pay
Executive his Base Salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given, as well as all accrued and unpaid
bonus compensation (including Annual Bonus Amount) through the Date of
Termination, and the Company shall have no further obligations to Executive
under this Agreement. Executive's entitlement to the Annual Bonus Amount under
the Bonus Pool shall be pro-rated for any fiscal year which has commenced but
not ended prior to the Date of Termination and be otherwise payable in
accordance with Section 4.2.
- 9 -
<PAGE>
8.4 Improper Termination; Good Reason. If (a) in breach of this
Agreement, the Company shall terminate Executive's employment other than
pursuant to Section 7.1, 7.2 or 7.3 (it being understood that a purported
termination pursuant to Section 7.2 or 7.3 which is disputed and finally
determined not to have been proper shall be a termination by the Company in
breach of this Agreement) or (b) Executive shall terminate his employment for
Good Reason, then:
(i) The Company shall pay Executive his full Base Salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given, as well as all accrued bonus compensation
(including Annual Bonus Amount) through the Date of Termination.
(Executive's entitlement to the Annual Bonus Amount under the Bonus Pool
shall be pro-rated for any fiscal year which has commenced but not ended
prior to the Date of Termination and be otherwise payable in accordance
with Section 4.2.)
(ii) In lieu of all salary and incentive compensation
payments which Executive would have earned under this Agreement but for
his termination, the Company shall pay to Executive as liquidated
damages a lump sum amount equal to the present value, based on the
Applicable Federal Rate (as defined in Section 1274(d) of the Internal
Revenue Code of 1986, as amended (the "Code")), of the product of (A)
the sum of (1) the Base Salary in effect as of the Date of Termination
(as such Base Salary would have been adjusted pursuant to Section 4.1
hereof during the remainder of the Term (assuming the CPI in effect for
the year preceding the year in which the Date of Termination occurs
remains in effect)) and (2) the largest bonus compensation paid or
payable to the Executive with respect to any of the three years
preceding the year in which the Date of Termination occurs, whether or
not such years were a part of the Term, and (B) 2.99 (such payment being
referred to as the "Termination Payment"). All payments under this
clause (ii) shall be made on or before the fifth day following the Date
of Termination. In addition, if the receipt of the lump sum pursuant to
the foregoing sentence would cause Executive to pay federal income tax
for the year of receipt at a higher marginal rate than Executive would
have paid for such year had Executive's employment not been terminated
(the "Original Marginal Amount"), Executive shall receive an additional
amount such that the amount retained by Executive after the payment of
federal income taxes on such lump sum shall be the same as if such lump
sum had been taxed at the Original Marginal Rate. Executive shall not be
required to mitigate the amount of compensation payable to Executive
hereunder, by securing other employment or otherwise, nor will such
compensation be reduced by reason of Executive securing other employment
or for any other reason.
(iii) In the event that Executive becomes entitled to the
Termination Payment provided for in clause (ii) and any of the
Termination Payment will be subject to the tax (the "Excise Tax")
imposed by Section 4999 of the Code, the Company shall pay to Executive,
at the time specified below, an additional amount (the "Gross-Up
- 10 -
<PAGE>
Payment") such that the net amount retained by Executive, after
deduction of any Excise Tax on the Termination Payment and any federal,
state and local income tax and Excise Tax upon the payment provided for
by this paragraph, shall be equal to the Termination Payment. For
purposes of determining whether any of the Termination Payment will be
subject to the Excise Tax and the amount of such Excise Tax, (x) any
other payments or benefits received or to be received by Executive in
connection with a Change in Control of the Company or the termination of
Executive's employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the Company, any person
whose actions result in a Change in Control or any person having such a
relationship with the Company or such person as to require attribution
of stock ownership between the parties under Section 318(a) of the Code)
shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of Section 280G(b)(1) shall be treated as subject to the Excise
Tax, unless, in the opinion of tax counsel selected by the Company's
independent auditors and acceptable to Executive, such other payments or
benefits (in whole or in part) do not constitute parachute payments, or
such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the
meaning of Section 280G(b)(4) of the Code, (y) the amount of the
Termination Payment which shall be treated as subject to the Excise Tax
shall be equal to the lesser of (A) the total amount of the Termination
Payment or (B) the amount of excess parachute payments within the
meaning of Sections 280G(b)(1) and (4) (after applying clause (x) above
and after deducting any excess parachute payments in respect of which
payments have been made under this clause (y)), and (z) the value of any
non-cash benefits or any deferred payment or benefit shall be determined
by the Company's independent auditors in accordance with the principles
of Sections 280G(d)(3) and (4) of the Code. For purposes of determining
the amount of the Gross-Up Payment, Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be
made and state and local income taxes at the highest marginal rates of
taxation in the state and locality of Executive's residence upon the
Date of Termination, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local
taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of
termination of Executive's employment, Executive shall repay to the
Company at the time that the amount of such reduction in Excise Tax is
finally determined the portion of the Gross-Up Payment attributable to
such reduction plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of Executive's employment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional gross-up payment in respect of such excess
(plus any interest payable with respect to such excess) at the time that
the amount of such excess is finally determined.
- 11 -
<PAGE>
(iv) If termination of Executive's employment arises out
of a breach by the Company of this Agreement, the Company shall pay all
other damages to which Executive may be entitled as a result of such
breach, including damages for any and all loss of benefits which
Executive would have received under the Company's employee benefit plans
if the Company had not breached this Agreement and had Executive's
employment continued for the full Term as then in effect (including,
without limitation, benefits Executive would have been entitled to
receive pursuant to any of the Company's pension plans had his
employment continued for such Term at the rate of compensation specified
herein), and including all legal fees and expenses incurred by him as a
result of such termination and in enforcing his rights.
9. Indemnification.
(a) The Company agrees to indemnify Executive to the fullest
extent permitted by applicable law consistent with the Company's Certificate of
Incorporation and ByLaws as in effect on the date hereof with respect to any
acts or non-acts he may have committed while he was an officer, director, and/or
employee (i) of the Company or any subsidiary or affiliate thereof, or (ii) at
the request of the Company, of any other entity.
(b) The Company agrees to maintain for Executive a directors' and
officers' liability insurance policy not less favorable than any policy that the
Company maintains for its directors and executive officers in general.
10. Confidential Information.
(a) Executive hereby acknowledges that, in the course of his
employment by the Company, he has had and will have access to secret and
confidential information which relates to or affects all aspects of the business
and affairs of the Company, its subsidiaries, affiliates or divisions, and which
are not available to the general public ("Confidential Information"). Without
limiting the generality of the foregoing, Confidential Information shall include
information relating to inventions, developments, specifications, technical and
engineering data, business ideas, trade secrets, products under development,
production methods and processes, sources of supply, marketing plans, and the
names of any customers or prospective customers or of any persons who have or
shall have traded or dealt with the Company. Accordingly, Executive agrees that,
except as required by the performance of his duties hereunder, he will not, at
any time during the Term and for a period commencing on the Date of Termination
and concluding upon the earlier to occur of (i) three (3) years after such Date
of Termination and (ii) the date subsequent to such Date of Termination upon
which the Company is in material breach of any material provision of this
Agreement (provided that Executive notifies the Company in writing of such
breach and the Company does not cure such breach within ten (10) days of the
receipt of such notice from Executive), disclose or furnish any Confidential
Information to any person, firm, corporation or other entity without the express
prior written consent of the Company. Notwithstanding the foregoing, the term
Confidential
- 12 -
<PAGE>
Information shall not include information or data which (w) is now or hereafter
in the public domain, other than as a result of the breach of this Section 10 by
Executive, (x) prior to the date of commencement of Executive's employment by
the Company was known to Executive, (y) is lawfully acquired by Executive from a
third party who, to Executive' s knowledge, is not prohibited from disclosing
such data or information to Executive or (z) is required to be disclosed by
court order or other legal process.
(b) Executive hereby acknowledges and agrees that any and all
models, prototypes, notes, memoranda, notebooks, drawings, records, plans,
documents or other material in physical form which contain or embody
Confidential Information, whether created or prepared by Executive or by others
("Confidential Materials"), which are in Executive's possession or under his
control, are the sole property of the Company. Accordingly, Executive hereby
agrees that, upon the termination of his employment with the Company, whether
pursuant to this Agreement or otherwise, or at the Company's earlier request,
Executive shall return to the Company all Confidential Materials and all copies
thereof in his possession or under his control and shall not retain any copies
of Confidential Materials.
11. Non-Competition.
(a) Executive agrees that he shall not, so long as he shall be
employed by the Company in any capacity (whether pursuant to this Agreement or
otherwise), own, manage, operate, control or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any business, firm or corporation which is or may be in competition
with the business of the Company or its subsidiaries without the express written
consent of the Company.
(b) Executive agrees that for a period commencing on the
effective Date of Termination and for so long thereafter as he is entitled to
receive and receives any payments pursuant to this Agreement or, in the case of
the termination of Executive's employment for Cause by the Company or without
Good Reason by Executive, for a period of twelve (12) months after the effective
Date of Termination, Executive shall not own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
employed by or connected in any manner with, any business, firm or corporation
which is engaged in or competes with the business of the Company or its
subsidiaries as such business is constituted on the Date of Termination.
(c) Anything to the contrary herein notwithstanding, the
provisions of this Section 11 shall not be deemed violated by the purchase
and/or ownership by Executive of shares of any class of equity securities (or
options, warrants or rights to acquire such securities, or any securities
convertible into or exchangeable or exercisable for such securities) (i) of the
Company (or any successor thereto), (ii) representing (together with any
securities which would be acquired upon the exercise of any such options,
warrants or rights or upon the conversion of any other security convertible into
or exchangeable or exercisable for such securities) five percent
- 13 -
<PAGE>
(5%) or less of the outstanding shares of any such class of equity securities of
any issuer whose securities are traded on a national securities exchange or
listed by The Nasdaq Stock Market, the National Quotation Bureau Incorporated or
any similar organization; provided, however, that Executive shall not be
otherwise connected with or active in the business of the issuers described in
this clause (ii), or (iii) of any entity which is then employing Executive not
in breach of this Section 11.
12. Remedy For Breach. Executive hereby acknowledges that, in the event
of any breach or threatened breach by him of any of the provisions of Sections
10 or 11 of this Agreement, the Company would have no adequate remedy at law and
could suffer substantial and irreparable damage. Accordingly, Executive hereby
agrees that, in such event, the Company shall be entitled, and notwithstanding
any election by the Company to claim damages, to obtain a temporary and/or
permanent injunction to restrain any such breach or threatened breach or to
obtain specific performance of any such provisions, all without prejudice to any
and all other remedies which the Company may have at law or in equity.
13. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if delivered personally or sent
by registered or certified mail (return receipt requested), postage prepaid, or
by telecopy (immediately followed by telephone confirmation of delivery of such
telecopy with the intended recipient of such notice and by notice in writing
sent promptly by registered or certified mail as provided above) to the parties
to this Agreement at the following addresses or at such other address for a
party as shall be specified by like notice:
To the Company: Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, NJ 07701
Attention: Secretary
Telephone: (732) 224-9292
Telecopy: (732) 224-9329
To Executive: Elliott H. Vernon
50 Rumson Road
Rumson, NJ 07760
Telephone: (732) 345-1493
Telecopy: (732) 530-7356
All such notices and communications shall be deemed to have been
received on the date of personal delivery, on the date that the telecopy is
confirmed as having been received or on the third business day after the mailing
thereof, as the case may be.
14. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the employment matters contemplated
herein and supersedes all
- 14 -
<PAGE>
prior agreements or understandings among the parties related to such employment
matters, including, without limitation, the Employment Agreement, dated October
22, 1991, between the Company and Executive, as amended. Notwithstanding the
foregoing, all stock option agreements between Executive and the Company shall
remain in full force and effect.
15. Binding Effect; Third Party Beneficiaries. Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of the Company and its successors and assigns and upon Executive. "Successors
and assigns" shall mean, in the case of the Company, any successor pursuant to a
merger, consolidation, or sale, or other transfer of all or substantially all of
the assets of the Company. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as if Executive terminated his employment for Good Reason, except that,
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean Healthcare Imaging Services, Inc. and any
successor to its business and/or assets.
16. No Assignment. Except as contemplated by Section 15 above, this
Agreement shall not be assignable or otherwise transferable by either party.
17. Amendment or Modification; Waiver. No provision of this Agreement
may be amended or waived unless such amendment or waiver is authorized by the
Board and is agreed to in writing, signed by Executive and by an officer of the
Company thereunto duly authorized. Except as otherwise specifically provided in
this Agreement, no waiver by either party hereto of any breach by the other
party hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of a similar or dissimilar provision
or condition at the same or at any prior or subsequent time.
18. Fees and Expenses. Except as expressly provided herein, if either
party institutes any action or proceeding to enforce any rights the party has
under this Agreement, or for damages by reason of any alleged breach of any
provision of this Agreement, or for a declaration of each party's rights or
obligations hereunder or to set aside any provision hereof, or for any other
arbitral or judicial remedy, each party shall be responsible for its own costs
and expenses incurred thereby, including but not limited to, attorneys' fees and
disbursements.
19. Governing Law; Arbitration. 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. Any controversy or claim
- 15 -
<PAGE>
arising out of or relating to this Agreement, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association, and judgment
upon such award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The arbitration shall be held in Monmouth County, New
Jersey or such other place as may be agreed upon at the time by the parties to
the arbitration. The expense of such arbitration shall be borne by the Company.
20. Titles. Titles to the Sections and subsections in this Agreement are
intended solely for convenience and no provision of this Agreement is to be
construed by reference to the title of any Section.
21. Counterparts. This Agreement may be executed in one or more
counterparts, which together shall constitute one agreement. It shall not be
necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
22. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
- 16 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
HEALTHCARE IMAGING SERVICES, INC.
By: _________________________
Name:
Title:
/s/ Elliott H. Vernon
ELLIOTT H. VERNON
- 17 -
<PAGE>
CONSULTING SERVICES
AGREEMENT
by and between
HealthCare Imaging Services, Inc.
and
M.R. Radiology Imaging
of Lower Manhattan, P.C.
Dated: November 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
1. Retainer; Right of Access and Grant of Limited
Purpose License . . . . . . . . . . . . . . . . . . . 2
2. Preparation of the Premises . . . . . . . . . . . . . 3
3. Permitted Uses of the Equipment . . . . . . . . . . . 4
4. Repairs and Maintenance . . . . . . . . . . . . . . . 4
5. Utilities . . . . . . . . . . . . . . . . . . . . . . 5
6. Insurance . . . . . . . . . . . . . . . . . . . . . . 5
7. Management Services . . . . . . . . . . . . . . . . . 6
8. Personnel . . . . . . . . . . . . . . . . . . . . . . 10
9. Service Fees. . . . . . . . . . . . . . . . . . . . . 12
10. Term and Termination. . . . . . . . . . . . . . . . . 13
11. Surrender of Premises . . . . . . . . . . . . . . . . 17
12. Representations of Group . . . . . . . . . . . . . . . 18
13. Group's Professional Services . . . . . . . . . . . . 19
14. Indemnification . . . . . . . . . . . . . . . . . . . 19
15. Limitation on the Activities of Group and Associates. 21
16. General . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
CONSULTING SERVICES AGREEMENT
This Consulting Services Agreement made and entered into as of the 1st
day of November 1997 by and between HealthCare Imaging Services, Inc., a
Delaware corporation, ("HIS"), having an office at Tri-Parkway Corporate Park,
200 Schulz Drive, Red Bank, New Jersey 07701 and M.R. Radiology Imaging of
Lower Manhattan, P.C., a New York professional service corporation having an
office at 45 Beekman Street, New York, New York 10038 ("the Group").
W I T N E S S E T H:
WHEREAS, Group is a New York professional service corporation established
and existing in accordance with all applicable laws and regulations; and
WHEREAS, Group and its physician shareholders and physician employees
wish to obtain management, administrative and personnel services necessary for
the provision of magnetic resonance imaging services provided by Group at its
medical practice (the "Practice") located at 45 Beekman Street, New York, New
York 10038, (the "Premises"), which Practice includes a magnetic resonance
imaging device; and
WHEREAS, HIS is formed to operate and agrees to provide administrative
and personnel services in the management of the Practice and is capable of
providing equipment necessary for the performance of diagnostic medical
services and of administering the business operations of the Group and for the
Practice; and
WHEREAS, Group desires to retain HIS to develop and provide such services
and equipment upon the terms and conditions set forth herein.
<PAGE>
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
adequacy of which are forever acknowledged and confessed, the parties hereto
agree as follows:
1. RETAINER; RIGHT OF ACCESS AND GRANT OF LIMITED PURPOSE LICENSE
Group hereby retains from HIS the right to use the equipment set forth on
Exhibit "A" annexed hereto and made a part hereof (the "Equipment"), on an
exclusive basis in accordance with the physician coverage schedule set forth on
Exhibit "B" annexed hereto and made a part hereto (the "Schedule") and further
engages HIS to provide to Group the necessary personnel and administrative
services in the management of the Practice at the Premises (the "Management
Services"). HIS hereby accepts such retainer, subject to the terms and
conditions as hereinafter provided. HIS hereby grants to Group and its
designated members and employees a limited purpose license to use the Equipment
in accordance with the terms and conditions as hereinafter provided. Title to
the Equipment and other personal property located at the Premises, other than
personal property delivered to and stored at the Premises by or on behalf of
Group with the consent of HIS (the "Group Property"), is and shall remain at
all times in HIS, its lessor or its assignee. Group shall have the right to use
the Equipment in the performance of magnetic resonance imaging scans for
physicians and other entities not parties to this Agreement.
2. PREPARATION OF THE PREMISES
2.1 Acquisition and Installation of Equipment. The Group has selected and
installed the Equipment set forth in Exhibit "A". HIS has acquired the
Equipment from the Group and shall cause same to remain installed at the
Premises. Group has prepared and
<PAGE>
maintained the installation site for the Equipment which complies in all
material respects with the siting and set-up specifications pursuant to all
applicable laws and regulations and HIS shall cause same to remain in
compliance.
2.2 Disclaimer of Warranty. HIS hereby assigns to Group all of the
benefits of HIS' rights and entitlements to the warranties and representations
of the manufacturer of the Equipment, and disclaims any representations,
expressed, implied or otherwise with respect thereto.
2.3 HIS' Warranties. HIS represents and warrants that it has purchased
and/or leased the Equipment and is, therefore, the owner or lessee (or
authorized sublessee) of same and, in its capacities as such, is entitled to
provide the Equipment to the Group hereunder, and has obtained all necessary
consents to this Agreement. In recognition that HIS is not the manufacturer of
the Equipment, THE GROUP UTILIZES THE EQUIPMENT "AS IS" AND HIS HEREBY
DISCLAIMS ANY REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED, AS TO
ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT, INCLUDING WITHOUT LIMITATION,
THE DESIGN OR CONDITION OF THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL OR
WORKMANSHIP, OR AS TO PATENT INFRINGEMENT OR THE LIKE. The Group agrees to look
to the manufacturer of the Equipment for any and all warranty claims.
3. PERMITTED USES OF THE EQUIPMENT
Group shall, during the term of this Agreement, use the Equipment solely
for the purpose of providing its medical services and shall use the Equipment
in accordance with
<PAGE>
all instructions and manuals provided by the manufacturer of the Equipment and
in accordance with all applicable federal, state and local statutes, rules and
regulations.
4. REPAIRS AND MAINTENANCE
4.1 Group shall not make nor cause any other person to make alterations,
modifications, replacements, repairs or adjustments to the Equipment or any
component parts thereof, without the expressed prior written consent of HIS,
which consent will not be unreasonably withheld or delayed.
4.2 In the event Group wants or needs to have alterations, modifications,
replacements, repairs or adjustments in, to or of the Equipment or any
component parts thereof, Group shall give written notice of such want or need
to HIS.
4.3 Upon receipt of the aforementioned notice, HIS, at its own expense,
shall ascertain within a reasonable period of time and within its reasonable
and good faith discretion, whether the Equipment requires alteration,
modification, replacement, repair or adjustment. In the event HIS determines
that such alteration, modification, replacement, repair or adjustment is
required, HIS shall, at its sole expense, alter, modify, replace, repair or
adjust the Equipment.
4.4 HIS' obligation to undertake, at its sole expense, any and all
alterations, modifications, replacements, repairs or adjustments of the
Equipment or any component part thereof, pursuant to Section 4.3, shall not
apply if HIS, in its reasonable and good faith discretion, determines that the
unsafe or improper operation of the Equipment or any component part thereof is
a result of intentional acts on the part of Group, its employees,
<PAGE>
agents (other than HIS) or independent contractors unless such acts are
intentional on the part of Group.
5. UTILITIES
5.1 Utilities. During the term of this Agreement, HIS shall at its
expense provide or arrange for the provision of electricity, full HVAC services
and telephone hookup and related services as are required to operate the
Equipment and provide diagnostic services at the Premises.
6. INSURANCE
6.1 Insurance. During the term of the Agreement, HIS shall at its expense
provide and keep in force general liability and casualty insurance covering the
Equipment in total limits of not less than $1,000,000 per occurrence or
$3,000,000 in the aggregate and shall provide Worker's Compensation Insurance
for its employees.
6.2 Professional Liability Insurance. Group, without cost or expense to
HIS, shall obtain, keep and maintain throughout the term of this Agreement,
professional liability insurance coverage on itself and all of its physician
shareholders and physician employees who provide medical services for the
Practice at the Premises in total limits of not less than $1,000,000 per
occurrence or $3,000,000 in the aggregate. The Group shall also have the
Practice named as an additional insured under such policies. Prior to providing
medical services at the Premises, Group shall provide to HIS a Certificate of
Insurance evidencing such coverage. Such policy or policies shall also provide
for at least thirty (30) days' prior written notice from the insurer as to any
alteration of coverage, cancellation or other termination.
<PAGE>
7. MANAGEMENT SERVICES
Consistent with the provisions of this Agreement, HIS shall provide
Management Services to Group in connection with the operation of the Practice
at the Premises, including the specific managerial and administrative services
set forth in this Section 7.
7.1 Supplies. HIS shall at its sole expense obtain and provide to Group,
and maintain at the Premises, the medical and office supplies necessary for the
operation of the Practice at the Premises.
7.2 Billing and Collections. On behalf of and for the account of Group,
HIS shall establish and maintain credit and collection policies and procedures
and HIS shall timely bill and collect all professional and other fees for
magnetic resonance imaging services rendered by Group at the Premises. A bank
account shall be opened and maintained at all times while this Agreement is in
effect and shall remain in Group's name. The account shall be designated the
Group Account. Upon collection by HIS of funds pursuant to Sections 7.2-1
through 7.2-4 hereof, HIS shall deposit all amounts so collected, if any, in
the Group Account, which account has been opened and at all times shall remain
in Group's name. HIS shall deposit into the Group Account all sums to be
retained by Group as set forth in Exhibit C and HIS shall remit to the HIS
operating account all amounts due HIS also as set forth in Exhibit C. HIS shall
remit to the Group from the Group Account on the first (1st) and the fifteenth
(15th) day of each month hereunder, amounts due for radiology services
performed during the fifteen (15) day period commencing thirty (30) days prior
to the remittance date. The first remittance amount shall be submitted to the
Group on the first (1st) day of the month following the expiration of one (1)
calendar.
6
<PAGE>
month after execution hereof and shall include any additional amounts resulting
from the initial partial fifteen (15) day period from the Commencement Date (as
hereinafter defined). Thereafter, Group shall have all signatory rights over
Group Account. In connection therewith and throughout the term hereof, Group
hereby appoints HIS as Group's true and lawful agent and HIS hereby accepts
such appointment, for the following purposes:
7.2-1 To bill, in Group's name and on its behalf, Group's patients who
have received medical services at the Premises.
7.2-2 To collect, in Group's name and on its behalf, and deposit in the
Group Account, accounts receivable generated by the billings described in
Section 7.2-1.
7.2-3 To bill and collect, in Group's name and on its behalf, all claims
for reimbursement or indemnification from, all third party payors, including,
but not limited to, Blue Shield, Medicare, Medicaid and commercial insurance
companies, to the extent such reimbursement is available during the term of
this Agreement, and to deposit same in the Group M.R. Radiology Imaging
Account. HIS shall deposit in the Group M.R. Radiology Imaging Account all
amounts received by it from such third party payors. HIS hereby represents and
warrants that throughout the term hereof, HIS shall comply with all applicable
state and federal rules and regulations, including, but not limited to, the
Medicare anti-kickback statute, regarding the billing of patients in addition
to the requirements of all other applicable third-party payors.
7.2-4 To take possession of, and where applicable, endorse in the name of
Group, and deposit in Group Account, any notes, checks, money orders, cash,
insurance
<PAGE>
payments, and any other instruments received as fees from Group's Practice at
the Premises and collected by HIS.
7.3 Bank Account. HIS shall have access to the Group Account for the
purposes herein stated. In connection therewith, Group hereby appoints HIS for
the term of this Agreement as Group's true and lawful agent, and attorney in
fact. HIS hereby accepts such appointment, to deposit in the Group Account all
fees collected by HIS pursuant to Section 7.2 hereof, and to make withdrawals
from the Group Account for payments specified in Section 9, subject to the
limitations contained herein, as requested from time to time by HIS. Group
shall execute any and all additional documents reasonably required by the bank
where such Account is held to effectuate the herein granted power of attorney.
7.4 Miscellaneous Administrative Service. HIS, after consulting with
Group as to Group's needs, shall at its sole expense provide to Group (or
arrange for the provision of) such clerical services, laundry, printing, and
personnel services, and medical transcribing service will be provided in
conformity with the Group's requirements.
7.4-1 Financial Records. HIS shall at its expense maintain at either its
principal office or at its Monmouth, New Jersey facility, a comprehensive
system of office records, books and M.R. Radiology Imaging Account which
reflect the income and expenses of Group which may be inspected by Group or its
representative at any reasonable time during regular business hours.
7.4-2 Marketing. HIS, after consultation with Group, shall at its expense
develop, maintain and be solely responsible for all marketing promotions of
Group and all related
<PAGE>
advertising efforts consistent with appropriate rules and regulations and which
Group determines will not be detrimental to its good business name and
reputation.
7.4-3 Record Keeping. HIS shall maintain a log of all procedures
performed on the Equipment. Such log shall be available for inspection by duly
authorized representatives of the Group upon reasonable notice to HIS during
regular business hours.
7.5 Consultants. HIS may retain, without any cost or expense to Group,
any consultants and/or subcontractors it desires to assist it in connection
with providing Management Services.
7.6 Accounting and Recordkeeping.
7.6-1 Accounting and Financial Records. HIS shall at its expense
establish and administer accounting procedures and controls, and systems for
the development, preparation and safekeeping of records and books of account
relating to the business and financial affairs of the Practice, and shall
maintain such records and books on a consistent basis. HIS shall, during the
terms of this Agreement, including any renewal term hereof, prepare and deliver
to Group monthly financial statements prepared on the basis of the foregoing
records and books reporting Group's receipts, expenditures and revenue from the
Practice at the Premises.
7.6-2 Access. Group shall, upon reasonable notice, have the right to
audit and examine the books of account maintained by HIS in connection with the
operation of Group at the Premises during regular business hours.
7.7 Medical Records. Group shall establish procedures and policies for
the creation, completion and filing of all medical records generated by Group
at the Premises.
<PAGE>
All such medical records shall be treated in accordance with all applicable
state and federal laws relating to the confidentiality of same.
8. PERSONNEL
8.1 Administrative Personnel. HIS, after consultation with Group as to
such issues, shall employ such clerical, secretarial, bookkeeping, management,
consulting and billing and collection personnel it deems reasonably necessary
in conjunction with the Practice, to perform the Management Services set forth
in Section 7 hereof. HIS with the advice of Group, shall establish the salaries
and fringe benefits of the administrative personnel described in the
immediately preceding sentence and the method for paying such salaries and
providing such fringe benefits. HIS shall also have the sole and exclusive
right to discipline and/or to terminate from employment such administrative
personnel.
8.2 Non-Physician Personnel. HIS shall, with the advice of the Group,
employ all of the radiologic technologists, or personnel with equivalent
training, as are reasonably necessary to support the Practice. HIS shall
determine the salaries and fringe benefits of such non-physician personnel and
the method for paying such salaries and providing such fringe benefits. HIS
shall, with the advice of Group, have the sole and exclusive right to terminate
from employment such non-physician personnel. For the purposes of this
Subsection, non-physician personnel shall include nurses and radiologic
technologists and all individuals employed on the Premises (other than
physicians) who are involved with the direct delivery of medical services to
patients of the Group.
8.3 Labor Reports. HIS shall prepare, maintain and file all requisite
reports with respect to withholding taxes, social security taxes, employment
taxes, Workers'
<PAGE>
Compensation, the Fair Labor Standards Act, and all other statements and
reports pertaining to employees and independent contractors of HIS.
8.4 Compensation. HIS shall pay the compensation (including fringe
benefits) of all HIS' employees and independent contractors and shall pay for
all local, state, and federal taxes and assessments (including without
limitation, social security taxes, unemployment insurance, and Workers'
Compensation insurance) which are incident to the employment of such personnel.
The number of such radiologic technologists or other such personnel shall be
mutually agreed to by the parties. It is understood and acknowledged that the
radiologic technologists or personnel with equivalent training shall be under
the direct supervision of the Group when performing medical procedures or
providing medical services.
9. SERVICE FEES
9.1 Fee. Group and HIS hereby mutually recognize and acknowledge that HIS
will incur substantial costs and expenses in performing the services described
herein. Accordingly, Group shall pay to HIS, through a billing and collection
service agreement and/or an operations management agreement by and between said
two (2) parties a Fee for its services.
9.1-1 The Fee for the Management Services rendered by HIS and the billing
and collection services rendered by HIS shall be an amount pursuant to Exhibit
"C" annexed hereto and made a part hereof.
9.2 Payment of Fees. Each day during the term or renewal term of this
Agreement, the Fees due with respect to the immediately preceding day shall be
due and
<PAGE>
payable to HIS. To facilitate the payment of the Fees to HIS, Group hereby
expressly authorizes HIS to make withdrawals from the Group Account during the
term of this Agreement, and any renewal term hereof, to pay itself the Fees due
with respect to the preceding day.
10. TERM AND TERMINATION
10.1 Initial Term. The initial term of this Agreement shall commence upon
the date first above written (the "Commencement Date"), and shall continue for
a period of three (3) years, unless sooner terminated as herein provided.
10.2 Renewal Term. Following the expiration of the initial term hereof,
this Agreement shall automatically be renewed for successive additional one (1)
year periods unless either party gives the other notice of intent not to renew
at least one hundred and twenty (120) days prior to the expiration of the then
existing term. For each successive renewal term, all the provisions of this
Agreement shall continue in full force and effect.
10.3 Termination. This Agreement may be terminated as follows:
10.3-1 Damage/Condemnation of Premises. If the Premises are totally or
partially destroyed by fire, windstorm, hail, earthquake or other casualty or
Act of God and HIS decides not to rebuild or if all or a substantial portion of
the Premises is taken or is to be taken by condemnation or eminent domain
proceeding, then either HIS or Group may immediately terminate this Agreement.
Upon such a termination, all Fees, shall be due and payable and HIS shall
continue to collect all outstanding Accounts receivable under the provisions
hereof. Subject to the collection of outstanding M.R. Radiology Imaging Account
<PAGE>
receivable, if any, the Group shall continue to withdraw such fees from Account
I on the first and the fifteenth of each month.
10.3-2 Bankruptcy. Either party may immediately terminate this Agreement
upon the filing by the other of a petition in voluntary bankruptcy or an
assignment for the benefit of creditors by either party, or upon other action
taken or suffered, voluntarily or involuntarily, under any Federal or State law
for the benefit of insolvents by either party, except for the filing of a
petition in involuntary bankruptcy against either party which is dismissed
within one hundred twenty (120) days thereafter.
10.3-3 Disqualification of Group. This Agreement shall terminate at such
time as Group does not qualify for any reason as a professional service
corporation under the laws of the State of New York as determined by the
appropriate governmental or regulatory body, and such failure to so qualify is
not fully remedied within ninety (90) days following notice of such failure.
10.3-4 License to Practice Medicine. If the license to practice medicine
in the State of New York of any physician who is a member or employee of Group
is suspended or revoked on any grounds, including, without limitation, improper
medical practice or improper or unethical conduct by such physician and such
physician member or physician employee practices medicine at the Premises
following such suspension or revocation, then HIS, at its option, may terminate
this Agreement immediately.
10.3-5 Licensure of Personnel. If Group shall cause, permit, or suffer to
be rendered at the Premises any professional medical services by a person not
qualified and/or
<PAGE>
licensed or adequately trained to perform such services under all applicable
laws, rules and regulations, HIS may terminate this Agreement immediately.
10.3-6 Loss on Operations. HIS may terminate this Agreement in the event
it reasonably determines that continuation of the Practice is not financially
feasible to HIS by giving Group ninety (90) days prior written notice. Such a
determination may be established in the event the operation of the facility
shall be unprofitable for any consecutive three (3) month period and a decision
is made to close the facility.
10.3-7 With Cause. Except as may be otherwise provided in this Agreement,
if Group shall fail to substantially or materially perform any of the duties,
obligations or responsibilities to be performed by it pursuant to this
Agreement and such default shall continue for a period of fifteen (15) days
after written notice thereof has been given to Group by HIS, HIS may terminate
this Agreement on five (5) days' prior written notice. Included in this
Provision is the failure of Group to provide Magnetic Resonance Imaging reports
that meet American College of Radiology standards on a timely basis (i.e.
verbal reports within 24 hours); provided, however, said reports shall be
timely delivered when they are submitted during the next business day,
excluding weekends and HIS Holidays, for radiology services performed on the
immediately preceding business day or Group's failure to provide physician
services at the facility at which the Practice is located in accordance with
Exhibit B attached hereto. If HIS shall fail to perform any of the duties,
obligations or responsibilities to be performed by it pursuant to this
Agreement and such default shall continue for a period of ninety (90) days
after prior written notice thereof has
<PAGE>
been given to HIS by Group, Group may terminate this Agreement on five (5)
days' prior written notice.
10.3-8 Regulation. This Agreement may be terminated immediately by either
party if a court of competent jurisdiction or administrative agency having
authority to regulate either of the parties holds this Agreement or the
obligations to be performed hereunder to be illegal in whole or in part, with
respect to any portion hereof or adopts regulations which would hold this
Agreement or the obligations to be performed hereunder to be illegal, in whole
or in part, with respect to any portion hereof. However, immediately upon the
happening of such event, the parties agree, for a period of ninety (90) days,
to restructure the practical conduct of this contractual arrangement in a
manner which will eliminate the illegal or unenforceable aspects hereof, while
remaining consistent with the intent and financial result of this Agreement in
its original form, during which ninety (90) day period the parties shall
negotiate in good faith a revised Agreement to evidence their restructured
relationship.
10.3-9 Insurance. The Group fails to maintain professional liability
insurance as required by Section 6.2 hereof.
10.3-10 Punishable Offense. In the event any Group physician shareholder
and/or physician employee is convicted of any offense punishable as a felony or
involving moral turpitude, HIS may terminate this Agreement immediately.
10.3-11 Surrender of Group Name. In the event of a termination of this
Agreement for any reason whatsoever, Group agrees that it shall cease the use
of the term "M.R. Radiology Imaging of Lower Manhattan, P.C.", in its name and
that the Group and its
<PAGE>
physician members and physician employees shall not establish a new practice or
promote their services using the term "M.R. Radiology Imaging of Lower
Manhattan, P.C.", apart from the Practice at the Premises.
11. SURRENDER OF PREMISES
Group agrees that upon the expiration or termination of this Agreement,
it shall, without notice from HIS other than as may be specifically required
herein, quietly and peaceably surrender to HIS possession of the Equipment and
any additional equipment purchased by HIS during the term of this Agreement.
Group shall surrender possession of the Equipment and additional equipment in
as good order, repair and condition as same were as of the Commencement Date of
this Agreement, reasonable wear and tear excepted.
12. REPRESENTATIONS OF GROUP
12.1 Licensure of Shareholders, Employees and Consultants of Group. Group
represents and warrants that each of its physician shareholders, employees,
and/or consultants who shall be providing magnetic resonance imaging services
for the Practice are now, and at all times during the term of this Agreement,
shall be duly licensed to practice medicine in the State of New York and shall
have the requisite knowledge, skill and training to provide magnetic resonance
imaging or other professional medical services, including, without limitation,
the supervision of the operation of the Equipment and the reading and
interpretation of all data derived therefrom.
12.2 Performance Throughout the Term of the Agreement. Group hereby
represents and warrants that it has not agreed to or executed, and shall not
agree to or
<PAGE>
execute during the period commencing with the execution of this Agreement and
continuing throughout the term of this Agreement and any renewal terms hereof,
any agreement, whether expressed or implied, with any hospital or any other
corporation, partnership or any other person, or take or consent to any action,
which may, in any manner whatsoever, prohibit, or materially or substantially
limit, impair or otherwise interfere with Group's performance of its duties,
obligations and responsibilities hereunder throughout the term of this
Agreement and any renewal terms hereof.
12.3 Provider Numbers. Group shall make application within fifteen (15)
days of execution of this Agreement for any and all provider numbers as may be
necessary or desirable in order to obtain payment from Medicare or any other
third party payor for professional services rendered at the Premises.
13. GROUP'S PROFESSIONAL SERVICES
13.1 Exclusive Control. The Parties acknowledge and agree that Group, its
physician shareholders and physician employees shall be in complete and
exclusive control of its medical practice, shall be solely responsible for all
acts and decisions with respect thereto, and shall conduct such practice in
accordance with applicable statutes, regulations and ordinances, applicable
professional standards and their respective best judgment and discretion. Group
shall have complete and exclusive authority and control regarding medical
appropriations of all examinations and protocols to be utilized. The Standard
of Appropriations shall conform to the American College of Radiology
appropriations criteria promulgated in 1995. The Group shall promptly inform
HIS of any deficiency in personnel, supplies, facilities, equipment or working
environment which directly, or indirectly, could
<PAGE>
adversely affect the rendition of magnetic resonance imaging services of the
highest quality on a consistent basis.
13.2 Supervision of Non-Physician Personnel. Group represents and
warrants that each of its physician shareholders and/or physician employees
shall properly supervise and direct the professional medical services provided
by the non-physician personnel referred to in Section 8.2 hereof at the
Premises.
14. INDEMNIFICATION
14.1 Indemnity by HIS. HIS shall indemnify and hold Group harmless from
and against any and all liability (whether accrued, absolute, contingent or
otherwise), loss, damage, expense (including reasonable counsel fees) or
deficiency resulting from any misrepresentation, breach of warranty or
nonfulfillment of any agreement on the part of HIS under this Agreement and
from any act or negligence of HIS and its employees in or about the Premises
during the term of this Agreement. To be entitled to such indemnification,
Group shall give HIS prompt written notice of the assertion by a third party of
any claim with respect to which Group might bring a claim for indemnification
hereunder, and in all events must have provided such notice to HIS within the
applicable period for defense of such claim by Group. HIS shall have the right,
at HIS' own expense, to defend and litigate any such third party claim, using
the attorney selected by HIS. In no event shall HIS be liable for the acts or
omissions of Group, its members, employees or agents (other than HIS),
including, without limitation, any liability arising out of or in connection
with claims of malpractice.
<PAGE>
14.2 Indemnity by Group. Group shall indemnify and hold HIS harmless from
and against any and all liability (whether accrued, absolute, contingent or
otherwise), loss, damage, expense (including reasonable counsel fees) or
deficiency resulting from any misrepresentation, breach of warranty or
nonfulfillment of any agreement on the part of Group under this Agreement, and
from any act or omission of Group, its shareholders employees or agents. To be
entitled to such indemnification, HIS shall give Group prompt written notice of
the assertion by a third party of any claim with respect to which HIS might
bring a claim for indemnification hereunder, and in all events must have
supplied such notice to Group within the applicable period for defense of such
claim by HIS. Group shall have the right, at Group's own expense, to defend and
litigate any such third party claim, using the attorney selected by Group. In
no event shall Group be liable for the acts or omissions of HIS, its members,
employees or agents.
15. LIMITATION ON THE ACTIVITIES OF GROUP
Group acknowledges that it and its shareholders are affiliated with
George Braff, M.D., a radiology group with offices located at various locations
in the State of New York.
Upon the execution hereof, the Group shall and shall cause its
shareholders and employees not to, engage, either directly or indirectly, in
any activities which compete with the current or future, as of the date hereof,
business interests or activities of HIS, any affiliate of HIS or any entity of
which HIS owns a substantial part. The term "compete" as used herein shall
include within its meaning, without limitation, the operation of any magnetic
resonance imaging facility within (2) miles of any facility operated by HIS or
any of its affiliates.
<PAGE>
However, this Section shall not apply if this Agreement is terminated by
operation of law or regulations or if it is terminated in accordance with the
provisions of Sections 10.3-1, 10.3-2 and 10.3-6. Notwithstanding the
foregoing, George Braff, M.D. shall have the right to participate in a
hospital-based magnetic resonance imaging practice at any hospital at which he
regularly practices radiology at present or in the future. Group and HIS agree
that if any restriction contained in this Section 15 is held by any Court to be
unenforceable or unreasonable, a lesser restriction shall be severable
therefrom and be enforced in its place, and the remaining restrictions
contained herein shall be and remain enforceable in accordance with its terms.
16. GENERAL
16.1 Additional Assurances. The provisions of this Agreement shall be
self-operative and shall not require further agreement by the parties except as
may be herein specifically provided to the contrary; provided, however, at the
reasonable request of either party, the other party shall execute such
additional instruments and take such additional acts as the requesting party
may deem necessary to effectuate this Agreement.
16.2 Consents, Approvals and Discretion. Except as herein expressly
provided to the contrary, whenever this Agreement requires any consent or
approval to be given by either party or either party must or may exercise
discretion, the parties agree that such consent or approval shall not be
unreasonably delayed and such discretion shall be reasonably exercised.
16.3 Choice of Law. The parties agree that this Agreement shall be
governed by and construed in accordance with the laws of the State of New York
and that the courts
<PAGE>
of such State shall be the exclusive courts of jurisdiction for any litigation,
special proceedings or other proceeding as between the parties that may be
brought, or arise out of, in connection with, or by reason of, this Agreement.
16.4 Legal Fees and Costs. In the event either party elects to incur
legal expenses to enforce or interpret any provision of this Agreement, the
prevailing party will be entitled to recover such legal expenses, including
without limitation, attorneys' fees, cost and necessary disbursements, in
addition to any other relief to which such party shall be entitled.
16.5 Benefit/Assignment. Subject to provisions herein to the contrary,
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective legal representatives, successors and assigns;
provided, however, that neither party may assign this Agreement without the
prior written consent of the other party, which consent shall not be
unreasonably withheld; provided further, that HIS may assign its rights and
delegate its duties hereunder to an entity which is, or will be, following such
assignment, in control of, controlled by or under common control affiliated
with HIS.
Further, the Group shall not:
(a) Assign, mortgage or encumber this Agreement or the Equipment or any
part of it, or permit its use by others;
(b) Pledge, loan, create a security interest in, or abandon
possession of the Equipment;
(c) In any other manner attempt to dispose of the Equipment or any
part of it; or
<PAGE>
(d) Permit any liens or legal process arising by, through or under
the Group to be incurred or levied on the Equipment or any part thereof.
16.6 Waiver of Breach. The waiver by either party of any breach or
violation of any provision of this Agreement shall not operate as, or be
construed to constitute, a waiver of any subsequent breach of the same or other
provision hereof.
16.7 Notice. Any notice, demand or communication required, permitted or
desired to be given hereunder shall be deemed effectively given when personally
delivered or mailed by pre-paid certified mail, return receipt requested,
addressed as follows:
HIS: HealthCare Imaging Services, Inc.
c/o Mark R. Vernon
Vice President, Director of Operations
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, New Jersey 07701
Group: George Braff, M.D., P.A.
45 Beekman Street
New York, New York 10038
or to such other address and to the attention of such other person or officer
as any party may designate, with copies thereof to the respective counsel
thereof as notified by such party.
16.8 Severability. If any term or provision of this Agreement is held to
be invalid, illegal or unenforceable for any reason and in any respect, such
invalidity, illegality or unenforceability shall in no event affect, prejudice
or disturb the validity of the remainder
<PAGE>
of this Agreement, which shall be and remain in full force and effect,
enforceable in accordance with its terms.
16.Gender and Number. Whenever the context of this Agreement requires, the
gender of all words herein shall include the masculine, feminine and neuter,
and the number of all words herein shall include the singular and plural.
16.10 Division and Headings. The division of this Agreement into sections
and subsections and the use of captions and headings in connection therewith
are solely for the convenience and shall have no legal effect in construing the
provisions of this Agreement.
16.Independent Relationship. It is mutually understood and agreed that the
Group and the HIS in performing their respective duties and obligations
hereunder are at all times acting and performing as independent contractors
with respect to each other. HIS shall neither have nor exercise any control or
discretion over the method by which Group, its partners or employees practice
medicine. The sole function of HIS hereunder is to provide Group with the
Equipment, additional equipment and Management Services as described herein.
16.Entire Agreement/Amendment. This Agreement supersedes all previous
contracts and constitutes the entire agreement of whatsoever kind or nature
existing between the parties respecting the within subject matter, and neither
party shall be entitled to benefits other than those specified herein. As
between the parties, no oral statements or prior written material not
specifically incorporated herein shall be of any force and effect; the parties
specifically acknowledge that in entering into and executing this
<PAGE>
Agreement, the parties rely solely upon the representations and agreements
contained in this Agreement and no others. All prior representations or
agreements, whether written or verbal, not expressly incorporated herein are
superseded and no changes in or additions to this Agreement shall be recognized
unless and until made in writing and signed by the parties hereto.
16.Legal Actions. HIS shall advise Group when instituting or defending, in
the name of the Group, any and all legal actions or proceedings by or against
third parties arising out of Group's medical practice at the Premises,
including, without limitation, those necessary for the protection and continued
operation of Group at the Premises.
16.Confidentiality. The Parties agree that, upon the execution of this
Agreement and continuing throughout the term hereof, and after the termination
of this Agreement, Group and its agents, employees, consultants, and/or
subcontractors shall not disclose any of the terms or provisions hereunder to
third parties, without the prior written consent of the other, unless such
disclosure is required by law or by any governmental body or agency, it being
understood that HIS is a public company and is thereby subject to certain
disclosure requirements.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have hereunto set their hands and
seals or cause to be executed by its duly authorized officers, all as of the
date and year first above written.
ATTEST: HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
- - ------------------------ -----------------------------------
Name: Elliott H. Vernon
Title: President
ATTEST: M.R. RADIOLOGY IMAGING OF LOWER
MANHATTAN, P.C.
_ By: /s/ George Braff
- - ------------------------ -----------------------------------
Name: George Braff, M.D.
Title: President
<PAGE>
EXHIBIT "A"
One (1) G.E. MR MAX .5 Tesla MRI Unit with Coils: Knee, Head, Lumbar Spine,
Cervical Spine, Shoulder and Body.
One (1) G.E. Laser Printer
One (1) Fuji FPM 2100 Processor
One (1) Hitachi Ultrasound Unit EUB 405 Plus with Two Probes
Assorted Leased Office Equipment
Digital Dictation System Model #9906
Postage Machine Model #E500
Panther II Telephone System with Eight (8) Phones
Zerox 5328 Copy Machine
Assorted Office Furniture
<PAGE>
EXHIBIT "B"
SCHEDULE
Group agrees to provide a radiologist on site at the Practice, located at
the Premises, on the weekly schedule set forth below. Group agrees to provide,
to the best of its ability, verbal and written radiology interpretation reports
within twenty-four (24) hours; provided, however, said reports shall be timely
delivered when they are submitted during the next business day, excluding
weekends and HIS Holidays, for radiology services performed on an immediately
preceding business day. Such coverage shall include all business days that the
Practice is in operation.
Group further agrees to be available on an "on-call" basis at all times
for emergencies and/or scans that require contrast material to be used.
Dr. Braff shall be at the Premises for at least one (1) hour each day for
at least five (5) hours each week hereunder including, but not limited to, the
time periods set forth below and Dr. Braff shall be available on a flexible as
needed basis to provide gadolinium injections in order to accommodate the
requirements of the referring physicians at the Premises.
Monday
Tuesday
Wednesday
Thursday
Friday
<PAGE>
EXHIBIT "C"
FEE SCHEDULE
Group shall pay HIS all of Group's gross cash receipts for the
interpretation of procedures performed hereunder, less then (10%) percent of
said gross cash receipts received. In the event this Agreement is terminated by
either party hereto, Group shall continue to receive ten (10%) percent of the
accounts receivable as collected for procedures performed at Premises prior to
the date of termination.
<PAGE>
December 31, 1997
Ulises C. Sabato, M.D.
106 Grand Avenue
Englewood, New Jersey 07701
RE: HEALTHCARE IMAGING SERVICES, INC.
(THE "COMPANY")
Dear Dr. Sabato:
Pursuant to our recent discussions, the following outlines the salient points
of the consulting arrangement between you and the Company, which is
substantially the same as the agreement between you and the Company which
expired on or about October 15, 1997. You will continue to provide such
consultation and advice as the Company may reasonably request, including:
1. Recommendations to the Company regarding new developments affecting
the diagnostic imaging market;
2. Recommendations to the management of the Company regarding
interaction with physicians at the various facilities owned,
operated or managed by the Company;
3. Assistance in the development of newsletters, if so requested by
the Company, regarding diagnosing neurological injuries and
diseases;
4. Review of medical information set forth in facility marketing
literature if so requested by the Company;
5. Assistance in the education and training of technologist in
applications of MRI (and other diagnostic imaging modalities)
relating to neurology; and
<PAGE>
-2-
6. Preparation and arrangement of seminars, luncheons and other
training or education vehicles with physicians, chiropractors and
other current and/or potential referral sources.
Please note that you shall have no authority or power to incur any debt,
obligation or liability or enter into any contract or commitment on behalf of
the Company.
The terms of this agreement will be one (1) year beginning as of October 16,
1997 and may be renewed for additional six month periods subject to our
renegotiation of such extension prior to the anticipated termination date;
however, either party may terminate this agreement upon sixty (60) days prior
written notice to the other party.
For all of your consulting services to the Company, the Company will pay you an
annual consulting fee of $48,000, payable in twelve (12) monthly installments
of $4,000 beginning upon the execution of this Agreement.
As a consultant, you hereby represent that you are aware of the Anti-Fraud and
Abuse Amendments to the Social Security Act, the Medicare and Medicaid Program
Protection Act and the Federal Safe Harbor Regulations. You further represent
that, as a consultant, you cannot knowingly or willfully offer, pay, solicit or
receive remuneration in order to induce business; and if you do so you will be
subject to civil and/or criminal penalties. I have enclosed a separate
HealthCare Imaging Services, Inc. Statement of Policy for contractors and
consultants which requires your signature. In addition, you represent that you
are under no contractual or other restriction or obligation, and you will not
enter into any contractual or other arrangements, which is inconsistent with
the performance of your consulting services to the Company.
Please note that United States securities laws prohibit any person who has
material, non-public information regarding the Company from purchasing or
selling the Company's securities or from communicating such information to any
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities.
On behalf of the Company, we look forward to a long and mutually beneficial
consulting relationship with you. If the foregoing correctly sets forth our
mutual understanding, please sign and
<PAGE>
-3-
return a copy of this letter. This letter shall contain the entire agreement
between us with respect to your consulting arrangement with the Company and
shall supersede all prior agreements or understandings between us relating to
such arrangement.
Yours truly,
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
-----------------------------
ELLIOTT H. VERNON
Chief Executive Officer
AGREED TO AND ACCEPTED:
/s/ Ulises Sabato
- - ---------------------------
Ulises Sabato, MD
Date: December 31, 1997
cc: Scott McGrory, Vice President/Controller, HealthCare Imaging Services, Inc.
Scott Zimmerman, Esq., Shereff Friedman Hoffman & Goodman, LLP
<PAGE>
January 28, 1998
Munr Kazmir, M.D.
111 Grand Avenue
Suite 220
Palisades Park, NJ 07650
Re: HealthCare Imaging Services, Inc./Jersey Integrated HealthPractice, Inc./
Pavonia Medical Associates, P.A.
Dear Dr. Kazmir:
Pursuant to our recent discussions, the following outlines the salient points
of the consulting arrangement between you and the Company. You will provide
such consultation and advice as the Company may reasonably request, including:
1. Recommendations to the Company regarding new developments affecting
Physician Practice Management;
2. Recommendation to the management of the Company regarding
interaction with physicians in the community surrounding the
facility;
3. Assistance in the development of newsletters, if so requested by the
Company;
4. Preparation and arrangement of seminars, luncheons and other
training or education vehicles with physicians, chiropractors and
other current and/or potential acquisition candidates;
5. Recommendations to the Company regarding potential mergers/
acquisitions or strategic alliances with other healthcare related
companies.
Please note that you shall have no authority or power to incur any debt,
obligation or liability or enter into any contract or commitment on behalf of
the Company.
The term of this agreement will be for one (1) year beginning January 1, 1998
and may be renewed for additional six month periods subject to our
renegotiation of such extension prior to the anticipated termination date.
<PAGE>
Munr Kazmir, M.D.
Page 2
For all of your consulting services to the Company, the Company will pay you a
consulting fee of $6,000 per month commencing January 1, 1998 and continuing
for a period of 12 months until December 31, 1998. It is understood that this
agreement supersedes the previous agreement entered into between you and
Meadowlands MRI LLC, a subsidiary of the Company on May 22, 1997, which
terminated as of December 31, 1997.
As a consultant, you hereby represent that you are aware of the Anti-Fraud and
Abuse Amendments to the Social Security Act, the Medicare and Medicaid Program
Protection Act and the Federal Safe Harbor Regulations. You further represent
that, as a consultant, you cannot knowingly or willfully offer, pay, solicit or
receive remuneration in order to induce business; and if you so you will be
subject to civil and/or criminal penalties. I have enclosed a separate
HealthCare Imaging Services, Inc. Statement of Policy for contracts and
consultants which requires your signature. In addition, you represent that you
are under no contractual or other restriction or obligation, and you will not
enter into any contractual or other arrangement, which is inconsistent with the
performance of your consulting services to the Company.
Please note that Untied States securities laws prohibit any person who has
material, non-public information regarding the Company from purchasing or
selling the Company's securities or from communicating such information to any
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities.
On behalf of the Company, we look forward to a long and mutually beneficial
consulting relationship with you. If the foregoing correctly sets forth our
mutual understanding, please sign and return a copy of this letter. This letter
shall contain the entire agreement between us with respect to your consulting
arrangement with the Company and shall supersede all prior agreements or
understandings between us relating to such arrangement.
Yours truly,
/s/ Elliott H. Vernon
----------------------------------
ELLIOTT H. VERNON
AGREED TO AND ACCEPTED:
/s/ Munr Kazmir
- - ---------------------------------
Munr Kazmir, M.D.
Date: January 28, 1998
<PAGE>
FINANCIAL AND CONSULTING SERVICES AGREEMENT
This FINANCIAL AND CONSULTING SERVICES AGREEMENT ("Agreement") is made
and entered into as of October 1, 1998 by and between HEALTHCARE IMAGING
SERVICES, INC., a Delaware corporation (the "Company") located at 200 Schulz
Drive, Red Bank, NJ 07701, and DVI FINANCIAL SERVICES INC., a Delaware
corporation ("Consultant") located at 500 Hyde Park, Doylestown, PA 18901.
WHEREAS, Consultant currently provides medical equipment and working
capital financing to the Company;
WHEREAS, the Company desires to expand its current diagnostic imaging
operations;
WHEREAS, the Company also intends to become a leading provider of
physician practice management services to an integrated network of physicians
in New Jersey offering a comprehensive array of primary care, multi-specialty
and diagnostic imaging services;
WHEREAS, the Company desires, where appropriate, to complete acquisitions
(referred to collectively herein as "Acquisitions") of certain entities
designated by the Company (referred to collectively herein as "Acquisition
Candidates") in furtherance of its strategy to expand its current diagnostic
imaging operations and to establish physician practice management operations;
WHEREAS, Consultant, at the request of the Company, provided a $1.0
million term loan (the "Jersey Integrated Term Loan") to Jersey Integrated
HealthPractice, Inc. ("Jersey Integrated"), an Acquisition Candidate, on
January 8, 1998;
WHEREAS, Consultant, at the request of the Company, has provided a $4.0
million line of credit (the "Pavonia Line of Credit") to Pavonia Medical
Associates, P.A., a stockholder of Jersey Integrated; and
WHEREAS, the Company may require assistance in financing and structuring
the Acquisitions, and, therefore, the Company desires to engage Consultant to
provide those services set forth in Section 3 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 Consultant hereby agree as follows:
1. Appointment as Consultant. The Company hereby appoints
Consultant as an independent contractor, and Consultant hereby accepts such
appointment by the Company, commencing on the date hereof (the "Effective
Date"), for the Term (as defined below), with the obligations set forth in
Section 3 below, and upon the other terms and subject to the conditions
hereinafter stated.
<PAGE>
2. Term. Except as otherwise specifically provided in Section 5
below, the term of the Agreement (the "Term") shall commence on the Effective
Date and shall continue until the fifth (5th) anniversary of the Effective
Date, subject to the terms and conditions of this Agreement.
3. Obligations of Consultant. During the Term, Consultant shall
devote such working time, attention and energies to the affairs of the Company
as shall be necessary to provide the services set forth herein. Consultant
shall be subject to the supervision of the Company's Chairman of the Board,
Chief Executive Officer and President. All services under this Agreement shall
be performed by Consultant, and Consultant shall not engage any other person,
entity or group to perform such activities without the Company's prior written
consent. Consultant shall provide to the Company such services as are
reasonably requested by the Company from time to time which may include, but
not be limited to, the following:
a. Rendering advice regarding any aspect of an Acquisition,
including the financial structuring of such Acquisition;
b. Rendering advice with respect to the securing of any
additional financing by the Company through banks, insurance
companies and/or other institutions;
c. Providing some or all of the financing, in amounts and on
terms and conditions reasonably acceptable to Consultant,
necessary for the Company to fund the Acquisitions; and
d. Providing Acquisition Candidates with interim financing,
in amounts and on terms and conditions reasonably acceptable
to Consultant, pending the consummation of such Acquisition
by the Company.
4. Compensation.
a. In consideration for the consulting services provided by
Consultant pursuant to this Agreement, the Company hereby agrees to grant to
Consultant an option, substantially in the form attached hereto as Exhibit A,
to purchase 50,000 shares of common stock, par value of $.01 per share ("Common
Stock"), of the Company at an exercise price per share equal to the closing
sale price of the Common Stock, as reported by The Nasdaq Stock Market
("NASDAQ"), on the date of this Agreement.
b. In consideration for Consultant providing the Jersey
Integrated Term Loan, the Company hereby agrees to grant to Consultant an
option, substantially in the form attached hereto as Exhibit A, to purchase
10,000 shares of Common Stock at an exercise price of $1.25 per share.
c. In consideration for Consultant providing the Pavonia Line
of Credit, the Company hereby agrees to grant to Consultant options,
substantially in the form attached hereto as Exhibit A,
-2-
<PAGE>
to purchase (i) 20,000 shares of Common Stock at an exercise price per share
equal to the closing sale price of the Common Stock, as reported by NASDAQ, on
the date the definitive credit documentation with respect to the Pavonia Line
of Credit was executed by all parties thereto and (ii) 20,000 shares of Common
Stock at an exercise price per share equal to the closing sale price of the
Common Stock, as reported by NASDAQ, on the date the Pavonia Line of Credit was
initially funded.
d. The Company hereby agrees to grant an additional option
(the "Beran Option"), substantially in the form attached hereto as Exhibit A,
to purchase up to 400,000 shares of Common Stock to Consultant contemporaneous
with Consultant providing $15.0 million of financing (the "Beran Financing") to
the Company to fully fund the acquisition of certain diagnostic imaging centers
owned by the Estate of Irving N. Beran, among other parties, pursuant to that
certain letter of intent among the Company, the Estate of Irving N. Beran, and
other related persons, dated March 6, 1998 (the "Beran Acquisition"). The
400,000 shares of Common Stock underlying the Beran Option shall have a
purchase price per share equal to the lesser of (i) $2.00 and (ii) the closing
sale price of the Common Stock, as reported by NASDAQ, on the date the Beran
Financing is provided to the Company. If Consultant issues a firm commitment,
not subject to any material conditions (including, without limitation,
completion of due diligence, absence of material adverse changes or the like)
to provide the Beran Financing, and (x) the Beran Financing is not utilized by
the Company and (y) the Beran Acquisition is consummated, then the Beran Option
will only be exercisable as to 100,000 shares of Common Stock. Notwithstanding
anything to the contrary contained herein, Consultant will only be entitled to
receive and/or exercise the Beran Option if (1) the Beran Financing is on
commercially reasonable terms and conditions and (2) the Beran Financing, the
Jersey Integrated Term Loan, the Pavonia Line of Credit and any other credit
facility (other than capital leases) provided by Consultant or any affiliate
thereof to the Company or any Acquisition Candidate contain no, or there is a
waiver or relinquishment of all, prepayment or other early repayment fees or
charges.
5. Termination. Either party may, upon ninety (90) days prior
written notice to the other, terminate this Agreement.
6. Confidential Information.
a. Consultant agrees not to use, disclose or make accessible
to any person, entity or group any Confidential Information (as defined below)
pertaining to the business of the Company and/or any of its affiliates or
subsidiaries, except when required to do so by a court of competent
jurisdiction, by any governmental agency having supervisory authority over the
business of the Company, or by any administrative body or legislative body
(including a committee thereof) with jurisdiction to order Consultant to
divulge, disclose or make accessible such information. For purposes of this
Agreement, "Confidential Information" means any non-public information
concerning the Company's and/or any of its affiliates' or subsidiaries'
financial data, statistical data, strategic business plans, pricing or pricing
strategies, customer and supplier lists, customer and supplier information,
information relating to governmental relations, practices, processes, methods,
trade secrets, marketing plans and other non-public, confidential information
of the Company and/or any of its affiliates or subsidiaries, that, in any case,
is not otherwise generally available to the public.
-3-
<PAGE>
b. In the event this Agreement expires or is terminated,
Consultant shall immediately return to the Company all Confidential Information
in its possession.
c. Consultant and the Company agree that the covenant
regarding Confidential Information contained in this Section 6 is a reasonable
covenant under the circumstances, and further agree that if, in the opinion of
any court of competent jurisdiction, such covenant is not reasonable in any
respect, such court shall have the right, power and authority to excise or
modify such provision or provisions of this covenant as to the court shall
appear not reasonable and to enforce the remainder of the covenant as so
amended.
d. Consultant acknowledges that the consideration received,
and to be received, by it under this Agreement adequately and sufficiently
compensates it for the restrictions set forth in this Section 6.
e. The provisions of this Section 6 shall extend for the Term
and shall survive the expiration or termination of the Agreement for a period
of three (3) years.
7. Remedy for Breach. Consultant hereby acknowledges that, in the
event of any breach of Section 6 of this Agreement, the Company would have no
adequate remedy at law and would suffer substantial and irreparable damage.
Accordingly, Consultant hereby agrees that, in such event, the Company shall be
entitled, without the necessity of proving damages or posting bond, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction (without proving a breach therefor) to
restrain any such breach or threatened breach or to obtain specific performance
of any such provisions, all without prejudice to any and all other remedies
that the Company may have at law or in equity.
8. Representations of Consultant. Consultant hereby represents and
warrants to the Company the following:
a. Neither the execution and delivery of this Agreement by
Consultant, the consummation of the transactions required of
Consultant herein, nor the fulfillment of, or compliance
with, the terms and conditions of this Agreement, will
conflict with, or result in, with or without the giving of
notice or the passage of time or both, a breach of any of the
terms, conditions or provisions of any agreement or
instrument to which Consultant is now a party or by which it
or its assets or property is bound or subject, or constitute
a default or result in an acceleration under any of the
foregoing, or result in the creation of any liens, claims or
encumbrances on any assets or property of Consultant or the
violation of any law, rule, regulation, order, judgment or
decree to which it or its assets or property is subject;
b. Consultant is aware of the Anti-Fraud and Abuse Amendments
to the Social
-4-
<PAGE>
Security Act, the Medicare and Medicaid Program Protection
Act and the Federal Safe Harbor Regulations, and that, as a
consultant, it cannot knowingly or willfully offer, pay,
solicit or receive remuneration in order to induce business,
and if it does so, it will be subject to civil and/or
criminal penalties;
c. Consultant has reviewed and executed the Company's
Statement of Policy for Contractors and Consultants attached
hereto; and
d. Consultant will not enter into any contractual or other
arrangement, which is inconsistent with the performance of
its obligations pursuant to Section 3 herein.
9. Miscellaneous.
a. Relationship of the Parties. In performing the services
provided for hereunder, Consultant is acting as an independent contractor, and
Consultant shall not be deemed by virtue of this Agreement to be the servant,
agent or employee of the Company for any purpose whatsoever.
b. Notices. 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 delivery if personally delivered 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 or express mail for next day delivery, and on the
third day after mailing if mailed to the other party to whom notice is to be
given, by first class mail, registered, return receipt requested, postage
prepaid and addressed as follows:
If to the Company, to:
Healthcare Imaging Services, Inc.
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, New Jersey 07701
Attn: Elliott H. Vernon, Esq.
Fax: (732) 224-9362
If to Consultant, to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attn: Richard Miller, President
Fax: (215) 230-1845
-5-
<PAGE>
with a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attn: Sara Lee Keller-Smith, Deputy General Counsel
Fax: (215) 345-4428
c. Entire Agreement; Amendment; Construction. This Agreement
constitutes the entire agreement and understanding between the parties
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings between the parties hereto with respect to the subject matter
hereof, whether oral or written. Any amendment to this Agreement shall be made
only upon the written consent of Consultant and a duly authorized officer of
the Company. The language used in this Agreement shall be deemed to be the
language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against any party. Accordingly,
the language of all parts of this Agreement shall at all times be construed as
a whole, allowing for a fair reading, and not strictly construing such language
for or against any of the parties to this Agreement. Furthermore, it is
acknowledged and agreed by each of the parties to this Agreement that each of
the parties participated in the drafting of this Agreement, and any time any
claims arise concerning such language, such language shall not be construed for
or against the party alleged to be responsible for such drafting.
d. No Waivers. No failure or delay by any party in exercising
any right, power or privilege under this Agreement shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other
further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies provided in this Agreement shall be
cumulative and not exclusive of any rights or remedies provided by any law,
rule, regulation or order.
e. Severability. This Agreement shall be deemed to be severable and the
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement.
Furthermore, in lieu of any such invalid or unenforceable provision, the
parties hereto intend that there shall be added as a part of this Agreement a
provision as similar in terms to such invalid or unenforceable provision as
possible to be valid and enforceable.
f. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their permitted
successors and assigns. However, Consultant shall not assign any of its rights
or obligations under this Agreement (whether by operation of law or otherwise),
in whole or in part, without the prior written consent of the Company, which
the Company may grant or withhold in its sole discretion.
g. Governing Law. This Agreement shall be construed and governed in
-6-
<PAGE>
accordance with the laws of the State of New Jersey, without any regard to the
conflicts-of-law principles thereof.
h. Headings. Section headings contained in this Agreement are
intended solely for convenience of the parties hereto, and no provision of this
Agreement is to be construed by reference to any such heading.
i. Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an
original, but all of such counterparts shall together constitute one and the
same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the date first written above.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title: Chairman of the Board, President and
Chief Executive Officer
DVI FINANCIAL SERVICES INC.
By: /s/ Richard E. Miller
Name: Richard E. Miller
Title: President
<PAGE>
EXHIBIT A
OPTION AGREEMENT
This OPTION AGREEMENT ("Agreement") is made and entered into as of
___________, ____ by and between HEALTHCARE IMAGING SERVICES, INC., a Delaware
corporation (the "Company") located at 200 Schulz Drive, Red Bank, NJ 07701,
and DVI Financial Services Inc., a Delaware corporation (the "Grantee") located
at 500 Hyde Park, Doylestown, PA 18901.
1. Grant of Option. Subject to the provisions of the Financial and
Consulting Services Agreement dated as of October 1, 1998 between the Company
and the Grantee, as applicable, the Company does hereby grant to the Grantee a
non-qualified stock option to purchase up to _______ (____) shares (the
"Shares") of common stock, par value $0.01 per share, of the Company (the
"Common Stock") at an exercise price of $_____ per share (the "Option"). The
Option is, in its entirety, intended to be a non-qualified stock option.
2. Term of the Option. The Option (to the extent not earlier exercised or
forfeited) will expire five (5) years from the date hereof.
3. Vesting of the Option. The Option shall be fully vested on the date of
this Agreement.
4. Manner of Exercise. The Option may be exercised solely by delivery to
the secretary of the Company, or to his/her office, of all of the following
after the vesting thereof and prior to the expiration thereof:
(a) Notice in writing signed by the Grantee or any other person
then entitled to exercise the Option, stating that the Option, or a
portion thereof, is thereby exercised;
(b) Full payment (in cash or by check, or as otherwise permitted
under Section 5 of this Agreement) to the Company for the Shares with
respect to which the Option, or any portion thereof, is exercised;
(c) Such representations and documents as the Company deems
reasonably necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended (the
"Act"), and any other federal or state securities laws or regulations.
(The Company may also take whatever additional actions it deems
reasonably appropriate to effect such compliance including, without
limitation, placing legends on the certificate(s) evidencing the Shares
and issuing stop transfer orders to transfer agents and registrars);
(d) Promptly upon delivery of a written statement by the Company
describing in detail
-1-
<PAGE>
the withholding taxes due upon exercise of the Option, full payment to
the Company of all amounts which, under federal, state or local tax laws,
the Company is required to withhold upon exercise of the Option as
determined by the Company promptly upon the Grantee's delivery of the
notice described in Section 4(a); and
(e) In the event the Option shall be exercised by any person or
persons other than the Grantee, appropriate proof of the right of such
person or persons to exercise the Option.
The date of exercise of the Option shall be deemed to be the date
all of the foregoing conditions have been satisfied.
5. Cashless Exercise Procedures. The Company agrees, at the request of
the Grantee, to allow the cashless exercise of the Option, or a portion
thereof, through a brokerage firm acceptable to the Company whereby the Grantee
(to the extent permitted by, and subject to, applicable law) can exercise the
Option, or a portion thereof, without making a direct payment of the exercise
price thereof to the Company.
6. Conditions to Issuance of Stock Certificates. The Shares deliverable
upon exercise of the Option, or any portion thereof, may be either previously
authorized but unissued shares of Common Stock or issued shares of Common Stock
which have then been reacquired by the Company. Such Shares shall be fully paid
and nonassessable. The Company shall not be required to issue or deliver any
certificate or certificates evidencing the Shares purchased upon the exercise
of the Option, or any portion thereof, prior to fulfillment of all of the
following conditions (in addition to the conditions set forth in Section 4 of
this Agreement):
(a) The completion of any registration or other qualification of
such Shares under any state or federal law or under ruling or regulations
of the Securities and Exchange Commission or of any other governmental
regulatory body, which the Company shall deem reasonably necessary or
advisable;
(b) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Company shall determine to be
reasonably necessary or advisable; or
(c) The lapse of such reasonable period of time following the
exercise of the Option as the Company may from time to time reasonably
establish for reasons of administrative convenience.
The Company agrees that to the extent its action is required to
fulfill the conditions set forth in Sections 4 and 6 hereof, the Company shall
use its reasonable efforts to promptly fulfill its obligations thereunder;
provided, however, that the foregoing shall in no event be deemed to require
the Company to
-2-
<PAGE>
register or otherwise qualify any Shares under any federal, state or local law,
rule or regulation or to obtain any approval or other clearance from any
federal, state or local governmental agency.
7. Transfer of Option. The Option shall not be assignable, saleable, or
transferable by the Grantee without the consent of the Company. The Option may
not 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.
8. Rights of Stockholder. The holder of the Option shall not be, nor have
any of the rights or privileges of, a stockholder of the Company in respect of
any Shares purchasable upon the exercise of any part of the Option unless and
until the conditions set forth in Sections 4 and 6 have been satisfied.
9. Other Conditions and Limitations.
(a) The Option is granted on the condition that the purchase of
Shares thereunder shall be for investment purposes and not with a view to
resale or distribution, except that such condition shall be inoperative if the
offering of Shares subject to the Option is registered under the Act or if in
the opinion of counsel for the Company such Shares may be resold without
registration. At the time of the exercise of the Option or any portion thereof,
the Grantee will execute such further agreements as the Company may reasonably
require to implement the foregoing condition and to acknowledge the Grantee's
familiarity with restrictions on the resale of the Shares under applicable
securities laws.
(b) The Company will furnish upon request of the Grantee copies of
such publicly available financial and other information concerning the Company
and its business and prospects as may be reasonably requested by the Grantee in
connection with the exercise of the Option, or any portion thereof.
10. Adjustments Upon Certain Events.
(a) In the event of any (i) subdivision or consolidation of the
Common Stock, (ii) dividend or other distribution (whether in the form of cash,
shares of Common Stock, other securities, or other property), (iii)
recapitalization or other capital adjustment of the Company or (iv) merger,
consolidation or other reorganization of the Company or other similar corporate
transaction or event that affects the Common Stock, appropriate adjustments
shall be made to prevent dilution of the Grantee's interest in the Common Stock
and to preserve the benefits or potential benefits intended to be made
available to the Grantee under this Agreement; provided, however, that the
number of shares of Common Stock subject to the Option shall always be a whole
number.
(b) No adjustment in the current exercise price per share (the "Per
Share Option Price") shall be required unless such adjustment would require an
increase or decrease of at least $0.10 in such price, provided, however, that
any adjustments which by reason of this clause (b) are not required to
-3-
<PAGE>
be made shall be carried forward cumulatively and taken into account in any
subsequent calculation.
(c) In any case in which this Section 10 shall require that an
adjustment as a result of any event become effective from and after a record
date, the Company may elect to defer until the occurrence of such event (i) the
issuance to the Grantee exercised after such record date and before the
occurrence of such event of the additional shares of Common Stock issuable upon
such exercise over and above the shares issuable immediately prior to
adjustment and (ii) the payment to the Grantee of any amount in cash in lieu of
a fractional share of Common Stock; provided, however, that the Company shall
deliver to the Grantee a due bill or other appropriate instrument evidencing
the Grantee's right to receive such additional Common Stock or such payment in
lieu of such fractional shares.
(d) Whenever the Per Share Option Price is adjusted as provided in
this Section 10 and upon any modification of the rights of the holder in
accordance with this Section 10, the Company shall promptly prepare a
certificate of an officer of the Company setting forth the Per Share Option
Price and the number of shares of Common Stock issuable upon exercise of the
Option after such adjustment or modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same
and cause a copy of such certificate to be mailed to the Grantee.
11. Notices. 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
delivery if personally delivered 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 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 as
follows:
If to the Company to:
Healthcare Imaging Services, Inc.
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, NJ 07701
Attn: Elliott H. Vernon, Esq.
Fax: (732) 224-9362
If to the Grantee to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attn: Richard Miller, President
Fax: (215) 230-1845
-4-
<PAGE>
with a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attn: Sara Lee Keller-Smith, Deputy General Counsel
Fax: (215) 345-4428
12. Miscellaneous. This Agreement shall bind and inure to the benefit of
the parties hereto, the successors and assigns of the Company and the permitted
successors and assigns of the Grantee. 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. This Agreement may be executed in one or more
counterparts, which together shall constitute one agreement.
-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:
-----------------------------------
Name:
Title:
DVI FINANCIAL SERVICES INC.
By:
-----------------------------------
Name:
Title:
-6-
<PAGE>
LOAN AND SECURITY AGREEMENT
NO. 1969
By and Between
DVI FINANCIAL SERVICES INC.
and
HEALTHCARE IMAGING SERVICES INC.
Executed September 30, 1998, to be effective as of October 1,
1998
<PAGE>
LOAN AND SECURITY AGREEMENT NO. 1969
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is executed September
30, 1998, to become effective as of October 1, 1998, by and between HEALTHCARE
IMAGING SERVICES, INC., ("Borrower") and DVI FINANCIAL SERVICES INC.
("Lender").
BACKGROUND
A. Borrower has requested that Lender extend a bridge loan to Borrower,
which Lender is willing to do on the terms set forth herein.
B. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in Section 10 of this Agreement.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any extensions of credit now or hereafter made to or for the
benefit of Borrower by Lender, the parties hereto, intending to be legally
bound hereby, agree as follows:
1. TERM LOAN; USE OF PROCEEDS.
1.1 Term Loan. Lender will lend to Borrower and Borrower will borrow from
Lender the aggregate amount of Fourteen Million Dollars ($14,000,000.00) (the
"Term Loan"). Borrower's obligation to repay the Term Loan shall be evidenced
by Borrower's promissory note (the "Note") in the face amount of Fourteen
Million Dollars ($14,000,000.00), which shall be in the form attached hereto as
Exhibit "A", with the blanks appropriately filled in.
1.2. Use of Proceeds. Borrower agrees to use the proceeds of the Term
Loan to finance, in part, the acquisition of substantially all of the assets of
the Beran Companies.
2. INTEREST RATE.
2.1. Interest on Term Loan. Interest on the unpaid principal balance of
the Term Loan will accrue until final payment thereof at the rate per annum
which is equal to twelve percent (12%).
2.2. Default Interest. Interest will accrue on the principal balance of
the Term Loan after the occurrence of an Event of Default at a rate equal to
eighteen percent (18%) (the "Default Rate").
2.3. Post Judgment Interest. Any judgment obtained for sums due hereunder
or under the Loan Documents will accrue interest at the Default Rate until paid
in full.
2.4. Calculation. Interest will be computed on the basis of a year of 360
days comprised of twelve (12) 30-day months and paid for the actual number of
days elapsed.
<PAGE>
2.5. Limitation of Interest to Maximum Lawful Rate. In no event will the
rate of interest payable hereunder exceed the maximum rate of interest
permitted to be charged by applicable law (including the choice of law rules)
and any interest paid in excess of the permitted rate will be refunded to
Borrower. Such refund will be made by application of the excessive amount of
interest paid against any sums outstanding hereunder and will be applied in
such order as Lender may determine. If the excessive amount of interest paid
exceeds the sums outstanding, the portion exceeding the sums outstanding will
be refunded in cash by Lender. Any such crediting or refunding will not cure or
waive any default by Borrower. Borrower agrees, however, that in determining
whether or not any interest payable hereunder exceeds the highest rate
permitted by law, any non-principal payment, including without limitation
prepayment fees and late charges, will be deemed to the extent permitted by law
to be an expense, fee, premium or penalty rather than interest.
3. PAYMENTS AND FEES.
3.1. Principal and Interest Payments on the Term Loan. Borrower will pay
the principal of the Term Loan and accrued interest thereon as follows:
Interest Only. Borrower will pay accrued
interest only as follows:
November 1, 1998 $0
December 1, 1998 $140,000.00
January 1, 1999 $140,000.00
February 1, 1999 $140,000.00
Principal and Interest. Borrower will pay:
March 1, 1999 $308,338.38
April 1, 1999 $308,338.38
Balloon. All remaining principal of the Term Loan and
all accrued interest due thereon shall be due and payable in
full on the Maturity Date.
3.2 Net Proceeds. In addition to the payments required under Section 3.1
hereof, Borrower shall also pay to Lender all Net Proceeds of any debt
(including senior or subordinate debt) or any equity offering consummated by
Borrower prior to the Maturity Date.
3.3. Commitment Fee. Borrower shall pay to Lender a one-time commitment
fee of One Hundred Fifty Thousand Dollars ($150,000.00), to be paid
contemporaneously herewith.
3.4. Late Charge. In the event that Borrower fails to pay any principal,
interest or other fees or expenses payable hereunder for a period of at least
fifteen (15) days, in addition to paying such sums, Borrower will pay to Lender
a late charge equal to five percent (5%), of such past due payment as
compensation for the expenses incident to such past due payment.
<PAGE>
3.5. Application of Payments. Any and all payments on account of the Term
Loan will be applied to accrued and unpaid interest, outstanding principal and
other sums due hereunder or under the Loan Documents, in such order as Lender,
in its discretion, elects. If Borrower makes a payment or payments and such
payment or payments, or any part thereof, are subsequently invalidated,
declared to be fraudulent or preferential, set aside or are required to be
repaid to a trustee, receiver, or any other person under any bankruptcy act,
state or federal law, common law or equitable cause, then to the extent of such
payment or payments, the obligations or part thereof hereunder intended to be
satisfied shall be revived and continued in full force and effect as if said
payment or payments had not been made.
3.6. Indemnity. Borrower will indemnify Lender against any loss or
expense which Lender sustains or incurs as a consequence of an Event of
Default, including, without limitation, any failure of Borrower to pay when due
(at maturity, by acceleration or otherwise) any principal, interest, fee or any
other amount due under this Agreement or the other Loan Documents. If Lender
sustains or incurs any such loss or expense it will from time to time notify
Borrower in writing of the amount determined in good faith by the Lender to be
necessary to indemnify Lender for the loss or expense. Such amount will be due
and payable by Borrower to Lender within ten (10) days after presentation by
Lender of a statement setting forth a brief explanation of and Lender's
calculation of such amount, which statement shall be conclusively deemed
correct absent manifest error. Any amount payable to the Lender under this
Section will bear interest at the default rate payable under the Line from the
due date until paid, both before and after judgment.
4. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL.
4.1. Personal Property. As security for the full and timely payment and
performance of all DVI Indebtedness, Borrower hereby grants, or will cause to
be granted, to Lender a security interest in all of the following:
(a) All of Obligors' present and future accounts, contract rights,
chattel paper, instruments and documents and all other rights to the payment of
money whether or not yet earned, for services rendered or goods sold,
consigned, leased or furnished by any Obligor or otherwise, together with (i)
all goods (including any returned, rejected, repossessed or consigned goods),
the sale, consignment, lease or other furnishings of which shall be given or
may give rise to any of the foregoing, (ii) all of Obligors' rights as a
consignor, consignee, unpaid vendor or other lienor in connection therewith,
including stoppage in transit, set-off, detinue, replevin and reclamation,
(iii) all general intangibles related thereto, (iv) all guaranties, mortgages,
security interests, assignments, and other encumbrances on real or personal
property, leases and other agreements or property securing or relating to any
accounts, (v) chooses-in-action, claims and judgments, (vi) any return of
unearned premiums, which may be due upon cancellation of any insurance
policies, and (vii) all products and proceeds of any of the foregoing.
(b) All of Obligors' present and future inventory (including but
not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in Obligors' businesses) whether owned, consigned or
held on consignment, together with all merchandise, component materials,
supplies, packing, packaging and shipping materials, and all returned, rejected
or repossessed goods sold, consigned, leased or otherwise furnished by any
Obligor, all documents of title covering any of such goods or inventory and all
products and proceeds of any of the foregoing.
<PAGE>
(c) All of Obligors' present and future general intangibles
(including but not limited to tax refunds and rebates, manufacturing and
processing rights, designs, patent rights and applications therefor, trademarks
and registration or applications therefor, tradenames, brand names, logos,
inventions, copyrights and all applications and registrations therefor),
licenses, permits, approvals, software and computer programs, license rights,
royalties, trade secrets, methods, processes, know-how, formulas, drawings,
specifications, descriptions, label designs, plans, blueprints, patterns and
all memoranda, notes and records with respect to any research and development,
and all products and proceeds of any of the foregoing.
(d) All of Obligors' present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other
articles of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, all documents of title covering any of
such goods or inventory and all manuals of operation, maintenance or repair,
and all products and proceeds of any of the foregoing.
(e) All of Obligors' present and future general ledger sheets,
files, records, customer lists, books of account, invoices, bills, certificates
or documents of ownership, bills of sale, business papers, correspondence,
credit files, tapes, cards, computer runs and all other data and data storage
systems whether in the possession of any Obligor or any service bureau.
(f) All letters of credit now existing or hereafter issued naming
an Obligor as a beneficiary or assigned to an Obligor, including the right to
receive payment thereunder, and all documents and records associated therewith.
(g) Those certain securities described on Schedule 4.1(g) hereto,
all additional securities pledged to Lender from time to time, together with
all cash, stock or other dividends paid upon such securities; all securities
received in addition to or in exchange for such securities; all subscription
rights incident to such securities; any other distribution in respect of such
securities in any form; and the proceeds thereof. All of such securities shall
be freely assignable and transferable to Lender, and shall be accompanied by
such stock pledge agreements and blank stock powers with signatures guaranteed
as Lender may require.
(h) All deposits, funds, instruments, documents, policies,
evidences and certificates of insurance, securities, chattel paper and other
assets of any Obligor or in which Borrower has an interest and all proceeds
thereof, now or at any time hereafter on deposit with or in the possession or
control of Lender or owing by Lender to any Obligor or in transit by mail or
carrier to Lender or in the possession of any other Person acting on Lender's
behalf, without regard to whether Lender received the same in pledge, for
safekeeping, as agent for collection or otherwise, or whether Lender has
conditionally released the same, and in all assets of Obligors in which Lender
now has or may at any time hereafter obtain a lien, mortgage, or security
interest for any reason.
<PAGE>
4.2. General. The collateral described above in Section 4.1 is collectively
referred to herein as the "Collateral".
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows:
5.1. Valid Organization, Good Standing and Qualification (Borrower).
Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, has full power and authority
to execute, deliver and comply with the Loan Documents, and to carry on its
business as it is now being conducted and is duly licensed or qualified as a
foreign corporation in good standing under the laws of each other jurisdiction
in which the character or location of the properties owned by it or the
business transacted by it requires such licensing or qualification, except
where the failure to be so licensed or qualified would not have a material
adverse effect on the Collateral, assets, business, operations or financial
condition of Borrower or the ability of Borrower to perform its obligations
under the Loan Documents.
Valid Organization, Good Standing and Qualification (Guarantor).
Guarantor is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, has full power and authority
to execute, deliver and comply with the Loan Documents, and to carry on its
business as it is now being conducted and is duly licensed or qualified as a
foreign corporation in good standing under the laws of each other jurisdiction
in which the character or location of the properties owned by it or the
business transacted by it requires such licensing or qualification, except
where the failure to be so licensed or qualified would not have a material
adverse effect on the Collateral, assets, business, operations or financial
condition of Guarantor or the ability of Guarantor to perform its obligations
under the Loan Documents.
5.3. Licenses. Borrower and Guarantor have all licenses, registrations,
approvals and other authority as may be necessary to enable them to own and
operate their business and perform all services and business which they have
agreed to perform in any state, municipality or other jurisdiction, except
where the failure to have such licenses, registrations, approvals and other
authority would not have a material adverse effect on Borrower or Guarantor as
applicable.
5.4. Ownership Interests The ownership of all stock, debentures, options,
warrants, bonds and other securities (debt and equity) of Guarantor and all
pledges, proxies, voting trusts, powers of attorney and other agreements
affecting the ownership or voting rights of said interests is as set forth on
Schedule 5.4 attached hereto.
5.5. Subsidiaries. Except as set forth on Schedule 5.5 attached hereto,
neither Borrower nor Guarantor owns any shares of stock or other equity
interests in any Person, directly or indirectly (by any Subsidiary or
otherwise).
<PAGE>
5.6. Financial Statements.
(a) Borrower's Statement. Borrower has furnished to Lender the
audited financial statements of Borrower and its Subsidiaries certified without
qualification by independent public accountants as of December 31, 1997 and all
management and comment letters from such accountants in connection therewith,
and its internally prepared interim financial statements as of June 30, 1998.
Such financial statements of Borrower and its Subsidiaries (together with the
related notes and comments), are correct and complete in all material respects,
fairly present in all material respects the financial condition and the assets
and liabilities of Borrower and its Subsidiaries at such dates, and have been
prepared in accordance with GAAP. With respect to the interim statements, such
statements are subject to year-end adjustment and any accompanying footnotes.
(b) Sellers' Statements. Borrower has furnished to Lender the
audited financial statements of Sellers certified without qualification by
independent certified public accountants as of December 31, 1997. To the best
of Borrower's knowledge, after due inquiry, such statements are correct and
complete in all material respects, fairly present in all material respects the
financial condition and assets of the Sellers and have been prepared in
accordance with GAAP.
5.7. No Material Adverse Change in Financial Condition. There has been no
material adverse change in the financial condition of Borrower and its
Subsidiaries sinceDecember 31, 1998.
5.8. Pending Litigation or Proceedings. Except as set forth on Schedule
5.8 attached hereto, there are no judgments outstanding or actions, suits or
proceedings pending or, to the best of Borrower's knowledge, threatened against
or affecting Borrower or Guarantor, at law or in equity or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which individually or
in the aggregate, if finally determined adversely to Borrower or Guarantor,
involves the possibility of any judgment or liability in excess of One Hundred
Thousand Dollars ($100,000.00), or which individually or in the aggregate may
materially and adversely affect any of their activities, properties or
financial condition, their rights to carry on activities as now conducted, or
their ability to perform their obligations under this Agreement, the Loan
Documents or the Acquisition Documents.
5.9. Due Authorization; No Legal Restrictions. The execution and delivery
by Borrower and Guarantor of the Loan Documents and the Acquisition Documents,
the consummation of the transactions contemplated by the Loan Documents and the
Acquisition Documents and the fulfillment and compliance with the respective
terms, conditions and provisions of the Loan Documents and the Acquisition
Documents: (a) have been duly authorized by all requisite corporate action of
Borrower and Guarantor, (b) will not conflict with or result in a breach of, or
constitute a default (or might, upon the passage of time or the giving of
notice or both, constitute a default) under, any of the terms, conditions or
provisions of any applicable statute, law, rule, regulation or ordinance or
Borrower's or Guarantor's Certificates of Incorporation or By-Laws or any
indenture, mortgage, loan or credit agreement or instrument to which Borrower
or Guarantor is a party or by which either of them may be bound or affected, or
any judgment or order of any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, and (c) will not
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon any of the property or assets of Borrower or Guarantor
under the terms or provisions of any such agreement or instrument, except liens
in favor of Lender.
<PAGE>
5.10. Enforceability. The Loan Documents have been duly executed by the
Obligors and delivered to Lender and constitute legal, valid and binding
obligations of the Obligors, enforceable against the Obligors in accordance
with their terms, except as enforceability may be limited by any bankruptcy,
insolvency, reorganization, moratorium or other laws or equitable principles or
remedies affecting creditors' rights generally or the availability of equitable
remedies.
5.11. No Default Under Other Obligations, Orders or Governmental
Regulations. Neither Borrower nor Guarantor are in violation of its Certificate
of Incorporation or in default in the performance or observance of any of their
obligations, covenants or conditions contained in any indenture or other
agreement creating, evidencing or securing any Indebtedness or pursuant to
which any such Indebtedness is issued and Borrower and Guarantor are not in
violation of or in default under any other agreement or instrument or any
judgment, decree, order, statute, rule or governmental regulation, applicable
to them or by which their properties may be bound or affected, except for any
violation or default which would not have a material adverse affect on Borrower
or Guarantor, as applicable .
5.12 Governmental Consents. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of Borrower or Guarantor is required in connection with the execution, delivery
or performance by Borrower or Guarantor of the Loan Documents or the
consummation of the transactions contemplated thereby.
5.13 Taxes. Borrower and Guarantor have filed when due all tax returns
which they are required to file and have paid, or made provision for the
payment of, all taxes which have or may have become due pursuant to such
returns or pursuant to any assessment received by it, except such taxes (other
than real estate taxes which must be paid regardless of challenge), if any, as
are being contested in good faith and as to which adequate reserves have been
provided. Such tax returns are complete and accurate in all material respects.
Borrower does not know of any proposed additional assessment or basis for any
assessment of additional taxes.
5.14. Title to Collateral. The Collateral is and will be owned by
Borrower or Guarantor, as the case may be, free and clear of all liens and
other encumbrances of any kind (including liens or other encumbrances upon
properties acquired or to be acquired under conditional sales agreements or
other title retention devices), excepting only liens in favor of the DVI
Lenders and those liens and encumbrances permitted under Section 6.8 below.
Borrower and Guarantor will defend the Collateral against any claims of all
Persons other than the DVI Lenders.
5.15. Addresses. During the past five (5) years, neither Borrower or
Guarantor (which was incorporated in September 1998) has been known by any
names (including tradenames) other than those set forth in Schedule 5.15
attached hereto and has been located at any addresses other than those set
forth on Schedule 5.15 attached hereto. The portions of the Collateral which
are tangible property and Borrower's and Guarantor's books and records
pertaining thereto will at all times be located at the addresses set forth on
Schedule 5.15; or such other location determined by Borrower and Guarantor
after prior notice to Lender and delivery to Lender of any items requested by
Lender to maintain perfection and priority of Lender's security interests and
access to Borrower's and Guarantor books and records. Schedule 5.15 identifies
the chief executive office of Borrower and Guarantor.
<PAGE>
5.16. Current Compliance. Borrower and Guarantor are currently in
compliance with all of the terms and conditions of the Loan Documents.
5.17. Pension Plans. Except as disclosed on Schedule 5.17 hereto, (a)
Borrower and Guarantor have no obligations with respect to any employee pension
benefit plan ("Plan") (as such term is defined in the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), (b) no events, including,
without limitation, any "Reportable Event" or "Prohibited Transaction" (as
those terms are defined under ERISA), have occurred in connection with any Plan
of Borrower or Guarantor which might constitute grounds for the termination of
any such Plan by the Pension Benefit Guaranty Corporation ("PBGC") or for the
appointment by any United States District Court of a trustee to administer any
such Plan, (c) all of the Borrower's and Guarantor's Plans meet with the
minimum funding standards of Section 302 of ERISA, and (d) Borrower and
Guarantor have no existing liability to the PBGC. Borrower and Guarantor are
not subject to or bound to make contributions to any "multi-employer plan" as
such term is defined in Section 4001(a)(3) of ERISA.
5.18. Leases and Contracts. Borrower and Guarantor have complied with the
provisions of all material leases, contracts or commitments of any kind (such
as employment agreements, collective bargaining agreements, powers of attorney,
distribution agreements, patent license agreements, contracts for future
purchase or delivery of goods or rendering of services, bonus, pension and
retirement plans or accrued vacation pay, insurance and welfare agreements)
including, without limitation, the Acquisition Documents, to which they are a
party and are not, to the best of Borrower's and Guarantor's knowledge, in
default thereunder. No other party is in default under any such leases,
contracts or other commitments and no event has occurred which, but for the
giving of notice or the passage of time or both, would constitute an event of
default thereunder.
5.19. Business Interruptions. Within five (5) years prior to the date
hereof, neither the business, Collateral nor operations of Borrower have been
materially and adversely affected in any way by any casualty, strike, lockout,
combination of workers, order of the United States of America, or any state or
local government, or any political subdivision or agency thereof, directed
against Borrower. There are no pending or, to the best of Borrower's knowledge,
threatened labor disputes, strikes, lockouts or similar occurrences or
grievances against the business being operated by Borrower.
5.20. Accuracy of Representations and Warranties. No representation or
warranty by Borrower or Guarantor contained herein or in any certificate or
other document furnished by Borrower or Guarantor pursuant hereto or in
connection herewith fails to contain any statement of material fact necessary
to make such representation or warranty not misleading in light of the
circumstances under which it was made. There is no fact which Borrower or
Guarantor knows or should know and has not disclosed to Lender, which does or
is reasonably likely to materially and adversely affect Borrower, or Guarantor
or any of their operations.
<PAGE>
5.21. Interrelatedness of Borrower and Guarantor. The business operations
of Borrower and Guarantor are interrelated and complement one another, and such
entities have a common business purpose, with intercompany bookkeeping and
accounting adjustments used to separate their respective properties,
liabilities, and transactions. To permit their uninterrupted and continuous
operations, such entities now require and will from time to time hereafter
require funds and credit accommodations for general business purposes. The
proceeds of the Term Loan will directly or indirectly benefit Borrower and
Guarantor hereunder, severally and jointly, regardless of who receives part or
all of the proceeds of such proceeds.
6. GENERAL COVENANTS. Except with the prior written consent of Lender,
Borrower and Guarantor will comply with the following:
6.1. Payment of Principal, Interest and Other Amounts Due. Borrower will
pay when due all DVI Indebtedness and all other amounts payable by it
hereunder.
6.2. Limitation on Sale and Leaseback. Neither Borrower nor Guarantor
will enter into any arrangement whereby it will sell or transfer any real
property or improvements thereon or other fixed assets owned by it and then or
thereafter rent or lease as lessee such property, improvements or assets or any
part thereof, or other property which Borrower shall intend to use for
substantially the same purposes as the property sold or transferred.
6.3. Limitation on Indebtedness. Neither Borrower or Guarantor will have
at any time outstanding to any Person other than Lender, any Indebtedness for
borrowed money, Capitalized Lease Obligations, or any outstanding letters of
credit, except:
(a) Current accounts payable incurred in the ordinary course of
Borrower's or Guarantor's business, accrued expenses and other current items
arising out of transactions (other than borrowings) in the ordinary course of
Borrower's and/or Guarantor's, as the case may be, business;
(b) Existing Indebtedness and Capitalized Lease Obligations
described on Schedule 6.3.
Any of such existing permitted Indebtedness may not be refinanced
or replaced without the consent of the Lender.
6.4. Guaranties. Neither Borrower nor Guarantor will directly or
indirectly guarantee, endorse (other than for collection or deposit in the
ordinary course of business), discount (except for the settlement of accounts
receivable in the ordinary course of business), sell with recourse or for less
than the face value or agree (contingently or otherwise) to purchase or
repurchase or otherwise acquire, or otherwise become directly or indirectly
liable for, or agree (contingently or otherwise) to supply or advance funds
(whether by loan, stock purchase, capital contribution or otherwise) in respect
of, any Indebtedness, obligations or liabilities of any Person.
<PAGE>
6.5. Disposition of Assets. Neither Borrower nor Guarantor will sell,
lease, transfer or otherwise dispose of all, substantially all, or any material
portion of its property or assets, except for sales of inventory in the
ordinary course for fair consideration or the replacement of obsolete equipment
in the ordinary course.
6.6. Merger; Consolidation; Business Acquisitions; Subsidiaries. Neither
Borrower nor Guarantor will merge into or consolidate with any Person, acquire
any material portion of the stock, ownership interests, assets or business of
any Person, permit any Person to merge into it, or form any new Subsidiaries.
6.7. Taxes; Claims for Labor and Materials. Borrower and Guarantor will
pay or cause to be paid when due all taxes, assessments, governmental charges
or levies imposed upon them or their income, profits, payroll or any property
belonging to them, including without limitation all withholding taxes, and all
claims for labor, materials and supplies which, if unpaid, might become a lien
or charge upon any of its properties or assets; provided that they shall not be
required to pay any such tax (other than real estate taxes which must be paid
regardless of challenge), assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings
promptly initiated and diligently conducted by them, and neither execution nor
foreclosure sale or similar proceedings shall have been commenced in respect
thereof (or such proceedings shall have been stayed pending the disposition of
such contest of validity), and they shall have set aside on its books, adequate
reserves with respect thereto. Neither Borrower nor Guarantor will file, or
consent to the filing of, any consolidated income tax return with any Person
other than a Subsidiary or Borrower.
6.8. Liens. Neither Borrower nor Guarantor will create, incur or permit
to exist any mortgage, pledge, encumbrance, lien, security interest or charge
of any kind (including liens or charges upon properties acquired or to be
acquired under conditional sales agreements or other title retention devices)
on its property or assets, whether now owned or hereafter acquired, or upon any
income, profits or proceeds therefrom, except:
(a) Security interests, liens and mortgages held by
the DVI Lenders;
(b) Liens incurred or deposits made in the ordinary course of
business (i) in connection with worker's compensation, unemployment insurance,
social security and other like laws or (ii) to secure the performance of
statutory obligations, not incurred in connection with either (A) the borrowing
of money or (B) the deferred purchase price of goods or inventory;
(c) Encumbrances consisting of zoning restrictions, easements,
restrictions on the use of real property or minor irregularities of title
thereto, none of which materially impairs the use of such property by Borrower
or Guarantor in the operation of its business; or
<PAGE>
(d) Liens and security interests listed on Schedule 6.8 attached
hereto.
Neither Borrower nor Guarantor shall enter into any agreement with
any other Person which shall prohibit the Borrower from granting, creating or
suffering to exist, or otherwise restrict in any way (whether by covenant, by
identifying such event as a default under such agreement or otherwise) the
ability of the Borrower or Guarantor to grant, create or suffer to exist, any
lien, security interest or other charge or encumbrance upon or with respect to
any of their respective assets in favor of the Lender.
6.9. Existence; Approvals; Qualification; Business Operations; Compliance
with Laws. Borrower and Guarantor (a) will obtain, preserve and keep in full
force and effect their separate corporate existence and all rights, licenses,
registrations and franchises necessary to the proper conduct of their
businesses or affairs; (b) will qualify and remain qualified as a foreign
corporation in each jurisdiction in which the character or location of the
properties owned by them or the business transacted by them requires such
qualification except where the failure to obtain or maintain such qualification
would not have a material adverse effect on the Collateral, assets, business,
operations or financial condition of Borrower or the Guarantor or the ability
of Borrower or Guarantor to perform their respective obligations under the Loan
Document; (c) will continue to operate their respective businesses as presently
operated and (d) will comply in all material respects with the requirements of
all applicable laws and all rules, regulations (including environmental
regulations) and orders of regulatory agencies and authorities having
jurisdiction over it.
6.10. Maintenance of Properties. Borrower and Guarantor will maintain,
preserve, protect and keep or cause to be maintained, preserved, protected and
kept its real and personal property used or useful in the conduct of its
business in good working order and condition, reasonable wear and tear
excepted, and will pay and discharge when due the cost of repairs to and
maintenance of the same.
6.11. Insurance. Borrower and Guarantor will carry adequate insurance
issued by an insurer reasonably acceptable to Lender, in amounts acceptable to
Lender (at least adequate to comply with any co-insurance provisions) and
against all such liability and hazards as are usually carried by entities
engaged in the same or a similar business similarly situated or as may be
reasonably required by Lender, and in addition, will carry business
interruption insurance in such amounts as may be reasonably required by Lender.
In the case of insurance on any of the Collateral, Borrower and Guarantor shall
carry insurance in the full insurable value thereof and cause Lender to be
named as insured mortgagee with respect to all real property, loss payee (with
a lender's loss payable endorsement) with respect to all personal property, and
additional insured with respect to all liability insurance, as its interests
may appear with thirty (30) days' notice to be given Lender by the insurance
carrier prior to cancellation or material modification of such insurance
coverage.
Borrower and Guarantor shall cause to be delivered to Lender the
insurance policies for the insurance coverage required pursuant to this Section
6.11 or in the alternative, evidence of insurance and at least thirty (30)
business days prior to the expiration of any such insurance, additional
policies or duplicates thereof or in the alternative, evidence of insurance
evidencing the renewal of such insurance and payment of the premiums therefor.
Borrower and Guarantor shall direct all insurers that in the event of any loss
thereunder or the cancellation of any insurance policy, the insurers shall make
payments for such loss and pay all return or unearned premiums directly to
Lender and not to Borrower and Guarantor and Lender jointly.
<PAGE>
In the event of any loss, Borrower or Guarantor will give Lender
immediate notice thereof and Lender may make proof of loss whether the same is
done by Borrower or Guarantor. Lender is granted a power of attorney by
Borrower or Guarantor with full power of substitution to file any proof of loss
in Borrower's, Guarantor's or Lender's name, to endorse Borrower's or
Guarantor's name on any check, draft or other instrument evidencing insurance
proceeds, and to take any action or sign any document to pursue any insurance
loss claim. Such power being coupled with an interest is irrevocable.
In the event of any loss, Lender, at its option, may (a) retain and apply
all or any part of the insurance proceeds to reduce, in such order and amounts
as Lender may elect, the DVI Indebtedness, or (b) disburse all or any part of
such insurance proceeds to or for the benefit of Borrower or Guarantor for the
purpose of repairing or replacing Collateral after receiving proof satisfactory
to Lender of such repair or replacement, in either case without waiving or
impairing the DVI Indebtedness or any provision of this Agreement. Any
deficiency thereon shall be paid by Borrower and Guarantor to Lender upon
demand. Borrower nor Guarantor shall take out any insurance without having
Lender named as loss payee or additional insured thereon. Borrower and
Guarantor shall bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral.
6.12. Inspections; Examinations. Borrower and Guarantor hereby
irrevocably authorize and direct all accountants and auditors employed by them
at any time to exhibit and deliver to Lender copies of any and all of
Borrower's and Guarantor's financial statements, trial balances or other
accounting records of any sort in the accountant's or auditor's possession and
copies of all reports submitted to Borrower by such accountants or auditors,
including management letters, "comment" letters and audit reports, and to
disclose to Lender any information they may have concerning Borrower's and
Guarantor's financial status and business operations. Borrower and Guarantor
further authorizes all federal, state and municipal authorities to furnish to
Lender copies of reports or examinations relating to Borrower or Guarantor ,
whether made by Borrower, Guarantor or otherwise.
The officers of Lender, or such Persons as any of them may
designate, may visit and inspect any of the properties of Borrower, examine
(either by Lender's employees or by independent accountants) any of the
Collateral or other assets of Borrower or Guarantor, including the books of
account of Borrower and Guarantor and discuss the affairs, finances and
accounts of Borrower or Guarantor with its officers and with its independent
accountants, at such times as Lender may reasonably desire; provided, however,
that prior to the occurrence of an Event of Default, Lender will give
reasonable prior notice of any such examination and will only conduct such an
examination during regular business hours.
<PAGE>
6.13. Default Under Other Indebtedness. Neither Borrower nor Guarantor
will permit any of its Indebtedness to be in default. If any Indebtedness of
Borrower or Guarantor is declared or becomes due and payable before its
expressed maturity by reason of default or otherwise or to the knowledge of
Borrower or Guarantor, the holder of any such Indebtedness shall have the right
(or upon the giving of notice or the passage of time, or both, shall have the
right) to declare such Indebtedness to be so due and payable, Borrower or
Guarantor will immediately give Lender written notice of such declaration,
acceleration or right of declaration.
6.14. Pension Plans. Borrower and Guarantor will (a) keep in full force
and effect any and all Plans which are presently in existence or may, from time
to time, come into existence under ERISA, unless such Plans can be terminated
without material liability to Borrower or Guarantor in connection with such
termination (as distinguished from any continuing funding obligation); (b) make
contributions to all of Borrower's and Guarantor's Plans in a timely manner and
in a sufficient amount to comply with the requirements of ERISA; (c) comply
with all material requirements of ERISA which relate to such Plans so as to
preclude the occurrence of any Reportable Event, Prohibited Transaction or
material "accumulated funding deficiency" as such term is defined in ERISA; and
(d) notify Lender immediately upon receipt by Borrower or Guarantor of any
notice of the institution of any proceeding or other action which may result in
the termination of any Plan and deliver to Lender, promptly after the filing or
receipt thereof, copies of all reports or notices which Borrower or Guarantor
files or receives under ERISA with or from the Internal Revenue Service, the
PBGC, or the U.S. Department of Labor.
6.15. Transactions with Affiliates. Borrower will not enter into or
conduct any transaction with any Affiliate except on terms that would be usual
and customary in a similar transaction between Persons not affiliated with each
other and except as disclosed to Lender. Borrower will not make any loans or
extensions of credit to any of its Affiliates, shareholders, directors or
officers, except for the existing loans described in Schedule 6.15 attached
hereto. Borrower will cause all of its Indebtedness at any time owed to its
Affiliates, shareholders, directors and officers (other than reasonable
salaries payable to officers for services actually performed) to be
subordinated in all respects to all present and future DVI Indebtedness and
will not make any payments thereon, except as approved by Lender in writing.
6.16. Restriction on Stock Transfer.
By Guarantor. Guarantor will not directly or indirectly
issue, transfer, sell or otherwise dispose of, or part with control of, or
permit the transfer of, any shares of its capital stock.
(b) By Borrower. Except in connection with the cashless exercise of
options issued by Borrower, Borrower will not directly or indirectly redeem or
purchase any of its stock or any option, warrant or other rights to obtain any
stock of the Borrower, including, without limitation, any stock, options,
warrants or other rights to obtain stock of Borrower held by Biltmore
Securities, Inc. or any of the Sellers except in accordance with the terms of
the DVI Warrant (as hereafter defined) or any other warrants issued by Borrower
to Lender.
<PAGE>
6.17. Name or Address Change. Neither Borrower nor Guarantor will change
its name or address except upon thirty (30) days prior written notice to Lender
and delivery to Lender of any items requested by Lender to maintain perfection
and priority of Lender's security interests and access to Borrower's books and
records.
6.18. Notices. Borrower and Guarantor will promptly notify Lender of (a)
any action or proceeding brought against Borrower or Guarantor wherein such
action or proceeding would, if determined adversely to Borrower or Guarantor
result in liability of Borrower or Guarantor in excess of Twenty-Five Thousand
Dollars ($25,000.00) individually, or One Hundred Thousand Dollars,
($100,000.00) in the aggregate, (b) the occurrence of any Event of Default, (c)
any fact, condition or event which, with the giving of notice or the passage of
time or both, would become an Event of Default, (d) the failure of Borrower or
Guarantor to observe any of its material undertakings under the Loan Documents,
or (e) any material adverse change in the assets, business, operations or
financial condition of Borrower or Guarantor.
6.19. Additional Documents and Future Actions. Borrower and Guarantor
will, at its sole cost, take such actions and provide Lender from time to time
with such agreements, financing statements and additional instruments,
documents or information as the Lender may in its discretion deem reasonably
necessary or advisable to perfect, protect, maintain or enforce the security
interests in the Collateral, to permit Lender to protect or enforce its
interest in the Collateral, or to carry out the terms of the Loan Documents.
Borrower and Guarantor each hereby authorizes and appoints Lender as its
attorney-in-fact, with full power of substitution, to take such actions as
Lender may deem reasonably necessary to protect the Collateral and its
interests thereon and its rights hereunder, to execute on Borrower's or
Guarantor's behalf and file at Borrower's or Guarantor's expense financing
statements, and amendments thereto, in those public offices deemed necessary or
appropriate by Lender to establish, maintain and protect a continuously
perfected security interest in the Collateral, and to execute on Borrower's or
Guarantor's behalf such other documents and notices as Lender may deem
reasonably necessary to protect the Collateral and its interests therein and
its rights hereunder. Such power being coupled with an interest is irrevocable.
Borrower and Guarantor irrevocably authorize the filing of a carbon,
photographic or other copy of this Agreement, or of a financing statement, as a
financing statement and agrees that such filing is sufficient as a financing
statement.
6.20. Material Adverse Contracts. Neither Borrower nor Guarantor will
become or be a party to any contract or agreement which has a materially
adverse impact on Borrower's or Guarantor's ability to perform under this
Agreement, the loan documents or the Acquisition Documents.
6.21. Purchase Agreement. Neither Borrower nor Guarantor will amend any
of the terms of the Acquisition Documents or waive any of their material rights
or remedies thereunder in any manner adverse to Lender without the prior
written consent of Lender. Borrower will comply in all material respects with
the terms of the Acquisition Documents.
<PAGE>
6.22 Financial Information. Borrower and Guarantor will maintain books of
record and account in which full, correct and current entries in accordance
with GAAP will be made of all of their dealings, business and affairs, and
Borrower and Guarantor will deliver to Lender with reasonable promptness, all
financial data, statements and information in respect of the condition,
operation and affairs of Borrower or Guarantor as Lender may reasonably request
from time to time.
6.23 Financing. At all times during the term of this Agreement, Borrower
shall use its best efforts to obtain financing in an amount sufficient to repay
in full all amounts due under the Loan Documents on or before the Maturity
Date. Borrower agrees to provide Lender with a written update of its efforts to
secure such financing upon Lender's request, but not more often than monthly.
7. CONDITIONS OF CLOSING. The obligation of Lender to make available the Term
Loan is subject to the performance by Borrower and Guarantor of all of their
agreements to be performed hereunder and to the following further conditions
(any of which may be waived by Lender):
7.1. Loan Documents. Borrower, Guarantor and all other
required Persons will have executed and delivered to Lender the
Loan Documents.
7.2. Representations and Warranties. All representations and warranties
of Borrower and Guarantor set forth in the Loan Documents will be true at and
as of the date hereof.
7.3. No Default. No condition or event shall exist or have occurred which
would constitute an Event of Default hereunder (or would, upon the giving of
notice or the passage of time or both, constitute such an Event of Default).
7.4. Proceedings and Documents. All proceedings taken by Borrower and
Guarantor in connection with the transactions contemplated by this Agreement,
the Acquisition Documents and all documents incident to such transactions shall
be satisfactory in form and substance to Lender and Lender's counsel, and
Lender shall have received all documents or other evidence which it reasonably
may request in connection with such proceedings and transactions. Each of
Borrower and Guarantor shall have delivered to Lender a certificate, in form
and substance satisfactory to Lender, dated the date hereof and signed on
behalf of the Borrower by an officer of Borrower, and on behalf of the
Guarantor by an officer of Guarantor certifying (a) true copies of the
Certificate of Incorporation and bylaws of the Borrower in effect on such date,
(b) true copies of all corporate actions taken by Borrower relative to the Loan
Documents, and (c) the names, true signatures and incumbency of the officers of
the Borrower and the Guarantor authorized to execute and deliver this Agreement
and the other Loan Documents as well as the Acquisition Documents. Lender may
conclusively rely on such certificate unless and until a later certificate
revising the prior certificate has been received by Lender.
7.5. Landlord's Release and Waiver Agreements. Lender shall have received
a landlord's release and waiver agreement, satisfactory in form and substance
to Lender, from each landlord for each location leased by Borrower or
Guarantor.
<PAGE>
7.6. Delivery of Other Documents. The following documents shall have been
delivered by or on behalf of Borrower and Guarantor to Lender:
(a) Good Standing Certificates. A good standing certificate of the
Department of State of Delaware certifying to the good standing and corporate
status of Borrower and Guarantor, good standing/foreign qualification
certificates from all other jurisdictions in which Borrower is required to be
qualified to do business.
(b) Authorization Documents. Evidence of authorization of
Borrower's and Guarantor's execution and full performance of this Agreement,
the Loan Documents, the Acquisition Documents and all other documents and
actions required hereunder.
(c) Insurance. Evidence of the insurance coverage required under
Section 6.11.
(d) Opinion of Counsel. An opinion of counsel for Borrower and
Guarantor in form and content reasonably satisfactory to Lender.
(e) Financial Information. The 1997 audited financial statements of
Sellers, as prepared by Borrower's certified public accountants.
Lien Search. Copies of record searches (including
UCC searches and judgments, suits, tax and other lien searches), acceptable to
Lender.
(g) No Material Adverse Change. Evidence satisfactory to the Lender
that no material adverse change has occurred with respect to the Borrower and
Guarantor sinceDecember 31, 1997.
(h) Licenses and Approvals. Copies of all licenses, approvals,
consents, authorizations and filings of Borrower and Guarantor, required or
necessary for the operation by Borrower and Guarantor of their businesses.
(i) Acquisition Documents. Copies of all Acquisition Documents as
executed and delivered by the applicable parties thereto, together with
evidence satisfactory to Lender of the consummation of all conditions (except
funding) of the transaction contemplated thereby.
(j) Warrants. Delivery to Lender of warrants issued by Borrower
entitling Lender to purchase up to 400,000 shares of Borrower's common stock
for a strike price per share equal to the lesser of (i) Two Dollars ($2.00), or
(ii) the then market value and such other terms and conditions as the Lender
shall reasonably require (the "DVI Warrants")
(k) Sellers Litigation. Delivery of evidence satisfactory to Lender
that any pending or threatened litigation against any of the Sellers will not
(i) affect in any manner whatsoever the transaction contemplated hereby or in
the Acquisition Documents, (ii) encumber or affect Guarantor's title to
Sellers' assets, or (iii) have a material adverse affect on the Guarantor or
the Sellers' assets.
<PAGE>
(l) Other Documents. Such other documents as may be
required to be submitted to Lender by the terms hereof or of any
Loan Document.
8. DEFAULT AND REMEDIES.
8.1. Events of Default. The occurrence of any one or more of the
following events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrower to pay any amount of principal or
interest on the Note, or any fee or other sums payable hereunder, or any other
DVI Indebtedness on the date on which such payment is due, whether on demand,
at the stated maturity or due date thereof, or by reason of any requirement for
the prepayment thereof, by acceleration or otherwise and such failure continues
unremedied for a period of five (5) days after the date such payment is first
due;
(b) The failure of Borrower or Guarantor to duly perform or observe
in any material respect any obligation, covenant or agreement on its part
contained herein or in any other Loan Document not otherwise specifically
constituting an Event of Default under this Section 8.1 and such failure
continues unremedied for a period of ten (10) days after the earlier of (i)
notice from Lender to Borrower or Guarantor of the existence of such failure,
or (ii) the date on which any officer or principal of Borrower or Guarantor
knows of the existence of such failure, provided that, in the event such
failure is incapable of remedy, or was willfully caused or permitted by
Borrower or Guarantor, Borrower and Guarantor shall not be entitled to any
notice or grace hereunder;
(c) The failure of Borrower or Guarantor to pay any Indebtedness
for borrowed money in excess of Twenty-Five Thousand Dollars ($25,000.00),
individually or in the aggregate, due to any third Person or the existence of
any other event of default under any loan, security agreement, mortgage or
other agreement pertaining thereto binding Borrower or Guarantor, after the
expiration of any notice and/or grace periods permitted in such documents;
(d) The failure of Borrower or Guarantor to pay or perform in any
material respect any other material obligation to Lender or to DVI Business
Credit Corporation under any other agreement or note or otherwise arising,
whether or not related to this Agreement, after the expiration of any notice
and/or grace periods permitted in such documents;
(e) The adjudication of Borrower or Guarantor as a bankrupt or
insolvent, or the entry of an order for relief against Borrower or Guarantor or
the entry of an order appointing a receiver or trustee for Borrower or
Guarantor of any of their property or approving a petition seeking
reorganization or other similar relief under the bankruptcy or other similar
laws of the United States or any state or any other competent jurisdiction;
(f) A proceeding under any bankruptcy, reorganization, arrangement
of debt, insolvency, readjustment of debt or receivership law is filed by or
(unless dismissed or stayed within 60 days) against Borrower or Guarantor, or
Borrower or Guarantor makes an assignment for the benefit of creditors, or
Borrower or Guarantor takes any action to authorize any of the foregoing;
<PAGE>
(g) The suspension of the operation of Borrower's or Guarantor's
present business, or Borrower or Guarantor becoming unable to meet its debts as
they mature, or the admission in writing by Borrower or Guarantor to such
effect, or Borrower or Guarantor calling any meeting of all or any material
portion of its creditors for the purpose of debt restructure;
(h) All or any material part of the Collateral or the assets of
Borrower or Guarantor are attached, seized, subjected to a writ or distress
warrant, or levied upon, or come within the possession or control of any
receiver, trustee, custodian or assignee for the benefit of creditors;
(i) The entry of a final judgment for the payment of money in
excess of Twenty-Five Thousand Dollars ($25,000.00), individually or in the
aggregate, against Borrower or Guarantor which, within ten (10) days after such
entry, shall not have been discharged or execution thereof stayed pending
appeal or shall not have been discharged within five (5) days after the
expiration of any such stay;
(j) Any representation or warranty of Borrower or Guarantor in any
of the Loan Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by Borrower or Guarantor pursuant
hereto is discovered to be untrue in any material respect as of the date as of
which the facts therein set forth are stated or certified;
(k) Borrower or Guarantor voluntarily or involuntarily dissolves or
is dissolved, liquidates or is liquidated;
(l) Borrower or Guarantor is enjoined, restrained, or in any way
prevented by the order of any court or any administrative or regulatory agency,
the effect of which order restricts Borrower or Guarantor from conducting all
or any material part of its business;
(m) A material and adverse change occurs in any of Borrower's or
Guarantor's operations, management or financial condition or in the value of
the Collateral;
(n) Any material uninsured damage to, or loss, theft, or
destruction of, any of the Collateral occurs;
(o) Any strike, lockout, labor dispute, embargo, condemnation, act
of God or public enemy, or other casualty loss occurs resulting in the
cessation or substantial curtailment of production or other revenue producing
activities at any facility of Borrower or Guarantor for more than thirty (30)
consecutive days;
(p) The loss, suspension, revocation or failure to renew any
license or permit now held or hereafter acquired by Borrower or Guarantor,
which loss, suspension, revocation or failure to renew would have a material
adverse effect on the business profits, assets or financial condition of
Borrower or Guarantor;
<PAGE>
(q) Any change in the stock ownership of Guarantor, as described on
Schedule 5.4, any issuance of stock, debentures, warrants or other securities
of Borrower or Guarantor which would cause a breach of Section 6.16 or any
pledge of the stock of Borrower or Guarantor other than to the DVI Lenders;
(r) Any breach by Borrower, Guarantor or any creditor of its
obligations under any subordination agreement now or hereafter executed in
favor of Lender; or
(s) The validity or enforceability of this Agreement, or any of the
Loan Documents, is contested by the Borrower or Guarantor; any stockholder of
Borrower or Guarantor; or Borrower or Guarantor denies that it has any or any
further liability or obligation hereunder or thereunder.
All notice, grace and cure periods provided herein shall run concurrently with
all notice, grace and cure periods provided in any other Loan Documents.
8.2. Remedies. At the option of the Lender, upon the
occurrence of an Event of Default, or at any time thereafter:
(a) The entire unpaid principal of the Term Loan, all other DVI
Indebtedness, or any part thereof, all interest accrued thereon, all fees due
hereunder and all other obligations of Borrower to Lender hereunder or under
any other agreement, note or otherwise arising will become immediately due and
payable without any further demand or notice;
(b) Lender may, upon notice, increase the interest rate on the Term
Loan to the Default Rate, without notice;
(c) Lender may enter the premises occupied by Borrower or Guarantor
and take possession of the Collateral and any records relating thereto; and/or
(d) Lender may exercise each and every right and remedy granted to
it under the Loan Documents, under the Uniform Commercial Code and under any
other applicable law or at equity.
If an Event of Default occurs under Section 8.1(e) or (f), all DVI
Indebtedness shall become immediately due and payable.
<PAGE>
8.3. Sale or Other Disposition of Collateral. The sale, lease or other
disposition of the Collateral, or any part thereof, by Lender after an Event of
Default may be for cash, credit or any combination thereof, and Lender may
purchase all or any part of the Collateral at public or, if permitted by law,
private sale, and in lieu of actual payment of such purchase price, may set-off
the amount of such purchase price against the DVI Indebtedness then owing. Any
sales of the Collateral may be adjourned from time to time with or without
notice. The Lender may cause the Collateral to remain on Borrower's or
Guarantor's premises or otherwise or to be removed and stored at premises owned
by other Persons, at Borrower's expense, pending sale or other disposition of
the Collateral. Borrower or Guarantor, at Lender's request, shall assemble the
Collateral consisting of inventory and tangible assets and make such assets
available to Lender at a place to be designated by Lender. Lender shall have
the right to conduct such sales on Borrower's or Guarantor's premises, at
Borrower's or Guarantor's expense, or elsewhere, on such occasion or occasions
as Lender may see fit. Any notice required to be given by Lender of a sale,
lease or other disposition or other intended action by Lender with respect to
any of the Collateral which is deposited in the United States mail, postage
prepaid and duly addressed to Borrower and Guarantor at the address specified
in Section 9.1 below, at least five (5) business days prior to such proposed
action, shall constitute fair and reasonable notice to Borrower of any such
action. The net proceeds realized by Lender upon any such sale or other
disposition, after deduction for the expenses of retaking, holding, storing,
transporting, preparing for sale, selling or otherwise disposing of the
Collateral incurred by Lender in connection therewith and all other costs and
expenses related thereto including reasonable attorney fees, shall be applied
in such order as Lender, in its sole discretion, elects, toward satisfaction of
the DVI Indebtedness. Lender shall account to Borrower and Guarantor for any
surplus realized upon such sale or other disposition, and Borrower and
Guarantor shall remain liable for any deficiency. The commencement of any
action, legal or equitable, or the rendering of any judgment or decree for any
deficiency shall not affect Lender's security interest in the Collateral.
Borrower and Guarantor agree that Lender has no obligation to preserve rights
to the Collateral against any other parties. Lender is hereby granted a license
or other right to use, after an Event of Default, without charge, Borrower's or
Guarantor's labels, general intangibles, intellectual property, equipment, real
estate, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks, service marks and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale and selling any inventory or other Collateral and
Borrower's and Guarantor's rights under all contracts, licenses, approvals,
permits, leases and franchise agreements shall inure to Lender's benefit.
Lender shall be under no obligation to marshall any assets in favor of Borrower
or Guarantor or any other party or against or in payment of any or all of the
DVI Indebtedness.
8.4. Actions with Respect to Accounts. Borrower and Guarantor hereby
irrevocably make, constitute and appoint Lender (and any of Lender's designated
officers, employees or agents) as their true and lawful attorney-in-fact, with
full power of substitution, with power to signtheir name and to take any of the
following actions, in their name or the name of Lender, as Lender may
determine, without notice to Borrower or Guarantor and at Borrower's and
Guarantor's expense:
(a) Verify the validity and amount of or any other matter relating
to the Collateral by mail, telephone, telecopy or otherwise;
(b) Notify all account debtors that Borrower's and Guarantor's
accounts have been assigned to Lender and that Lender has a security interest
therein;
(c) Upon the occurrence and during the continuation of an Event of
Default, direct all account debtors to make payment of all Borrower's and
Guarantor's accounts directly to Lender and forward invoices directly to such
account debtors;
(d) Upon the occurrence and during the continuation of an Event of
Default, take control in any manner of any cash or non-cash items of payment or
proceeds of such accounts;
(e) Upon the occurrence and during the continuation of an Event of
Default, notify the United States Postal Service to change the address for
delivery of mail addressed to Borrower or Guarantor to such address as Lender
may designate;
<PAGE>
(f) Upon the occurrence and during the continuation of an Event of
Default, have access to any lockbox or postal boxes into which Borrower's or
Guarantor's mail is deposited and receive, open and reasonably dispose of all
mail addressed to Borrower (any sums received pursuant to the exercise of the
rights provided in Sections 8.4 (a) through (f) above may, at Lender's option,
be deposited in a cash collateral account in favor of Lender);
(g) Upon the occurrence and during the continuation of an Event of
Default, take control in any manner of any rejected, returned, stopped in
transit or repossessed goods relating to any accounts;
(h) Upon the occurrence and during the continuation of an Event of
Default, enforce payment of and collect any accounts, by legal proceedings or
otherwise, and for such purpose Lender may:
(1) Demand payment of any accounts or direct any account
debtors to make payment of accounts directly to Lender;
(2) Receive and collect all monies due or to become due to
Borrower or Guarantor;
(3) Exercise all of Borrower's or Guarantor's rights and
remedies with respect to the collection of accounts;
(4) Settle, adjust, compromise, extend, renew, discharge or
release the accounts;
(5) Sell or assign the accounts on such terms, for such
amount and at such times as Lender deems advisable;
(6) Prepare, file and sign Borrower's or Guarantor's name or
names on any Proof of Claim or similar document in any proceeding filed under
federal or state Bankruptcy, insolvency, reorganization or other similar law as
to any account debtor;
(7) Prepare, file and sign Borrower's or Guarantor's name or
names on any Notice of Lien, Claim of Mechanic's Lien, Assignment or
Satisfaction of Lien or Mechanic's Lien or similar document in connection with
the
Collateral;
(8) Endorse the name of Borrower or Guarantor upon any
chattel papers, documents, instruments, invoices, freight bills, bills of
lading or similar documents or agreements relating to the accounts or goods
pertaining thereto or upon any checks or other media of payment or evidences of
a security interest that may come into Lender's possession;
<PAGE>
(9) Sign the name of Borrower or Guarantor to verifications
of accounts and notices thereof sent by account debtors to Borrower or
Guarantor; or
(10) Take all other actions necessary or desirable to protect
Borrower's Guarantor's or Lender's interest in the accounts.
Borrower and Guarantor ratify and approve all acts of said attorneys and agree
that said attorneys shall not be liable for any acts of commission or omission,
nor for any error of judgment or mistake of fact or law, except willful
misconduct or gross negligence. This power, being coupled with an interest, is
irrevocable. Borrower and Guarantor agree to assist the Lender in the
collection and enforcement of their accounts and not to hinder, delay or impede
the Lender in its collection or enforcement of said accounts.
8.5. Set-Off. Without limiting the rights of Lender under applicable law,
Lender has and may exercise a right of set-off, a lien against and a security
interest in all property of Borrower or Guarantor now or at any time in
Lender's possession in any capacity whatsoever, as security for all DVI
Indebtedness. At any time and from time to time following the occurrence of an
Event of Default, or an event which with the giving of notice or passage of
time or both would constitute an Event of Default, Lender may without notice or
demand, set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by Lender to or for the credit of Borrower or Guarantor against any
or all of the DVI Indebtedness and the Borrower's and Guarantor's obligations
under the Loan Documents.
8.6. Turnover of Property Held by Lender. Borrower and Guarantor
irrevocably authorize any Affiliate of Lender, upon and following the
occurrence of an Event of Default, at the request of Lender and without further
notice, to turnover to Lender any property of Borrower or Guarantor held by
such Affiliate, including without limitation, funds and securities for the
Borrower's or Guarantor's account and to pay or transfer such amount or
property to Lender for application to the DVI Indebtedness.
8.7. Delay or Omission Not Waiver. Neither the failure nor any delay on
the part of Lender to exercise any right, remedy, power or privilege under the
Loan Documents upon the occurrence of any Event of Default or otherwise shall
operate as a waiver thereof or impair any such right, remedy, power or
privilege. No waiver of any Event of Default shall affect any later Event of
Default or shall impair any rights of Lender. No single, partial or full
exercise of any rights, remedies, powers and privileges by the Lender shall
preclude further or other exercise thereof. No course of dealing between Lender
and Borrower or Guarantor shall operate as or be deemed to constitute a waiver
of Lender's rights under the Loan Documents or affect the duties or obligations
of Borrower or Guarantor.
8.8. Remedies Cumulative; Consents. The rights, remedies, powers and
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers and
privileges in Lender's favor at law or in equity. Whenever the Lender's consent
or approval is required or permitted, such consent or approval shall be at the
sole and absolute discretion of Lender.
<PAGE>
8.9. Certain Fees, Costs, Expenses, Expenditures and Indemnification.
Borrower and Guarantor agrees to pay on demand all costs and expenses of
Lender, including without limitation:
(a) all costs and expenses in connection with the preparation,
review, negotiation, execution, delivery and administration of the Loan
Documents, and the other documents to be delivered in connection therewith, or
any amendments, extensions and increases to any of the foregoing (including,
without limitation, reasonable attorney's fees and expenses, and the cost of
appraisals and reappraisals of Collateral), and the cost of periodic lien
searches and tax clearance certificates, as Lender reasonably deems advisable;
(b) all losses, costs and expenses in connection with the
enforcement, protection and preservation of the Lender's rights or remedies
under the Loan Documents, or any other agreement relating to any DVI
Indebtedness, or in connection with legal advice relating to the rights or
responsibilities of Lender (including without limitation court costs,
reasonable attorney's fees and expenses of accountants and appraisers); and
(c) any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of the Loan Documents,
and all liabilities to which Lender may become subject as the result of delay
in paying or omission to pay such taxes.
In the event Borrower shall fail to pay taxes, insurance, assessments,
costs or expenses which it is required to pay hereunder, or fails to keep the
Collateral free from security interests or lien (except as expressly permitted
herein), or fails to maintain or repair the Collateral as required hereby, or
otherwise breaches any obligations under the Loan Documents, Lender in its
discretion, may make expenditures for such purposes and the amount so expended
(including attorney's fees and expenses, filing fees and other charges) shall
be payable by Borrower on demand and shall constitute part of the DVI
Indebtedness.
With respect to any amount required to be paid by Borrower under this
Section, in the event Borrower fails to pay such amount on demand, Borrower
shall also pay to Lender interest thereon at the Default Rate.
Borrower agrees to indemnify and hold harmless, Lender and Lender's
officers, directors, shareholders, employees and agents, from and against any
and all claims, liabilities, losses, damages, costs and expenses actually
incurred by such Person (whether or not such Person is a party to any
litigation), including reasonable attorney's fees and costs and costs of
investigation, document production, attendance at depositions or other
discovery with respect to or arising out of this Agreement, the use of any
proceeds advanced hereunder, the transactions contemplated hereunder, or any
claim, demand, action or cause of action being asserted against Borrower or any
of its Affiliates, except for any of the foregoing arising solely from the
willful misconduct or gross negligence of Lender.
Borrower's obligations under this Section shall survive termination of
this Agreement and repayment of the DVI Indebtedness.
<PAGE>
8.10. Time is of the Essence. Time is of the essence in Borrower's and
Guarantor's performance of their obligations under the Loan Documents.
8.11. Acknowledgement of Confession of Judgment Provisions. BORROWER AND
GUARANTORS ACKNOWLEDGE AND AGREE THAT THE NOTE AND THE LOAN DOCUMENTS CONTAIN
PROVISIONS WHEREBY LENDER MAY ENTER JUDGMENT BY CONFESSION AGAINST BORROWER AND
GUARANTOR. BEING FULLY AWARE OF THEIR RIGHTS TO PRIOR NOTICE AND HEARING ON THE
QUESTION OF THE VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THEM BY
LENDER UNDER THE NOTE AND LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED,
BORROWER AND GUARANTOR HEREBY WAIVE THESE RIGHTS AND AGREE AND CONSENT TO
LENDER ENTERING JUDGMENT AGAINST BORROWER AND GUARANTOR BY CONFESSION. ANY
PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN DOCUMENTS FOR AN
ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY LIMIT BORROWER'S AND
GUARANTOR'S LIABILITY TO REIMBURSE LENDER FOR ALL LEGAL FEES ACTUALLY INCURRED
BY LENDER, EVEN IF SUCH FEES ARE IN EXCESS OF THE ATTORNEY'S COLLECTION
COMMISSION PROVIDED FOR IN SUCH CONFESSION OF JUDGMENT.
9. COMMUNICATIONS AND NOTICES.
9.1. Communications and Notices. All notices, requests and other
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division
or department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
<PAGE>
To Borrower:
Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, NJ 07701
Attention: Eliott H. Vernon, Chairman
Telecopier: (732) 224-9379
With a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Attention: Scott Zimmerman, Esquire
Telecopier: 212-758-9526
To Guarantor:
HIS Imaging Co.
200 Schulz Drive
Red Bank, NJ 07701
Attention: Eliott H. Vernon, Chairman
Telecopier: (732) 224-9379
With a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Attention: Scott Zimmerman, Esquire
Telecopier: 212-758-9526
To Lender:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Richard Miller, President
Telecopier: 215-230-1845
With a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Sara Lee Keller-Smith, Deputy General
Counsel
Telecopier: 215-345-4428
<PAGE>
10. DEFINITIONS. The following words and phrases as used in capitalized form in
this Agreement, whether in the singular or plural, shall have the meanings
indicated:
10.1. "Accounting Terms" as used in this Agreement, or any certificate,
report or other document made or delivered pursuant to this Agreement, and not
defined elsewhere in this Agreement shall have the respective meanings given to
them under GAAP.
10.2. "Acquisition Documents" means that certain Asset Purchase Agreement
dated September 16, 1998 by and among Borrower and Sellers and all documents,
instruments and agreements executed and delivered in connection therewith.
10.3. "Affiliate", as to any Person, means each other Person that
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person in question.
10.4 "Beran Companies" means Echelon MRI, P.C., Mainland Imaging Center,
P.C., North Jersey Imaging Management Associates, L.P., Bloomfield Imaging
Associates, P.A. and Irving N. Beran, M.D., P.A.
10.5. "Business Day" means any day except a Saturday, Sunday or other day
on which commercial Lenders in Philadelphia, PA are authorized by law to close.
10.6. "Capitalized Leases" means all lease obligations which have been or
should be, in accordance with GAAP, capitalized on the books of the lessee.
10.7. "Capitalized Lease Obligations" means all amounts payable with
respect to a Capitalized Lease.
10.8. "Corporation" means a corporation, partnership, trust,
unincorporated organization, association or joint stock company.
10.9. "DVI Indebtedness" shall mean all obligations and Indebtedness of
Borrower to Lender, whether now or hereafter owing or existing, under the Loan
Documents, together with all interest and other sums payable in connection with
any of the foregoing.
<PAGE>
10.10. "DVI Lenders" or "DVI Lender" means Lender and/or
DVI Business Credit Corporation.
10.11. "Event of Default" means each of the events specified in Section
8.1.
10.12. "GAAP" means generally accepted accounting principles in the
United States of America, in effect from time to time, consistently applied and
maintained.
10.13. "Guarantor" means HIS Imaging Co., a Delaware corporation.
10.14. "Indebtedness," as applied to a Person, means:
(a) all items (except items of capital stock or of surplus) which
in accordance with GAAP would be included in determining total liabilities as
shown on the liability side of a balance sheet of such Person as at the date as
of which Indebtedness is to be determined;
(b) to the extent not included in the foregoing, all indebtedness,
obligations, and liabilities secured by any mortgage, pledge, lien, conditional
sale or other title retention agreement or other security interest to which any
property or asset owned or held by such Person is subject, whether or not the
indebtedness, obligations or liabilities secured thereby shall have been
assumed by such Person; and
(c) to the extent not included in the foregoing, all indebtedness,
obligations and liabilities of others which such Person has directly or
indirectly guaranteed, endorsed (other than for collection or deposit in the
ordinary course of business), sold with recourse, or agreed (contingently or
otherwise) to purchase or repurchase or otherwise acquire or in respect of
which such Person has agreed to supply or advance funds (whether by way of
loan, stock purchase, capital contribution or otherwise) or otherwise to become
directly or indirectly liable.
10.15 "Loan Documents" means this Agreement, the Note, Surety Agreement,
Subordination Agreement, Security Agreement, Security Pledge Agreements and all
other documents, executed or delivered by Borrower or Guarantor pursuant to
this Agreement, as they may be amended from time to time.
10.16. "Maturity Date" means May 1, 1999.
<PAGE>
10.17. "Net Proceeds" means the gross proceeds of any debt or equity
offering consummated by the Borrower less the usual and customary costs of such
offering actually incurred by the Borrower in connection therewith.
10.18. "Obligors" means Borrower and Guarantor and "Obligor" means
Borrower or Guarantor.
10.19. "Person" means an individual, a Corporation or a government or any
agency or subdivision thereof, or any other entity
10.20. "Sellers" means Echelon MRI, P.C., Mainland Imaging Center, P.C.,
North Jersey Imaging Management Associates, L.P., Bloomfield Imaging
Associates, P.A., Irving N. Beran, M.D., P.A., The Estate of Irwin N. Beran,
Deceased, Mrs.
Phyllis Beran and Sam Beran, M.D.
10.21. "Subsidiary" means a Corporation (a) which is organized under the
laws of the United States or any State thereof, or any other county or
jurisdiction Canada or Puerto Rico, (b) which conducts substantially all of its
business and has substantially all of its assets within the United States,
Canada or Puerto Rico, and (c) of which more than fifty percent (50%) of its
outstanding voting stock of every class (or other voting equity interest) is
owned by Borrower or one or more of its Subsidiaries.
11. WAIVERS.
11.1. Waivers. In connection with any proceedings under the Loan
Documents, including without limitation any action by Lender in replevin,
foreclosure or other court process or in connection with any other action
related to the Loan Documents or the transactions contemplated hereunder,
Borrower and Guarantor waive:
(a) all procedural errors, defects and imperfections in such
proceedings;
(b) all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from
attachment, levy or sale under execution, or providing for any stay of
execution to be issued on any judgment recovered under any of the Loan
Documents or in any replevin or foreclosure proceeding, or otherwise providing
for any valuation, appraisal or exemption;
<PAGE>
(c) presentment for payment, demand, notice of demand, notice of
non-payment, protest and notice of protest of any of the Loan Documents,
including the Note;
(d) any requirement for bonds, security or sureties required by
statute, court rule or otherwise;
(e) any demand for possession of Collateral prior to commencement
of any suit; and
(f) all rights to claim or recover attorney's fees and costs in the
event that Borrower or Guarantor is successful in any action to remove, suspend
or enforce a judgment entered by confession.
12.2. Forbearance. Lender may release, compromise, forbear with respect
to, waive, suspend, extend or renew any of the terms of the Loan Documents,
without notice to Borrower or Guarantor.
12.3. Limitation on Liability. Borrower and Guarantor
shall be responsible for and Lender is hereby released from any
claim or liability in connection with:
(a) Safekeeping any Collateral;
(b) Any loss or damage to any Collateral;
(c) Any diminution in value of the Collateral; or
(d) Any act or default of another Person.
Lender shall only be liable for any act or omission on its part constituting
willful misconduct and gross negligence. In the event that Lender breaches its
required standard of conduct, Borrower and Guarantor agree that its liability
shall be only for direct damages suffered and shall not extend to consequential
or incidental damages. In the event Borrower or Guarantor brings suit against
Lender in connection with the transactions contemplated hereunder and Lender is
found not to be liable, Borrower and Guarantor will indemnify and hold Lender
harmless from all costs and expenses, including reasonable attorney's fees,
incurred by Lender in connection with such suit. This Agreement is not intended
to obligate Lender to take any action with respect to the Collateral or to
incur expenses or perform any obligation or duty of Borrower.
<PAGE>
13. SUBMISSION TO JURISDICTION.
13.1. Submission to Jurisdiction. Borrower and Guarantor hereby consent
to the exclusive jurisdiction of any state or federal court located within the
Commonwealth of Pennsylvania, and irrevocably agree that, subject to the
Lender's election, all actions or proceedings relating to the Loan Documents or
the transactions contemplated hereunder shall be litigated in such courts, and
Borrower and Guarantor waive any objection which they may have based on lack of
personal jurisdiction, improper venue or forum non conveniens to the conduct of
any proceeding in any such court and waive personal service of any and all
process upon them, and consent that all such service of process be made by mail
or messenger directed to them at the address set forth in Section 9.1. Borrower
and Guarantor hereby irrevocably appoint
as their agent for
the purpose of accepting service of any process within the Commonwealth of
Pennsylvania. Nothing contained in this Section 13.1 shall affect the right of
Lender to serve legal process in any other manner permitted by law or affect
the right of Lender to bring any action or proceeding against Borrower or
Guarantor or their property in the courts of any other jurisdiction.
14. MISCELLANEOUS.
14.1. Brokers. The transaction contemplated hereunder was brought about
and entered into by Lender and Borrower and Guarantor acting as principals and
without any brokers, agents or finders being the effective procuring cause
hereof. Borrower and Guarantor represent to Lender that Borrower and Guarantor
have not committed Lender to the payment of any brokerage fee or commission in
connection with this transaction. If any such claim is made against Lender by
any broker, finder or agent or any other Person, Borrower and Guarantor agree
to indemnify, defend and hold Lender harmless against any such claim, at
Borrower's and Guarantor's own cost and expense, including Lender's reasonable
attorneys' fees. Borrower and Guarantor further agree that until any such claim
or demand is adjudicated in Lender's favor, the amount claimed and/or demanded
shall be deemed part of the DVI Indebtedness secured by the Collateral.
14.2. No Joint Venture. Nothing contained herein is intended to permit or
authorize Borrower or Guarantor to make any contract on behalf of Lender, nor
shall this Agreement be construed as creating a partnership, joint venture or
making Lender an investor in Borrower.
14.3. Survival. All covenants, agreements, representations and warranties
made by Borrower and Guarantor in the Loan Documents or made by or on their
behalf in connection with the transactions contemplated here shall be true at
all times this Agreement is in effect and shall survive the execution and
delivery of the Loan Documents, any investigation at any time made by Lender or
on its behalf and the making by Lender of the loans or advances to Borrower.
All statements contained in any certificate, statement or other document
delivered by or on behalf of Borrower or Guarantor pursuant hereto or in
connection with the transactions contemplated hereunder shall be deemed
representations and warranties by Borrower.
<PAGE>
14.4. No Assignment by Borrower. Borrower may not assign any of its
rights hereunder without the prior written consent of Lender, and Lender shall
not be required to lend hereunder except to Borrower as it presently exists.
14.5. Assignment or Sale by Lender. Lender may sell, assign or
participate all or a portion of its interest in the Loan Documents and in
connection therewith may make available to any prospective purchaser, assignee
or participant any information relative to Borrower and Guarantor in its
possession.
14.6. Binding Effect. This Agreement and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
14.7. Severability. The provisions of this Agreement and all other Loan
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
14.8. No Third Party Beneficiaries. The rights and benefits of this
Agreement and the Loan Documents shall not inure to the benefit of any third
party.
14.9. Modifications. No modification of this Agreement or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
14.10. Holidays. If the day provided herein for the payment of any amount
or the taking of any action falls on a Saturday, Sunday or public holiday at
the place for payment or action, then the due date for such payment or action
will be the next succeeding Business Day.
14.11. Law Governing. This Agreement has been made, executed and
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth (without giving
effect to the principles of conflicts of law).
14.12. Integration. The Loan Documents shall be construed as integrated
and complementary of each other, and as augmenting and not restricting Lender's
rights, powers, remedies and security. The Loan Documents contain the entire
understanding of the parties thereto with respect to the matters contained
therein and supersede all prior agreements and understandings between the
parties with respect to the subject matter thereof and do not require parol or
extrinsic evidence in order to reflect the intent of the parties. In the event
of any inconsistency between the terms of this Agreement and the terms of the
other Loan Documents, the terms of this Agreement shall prevail.
14.13. Exhibits and Schedules. All exhibits and schedules attached hereto
are hereby made a part of this Agreement.
<PAGE>
14.14. Headings. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
14.15. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
14.16. Waiver of Right to Trial by Jury. BORROWER, GUARANTOR AND LENDER
WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (a) ARISING UNDER ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF BORROWER, GUARANTOR OR LENDER
WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR
THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER, GUARANTOR AND LENDER AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND
THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWER,
GUARANTOR AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWER
AND GUARANTOR ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO CONSULT WITH
COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT
AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS
SECTION.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
Name/Title: President
DVI FINANCIAL SERVICES INC.
By: /s/ Anthony J. Turek
Name/Title: Managing Director
<PAGE>
The undersigned, intending to be legally bound, hereby joins in the
representations and warranties and consents to and agrees to be bound by the
terms, conditions and covenants applicable to the undersigned as set forth in
the foregoing Loan and Security Agreement, including without limitations the
waivers set forth in Sections 11 and 14.16.
HIS IMAGING CO.
By: /s/ Elliott H. Vernon
Name/Title: President
<PAGE>
EXHIBITS
Exhibit "A" - Term Note
SCHEDULES
Schedule 4.1(g) Description of Pledged Securities
Schedule 5.4 Ownership of Guarantor
Schedule 5.5 Equity Interests owned by Borrower or
Guarantor
Schedule 5.8 Pending or Threatened Litigation
Schedule 5.15 Names (including tradenames) and Addresses of Borrower
and Guarantor.
Schedule 5.17 Employee Pension Benefit Plan Obligations of
Borrower and Guarantor
Schedule 6.3 Permitted Indebtedness for Borrowed Money
Schedule 6.8 Permitted Liens and Security Interests
Schedule 6.15 Permitted Loans to Affiliates, Shareholders,
Officers or Directors
<PAGE>
LOAN MODIFICATION AGREEMENT
THIS LOAN MODIFICATION AGREEMENT (the "Agreement") is made this 31st day
of December, 1998, by and among HEALTHCARE IMAGING SERVICES, INC., a Delaware
corporation (the "Borrower"), and DVI FINANCIAL SERVICES INC. (the "Lender").
REFERENCES TO CAPITALIZED TERMS USED HEREIN ARE SET FORTH IN SECTION 1 HEREOF.
BACKGROUND
A. Pursuant to the Loan Agreement, Lender agreed to extend to Borrower the
Loan as evidenced by Borrower's Note.
B. Borrower's obligations to Lender under the Loan Agreement and the Note
are secured, inter alia, by the Collateral.
C. At Borrower's request, Lender has agreed to enter into this Agreement,
inter alia, to (i) ratify and confirm the obligations and liability of Borrower
to Lender under the Loan Documents, (ii) reaffirm, ratify and continue Lender's
liens on, and security interests in, certain assets of Borrower, (iii) amend
certain terms and conditions of the Loan Documents and (iv) extend an additional
term loan to Borrower in the principal amount of $118,271.88.
NOW, THEREFORE, in consideration of foregoing premises and intending to be
legally bound hereby, the parties hereto agree as follows:
TERMS
1. CAPITALIZED TERMS. For purposes of this Agreement:
"Borrower" means Healthcare Imaging Services, Inc., a Delaware corporation.
"Collateral" means all tangible and intangible property of Borrower pledged
and/or granted to Lender as security for the Loan.
"Lender" means DVI Financial Services Inc.
"Loan" means that certain $14,000,000.00 bridge loan extended by Lender to
Borrower under the Loan Documents.
"Loan Agreement" means that certain Loan and Security Agreement
dated September 30, 1998, to be effective October 1, 1998, by and between Lender
and Borrower.
"Loan Documents" means the Loan Agreement, the Note, all documents relating
to the Collateral, together with all documents collateral to any of the
foregoing, all as the same may have been modified, revised, supplemented,
replaced and/or amended from time to time.
"Note" means that certain Note dated September 30, 1998, to be effective
October 1, 1998, given by Borrower to Lender in the original principal amount of
$14,000,000.00.
All other capitalized terms used herein shall have the meanings set forth in the
Loan Agreement.
2. CONFIRMATION OF BACKGROUND. Borrower hereby ratifies, confirms and
acknowledges that the statements contained in the foregoing Background are true
and complete in all material respects and that the Loan Documents are valid,
binding and in full force and effect as of the date hereof and fully enforceable
against Borrower and its assets in accordance with the terms thereof.
<PAGE>
3. GENERAL ACKNOWLEDGEMENTS. Borrower hereby acknowledges and agrees that:
(a) Neither this Agreement nor any other agreement entered in connection
herewith or pursuant to the terms hereof shall be deemed or construed to be a
compromise, satisfaction, reinstatement, accord and satisfaction, novation or
release of any of the Loan Documents, or any rights or obligations thereunder,
or a waiver by Lender of any of its rights under the Loan Documents or at law or
in equity;
(b) All liens, security interests, rights and remedies granted to Lender in
the Loan Documents are hereby renewed, confirmed and continued, and shall also
secure the performance by Borrower of its obligations hereunder; and
(c) It has no defense, set-off, counterclaim or challenge against the
payment of any sums owing under the Loan Documents, or the enforcement of any of
the terms or conditions thereof.
4. AMENDMENTS. The Loan Agreement shall be and is hereby amended as
follows:
(a) References to Term Loan. All references contained in Sections 1.1, 1.2,
2.1 and 3.1 to the (i) "Term Loan" shall be deemed to refer to "Term Loan 1.",
and (b) the "Note" shall be deemed to refer to "Note 1."
(b) New Term Loan.
(i) New Term Loan. Lender will lend to Borrower and Borrower will borrow
from Lender the aggregate amount of One Hundred Eighteen Thousand Two Hundred
Seventy-One Dollars and Eighty-Eight Cents ($118,271.88) (the "Term Loan 2").
Borrower's obligation to repay the Term Loan 2 shall be evidenced by Borrower's
promissory note (the "Note 2") in the face amount of One Hundred Eighteen
Thousand Two Hundred Seventy-OneDollars and Eighty-Eight Cents ($118,271.88),
which shall be in the form attached hereto as Exhibit "A-1", with the blanks
appropriately filled in.
(ii) Interest on Term Loan 2. Interest on the unpaid principal balance of
the Term Loan 2 will accrue until final payment thereof at the rate per annum
which is equal to twelve percent (12%).
(iii) Default Interest. Interest will accrue on the principal balance of
the Term Loan 2 after the occurrence of any Event of Default at a rate equal to
the Default Rate.
(iv) Principal and Interest Payments on the term Loan 2. Borrower will pay
the principal of the Term Loan and accrued interest thereon in accordance with
the terms of Note 2.
<PAGE>
(v) Reference. At all times hereafter the following capitalized terms used
in the Loan Documents shall have the meanings set forth next to them, except to
the extent specifically provided in Section 1(a) above:
"Note" shall mean Note 1 and Note 2.
"Term Loan" shall mean Term Loan 1 and Term Loan 2.
"Loan Documents" shall include Note 2, that certain Security Agreement of
even date herewith given by Borrower to Lender and all other documents,
instruments and agreements executed and delivered in connection therewith, as
the same may be modified, revised, supplemented, replaced and/or amended from
time to time.
5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants,
which representations and warranties shall survive until all Bank Indebtedness
and all other obligations of the Borrower to Lender are paid and satisfied in
full, as follows:
(a) All representations and warranties of Borrower set forth in the Loan
Documents are true and complete as of the date hereof.
(b) No condition or event exists or has occurred which would constitute an
event of default under the Loan Documents (or would, upon the giving of notice
or the passage of time, or both constitute an event of default).
(c) The execution and delivery of this Agreement by Borrower and all
documents and agreements to be executed and delivered pursuant to the terms
hereof;
(i) has been duly authorized by all requisite corporate action by Borrower;
(ii) will not conflict with or result in the breach of or constitute a
default (upon the passage of time, delivery of notice or both) under Borrower's
Articles of Incorporation or By-Laws or any applicable statute, law, rule,
regulation or ordinance or any indenture, mortgage, loan or other document or
agreement to which Borrower is a party or by which any of them is bound or
affected; or
(iii) will not result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the property or assets of
Borrower, except liens in favor of the Lender or as permitted hereunder or under
the Loan Documents.
6. CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Borrower will pay all
of the Lender's expenses in connection with the review, preparation,
negotiation, documentation and closing of this Agreement and the consummation of
the transactions contemplated hereunder, including without limitation, fees,
disbursements, expenses, appraisal costs and fees and expenses of counsel
retained by Lender and all fees related to filings, recording of documents and
searches, whether or not the transactions contemplated hereunder are
consummated. Nothing contained herein shall limit in any manner whatsoever
Lender's right to reimbursement under any of the Loan Documents.
7. INCONSISTENCIES. To the extent of any inconsistency between the terms
and conditions of this Agreement and the terms and conditions of the Loan
Documents, the terms and conditions of this Agreement shall prevail. All terms
and conditions of the Loan Documents not inconsistent herewith shall remain in
full force and effect and are hereby ratified and confirmed by Borrower.
8. BINDING EFFECT. This Agreement and all rights and powers granted hereby
will bind and inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
9. SEVERABILITY. The provisions of this Agreement and all other Loan
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
10. NO THIRD PARTY BENEFICIARIES. The rights and benefits of this Agreement
and the Loan Documents shall not inure to the benefit of any third party.
11. MODIFICATIONS. No modification of this Agreement or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
<PAGE>
12. HOLIDAYS. If the day provided herein for the payment of any amount or
the taking of any action falls on a Saturday, Sunday or public holiday at the
place for payment or action, then the due date for such payment or action will
be the next succeeding business day.
13. LAW GOVERNING. This Agreement has been made, executed and delivered in
the Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth (without giving effect to any
principles of conflicts of law).
14. EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto are
hereby made a part of this Agreement.
15. HEADINGS. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among
the parties hereto concerning the subject matter set forth herein and supersedes
all prior or contemporaneous oral and/or written agreements and representations
not contained herein concerning the subject matter of this Agreement.
18. ACKNOWLEDGEMENT OF CONFESSION OF JUDGMENT PROVISIONS. BORROWER
ACKNOWLEDGES AND AGREES THAT THE NOTE AND THE LOAN DOCUMENTS CONTAIN PROVISIONS
WHEREBY LENDER MAY ENTER JUDGMENT BY CONFESSION AGAINST BORROWER. BEING FULLY
AWARE OF ITS RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE VALIDITY
OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST IT BY LENDER UNDER THE NOTES AND LOAN
DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED, BORROWER HEREBY WAIVES THESE RIGHTS
AND AGREES AND CONSENTS TO LENDER ENTERING JUDGMENT AGAINST BORROWER BY
CONFESSION. ANY PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN
DOCUMENTS FOR AN ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY LIMIT
BORROWER'S LIABILITY TO REIMBURSE LENDER FOR ALL LEGAL FEES ACTUALLY INCURRED BY
LENDER, EVEN IF SUCH FEES ARE IN EXCESS OF THE ATTORNEY'S COLLECTION COMMISSION
PROVIDED FOR IN SUCH CONFESSION OF JUDGMENT.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the day and year first above written.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title: President
DVI FINANCIAL SERVICES INC.
By: /s/ Anthony J. Turek
Name: Anthony J. Turek
Title: Managing Director
<PAGE>
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT ("AGREEMENT")
DATED DECEMBER 26, 1996
BETWEEN
HEALTHCARE IMAGING SERVICES, INC.
EDGEWATER IMAGING ASSOCIATES, L.P.
WAYNE IMAGING ASSOCIATES, L.P.
RITTENHOUSE SQUARE IMAGING ASSOCIATES, L.P.
(COLLECTIVELY HEREIN "BORROWER")
AND
DVI BUSINESS CREDIT CORPORATION ("LENDER")
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree to amend the Agreement as follows:
1) Section 1(l) "Eligible Accounts" shall be amended and replaced in its
entirety as follows:
Eligible Accounts shall mean Borrower's accounts receivable from
commercial insurance, Medicare, Medicaid, managed care providers, workers'
compensation authorized, which have been due and payable for one hundred
fifty (150) or fewer days from the date of service, and worker's
compensation lien and personal injury claims, which have been due and
payable for one hundred eighty (180) or fewer days from the date of
service, and earned but unbilled charges for no-fault accounts up to
ninety (90) days from the date of service (collectively referred to as
"Retail Accounts").
Any provision in Amendment No. 1 ("Amendment") hereof that may be contrary to
any provision of the Agreement shall prevail and override the Agreement.
Except as expressly set forth herein, all other provisions of this Amendment
shall be interpreted in light of the provisions of the Agreement.
Both parties warrant to each other that this Amendment has been authorized and
duly executed and is binding on both parties hereto as of 31st day of
January, 1997.
LENDER:
DVI Business Credit Corporation
By: /s/ Anthony J. Turek
Name: Anthony J. Turek
Title: Managing Director
BORROWER:
HealthCare Imaging Services, Inc. Edgewater Imaging Associates, L.P.
By: HealthCare Imaging Services
of Edgewater, Inc.
its General Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Name: Elliott H. Vernon
Name: Elliott H. Vernon
Title: President Title: President
Rittenhouse Square Imaging
Wayne Imaging Associates, L.P. Associates, L.P.
By: HealthCare Imaging Services, Inc. By: HealthCare Imaging Services
its General Partner of Rittenhouse Square its General
Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
<PAGE>
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT ("AGREEMENT")
DATED DECEMBER 26, 1996, AS AMENDED JANNUARY 31, 1997
BETWEEN
HEALTHCARE IMAGING SERVICES, INC.
EDGEWATER IMAGING ASSOCIATES, L.P.
WAYNE IMAGING ASSOCIATES, L.P.
RITTENHOUSE SQUARE IMAGING ASSOCIATES, L.P.
(COLLECTIVELY HEREIN "BORROWER")
AND
DVI BUSINESS CREDIT CORPORATION ("LENDER")
WHEREAS, Meadowlands MRI, LLC, a Delaware limited liability company, wishes to
become a party to the Agreement;
WHEREAS, Meadowlands MRI, LLC has read the Agreement and agrees to be bound by
the Agreement and all related documents thereto; and
WHEREAS, HealthCare Imaging Services, Inc. operates an additional site located
at 45 Beekman Street, New York, NY 10038 and wishes to add this site to the
Borrowing Base.
NOW THEREFORE, FOR VALUE CONSIDERATION, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree to amend the Agreement as follows:
1. Add the following Borrower to the first paragraph of page 1:
"Meadowlands MRI, LLC, a Delaware limited liability company"
2. Add the following Borrower to Section 4.1 "Name of Borrower"
"Meadowlands MRI, LLC, a Delaware limited liability company"
3. Section 3.1 "Security Interest" add the following language to the end of the
paragraph:
; that certain Consulting Services Agreement dated November 1, 1997
between HealthCare Imaging Services, Inc. and M.R. Radiology Imaging of Lower
Manhattan, P.C.; that certain Consulting Services Agreement dated September 1,
1997 between Meadowlands MRI, LLC and Meadowlands Diagnostic Imaging, P.A.
Any provision in Amendment No. 2 ("Amendment") hereof that may be contrary to
any provision of the Agreement shall prevail and override the Agreement.
Except as expressly set forth herein, all other provisions of the Agreement
shall remain in full force and effect. Both parties warrant to each other that
this Amendment has been authorized and duly executed and is binding on both
parties hereto as of the 26th day of December, 1997.
LENDER:
DVI Business Credit Corporation
By: /s/ Anthony J. Turek
Name: Anthony J. Turek
Title: Managing Director
BORROWER: BORROWER:
HealthCare Imaging Services, Inc. Edgewater Imaging Associates, L.P.
By: HealthCare Imaging Services of
Edgewater, Inc.
its General Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
BORROWER: BORROWER:
Wayne Imaging Associates, L.P. Rittenhouse Square Imaging Assoc LP
By: HealthCare Imaging Services, Inc. By: HealthCare Imaging Services of
its General Partner Rittenhouse Square its
General Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
BORROWER:
Meadowlands MRI, LLC
By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon
Title: President
<PAGE>
EXHIBIT A
TO UCC-1 FINANCING STATEMENT
Debtor: Meadowlands Diagnostic Imaging, P.A.
Secured Party: Meadowlands MRI, LLC
Assignee of Secured Party: DVI Business Credit Corporation
Debtor hereby grants to Secured Party a security interest in Secured
Party's portion of all of the Debtor's present and future accounts,
accounts receivable, and reimbursement rights pursuant to that certain
Consulting Services Agreement dated September 1, 1997 ("Agreement")
between Debtor and Secured Party including Secured Party's portion of the
proceeds thereof generated from all services rendered by Debtor, except
for such accounts receivable in which the Debtor is not permitted to grant
a security interest as a matter of law. The Secured Party's portion refers
to the portion of collections that Debtor is obligated to remit to Secured
Party pursuant to Exhibit C of the Agreement
<PAGE>
EXHIBIT A
TO UCC-1 FINANCING STATEMENT
Debtor: M.R. Radiology Imaging of Lower Manhattan, P.C.
Secured Party: HealthCare Imaging Services, Inc.
Debtor hereby grants to Secured Party a security interest in Secured
Party's portion of all of the Debtor's present and future accounts,
accounts receivable, and reimbursement rights pursuant to that certain
Consulting Services Agreement dated November 1, 1997 ("Agreement") between
Debtor and Secured Party including Secured Party's portion of the proceeds
thereof generated from all services rendered by Debtor, except for such
accounts receivable in which the Debtor is not permitted to grant a
security interest as a matter of law. The Secured Party's portion refers
to the portion of collections that Debtor is obligated to remit to Secured
Party pursuant to Exhibit C of the Agreement
<PAGE>
AMENDMENT NO. 3
TO
LOAN AND SECURITY AGREEMENT
BETWEEN
HEALTHCARE IMAGING SERVICES, INC.
EDGEWATER IMAGING ASSOCIATES, L.P.
WAYNE IMAGING ASSOCIATES, L.P.
RITTENHOUSE SQUARE IMAGING ASSOCIATES, L.P.
MEADOWLANDS MRI, LLC
(COLLECTIVELY HEREIN "BORROWER")
AND
DVI BUSINESS CREDIT CORPORATION ("LENDER")
This Amendment No. 3 ("Amendment") to the Loan and Security Agreement is made
and entered into as of September 30, 1998, by and between Healthcare Imaging
Services, Inc.; Edgewater Imaging Associates, L.P.; Wayne Imaging Associates,
L.P.; Rittenhouse Square Imaging Associates, L.P.; Meadowlands MRI, LLC
(collectively referred to as the "Borrower") and DVI Business Credit
Corporation ("Lender").
RECITALS
A. Borrower and Lender entered into a Loan and Security Agreement dated
December 26, 1996, Amendment No. 1 dated January 31, 1997, and Amendment
No. 2 dated December 26, 1997 (collectively referred to as the "Agreement")
pursuant to which Borrower obtained a revolving loan in the amount of Two
Million Dollars ($2,000,000);
B. Borrower and HIS Imaging Co. desire that HIS Imaging Co. be included as a
Borrower under the Agreement, and Lender agrees to include HIS Imaging Co.
as a Borrower under the Agreement, pursuant to the terms of this Amendment
No. 3;
HIS Imaging Co. has received and has read the Agreement and agrees to be bound
by the Agreement and all related documents thereto; and
Borrower and Lender desire to amend the terms of the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are being acknowledged and affirmed, the parties hereto
agree as follows:
HIS Imaging Co. ("HIS Imaging"), a Delaware corporation is hereby added to
the Agreement as a Borrower, and all references to Borrower in the Agreement
shall be and be deemed to be references to HIS Imaging Co.
HIS Imaging shall be entitled to all rights as a Borrower under the
Agreement and hereby assumes and agrees to be bound by all of the terms and
conditions of the Agreement and all related documents thereto. HIS hereby grants
to Lender a continuing first-priority pledge and security interest in the
Collateral of HIS Imaging to secure the prompt payment and performance of all
Obligations.
3. Section 2.1 "The Loan" first sentence shall be amended to read as follows:
Section 2.1 The Loan. Subject to the terms and conditions and relying on the
representations and warranties set forth herein, Lender agrees to make
Advances to Borrower from time to time in an aggregate amount not to exceed
the lesser of (i) Three Million and no/100 Dollars ($3,000,000.00) (the
"Commitment Amount"), or (ii) the Borrowing Base. -----------------
4. Upon the execution hereof, Lender is entitled to an origination fee of
Fifteen Thousand Dollars ($15,000.00), equal to one percent (1.5%) of the
increase in the Commitment Amount.
5. The monthly maintenance fee set forth in Section 2.8 of the Agreement,
which is due and payable on the first day of each month, is amended to be One
Thousand Eight Hundred Seventy Five Dollars ($1,875.00).
6. The Term of the Agreement as set forth in Section 2.7 of the Agreement is
hereby extended until May 1, 1999. This Agreement shall be renewed for
consecutive one (1) year terms ("Additional Term") unless this Agreement is
terminated, effective as of the last day of a term, by written notice by Lender
or Borrower no later than thirty (30) days before the expiration of such term.
All of Lender's obligations, responsibilities and duties shall cease upon the
date of termination of this Agreement, except for its obligation to remit
excess receipts from the lock box deposit accounts in accordance with the terms
of this Agreement. To the extent this Agreement is renewed after the Initial
Term, regardless of the length of the renewal period, Borrower shall pay Lender
a renewal fee equal to one and one half percent (1.50%) of the Commitment
Amount at the time of the renewal.
7. The proceeds of the Loan shall be used by Borrower to (1) pay DVI Financial
Services, Inc. $150,000 for their fee for providing the bridge financing,
and (2) the remaining proceeds will be used to provide working capital.
Lender is entering into this Amendment No. 3 ("Amendment") without any
forbearance, and without waiver or prejudice of defaults, events of default, and
any rights or remedies Lender has or may have under the Agreement and applicable
law. Lender hereby expressly reserves the right to declare a default in
accordance with the Agreement and exercise all of Lender's rights and remedies
thereunder.
All capitalized terms used herein and not otherwise defined herein shall have
the same meaning as in the Agreement. Any provision in the Amendment hereof that
may be contrary to any provision of the Agreement shall prevail and override the
Agreement. Except as expressly set forth herein, all other provisions of the
Agreement shall remain in full force and effect. Borrower and Lender warrant to
each other that this Amendment has been authorized and duly executed and is
binding on all parties hereto.
LENDER:
DVI Business Credit Corporation
By: /s/ Anthony J. Turek
Name: Anthony J. Turek
Title: Managing Director
BORROWER: BORROWER:
HealthCare Imaging Services, Inc. Edgewater Imaging Associates, L.P.
By: HealthCare Imaging Services of
Edgewater, Inc.
its General Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
BORROWER: BORROWER:
Wayne Imaging Associates, L.P. Rittenhouse Sq. Imaging Assoc, L.P.
By: HealthCare Imaging Services, Inc. By: HealthCare Imaging Services of
its General Partner Rittenhouse Square its General
Partner
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
BORROWER: BORROWER:
Meadowlands MRI, LLC HIS Imaging Co.
By: /s/ Elliott H. Vernon By: /s/ Elliott H. Vernon
Name: Elliott H. Vernon Name: Elliott H. Vernon
Title: President Title: President
<PAGE>
Exhibit 22.1
HEALTHCARE IMAGING SERVICES, INC
Year Ended December 31, 1998
1. HealthCare Imaging Services
of Wayne, Inc.
2. HealthCare Imaging Services
of Rittenhouse Square, Inc.
3. HealthCare Imaging Services
of Catonsville, Inc.
4. HIS Imaging Co.
5. HIS PPM Co.
<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, No. 333-08699 and 333-71429 on Form S-8 of HealthCare Imaging
Services, Inc. (the "Company") of our report dated March 2, 1999, appearing in
this Annual Report on Form 10-K of the Company for the year ended December 31,
1998.
/s/ Deloitte & Touche LLP
- - -----------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,506,123
<SECURITIES> 0
<RECEIVABLES> 14,523,527
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,808,408
<PP&E> 16,330,212
<DEPRECIATION> 6,751,405
<TOTAL-ASSETS> 42,954,653
<CURRENT-LIABILITIES> 20,868,073
<BONDS> 0
0
87
<COMMON> 113,570
<OTHER-SE> 17,635,629
<TOTAL-LIABILITY-AND-EQUITY> 42,954,653
<SALES> 0
<TOTAL-REVENUES> 16,451,057
<CGS> 0
<TOTAL-COSTS> 13,712,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,259,430
<INCOME-TAX> 97,661
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,978,703
<EPS-PRIMARY> .19
<EPS-DILUTED> .10
</TABLE>
