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, 1999 File Number: 000-19636
HEALTHCARE INTEGRATED 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.)
1040 Broad Street, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 544-8200
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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 April
10, 2000 was approximately $4,958,000. As of April 10, 2000 there were 1,135,699
shares of Common Stock outstanding.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
1999 Annual Report on Form 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K 52
Signatures 62
Unless otherwise indicated, all share information has been adjusted to reflect
the 1:10 reverse stock split (the "Stock Split") effected on January 20, 2000 in
respect of the Company's common stock, par value $.01 per share (the "Common
Stock").
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PART I
Item 1. Business
Introduction
HealthCare Integrated Services, Inc. (prior to August 1, 1999 known as
Healthcare Imaging Services, Inc.) and its subsidiaries (hereinafter referred to
collectively as the "Company," unless the context indicates otherwise) is a
multi-disciplinary provider of healthcare services. Since its formation in 1991,
the Company has owned and operated fixed-site diagnostic imaging facilities. As
of December 31, 1999, the Company owned and operated 10 fixed-site diagnostic
imaging facilities. All but one of the Company's facilities provide magnetic
resonance imaging ("MRI"), and five of the facilities also provide additional
imaging technologies, including computerized axial tomography ("CAT"), nuclear
medicine, bone densitometry, mammography, ultrasound and x-ray/fluoroscopy
services. See "-- Diagnostic Imaging Operations - The Facilities."
In April 1999, the Company expanded its diagnostic imaging operations by
forming Atlantic Imaging Group, LLC ("Atlantic Imaging" or "AIG") to develop,
market and manage statewide networks of diagnostic imaging facilities. Atlantic
Imaging is a 50/50 joint venture with HealthMark Alliance, Inc. ("HAI"). The
network presently consists of 85 diagnostic imaging facilities in New Jersey and
currently provides services to 18 automobile insurance carriers in New Jersey.
See "--Diagnostic Imaging - Atlantic Imaging Group."
In addition, to its diagnostic imaging operations, the Company also has
physician management and consulting operations. The Company provides physician
management and consulting services to two of the largest independent,
multi-specialty physician practices in New Jersey. See "-- Physician Management
and Consulting Operations." In fiscal 1999, the Company also established
clinical research operations to arrange and coordinate clinical research trials
for pharmaceutical companies. To date, the Company has arranged 17 clinical
studies. In addition, the Company recently launched a Web site, CliniCure.com,
to provide web-based outreach for clinical research trials by physicians,
universities, hospitals and pharmaceutical companies. See "-- Clinical Research
Operations."
The following table shows net revenues and operating income by industry
segment for the years ended December 31, 1999 and 1998. Assets are not
identified by industry segment. Operating income consists of revenues less
direct operating expenses. All corporate operating expenses have been allocated
to the diagnostic imaging segment:
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<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Net revenues:
Diagnostic imaging $20,757,013 $15,866,057
Physician management/consulting and
clinical research 1,195,271 585,000
--------- -------
Total $21,952,284 $16,451,057
=========== ===========
Operating income:
Diagnostic imaging $(352,465) $2,376,285
Physician management/consulting and
clinical research 584,604 362,315
------- -------
Total $232,139 $2,738,600
======== ==========
</TABLE>
Over the past few years, the Company's results of operations have been
negatively impacted by several developments in the healthcare 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, including diagnostic imaging, and an increased demand for
lower overall healthcare costs. The Company is addressing this trend by actively
pursuing contracts for its diagnostic imaging operations 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." The Company's revenues from its diagnostic imaging operations
have also been adversely affected by The New Jersey Automobile Cost Reduction
Act of 1998 which was implemented in the second quarter of fiscal 1999. This Act
requires the pre-certification of MRI and other diagnostic imaging procedures
reimbursable through automobile insurance carriers before each procedure is
performed. This requirement has caused significant delays and decreases in MRI
and other diagnostic imaging referrals during the latter half of fiscal 1999 at
various of the Company's New Jersey facilities. The Company has instituted
measures to improve its revenues from its imaging operations, including the
formation of Atlantic Imaging as noted above, but no assurances can be given
that the Company's attempts will be successful. The Company also is considering
various other strategic alternatives with respect to its imaging operations,
including additional joint ventures and the sale and/or other disposition of all
or a portion of such operations. In addition, the Company has instituted other
revenue-enhancing measures, including the establishment of clinical research
operations and the launching of CliniCure.com as noted above, and is actively
pursuing additional alternatives to further expand its e-commerce operations and
leverage its relationship with the physicians for whom it provides management
and consulting services as well as with such physicians' patients.
Diagnostic Imaging Operations
The Facilities
The Company's 10 fixed-site facilities are as follows:
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMENCEMENT
OF OPERATIONS
NAME LOCATION BY THE COMPANY SERVICES
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
Densitometry
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)
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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
</TABLE>
* This facility is operated as a joint venture with the Company
owning a 51% partnership interest and acting as the general
partner. The Company is currently negotiating the purchase of the
limited partners' 49% partnership interests.
** Until May 1, 1999, this facility was operated as a joint venture
with the Company owning a 60% partnership interest and acting as
the general partner. Effective May 1, 1999, the Company purchased
the limited partners' 40% partnership interests.
From October 1, 1998 until July 14, 1999, the Company operated an
additional facility in Williamstown, New Jersey (the "Williamstown Facility")
which provided mammography, x-ray, ultrasound and CAT scan. The facility,
historically and since its acquisition in October 1998, had operated
unprofitably. Following its acquisition, the Company was unsuccessful in its
attempts to profitably operate the facility and, accordingly, the Company
determined to close the facility.
Operation of the Facilities
In the operation of its facilities, the Company either (i) leases use of
its diagnostic imaging equipment to healthcare providers ("Medical Lessees"),
who use the equipment to provide diagnostic imaging services to their patients
or patients of other healthcare providers with whom they or the Company have
contractual relationships, and the Company provides administrative, management
and billing and collection services, as well as equipment and real property, to
the Medical Lessees who typically pay the Company contractually negotiated fees
for the use of the equipment and property, and an administrative charge for
these support services or (ii) operates the facility itself and directly bills
and collects from patients and third party payors. The Company's revenues are
then comprised of (i) the fees it receives from the Medical Lessees, which are
paid by the Medical Lessees to the Company upon the Medical Lessees' receipt of
payment from, or on behalf of, its patients (the "Procedure Claims Revenues")
and (ii) the fees it receives for the services it directly provides to patients
(the "Direct Services Revenues").
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Relationship with Medical Lessees
Many healthcare 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 healthcare providers cannot afford
a capital investment of this size or cannot utilize the equipment in a
cost-effective manner. Moreover, a healthcare 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 healthcare 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.
For the year ended December 31, 1999, the Company had four Medical
Lessees which accounted for more than 5% of its total revenues: Monmouth
Diagnostic Imaging, P.A. ("MDI"), Edgewater Diagnostic Imaging, P.A. ("EDI"),
Rittenhouse Square Imaging Associates, L.P. ("RSIA") and Wayne MRI, P.A. ("WYN")
which accounted for approximately 20%, 8%, 7% and 6% of total revenues in fiscal
1999, respectively. For the year ended December 31, 1998, the Company had six
Medical Lessees which accounted for more than 5% of its total revenues: MDI,
EDI, WYN, RSIA, M.R. Radiology Imaging of Lower Manhattan, P.C. ("MRILM") and
Kings Medical Diagnostic Imaging, P.C. ("KMDI") which accounted for
approximately 27%, 14%, 14%, 9% 6% and 6% of total revenues in fiscal 1998,
respectively. For the year ended December 31, 1997, the Company had five Medical
Lessees which accounted for more than 5% of its total revenues: MDI, EDI, WYN,
RSIA, and KMDI which accounted for approximately 30%, 18%, 17%, 15% and 12% of
total revenues in fiscal 1997, respectively. To the extent the Company were to
lose any of its existing Medical Lessees, the impact on revenues and operations
would not be materially affected because the Company believes it will be readily
able to replace any such Medical Lessee.
The Beran Facilities
On October 2, 1998 (effective October 1, 1998), HIS Imaging LLC, 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 (which the Company closed in July 1999) and a radiology
facility in each of Atco and Williamstown, New Jersey (collectively, the "Beran
Entities").
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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
(the "Beran Loan") an aggregate of $2.5 million, which loan bore interest at 8%
per annum and was to mature upon the terms and conditions contained in the
related promissory notes, but in no event later then December 31, 1999. As of
December 31, 1999, the Beran Entities repaid the Beran Loan in shares of Series
D Stock (i.e., 238.096 shares of Series D Stock were transferred back to the
Company and cancelled in repayment of this loan). The Company used the proceeds
of a $14.0 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 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 an aggregate of approximately 634,120 shares
of the Common 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 209,477 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 209,477 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 2000.
Atlantic Imaging Group
Effective April 1999, the Company, in a 50/50 joint venture with HAI,
formed Atlantic Imaging to develop, market and manage statewide networks of
diagnostic imaging facilities. The initial scope of the network is New Jersey.
The Company provides day-to-day administrative and management services to
Atlantic Imaging, and both the Company and HAI provides marketing services.
Atlantic Imaging has entered into a five-year arrangement with National
Healthcare
8
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Resources, Inc. ("NHR"), which provides medical case management services to
several insurance carriers, whereby, among other things, NHR agreed to utilize
the network on an exclusive basis for any MRI services for which it refers
claimants on behalf of its clients (unless otherwise instructed by such client)
and will utilize the network for other radiology services to the extent
practicable. Atlantic Imaging is being accounted for by the Company using the
equity method. The network presently consists of 85 diagnostic imaging
facilities in New Jersey and currently provides services to 18 automobile
insurance carriers in New Jersey including: Allstate Insurance Company,
Palisades Safety and Insurance Association, National General Insurance Company,
Metropolitan, National Continental Progressive Insurance Company and Highlands
Insurance Group.
Physician Management and Consulting Operations
During fiscal 1997, the Company decided to expand its strategic focus
into the area of physician management and consulting and, in connection
therewith, in January 1998 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, which is
one of the largest independent, multi-specialty practices in New Jersey,
comprised of over 70 physicians servicing over 80,000 patients in three
locations in New Jersey. The consummation of the transaction was 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. No definitive
acquisition agreements or long-term administrative services agreement have yet
been executed by all the parties. However, the Company has been providing
management and consulting services to PMA since April 1998.
Given the significant declines in the financial performance of many of
the leading publicly-traded physician practice management companies during
1998-1999, the availability of financing for the JIHP acquisition (as well as
other physician practice acquisitions) 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 is in the process of actively renegotiating
the terms of the JIHP acquisition. The Company believes that such renegotiation
efforts will be successful and that the merger consideration, including the cash
portion, will be significantly reduced.
Since February 1999, the Company has also been providing management and
consulting services to another New Jersey based multi-specialty physician
practices, North Jersey Health, P.A. ("NJ Health"). NJ Health is one of the
largest independent multi-specialty physician practices in New Jersey,
consisting of 25 physicians, 16 offices and 80,000 active patients. In December
1999, the Company entered into a letter of intent with NJ Health setting forth
the terms of an agreement which provides for, among other things, management and
consulting services pursuant to an administrative services agreement with an
initial term of five years, during which period the
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Company will provide NJ Health with certain non-medical, management and
consulting services. In accordance with the agreement, NJ Health will pay to the
Company a fixed management fee of $500,000 per annum. In addition to the fixed
management fee, additional management fees will be paid to the Company from NJ
Health's net income related to ancillary services. The agreement also enables
the Company to acquire the assets of NJ Health, subject to certain financial
milestones being achieved, as well as the satisfaction of certain additional
conditions, during the first three years of the agreement.
Clinical Research Operations
In September 1999, the Company established clinical research operations
through a wholly-owned subsidiary, HIS Clinical Research Co. LLC ("HISCR").
HISCR focuses on arranging clinical research trials for pharmaceutical
companies. To date, HISCR has arranged 17 clinical studies in the areas of
rheumatology pain management medication, chronic prostatitis medication,
diabetes drug therapies, chronic bronchitis, diabetic polyneuropathy,
respiratory track infections, sinusitis, smoking reduction, hypertension and
pneumonia medication on behalf of various leading pharmaceutical companies
including ASTA Medica, Inc.; Abbott Laboratories; Merck & Co., Inc.;
Ortho-McNeil Pharmaceutical, Inc.; SmithKline Beecham Corporation; Takeda
America Research & Development Center, Inc.; Bristol Meyers Squibb Company; and
Glaxo Wellcome, Inc. HISCR has exclusive five-year agreements with PMA and NJ
Health to arrange and coordinate clinical research trials on behalf of their
over 100 physicians and 160,000 patients.
In January 2000, the Company formed CliniCure.com, LLC, a wholly-owned
subsidiary, to provide web-based outreach for clinical research trials by
physicians, universities, hospitals and pharmaceutical companies.
CliniCure.com's Web site is intended to be an easy to navigate medical web site
which will facilitate access to medical clinical trials for both patients and
physicians alike. It is expected that patient users will be able to research new
clinical trials beginning in a variety of areas and, if interested, will be able
to apply for participation in these trials. Additionally, physicians and
researchers will be able to utilize the site as a referral source in the
recruitment of candidates for clinical trials.
Managed Care
The proliferation of managed care reached virtually every healthcare
market segment in the 1990s. The New Jersey TriState region was no exception,
with over 40% of the population under some type of managed care plan in 1998.
The growth of managed care has fostered new challenges for radiology providers
as they continue to face declining reimbursements and continued consolidation
among hospitals, health systems and HMOs. Managed care has pushed mainly
independent radiologists to integrate with multi-facility chains for financial
stability. Only 15% of the freestanding imaging centers in existence today in
the U.S. are privately-owned by radiologists.
The relationships among the TriState's physicians, managed care
companies and the public are still evolving. As managed care revenue continues
to become a significant portion of income
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for diagnostic imaging providers, radiology centers will continue to focus their
efforts on forming alliances with insurance companies and healthcare networks to
be assured a steady patient base.
The Company believes that it is better positioned to compete in the
managed care market than many of its competitors because it has developed and
maintains contractual relationships with over 150 managed care entities. Though
third-payer reimbursement continued to decrease throughout the 1990s, the
Company feels that the decline was offset by the increased efficiency of its
radiology equipment, namely its MRI systems, which allow facilities to complete
scans more expeditiously than older generation MRI systems. In 1999, over 33% of
the Company's revenue was derived from its managed care contracts, an increase
of 6% from 1998. The Company is currently pursuing capitated agreements with
several large managed care payers, including Aetna U.S. Healthcare, AmeriHealth
and Cigna Health Plan. The Company has already gained significant market share
through a capitated contract with Aetna U.S. Healthcare at its Ocean Township
Facility by providing services to nearly one-half of the 40,000 Aetna U.S.
Healthcare members who reside in the county. The Company believes it is poised
for long term success and growth in the managed care industry by continuing to
maintain and adept to the changing healthcare marketplace.
Marketing/Sales
As of December 31, 1999, the Company employed one full-time marketing
and managed care executive and 10 full-time sales representatives. The Company
has also employed other part-time marketing representatives from time to time.
These personnel identify and contact healthcare providers, managed care
organizations and corporate subscribers which may require the Company's
diagnostic imaging 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's diagnostic imaging operation
has been existing customer referrals. Based on the Company's estimate, there are
approximately over 13,000 physicians who have referred patients to the Company's
10 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
Consolidation continued to be the key trend among freestanding imaging
centers in 1999, with multi-facility chains owning 42% of the nation's imaging
centers, up from 37% in 1997. The healthcare industry, in general, is highly
competitive, particularly for advanced diagnostic imaging services. In addition,
to direct competition from other diagnostic imaging providers, the Company faces
competition from larger healthcare providers, including hospitals and private
clinics.
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A number of competitors operate fixed-site MRI and other multi-modality
facilities in New York, New Jersey and Pennsylvania, the Company's service
areas. Moreover, certain of these competitors have substantially greater
financial resources than those of the Company, which may give them advantages in
areas such as negotiating equipment acquisitions and advertising. 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 respond to demand.
The physician management/consulting industry also is highly competitive.
A rapid consolidation of the healthcare delivery system into more cohesive
groups of multi-specialty healthcare providers has ensued as a result of the
government's restructuring of the overall healthcare delivery system. The
Company expects competition for affiliations to increase as cost containment
pressures intensify and HMOs and other similar organizations demand that
providers render additional services in order to become network members.
Survival in this type of economic atmosphere will likely lead to increased
consolidation among other management service organizations, for profit and
non-profit hospitals, as well as HMO's striving to form strategic alliances with
each other, in order to ensure a regional catchment area.
The Company believes that competition for revenue among physician
management and consulting organizations is dependent upon, among other things,
the geographic coverage of their affiliated group practices, the type of
services provided and the reputation and referral patterns of their affiliated
physicians. The Company believes that due, in part, to its regional focus, it
will have the ability to compete for regional capitated managed care contracts
with various managed care organizations, while maintaining its existing
providers' contract relationships. However, the Company has only recently
established its physician management and consulting operations and certain of
the Company's competitors in these operations have already established
significant relationships with healthcare providers and are able to provide a
wider variety of services then the Company currently can provide.
In addition, the Company also faces intense competition in its clinical
research operations. The market for patient subjects, as well as physician
investigators, is highly competitive. Among others, the Company competes against
traditional Clinical Research Organizations, some of whom have access to
thousands of prospective investigators and their patients.
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
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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.
Reimbursement
Many of the Company's customers are healthcare providers that are
subject to extensive federal and state legislation and regulation relating to
the reimbursement and control of healthcare 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 $569 and $1,242,
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, 1999.
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 healthcare
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 healthcare 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 Lessee,
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<PAGE>
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 healthcare facilities and personnel, compliance with
standards of testing and obtainment of Certificates of Need ("CON") and other
required certificates for certain types of healthcare facilities and major
medical equipment, such as an outpatient diagnostic imaging center using MRI or
other diagnostic imaging 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 healthcare
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 at which 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 healthcare 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.
14
<PAGE>
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 healthcare 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 unlicensed business corporations 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 management and consulting is
to acquire certain assets and assume certain liabilities of, and/or to enter
into service agreements with, affiliated physicians and other healthcare
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, if any, 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
15
<PAGE>
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. 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
healthcare 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.
16
<PAGE>
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 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 healthcare 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 healthcare 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
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<PAGE>
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.
Insurance Laws and Regulations
Certain states have enacted statutes or adopted laws and regulations
("Laws") affecting risk assumption in the healthcare 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
healthcare 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, 1999, the Company had 115 full-time employees,
including four radiologists, 18 trained diagnostic imaging technologists, one
marketing and managed care executive, ten sales representatives, and 82
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.
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<PAGE>
Item 2. Properties
The Company does not own any real property but leases space for its
corporate offices in Shrewsbury, New Jersey, and its 10 facilities (one of which
contains the Company's billing office). The addresses of these offices and
facilities are as follows:
Corporate Offices
Shrewsbury Executive Center II
1040 Broad Street
Shrewsbury, NJ 07702 (approximately 10,000 square feet)
Facilities
Brooklyn Facility
2095 Flatbush Avenue
Brooklyn, New York 11234 (approximately 5,000 square feet)
Edgewater Facility
725 River Road,
Edgewater, NJ 07020 (approximately 5,400 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)
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<PAGE>
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)
Management believes that its offices and facilities are suitable for the
purposes for which they are used.
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.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1999 Annual Meeting of Stockholders was held on December
17, 1999 (and the adjournment date on December 30, 1999). At the meeting, the
following directors were elected for a one year term and until their successors
are duly elected and qualified (these numbers do not reflect the Stock Split):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Votes Votes Votes Broker
Name For Against Withheld Abstentions Non-Votes
Shawn A. Friedkin 11,166,170 0 223,450 0 0
Manmohan A. Patel 11,166,170 0 223,450 0 0
Joseph J. Raymond 11,166,170 0 223,450 0 0
Michael S. Weiss 11,166,170 0 223,450 0 0
Elliott H. Vernon 11,166,170 0 223,450 0 0
</TABLE>
The following additional matters were voted upon at the Annual Meeting:
The approval of an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split of the Common Stock, whereby the
Company would issue one new share of Common Stock in exchange for between two
and eight shares of outstanding Common Stock was approved by the following vote
(these numbers do not reflect the Stock Split):
Votes Votes Votes Broke
For Against Withheld Abstentions Non-Votes
11,062,368 280,752 0 46,500 2,062,126
The approval of an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split of the Common Stock, whereby the
Company would issue one new share of Common Stock in exchange for between two
and ten shares of outstanding Common Stock was approved by the following vote
(these numbers do not reflect the Stock Split):
Votes Votes Votes Broker
For Against Withheld Abstentions Non-Votes
11,153,206 483,464 0 63,500 0
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<PAGE>
PART II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
Since January 20, 2000, the Common Stock has been listed on The American
Stock Exchange ("AMEX") under the symbol "HII". Prior thereto, it had been
included in The Nasdaq National Market under the symbol "HISS".
The following table sets forth the high and low closing sale prices for the
Common Stock for the period from January 1, 1998 through April 10, 2000 based on
transaction data as reported by The Nasdaq National Market (from January 1, 1997
through January 19, 2000) and AMEX (from January 20, 2000 through April 10,
2000).
High Low
Year Ended December 31, 1998
First Quarter $19-11/16 $9-11/16
Second Quarter $17-3/16 $10
Third Quarter $17-3/16 $ 6-1/4
Fourth Quarter $13-1/8 $ 7-3/16
Year Ended December 31, 1999
First Quarter $14-1/16 $9-11/16
Second Quarter $13-3/4 $7-1/2
Third Quarter $10-5/8 $7-1/2
Fourth Quarter $10-5/16 $3-3/4
Year Ending December 31, 2000
First Quarter $10-5/8 $4-1/2
Second Quarter (through April 10, 2000) $5-1/4 $4-3/8
As of February 17, 2000, there were 74 holders of record of the Common
Stock. The Company believes that there were approximately 2,100 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.
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<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial information is provided
for the Company and its predecessor entities.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998(A) 1997 1996 1995
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $21,952,284 $16,451,057 $10,247,940 $ 9,787,591 $ 9,249,284
Income/(loss) before equity
earnings in AIG, minority interest
and income taxes $ 232,139 $ 2,738,600 $ (331,094) $ (396,256) $ 33,227
Net income/(loss) available to
common shareholders $1,449,968 $ 1,978,703 $ (804,305) $ (861,796) $ (118,430)
Income/(loss) per common share -
basic $ 1.28 $ 1.88 $ (1.30) $ (1.83) $ (0.25)
Income/(loss) per common share -
diluted $ 1.25 $ 1.01 $ (1.30) $ (1.83) $ (0.25)
Balance Sheet Data:
Working capital (deficit)
surplus $9,111,585 $(2,059,665) $ 1,152,667 $ 2,943,313 $ 1,160,247
Total assets $39,129,119 $42,954,653 $13,540,635 $10,566,732 $10,006,699
Current portion of long-term debt,
reserves for subleased equipment
and capital lease obligatios $3,073,096 $15,800,300 $1,647,148 $ 1,252,613 $2,287,204
Long-term debt, reserves for
subleased equipment and capital
lease obligations less current $13,042,238 $ 3,440,890 $ 3,101,912 $ 2,717,216 $ 3,275,445
portion
Stockholders' equity $16,738,994 $17,749,286 $ 5,412,898 $ 5,004,807 $ 3,222,876
</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 -- Diagnostic Imaging Operations -- The
Beran Facilities."
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<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, and Section 21E of the Securities Exchange Act of 1934,
as amended. Any statements contained herein which are not historical facts or
which contain the words "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 regarding currently unforeseen
competitive pressures affecting participants in the healthcare market and risks
affecting the Company's industry, such as increased regulatory compliance and
changes in regulatory compliance, changes in payor reimbursement levels and
technological changes. In addition, the Company's business, operations and
financial condition 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, 1999 vs. December 31, 1998
For the year ended December 31, 1999, revenues were $21,952,284 as
compared to $16,451,057 for the year ended December 31, 1998, an increase of
approximately $5,501,000 or 33%. This increase was primarily due to revenues
associated with the operation of the Beran Facilities acquired in October 1998
(revenues from such facilities increased by approximately $6,222,000 in fiscal
1999 as compared to fiscal 1998) and revenues associated with the Company's
physician management and consulting operations (revenues from such operations
increased by approximately $610,000 in fiscal 1999 as compared to fiscal 1998),
all of which were partially offset by the closure of the Company's facility in
Secaucus, New Jersey (the "Secaucus Facility") in May 1998 (revenues from such
facility decreased by approximately $414,000 in fiscal 1999 as compared to
fiscal 1998) and a decrease in revenues associated with facilities that were
operated by the Company for both of the years ended December 31, 1999 and 1998
(revenues from such facilities decreased by approximately $917,000 in fiscal
1999 as compared to fiscal 1998). The same facility decline in revenues for the
year ended December 31, 1999 is attributable, in part, to The New Jersey
Automobile Cost Reduction Act of 1998 which was implemented in the second
quarter of fiscal 1999. This Act allows for the pre-certification of MRI and
other diagnostic imaging procedures reimbursable through automobile insurance
carriers before each
24
<PAGE>
procedure is performed. This requirement has caused some delays and decreases in
MRI and other diagnostic imaging referrals during the latter half of fiscal 1999
at various of the Company's New Jersey facilities.
For the year ended December 31, 1999, operating expenses were
$21,720,145 as compared to $13,712,457 for the year ended December 31, 1998, an
increase of approximately $8,008,000, or 58%. This increase was primarily due to
(i) expenses incurred in connection with the operation of the Beran Facilities
acquired in October 1998 (expenses related to such facilities increased by
approximately $6,555,000 in fiscal 1999 as compared to fiscal 1998), (ii)
increased expenses associated with facilities that were operated by the Company
for both of the years ended December 31, 1999 and 1998 (expenses related to such
facilities increased by approximately $1,171,000 in fiscal 1999 as compared to
fiscal 1998) primarily due to increased salary expenses relating to new
personnel, professional fees, temporary help costs and increased maintenance
agreement costs relating to new equipment not covered by manufacturers
warranties and (iii) expenses relating to the Company's physician management and
consulting operations (expenses related to such operations increased by
approximately $388,000 in fiscal 1999 as compared to fiscal 1998).
The operating results for the Company continue to be negatively impacted
by the Brooklyn Facility. For the years ended December 31, 1999 and 1998, the
Brooklyn Facility generated losses of $555,445 and $626,477 respectively. The
Brooklyn Facility continues to operate at a loss. Although the Company continues
to implement certain revenue enhancement measures, including excess capacity
arrangements, there can be no assurance that the procedures generated at the
Brooklyn Facility will be sufficient to better support the operations of the
Brooklyn Facility.
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 in October 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 management and consulting 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
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<PAGE>
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 management and consulting 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) 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 were negatively impacted by the
Brooklyn Facility, the Philadelphia Facility and the Secaucus Facility. In
connection with the Company's review of the viability of the Brooklyn Facility,
among other things, in September 1998 the Company entered into a new lease
arrangement with respect to the lease of this facility. The Company also
continued its negotiations for the purchase of the limited partners' interests
in the Philadelphia Facility not currently owned by it (i.e., the limited
partners' interests) and consummated such purchase in May 1999. 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.
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.
Liquidity and Capital Resources of the Company
As of December 31, 1999, the Company had a cash balance of $645,389,
current assets of $14,729,312 and working capital of $9,111,585. The significant
improvement in the Company's working capital is a result of the Company's
renegotiation in September 1999 of the short-term $14.0 million DFS Bridge Loan
into a long-term liability. As a result, the repayment date of the debt is now
May 1, 2004, with principal and interest payments of approximately $308,000
payable by the Company in each of the 56 months commencing October 1, 1999. The
outstanding balance of the DFS Loan at the time of renegotiation was
$13,166,217. The debt bears interest at 12% per annum. The DFS Bridge loan was
funded in October 1998 in connection with the Beran Acquisition and the initial
repayment schedule
26
<PAGE>
was as follows: 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), which balloon payment date had been subsequently extended to August 1,
1999.
Cash flows provided by operating activities were $3,101,685 for the year
ended December 31, 1999, which consisted primarily of (i) net income of
$1,449,968, (ii) depreciation and amortization of $3,203,530 and (iii) an
increase in the allowance for doubtful accounts receivable of $1,057,000. Other
significant components of cash flows provided by operating activities include
(x) an increase in deferred tax asset of $2,445,859, (y) an increase in accounts
receivable of $340,223, and (z) an increase in goodwill of $224,539, all of
which were partially offset by an increase in accounts payable and accrued
expenses of $415,240 and a decrease in deferred transaction and financing costs
of $216,088.
Cash flows used in investing activities were $666,849 which related to
purchase of property, plant and equipment.
Cash flows used in financing activities were $3,295,570, which consisted
primarily of payments on capital lease obligations of $1,513,217, payments on
the DFS Bridge Loan of $1,368,704, distributions to limited partners of $531,944
and payments on obligations related to subleased equipment of $294,790, all of
which were partially offset by borrowings under the revolving line of credit of
$413,085.
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 at
$26,330 per month. At December 31, 1999, approximately $579,241 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
(including any requisite stockholder approvals), 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
and further increased to $4,000,000 in December 1999, with advances limited to
75% of eligible accounts receivable, as
27
<PAGE>
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 26, 2001. 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, 1999 and 1998, the Company had
$3,251,360 and $2,838,275, respectively, of borrowings under this credit
facility.
Prior to May 1, 1999, the Philadelphia Facility was operated as a joint
venture among a wholly-owned subsidiary of the Company (as the general partner
holding a 60% partnership interest) and certain individual medical professionals
and others (as limited partners holding in the aggregate the remaining 40%
partnership interests). Effective May 1, 1999, the Company's subsidiary
consummated the purchase of the limited partners' 40% interest for $100,000 in
cash. At April 30, 1999, the net book value of this 40% partnership interest was
$0. The $100,000 purchase price has been recorded by the Company as goodwill and
is being amortized over a period of 10 years.
The Company is currently negotiating the purchase of the limited
partners' ownership interests in the Wayne Facility. This facility is operated
as a joint venture among a wholly-owned subsidiary of the Company (as the
general partner holding a 51% partnership interest) and two individual medical
professional, who also provide consulting services to this facility (as limited
partners holding in the aggregate the remaining 49% partnership interest).
However, there can be no assurance that the Company will be successful in its
negotiations to acquire the limited partners' ownership interest in the Wayne
Facility.
In July 1999, the Company closed the Williamstown Facility. The
facility, historically and since its acquisition in October 1998, had operated
unprofitably. Following its acquisition, the Company was unsuccessful in its
attempts to profitably operate the facility. It was decided that the Company had
to either invest in certain equipment upgrades to modernize the facility or
cease its operations. After analysis of the pertinent factors, the Company
determined to close the facility. The closure of the Williamstown Facility
resulted in a one-time charge to operations during the quarter ended September
30, 1999 of approximately $33,000, which is primarily comprised of a reserve for
estimated future cash outflows relating to the leased premises.
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 expansion
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of the Company's physician management/consulting operations and clinical
research 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 its
anticipated cash requirements for its present operations for the next twelve
months. The Company has instituted measures to improve its revenues, including
the formation of Atlantic Imaging, the establishment of clinical research
operations and the launching of CliniCure.com, and is also considering various
other strategic alternatives, including additional joint ventures, the sale
and/or other disposition of all or a portion of its diagnostic imaging
operations and expansion of its e-commerce operations. The Company is also
prepared to adopt additional expense reduction measures if its estimates as to
its cash requirements and satisfaction thereof prove to be inaccurate. Continued
expansion of the Company's business, including the expansion of the Company's
physician management/consulting operations and clinical research operations,
will require additional sources of financing.
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.
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,
1999 and 1998 F-2
Consolidated statements of operations -
For the years ended December 31, 1999,
1998 and 1997 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31,
1999, 1998 and 1997 F-4
Consolidated statements of cash flows - For the years
ended December 31, 1999, 1998 and 1997 F-5
Notes to consolidated financial statements F-7
29
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The members of the Board of Directors of the Company (the "Board"),
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 50 December 1998 - Present
Joseph J. Raymond 64 December 1995 - Present
Michael S. Weiss 34 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 which he founded, since its
formation in July 1992. Since its formation in 1997, Mr. Friedkin has also been
the President of SB Capital Group, a Florida-based venture investment company he
founded which has investments in the private education sector and medical
devices. 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 the founder of
Stand Among Friends, a non-profit public charity focused on promoting the
research, education and advocacy of neurological disorders and also is the
Secretary of the National Council on Spinal Cord Injury. Mr. Friedkin is a
graduate of Syracuse University School of Management.
Manmohan A. Patel, M.D. has been the Chairman of JIHP since August 1995.
Dr. Patel was one of the founders of PMA 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
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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.
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 the Chairman and Chief Executive Officer of
CancerEducation.com, Inc., an Internet-based health information company, since
April 1999. Prior thereto, from November 1993 until April 1999, he was a Senior
Managing Director of Paramount Capital, Inc. (a private investment banking firm)
("Paramount") and held various other positions with Paramount and certain of its
affiliates. Mr. Weiss is also the Vice Chairman of Genta Incorporated, a
publicly-traded biotechnology company, and Chairman of Heavenlydoor.com Inc.
(f/k/a Procept, Inc.) ("Heavenlydoor"), a publicly-traded holding company
engaged in providing both funeral-related services over the Internet as well as
developing novel drugs for the prevention of infectious diseases, with a primary
focus on the HIV disease. In addition, Mr. Weiss is also a member of the Board
of Directors of AVAX Technologies, Inc., 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 and Chief
Executive Officer of the Company since the Company's inception in July 1991. He
also was the President of the Company from July 1991 until August 1999. For over
ten years, Mr. Vernon has also been the managing partner of MR General
Associates, a New Jersey general partnership ("MR Associates") which is the
general partner of DMR Associates, L.P., a Delaware limited partnership which
was the Company's landlord of the Brooklyn Facility until September 1998. From
December 1995 until it merged with Procept, Inc. in March 1999, Mr. Vernon was a
director of Pacific Pharmaceuticals, Inc., a publicly-traded company
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engaged in the development and commercialization of medical products with a
primary focus on cancer treatment. Mr. Vernon was a director of Procept (a
publicly-traded biotechnology company) from December 1997 until it merged with
Heavenlydoor in January 2000 and thereafter has been a director of Heavenlydoor.
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, 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 information about them, are set forth below.
Name Age Position
Elliott H. Vernon (1) 57 Chairman of the Board and Chief
Executive Officer
Robert D. Baca 43 President and Chief Operating Officer
Scott P. McGrory 35 Vice President, Controller
Mark R. Vernon (1) 52 Senior Vice President
(1) Elliott H. Vernon and Mark R. Vernon are brothers.
See above for information regarding Mr. Vernon.
Robert D. Baca, C.P.A., became the President and Chief Operating Officer
of HIS PPM Co., a Delaware corporation and wholly-owned subsidiary of the
Company formed to
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engage in the physician practice management business ("HIS PPM") in April
1998, and in August 1999 he was elevated to the position of the President and
Chief Operating Officer of the Company. 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 certified public accountant.
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 advanced diagnostic imaging. Mr.
McGrory is a licensed certified public accountant in the State of New Jersey.
Mark R. Vernon has been a Senior Vice President of the Company since
April 1999 and has been the President of Atlantic Imaging since its formation in
April 1999. From April 1997 until April 1999, he was employed as an officer of
the Company in charge of field operations. Since September 1994, he also has
served as the Chairman of the Board, President and Chief Executive Officer of
Omni Medical Imaging, Inc., which company subleased the Company's mobile MRI
units from September 1994 until July 1996. See "Certain Relationships and
Related Transactions." From January 1991 until August 1994, he was the Vice
President of Field Operations of the Company. From February 1981 until November
1989, he was the President of National Labor Service, Inc. and from November
1975 until January 1981, he was the President of Country Wide Personnel, Inc.,
which are employment support companies that supplied employees to Fortune 500
and other corporations. From 1966 until 1971, Mr. Vernon was a Staff Sergeant in
the United States Army and served in Vietnam from 1966 until 1967.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (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
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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 1999, 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 Robert D. Baca and Mark R. Vernon did not timely file a Form 3 with respect
to his becoming an executive officer of the Company, (ii) each of Samuel Beran,
Phyllis Beran, Beran/Management III Partners Trust and Beran/Echelon I
Shareholders Trust did not timely file a Form 3 with respect to his/her/its
becoming a 10% stockholder of the Company, and (iii) Joseph J. Raymond, a
director of the Company, did not timely file a Form 4 with respect to nine
transactions.
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<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by, or
paid to, the Chief Executive Officer and each other executive officer of the
Company (whose total annual salary and bonus exceed $100,000) for services
rendered in all capacities to the Company and its subsidiaries during fiscal
1999, 1998 and 1997 (the "named executive officers"):
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------
Annual Compensation
-------------------
<S> <C> <C> <C> <C> <C> <C>
Other
Annual Securities All
Name and Principal Compensation Underlying Other
Position Year Salary ($) Bonus ($) ($)(1) Options (#) Compensation
- ---------------------------- ---------- --------- -------------- -------- ------------
ELLIOTT H.
VERNON................ 1999 $281,541 $325,000 $33,951(2) 25,000 --
(Chairman of the
Board and Chief 1998 $244,272 $328,829 $19,249(2) -- --
Executive Officer)
1997 $100,415 -- $29,359(2) 50,000 $88,076(3)
ROBERT D.
BACA ..................1999 $227,202 $25,000 -- 15,000 --
(President and Chief
Operating Officer) 1998 $165,808(4) $32,588 -- 35,000 --
MARK R.
VERNON.................1999 $105,750 -- -- -- --
(Senior Vice
President)
SCOTT P.
MCGRORY............. 1999 $97,404 5,000 -- -- --
(Vice President,
Controller)
</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.
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<PAGE>
(2) Represent payments for personal life and disability insurance and
medical payments made by the Company on behalf of Mr. Vernon pursuant to
Mr. Vernon's employment agreement.
(3) Represents a non-interest bearing advance made to Mr. Vernon during
fiscal 1997. See "Certain Relationships and Related Transactions."
(4) Represent compensation beginning on April 13, 1998, the commencement
date of Mr. Baca's employment with HIS PPM. He became the President and
Chief Operating Officer of the Company in August 1999.
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 and its committees. In addition, non-employee directors (other than
members of the Stock Option Committee) are entitled to participate in the
Company's 1996 Stock Option Plan for Non-Employee Directors (the "Directors
Plan") and the Company's 1997 Omnibus Incentive Plan (the "Omnibus Plan").
Pursuant to the Directors Plan, stock options exercisable to purchase an
aggregate of 2,500 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 500 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. It is not currently contemplated
that Fee Options will be issued to the non-employee directors for the 1999 Plan
Year.
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.
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
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<PAGE>
Elliott H. Vernon. 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 27,000 shares of Common Stock under the Company's 1991
Stock Option Plan (the "1991 Plan") (at exercise prices ranging from $15.00 to
$50.00 per share) were terminated and the Company granted him options
exercisable to purchase an aggregate of 50,000 shares of Common Stock at a cash
exercise price of $7.50 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 25,000 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 25,000 shares and the
50,000 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 will be obligated to file one 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 (which was extended to five years in August
1999). Pursuant to such new employment agreement, Mr. Vernon 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. Mr. Vernon's current base salary is $302,500. 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 25,000 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). (In August 1999, these
stock options were issued to Mr. Vernon at an exercise price of $10.60 per
share, subject to consummation of the JIHP acquisition on or prior to December
31, 2000). On each anniversary of the commencement date of the employment
agreement, the term is extended for an additional one year. 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
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<PAGE>
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 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. (The Company has guaranteed Mr. Vernon a cash bonus of $325,000 for
fiscal 1999). 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
47,120 shares of Common Stock under the 1991 Plan and 2,880 shares of Common
Stock under the Omnibus Plan at an exercise price of $10.625 per share. Such
options vest in 25% 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 $25.00, $50.00, $75.00 and $100.00, 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). (In August 1999, these options
were amended to provide for automatic vesting in 20% increments on each
anniversary of the grant date.)
In August 1999, Mr. Vernon resigned as President of the Company and Mr.
Baca became the President and Chief Operating Officer of the Company.
Robert D. Baca. 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). Mr. Baca's current base salary is $228,627.
The employment agreement is subject to successive
39
<PAGE>
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 20,000 shares of Common Stock at an exercise price of $13.125
per share (which option vested 50% on the date of grant and the remaining 10,000
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 $50.00,
$80.00 and $120.00 per share, respectively; provided, however, that in any event
the remaining 10,000 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 15,000 shares of Common Stock at an exercise price of $75.00 per share
(with respect to 5,000 of the shares subject to the options), $100.00 per share
(with respect to 5,000 of the shares subject to the option) and $125.00 per
share (with respect to 5,000 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 $200.00 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.
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 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
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<PAGE>
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.
In August 1999, Mr. Vernon resigned as President of the Company and Mr.
Baca became the President and Chief Operating Officer of the Company. In
connection with such elevation, Mr. Baca was granted an option to purchase
15,000 shares of Common Stock at an exercise price of $13.125 per share (subject
to consummation of the JIHP acquisition on or prior to December 31, 2000).
Option Grants in Fiscal 1999
The following table sets forth each grant of stock options made by the
Company during fiscal 1999 to each of the named executive officers:
41
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable
Number of Value at Assumed Annual Rates of
Securities % of Total Options Exercise Stock Price Appreciation for
Underlying Granted to or Base Price Option Term 1
-----------
Options Employee in ($/Share) Expiration Date
Name Granted($) Fiscal Year Range Range
- ---- ---------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
5%($) 10%($)
----- ------
Elliott H. Vernon 25,000(2) 61.8% $10.60 Aug. 2009 $123,814 $313,768
Robert D. Baca 15,000(2) 37.1% $13.125 Aug. 2009 $166,657 $422,342
</TABLE>
- ---------
(1) The potential realizable values represent future opportunity and have not
been reduced to present value in 1999 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.
(2) These options were granted under the Omnibus Plan and vest in increments of
20% on each anniversary of the grant date; provided, however, that in no
event shall the option become exercisable until the consummation of the
JIHP acquisition and such option shall expire unexercised if the
acquisition does not occur on or prior to December 31, 2000.
Aggregated Option Exercises in Fiscal 1999 and 1999 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, 1999 and the
aggregate dollar value of in-the-money, unexercised options held at December 31,
1999. No options were exercised by such persons during fiscal 1999. 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, 1999 (the
last trading day in fiscal 1999), which was $10.3125 per share. These values,
unlike the amounts set forth in the column headed "Value Realized," have not
been, and may never be, realized. The stock options have not been, and may never
be, exercised; and actual gains, if any, on exercise will depend on the value of
the Common Stock on the date of exercise. There can be no assurance that these
values will be realized.
The Company does not have any stock appreciation rights ("SARs")
outstanding.
42
<PAGE>
<TABLE>
<CAPTION>
Securities Underlying
Number of Value of Unexercised
Unexercised Options In-the-Money
at Options at
Fiscal Year End Fiscal Year End
<S> <C> <C> <C> <C>
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
Elliott H.
Vernon -0- N/A 75,000/50,000 $140,625/$0
Robert D.
Baca -0- N/A 13,333/36,667 $0/$0
Mark R.
Vernon -0- N/A 11,500/8,500 $9,844/$8,906
Scott P.
McGrory -0- N/A 3,810/1,250 $6,328/$3,516
</TABLE>
43
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Common Stock Ownership
The table below sets forth the beneficial ownership of the outstanding
shares of Common Stock as of April 10, 2000 of (i) each person known by the
Company to beneficially own 5% or more of the outstanding shares of Common
Stock, (ii) each of the Company's directors and director nominees, (iii) each of
the Company's executive officers named in the Summary Compensation Table, and
(iv) all of the Company's directors and executive officers as a group. An
asterisk indicates beneficial ownership of less than 1% of the outstanding
shares of Common Stock.
As of April 10, 2000
Number Percent
of Shares (1) of Class
Beran Entities (2) 209,477 15.57%
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Elliott H. Vernon (3) 158,050 13.05%
c/o HealthCare Integrated Services, Inc.
Shrewsbury Executive Center II
1040 Broad Street
Shrewsbury, New Jersey 07702
Elliot Loewenstern (4) 75,000 6.19%
6700 North Andrews Avenue
Suite 401
Fort Lauderdale, FL 33309
Ulises C. Sabato, M.D. (5) 81,237 7.12%
106 Grand Avenue
Englewood, NJ 07631
Shawn A. Friedkin (6) 3,700 *
Manmohan A. Patel, M.D.(6) 31,200 2.74%
Joseph J. Raymond (6)(7) 18,700 1.62%
Michael S. Weiss (6) 2,200 *
Robert D. Baca (8) 21,666 1.88%
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<PAGE>
All directors and 251,526 19.83%
executive officers
as a group (8 persons) (9)
(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 his
mother, 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 15 Pondview Close, Chappaqua, New York
10514 and the address of Mrs. Beran is 10 Grove Street, Cherry Hill, NJ
08002.
(3) Includes beneficial ownership of an aggregate of 75,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. Does not include an aggregate of 50,000 shares of Common Stock
issuable upon the exercise of certain stock options which are not
exercisable within 60 days of the Record Date. See "Executive Compensation
-- Employment Contracts and Termination of Employment and Change in Control
Arrangements."
(4) Includes beneficial ownership of an aggregate of (i) 12,500 shares of
Common Stock issuable upon the exercise of certain currently exercisable
stock options owned by the Stephanie Loewenstern Irrevocable Trust, (ii)
12,500 shares of Common Stock issuable upon the exercise of certain
currently exercisable stock options held by the Brett Loewenstern
Irrevocable Trust, (iii) 12,500 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options held by the
Victoria Loewenstern Irrevocable Trust and (iv) 37,500 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options owned by Akiva Merchant Group, Inc. Mr. Loewenstern is the trustee
of each of the aforementioned trusts and the sole stockholder and President
of Akiva Merchant Group, Inc.
(5) Includes beneficial ownership of an aggregate 5,000 shares of Common Stock
issuable upon the exercise of certain currently exercisable stock options.
See "Certain Relationships and Related Transactions."
(6) Such shares include shares of Common Stock issuable upon exercise of
certain currently exercisable stock options granted pursuant to the
Directors Plan.
(7) Includes an aggregate of 15,000 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options.
(8) Includes an aggregate of 16,666 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options. Does not include
an aggregate of 33,334 shares of Common Stock issuable upon the exercise of
stock options which are not exercisable within 60 days of the Record Date.
See "Executive Compensation -- Employment Contracts and Termination of
Employment and Change in Control Arrangements."
(9) Includes an aggregate of 133,376 shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of the Record Date.
See footnotes (3), (6), (7) and (8) above. Does not include an
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<PAGE>
aggregate of 101,784 shares of Common Stock issuable upon the exercise of
stock options which are not exercisable within 60 days of the Record Date.
See footnotes (3) and (8) 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 the Record Date. None of the
Company's directors, Director Nominees 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 887.385 shares of Series D Stock (the "Beran Issuance")
having an aggregate liquidation preference of $9,317,542.50 (i.e., $10,500 per
share liquidation preference) were issued by the Company in October 1998 in
connection with the Beran Acquisition. The companies that received these shares
are in the process of being dissolved and liquidating their assets, and the
shares of Series D Stock currently are held by their respective liquidating
trusts. There are currently an aggregate of 633.647 shares of Series D Stock
outstanding having an aggregate liquidation preference of $6,653,301.50 (i.e.,
$10,500 per share liquidation preference) as a result of an adjustment in the
purchase price of these assets.
The holders of the Series D Stock are entitled to convert the Series D
Stock into an aggregate of approximately 634,120 shares of Common Stock;
provided that until the Company obtains stockholder approval (which approval has
not yet been obtained) of the Beran Issuance, 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 209,477 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 (other than the ratification and approval of the Beran Issuance);
provided that until the Company obtains stockholder approval (which approval has
not yet been obtained) of the Beran Issuance, the aggregate voting 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
209,477 shares). In addition, certain matters also require the affirmative vote
of the holders of the Series D Stock voting separately as a class in addition to
the affirmative vote of the holders of the Common Stock and Series D Stock
voting together as a single class. 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 preferred stock in October 1998. The
Company expects to convene a special meeting during the second quarter of fiscal
2000 for the ratification and approval of the Beran Issuance.
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
46
<PAGE>
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 and as
such share voting and dispositive power with respect to the shares owned by
these holders. 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.
As of April 10, 2000
Number of Percent Number of Percent
Shares of of Shares of of
Series D Stock Class Common Stock (1) Class(1)
Beran/Bloomfield IV 44.355 7% 14,663.38 1.09%
Shareholders Trust (2)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Echelon I 329.496 52% 108,927,87 8.1%
Shareholders Trust (3)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/INB V 19.01 3% 6,284.48 *
Shareholders Trust (4)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Mainland II 69.701 11% 23,042.28 1.71%
Shareholders Trust (5)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Management III 171.085 27% 56,558.84 4.2%
Shareholders Trust
Associates, L.P. (6)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
47
<PAGE>
(1) Does not take into account stockholder ratification and 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 1,135,699 shares of
Common Stock outstanding as of the Record Date and approximately 209,477
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 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.
(3) Includes 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 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 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 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.
Item 13. Certain Relationships and Related Transactions
At December 31, 1999 and 1998, Elliott H. Vernon (the Company's
Chairman of the Board 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
48
<PAGE>
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
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, 1999, the amount
of the sublessee's past due indebtedness was approximately $196,000 (which
amount has been fully reserved for by the Company in its financial statements).
49
<PAGE>
During fiscal 1999, 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
facilities, was the majority shareholder and officer of three of the Medical
Lessees: MRILM, MDI and KMDI. For fiscal 1999, MRILM, MDI and KMDI paid the
Company approximately $886,193, $5,828,972 and $1,337,318, respectively, in fees
for services previously rendered. In addition, revenues generated to the Company
by MRILM, MDI and KMDI accounted for approximately 4%, 20% and 3%, respectively,
of the Company's total revenues in fiscal 1999. For fiscal 1999, MRILM, MDI and
KMDI paid Dr. Braff approximately $85,528, $222,000 and $98,855, respectively,
in fees for professional services rendered by him on their behalf. Such entities
have continued to be Medical Lessees of the Company's in fiscal 2000.
In May 1999, the Company entered into a consulting agreement with
Ulises C. Sabato, M.D., a significant stockholder of the Company, for a one year
term. (The Company had previously entered into one-year consulting agreements
with Dr. Sabato during fiscal 1996, 1997 and 1998.) Pursuant to such agreement,
Dr. Sabato has 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, and
assistance to the Company in the expansion of its physician management and
consulting operations. Pursuant to such agreement, Dr. Sabato is entitled to an
annual consulting fee of $48,000. During fiscal 1999, Dr. Sabato was paid an
aggregate of $28,000 in consulting fees under the consulting agreement.
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 was extended until
(and expired as of) December 31, 1999. Pursuant to such agreement, Dr. Patel had
agreed to 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 was to terminate upon the
earlier to occur of (i) the execution of an employment agreement between the
Company and Dr. Patel (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 30,000 shares of Common Stock under the
terms and conditions of the Omnibus Plan. Such stock options are exercisable at
$17.1875 per share, the closing sales price of the Common Stock on the Nasdaq
NMS on the date of grant, and vest in increments of 25% (i.e., 7,500 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 $25.00, $50.00, $75.00 and
$100.00, 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,
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<PAGE>
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. (In August
1999, these options were amended to provide for automatic vesting in 20%
increments on each anniversary of the grant date.) These options were terminated
as of December 31, 1999 upon termination of the consulting agreement.
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 19.91% 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 held by PMA of JIHP. 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 (as well as his current
nomination for election as a director) was not made in connection with such
provision. The Company is in the process of actively renegotiating the terms of
the JIHP acquisition. The Company believes that such renegotiation efforts will
be successful and that the merger consideration, including the cash portion,
will be significantly reduced.
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 at $26,330 per month. At December 31, 1999, approximately
$579,241 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.
51
<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,
1999 and 1998 F-2
Consolidated statements of operations -
For the years ended December 31, 1999,
1998 and 1997 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31, 1999,
1998 and 1997 F-4
Consolidated statements of cash flows - For the
years ended December 31, 1999, 1998 and 1997 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, 1999, 1998 and 1997 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
52
<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)
3.6 Certificate of Ownership and Merger merging HealthCare Integrated
Services, Inc. into HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
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
53
<PAGE>
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]
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]
54
<PAGE>
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]
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)
55
<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)*
56
<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 *
57
<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.
(Incorporated by reference to Exhibit 10.56 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)*
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,
58
<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 (Incorporated by reference to Exhibit 10.58 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998)*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996 Stock Option
Plan for Non-Employee Directors (Incorporated by reference to Exhibit
10.59 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D. Baca and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.60 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph J. Raymond
and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.61 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998)*
10.62 Agreement, dated as of October 1, 1998 between Joseph J. Raymond and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.62 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.63 Employment Agreement, dated as of October 1, 1998, between Elliott H.
Vernon and HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 10.63 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998)*
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. (Incorporated by reference to Exhibit 10.64 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998)
10.65 Consulting Agreement, dated as of December 31, 1997, between Dr. Ulises
C. Sabato and HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 10.65 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998)
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr. Munr
Kazmir and HealthCare Imaging Services, Inc.(Incorporated by reference
to Exhibit 10.66 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998)*
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. (Incorporated by
59
<PAGE>
reference to Exhibit 10.67 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998)
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.
(Incorporated by reference to Exhibit 10.68 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998)
10.69 Loan Modification Agreement dated December 31, 1998, by and between
HealthCare Imaging Services, Inc. and DVI Financial Services Inc.
(Incorporated by reference to Exhibit 10.69 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998)
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 (Incorporated by reference to
Exhibit 10.70 to the Company's Annual Report on Form 10- K for the
fiscal year ended December 31, 1998)
10.70 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 (Incorporated by reference to
Exhibit 10.70 to the Company's Annual Report on Form 10- K for the
fiscal year ended December 31, 1998)
10.70 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 (Incorporated
by reference to Exhibit 10.70 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998)
10.73 Amendment to Loan and Security Agreement No. 0001969 dated May 1, 1999
by and between DVI Financial Services, Inc. and HealthCare Imaging
Services Inc. (Incorporated by reference to Exhibit 10.73 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999)
10.74 Allonge to Note dated May 1, 1999 by and between HealthCare Imaging
Services, Inc. and DVI Financial Services, Inc. (Incorporated by
reference to Exhibit 10.74 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.75 Consulting Agreement, dated as of May 14, 1999, between Dr. Ulises C.
Sabato and HealthCare Imaging Services, Inc.
60
<PAGE>
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
Not applicable.
61
<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 INTEGRATED SERVICES, INC.
Dated: April 12, 2000 By: /s/Elliott H. Vernon
--------------------
Elliott H. Vernon
Chairman of the Board 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 April 12, 2000
- --------------------
Elliott H. Vernon Board and Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/Scott P. McGrory Vice President, April 12, 2000
- -------------------
Scott P. McGrory Controller
(Principal
Financial and
Accounting Officer)
/s/Shawn A. Friedkin Director April 12, 2000
- --------------------
Shawn A. Friedkin
/s/Manmohan A. Patel Director April 12, 2000
- --------------------
Manmohan A. Patel
/s/Joseph J. Raymond Director April 12, 2000
- --------------------
Joseph J. Raymond
/s/Michael S. Weiss Director April 12, 2000
- -------------------
Michael S. Weiss
62
<PAGE>
Index to 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 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)
3.6 Certificate of Ownership and Merger merging HealthCare Integrated
Services, Inc. into HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999)
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]
63
<PAGE>
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]
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
64
<PAGE>
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]
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
65
<PAGE>
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.
(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)*
66
<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 *
67
<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.
(Incorporated by reference to Exhibit 10.56 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998)*
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,
68
<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 (Incorporated by reference to Exhibit 10.58 to the
Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1998)*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996 Stock Option
Plan for Non-Employee Directors (Incorporated by reference to Exhibit
10.59 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D. Baca and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.60 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph J. Raymond
and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.61 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998)*
10.62 Agreement, dated as of October 1, 1998 between Joseph J. Raymond and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.62 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)*
10.63 Employment Agreement, dated as of October 1, 1998, between Elliott H.
Vernon and HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 10.63 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998)*
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. (Incorporated by reference to Exhibit 10.64 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998)
10.65 Consulting Agreement, dated as of December 31, 1997, between Dr. Ulises
C. Sabato and HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 10.65 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998)
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr. Munr
Kazmir and HealthCare Imaging Services, Inc.(Incorporated by reference
to Exhibit 10.66 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998)*
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. (Incorporated by
69
<PAGE>
reference to Exhibit 10.67 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998)
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.
(Incorporated by reference to Exhibit 10.68 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998)
10.69 Loan Modification Agreement dated December 31, 1998, by and between
HealthCare Imaging Services, Inc. and DVI Financial Services Inc.
(Incorporated by reference to Exhibit 10.69 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998)
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 (Incorporated by reference to
Exhibit 10.70 to the Company's Annual Report on Form 10- K for the
fiscal year ended December 31, 1998)
10.70 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 (Incorporated by reference to
Exhibit 10.70 to the Company's Annual Report on Form 10- K for the
fiscal year ended December 31, 1998)
10.70 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 (Incorporated
by reference to Exhibit 10.70 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998)
10.73 Amendment to Loan and Security Agreement No. 0001969 dated May 1, 1999
by and between DVI Financial Services, Inc. and HealthCare Imaging
Services Inc. (Incorporated by reference to Exhibit 10.73 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
10.74 Allonge to Note dated May 1, 1999 by and between HealthCare Imaging
Services, Inc. and DVI Financial Services, Inc. (Incorporated by
reference to Exhibit 10.74 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.75 Consulting Agreement, dated as of May 14, 1999, between Dr. Ulises C.
Sabato and HealthCare Imaging Services, Inc.
70
<PAGE>
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.
- -------------------------------------------------------------------------
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
HealthCare Integrated Services, Inc.
Shrewsbury, New Jersey
We have audited the accompanying consolidated balance sheets of HealthCare
Integrated Services, Inc. and subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 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 27, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $645,389 $1,506,123
Accounts receivable - net of allowances for doubtful
accounts of $7,237,000 and
$6,180,000 in 1999 and 1998, respectively 13,806,760 14,523,527
Loan receivable 50,411 2,550,000
Prepaid expenses and other 226,752 228,758
------- -------
Total current assets 14,729,312 18,808,408
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - Net 7,754,840 9,578,807
DEFERRED TAX ASSET -Net 2,494,184 48,325
OTHER ASSETS:
Due from officer 264,125 264,125
Deferred transaction and financing costs 905,676 1,122,175
Other 464,679 273,975
Investment in Atlantic Imaging Group, LLC ("AIG") 94,785 -
Goodwill - net of accumulated amortization of $1,002,702
and $317,939 in 1999 and
1998, respectively 12,421,518 12,858,838
---------- ----------
Total other assets 14,150,783 14,519,113
---------- ----------
TOTAL ASSETS $39,129,119 $42,954,653
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under revolving line of credit $ - $2,838,275
Accounts payable and accrued expenses 2,538,156 2,122,916
Current portion of capital lease obligations 766,338 1,505,510
Current portion of note payable 2,306,758 14,000,000
Reserve for subleased equipment - 294,790
Income taxes payable 6,475 106,582
----- -------
Total current liabilities 5,617,727 20,868,073
--------- ----------
NONCURRENT LIABILITIES:
Capital lease obligations 2,717,700 3,440,890
Borrowings under revolving line of credit 3,251,360 -
Note payable 10,324,538 -
---------- ----------
Total noncurrent liabilities 16,293,598 3,440,890
---------- ---------
MINORITY INTERESTS 478,800 896,404
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 1,000,000 shares authorized:
Series D 8% cumulative accelerating redeemable preferred stock,
633.647 and 871.743 shares outstanding at December 31, 1999
and 1998, respectively ($10,500
per share liquidation preference) 63 87
Common stock, $.01 par value: 50,000,000 shares authorized:
1,135,699 shares outstanding at December 31, 1999 and 1998,
respectively 11,357 11,357
Additional paid-in capital 20,742,679 23,152,289
Accumulated deficit (4,015,105) (5,414,447)
---------- ----------
Total stockholders' equity 16,738,994 17,749,286
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,129,119 $42,954,653
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
REVENUES: $21,952,284 $16,451,057 $10,247,940
OPERATING EXPENSES:
Salaries 7,084,286 4,547,363 2,819,601
Operating expenses 6,606,296 4,587,734 4,294,407
Provision of bad debts 695,537 148,269 -
Consulting and marketing fees 578,484 620,361 582,687
Professional fees 741,077 534,060 538,392
Depreciation and amortization 3,203,530 2,029,723 1,509,649
Interest 2,771,195 1,427,267 540,652
Gain on sale of property, plant and equipment - (317,937) (105,000)
Non-cash compensation charge 39,740 135,617 398,646
------ ------- -------
21,720,145 13,712,457 10,579,034
---------- ---------- ----------
INCOME/(LOSS) BEFORE EQUITY EARNINGS IN AIG,
MINORITY INTERESTS IN JOINT VENTURES AND
INCOME TAXES 232,139 2,738,600 (331,094)
EQUITY EARNINGS IN AIG 89,785 - -
MINORITY INTERESTS IN JOINT VENTURES (114,340) (479,170) (430,172)
-------- -------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 207,584 2,259,430 (761,266)
INCOME TAX (BENEFIT) PROVISION (2,412,502) 97,661 43,039
---------- ------ ------
NET INCOME/(LOSS) 2,620,086 2,161,769 (804,305)
PREFERRED DIVIDENDS 1,170,118 183,066 -
--------- ------- -------
NET INCOME/(LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $1,449,968 $1,978,703 $(804,305)
========== ========== =========
NET INCOME/(LOSS) PER COMMON SHARE - BASIC $ 1.28 $ 1.88 $ (1.30)
====== ====== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 1,135,699 1,051,189 618,782
========= ========= =======
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED $ 1.25 $ 1.01 $ (1.30)
====== ====== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 1,161,433 2,146,190 618,782
========= ========= =======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
- -------------------------------------------------------------------------------
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31, 1999,1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<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, 1997 .................. - - 660,000 $ 66,000 496,199 $ 4,962
Conversion of Series C Preferred Stock - - - (475,000) (47,500) 332,500 3,325
Amortization of unearned
compensation for stock option and
restricted stock grants ................ - - - - - -
Purchase of assets of M.R. Radiology
Imaging of Lower Manhattan, P.C ........ - - - - 100,000 1,000
Net loss ................................ - - - - - -
Other ................................... - - - - - -
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ................ - - 185,000 18,500 928,699 9,287
-------------------------------------------------------------
Conversion of Series C Preferred Stock - - (185,000) (18,500) 129,500 1,295
Beran Acquisition Issuance .............. 872 $87 - - - -
Issuance of stock to financial advisor .. - - - - 75,000 750
Compensation in connection with stock
option grants .......................... - - - - - -
Record cashless exercise of stock options - - - - 2,500 25
Net income .............................. - - - - - -
Other ................................... - - - - - -
---------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ................ 872 87 - - 1,135,699 11,357
---------------------------------------------------------------
Redemption of loan receivable ........... (238) (24) - - - -
Unearned compensation in connection
with stock option grants ............... - - - - - -
Amortization of unearned compensation
for stock options ...................... - - - - - -
Net Income .............................. - - - - - -
Preferred Dividends ..................... - - - - - -
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ................ 634 $63 - - 1,135,699 $11,357
----------------------------------------------------------------
<CAPTION>
Additional Total
Paid-in Accumulated Unearned Stockholders'
Capital Deficit Compensation Equity
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 .................. $11,921,336 ($6,588,845) ($398,646) $5,004,807
Conversion of Series C Preferred Stock - 44,175 - - -
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 ........ 830,250 - - 831,250
Net loss ................................ - (804,305) - (804,305)
Other ................................... (17,500) - - (17,500)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ................ 12,778,261 (7,393,150) - 5,412,898
------------------------------------------------------------
Conversion of Series C Preferred Stock - 17,205 - - -
Beran Acquisition Issuance .............. 9,153,210 - - 9,153,297
Issuance of stock to financial advisor .. 702,375 - - 703,125
Compensation in connection with stock
option grants .......................... 490,689 - - 490,689
Record cashless exercise of stock options (25) - - -
Net income .............................. - 1,978,703 - 1,978,703
Other ................................... 10,574 - - 10,574
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ................ 23,152,289 (5,414,447) - 17,749,286
-------------------------------------------------------------
Redemption of loan receivable ........... (2,499,976) - - (2,500,000)
Unearned compensation in connection
with stock option grants ............... 90,366 - (90,366) -
Amortization of unearned compensation
for stock options ...................... - - 39,740 39,740
Net Income .............................. - 2,620,086 - 2,620,086
Preferred Dividends ..................... - (1,170,118) - (1,170,118)
--------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ................ $20,742,679 $(3,964,479) ($50,626) $16,738,994
==============================================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $1,449,968 $ 1,978,703 $ (804,305)
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities
Depreciation and amortization 3,203,530 2,029,723 1,509,649
Amortization of non-cash compensation 39,740 135,617 398,646
Gain on sale of property, plant and equipment - (317,937) (105,000)
Interests in joint ventures 19,555 479,170 430,172
Allowance for doubtful accounts 1,057,000 1,140,000 659,000
Changes in assets and liabilities, exclusive
of changes resulting from acquisitions:
Accounts receivable (340,233) (3,703,492) (1,258,052)
Prepaid expenses and other 2,006 (42,676) (26,061)
Deferred taxes (2,445,859) (48,325) -
Goodwill (224,539) - -
Other (190,704) 17,029 65,510
Accounts payable and accrued expenses 415,240 768,716 160,977
Income taxes payable (100,107) 90,538 7,740
Deferred transaction and financing costs 216,088 (1,069,503) 7,605
------- ---------- -----
Net cash provided by operating activities 3,101,685 1,457,563 1,045,881
--------- --------- ---------
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 (666,849) (105,379) (120,169)
Proceeds from sale of marketable securities - - 625,000
Proceeds from sale of property, plant and equipment - 844,000 105,000
------- ------- -------
Net cash used in investing activities (666,849) (13,311,379) (593,890)
-------- ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings pursuant to bridge financing - 14,000,000 -
Borrowings under the revolving line of credit 413,085 1,376,275 1,462,000
Payments on capital lease obligations (1,513,217) (1,908,258) (1,363,860)
Payments on note payable (1,368,704) - -
Payments on reserve for subleased equipment (294,790) (49,505) (251,576)
Distributions to limited partners of joint ventures (531,944) (129,199) (384,308)
Other - - (17,500)
------- -------- -------
Net cash (used in) provided by financing
activities (3,295,570) 13,289,313 (555,244)
---------- ---------- --------
(DECREASE)/INCREASE IN CASH (860,734) 1,435,497 (103,253)
CASH:
Beginning of the year 1,506,123 70,626 173,879
--------- ------ -------
End of the year $645,389 $ 1,506,123 $ 70,626
======== ============ =============
</TABLE>
F-4
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $2,521,984 $1,272,446 $ 535,784
========== ========== ============
Income taxes paid $208,515 $ 31,558 $ 35,300
======== ========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital leases principally for property, plant and equipment $50,855 $2,427,063 $2,221,584
======= ========== ==========
Repayment of the loan by the Beran Entities in shares of Series
D cumulative accelerating redeemable preferred stock (see
Note 2) $2,500,000
= ==========
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-5
<PAGE>
- --------------------------------------------------------------------------------
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
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. The Company also recently commenced physician management and
consulting operations as well as clinical research operations.
Principles of Consolidation - The consolidated financial statements
include HealthCare Integrated 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.
Revenues - In the operation of its facilities, the Company either (i)
leases use of its diagnostic imaging equipment to healthcare providers
("Medical Lessees"), who use the equipment to provide diagnostic imaging
services to their patients or patients of other healthcare providers
with whom they or the Company have contractual relationships, and the
Company provides administrative, management and billing and collection
services, as well as equipment and real property, to the Medical Lessees
who typically pay the Company contractually negotiated fees for the use
of the equipment and property, and an administrative charge for these
support services or (ii) operates the facility itself and directly bills
and collects from patients and third party payors. The Company's
revenues are then comprised of (x) the fees it receives from the Medical
Lessees, which are paid by the Medical Lessees to the Company upon the
Medical Lessees' receipt of payment from, or on behalf of, its patients
(the "Procedure Claims Revenues") and (y) the fees it receives for the
services it directly provides to patients (the "Direct Services
Revenues"). The Company records a reserve for contractual allowances
relating to the Procedure Claims Revenues for amounts which may not be
paid by the Medical Lessees because it, in turn, may not be paid by the
third party payors for the related procedure. Procedure Claims Revenues
are then reported by the Company net of this reserve or contractual
allowances. In respect of Direct Services Revenues, the Company records
an allowance for doubtful accounts and a corresponding charge to bad
debt expense based upon the age of the receivable and the likelihood of
collection. Direct Services Revenues are not reported by the Company net
of this allowance.
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:
F-6
<PAGE>
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 10 to
20 years.
Deferred Transaction and Financing Costs - Deferred transaction costs
relate to legal and accounting fees incurred in connection with the
Company's proposed acquisition of a management services organization
("MSO") and other pending acquisitions or management services contracts
(See Note 2). Deferred financing costs relate to costs incurred in
connection with the Company's proposed new financing of the Company's
expansion plans. In the event any of such proposed acquisitions or
financing is not consummated or any such management services contract is
not executed, the related deferred 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, 1999, 1998 and 1997, 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, 1999, 1998 and 1997, as applicable, plus the
incremental shares that would have been outstanding upon the assumed
exercise of dilutive stock option awards and conversion of preferred
shares.
Reverse Stock Split - On January 20, 2000 the Company effectuated a 1:10
reverse stock split of its common stock and simultaneously therewith,
commenced trading on The American Stock Exchange under the symbol "HII".
The common stock discontinued trading on the Nasdaq National Market as of
the close of business on January 19, 2000, where it was traded under the
symbol "HISS". All references to number of shares or per share amounts in
the accompanying financial statements have been adjusted to reflect this
reverse stock split.
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
$16,115,334 and $16,189,726, respectively, at December 31, 1999, and
$18,946,400 and $19,187,886, respectively, at December 31, 1998.
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 Lessees, which in turn provide diagnostic imaging
services to their patients and the patients of individual physicians,
physicians' groups and other healthcare providers. The Company also
directly provides diagnostic imaging services at certain of its state
licensed facilities located in New Jersey. Although the Company's right to
payment for services rendered to Medical Lessees is not dependent upon
payments received by the Medical Lessees,
F-7
<PAGE>
as part of its arrangements with certain Medical Lessees, the Company does
not seek payment from the Medical Lessees until the Medical Lessees 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 Lessees (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 Lessees, the Company is contractually entitled to seek payment
from such Medical Lessees for all services provided, including those with
respect to which the Medical Lessees have not been paid. However, the
Company generally does not seek to recover unpaid claims from Medical
Lessees. The Company's accounts receivable represent (i) the Company's
amounts receivable relating to Procedure Claims Revenues, (ii) amounts
receivable relating to Direct Services Revenues, (iii) amounts receivable
from physician management and consulting services and (iv) certain
wholesale accounts (which relate to services provided to customers,
through August 31, 1994, that utilized the Company's mobile MRI units)
(the "Wholesale Accounts"). The Company records a reserve for contractual
allowances relating to the Procedure Claims Revenues for amounts which may
not be paid by the Medical Lessees because it, in turn, may not be paid by
the third party payors for the related procedure. Procedure Claims
Revenues are then reported by the Company net of this reserve or
contractual allowances. In respect of Direct Services Revenues and
Wholesale Accounts revenues, the Company records an allowance for doubtful
accounts and a corresponding charge to bad debt expense based upon the age
of the receivable and the likelihood of collection. Direct Services
Revenues and Wholesale Accounts revenues are not reported by the Company
net of this allowance. Accordingly, the Company's financial statements
reflect the following: (x) the allowance for doubtful accounts on the
balance sheet includes both the Company's estimate of bad debts related to
Direct Services Revenues and Wholesale Accounts revenues, as well as the
reserve for contractual allowances related to Procedure Claims Revenues,
(y) the provision for bad debt on the statement of operations only relates
to the Company's estimate of bad debts related to Direct Services Revenues
and Wholesale Accounts revenues (because the revenues have already been
netted against the reserve for contractual allowances related to Procedure
Claims Revenues) and (z) the allowance for doubtful accounts on the
statement of cash flows is the net amount of both the bad debt expenses
related to Direct Services Revenues and Wholesale Accounts revenues and
the reserve for contractual allowances related to Procedure Claims
Revenues.
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 income (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".
The Company does not expect adoption of this new accounting pronouncement
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 - Prior to May 1, 1999, the Company's facility in
Philadelphia, PA was operated as a joint venture among a wholly-owned
subsidiary of the Company (as the general partner holding a 60%
partnership interest) and
F-8
<PAGE>
certain individual medical professionals and others (as limited partners
holding in the aggregate the remaining 40% partnership interests).
Effective May 1, 1999, the Company's subsidiary consummated the purchase
of the limited partners' 40% partnership interests for $100,000 in cash.
At April 30, 1999, the net book value of this 40% partnership interest was
$0. The $100,000 purchase price was recorded by the Company as goodwill
and is being amortized over a period of ten years.
On October 2, 1998 (effective October 1, 1998), HIS Imaging LLC., 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 (x) the
assumption of certain obligations and liabilities of the Beran Entities,
(y) cash in the amount of $11,500,000 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 (the "Beran Loan") an aggregate of $2,500,000,
which loan bore interest at 8% per annum and was to mature upon the terms
and conditions contained in the related promissory notes, but in no event
later then December 31, 1999. As of December 31, 1999, the Beran Entities
repaid the Beran Loan in shares of Series D Stock (i.e., 238.096 shares of
Series D Stock were transferred back to the Company and cancelled in
repayment of this loan). 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 Beran Loan.
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 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 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-9
<PAGE>
Year Ended Year Ended
December 31, December 31,
1998 1997
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)
===== ======
Proposed Acquisitions - During fiscal 1997, the Company decided to expand
its strategic focus into the area of physician management and consulting
and, in connection therewith, in January 1998 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 HealthCare
Systems, Inc. ("Liberty"). JIHP provides management services to PMA, which
is one of the largest independent, multi-specialty practices in New
Jersey, comprised of over 70 physicians servicing over 80,000 patients in
three locations in New Jersey. The consummation of the transaction was
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. No definitive acquisition agreements or
long-term administrative services agreement have yet been executed by all
the parties. However, the Company has been providing management and
consulting services to PMA since April 1998. Given the significant
declines in the financial performance of many of the leading
publicly-traded physician practice management companies during 1998-1999,
the availability of financing for the JIHP acquisition (as well as other
physician practice acquisitions) 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 is in the process of
actively renegotiating the terms of the JIHP acquisition. The Company
believes that such renegotiation efforts will be successful and
that the merger consideration, including the cash portion, will be
significantly reduced.
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 at
$26,330 per month. At December 31, 1999, approximately $579,241 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.
Additionally, the Company is currently negotiating the purchase of the
limited partners' ownership interest in the Company's facility located in
Wayne, New Jersey (the "Wayne Facility"). This facility is operated as a
joint venture among a wholly-owned subsidiary of the Company (as the
general partner holding a 51% partnership interest) and two individual
medical professionals, who also provide consulting services to this
facility (as limited partners holding in the aggregate the remaining 49%
partnership interest). However, there can be no assurance that the Company
will be successful in its negotiations to acquire the limited partners'
ownership interest in the Wayne Facility.
Other Matters - In January 2000, the Company formed CliniCure.com, LLC, a
wholly-owned subsidiary, to provide web-based outreach for clinical
research trials by physicians, universities, hospitals and pharmaceutical
companies. CliniCure.com's web site is intended to be an easy to navigate
medical web site which will facilitate access to medical clinical trials
for both patients and physicians alike. It is expected that patient users
will be able to research new clinical trials beginning in a variety of
areas and, if interested, will be able to apply for participation in these
trials. Additionally, physicians and researchers will be able to utilize
the site as a referral source in the recruitment of candidates for
clinical trials.
F-10
<PAGE>
In September 1999 the Company established clinical research operations
through a wholly-owned subsidiary, HIS Clinical Research Co. LLC
("HISCR"). HISCR focuses on arranging clinical research trials for
pharmaceutical companies. To date, HISCR has arranged seventeen clinical
studies in the areas of rheumatology pain management medication, chronic
prostatitis medication, diabetes drug therapies, chronic bronchitis,
diabetic polyneuropathy, respiratory tract infections, sinusitis, smoking
reduction, hypertension and pneumonia medication on behalf of various
leading pharmaceutical companies including ASTA Medica, Inc.; Abbott
Laboratories; Merck & Co., Inc.; Ortho-McNeil Pharmaceutical, Inc.;
SmithKline Beecham Corporation; Takeda America Research & Development
Center, Inc.; Bristol Meyers Squibb Company; and Glaxo Wellcome, Inc.
Amounts attributable to the operations of HISCR for fiscal 1999 are not
significant. HISCR has exclusive five-year agreements with PMA and North
Jersey Health, P.A. ("NJ Health") to arrange and coordinate clinical
research trials for their over 100 physicians and 160,000 patients.
Effective April 1999, the Company, in a 50/50 joint venture with
HealthMark Alliance, Inc. ("HAI"), formed Atlantic Imaging Group, LLC
("Atlantic Imaging" or "AIG") to develop, market and manage statewide
networks of diagnostic imaging facilities. The initial scope of the
network is New Jersey. The Company provides day-to-day administrative and
management services to Atlantic Imaging, and both the Company and HAI
provide marketing services. Atlantic Imaging has entered into a five-year
arrangement with National Healthcare Resources, Inc. ("NHR"), which
provides medical case management services to several insurance carriers,
whereby, among other things, NHR agreed to utilize the network on an
exclusive basis for any MRI services for which it refers claimants on
behalf of its clients (unless otherwise instructed by such client) and
will utilize the network for other radiology services to the extent
practicable. Atlantic Imaging is being accounted for by the Company using
the equity method. The network presently consists of 85 diagnostic imaging
facilities in New Jersey and currently provides services to 18 automobile
insurance carriers in New Jersey including: Allstate Insurance Company,
Palisades Safety and Insurance Association, National General Insurance
Company, Metropolitan, National Continental Progressive Insurance Company
and Highlands Insurance Group.
The Company has expanded its strategic focus to practice management and
consulting services and currently provides management and consulting
services to two New Jersey based multi-specialty physician practices: PMA
and NJ Health. It has been providing such services to PMA since April 1998
(see "Proposed Acquisitions") and to NJ Health since February 1999. NJ
Health is one of the largest independent multi-specialty physician
practices in New Jersey, consisting of 25 physicians, 16 offices and
80,000 active patients. In December 1999, the Company entered into a
letter of intent with NJ Health setting forth the terms of an agreement
which provides for, among other things, management and consulting
services pursuant to an administrative services agreement with an
initial term of five years, during which period the Company will
provide NJ Health with certain non-medical, management and consulting
services. In accordance with the agreement, NJ Health will pay to the
Company a fixed management fee of $500,000 per annum. In addition to the
fixed management fee, additional management fees will be paid to the
Company from NJ Health's net income related to ancillary services.
The agreement also enables the Company to acquire the assets of NJ Health,
subject to certain financial milestones being achieved, as well as
the satisfaction of certain additional conditions, during the first
three years of the agreement.
From October 1, 1998 until July 14, 1999, the Company operated an
additional facility in Williamstown, New Jersey (the "Williamstown
Facility") which provided mammography, x-ray, ultrasound and CAT scan. The
facility, historically and since its acquisition in October 1998, has
operated unprofitably. Following its acquisition, the Company was
unsuccessful at its attempt to profitably operate the facility. It was
decided that the Company had to either invest in certain equipment
upgrades to modernize the facility or cease its operations. After analysis
of the pertinent factors, the Company determined to close the facility.
The closure of the Williamstown Facility resulted in a one-time charge to
operations during the quarter ended September 30, 1999 of approximately
$33,000, which is primarily comprised of a reserve for estimated future
cash outflows relating to the leased premises.
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.
In
F-11
<PAGE>
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 "Secaucus 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 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.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
1999 1998
Medical equipment under capital leases $7,316,521 $7,499,049
Medical equipment 3,885,503 3,707,250
Office equipment under capital leases - 45,466
Office equipment 130,784 122,300
Furniture and fixtures under capital leases 88,959 88,959
Furniture and fixtures 423,753 383,563
Computer equipment under capital leases 67,735 16,880
Computer equipment 247,282 242,085
Leasehold improvements under capital lease 1,161,381 1,161,381
Leasehold improvements 1,771,268 1,512,543
Building/Land 1,535,336 1,535,336
Automobiles 15,400 15,400
Construction in progress 3,000 -
---------- ----------
16,646,922 16,330,212
Less accumulated depreciation and amortization 8,892,082 6,751,405
--------- ---------
$7,754,840 $9,578,807
========== ==========
</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 and further increased to $4,000,000 in December
1999, with advances limited to 75% of eligible accounts receivable, as
determined by DVIBC. Borrowings under the line of
F-12
<PAGE>
credit bear interest at the rate of 3% over the prime lending rate and are
repayable on May 26, 2001. 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, 1999 and 1998, the Company had $3,251,360 and
$2,838,275, 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. If
for any reason the Company's estimates prove inaccurate, the Company is
prepared to adopt additional expense reduction measures in addition to
those already implemented, although there can be no assurance that any
such expense reduction measures will be successful.
Note Payable
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 Beran Loan. Options to purchase
5,000 and 40,000 shares of Common Stock at exercise prices of $9.0625 and
$10.3125 per share, respectively, were issued to DFS for providing the DFS
Loan. The value of these options were expensed over the initial term of
the DFS Loan (See Note 8). In September 1999, the Company renegotiated the
DFS Loan into a long-term liability. As a result, the repayment date of
the debt is now May 1, 2004, with principal and interest payments of
approximately $308,000 payable by the Company in each of the 56 months
commencing October 1, 1999. The outstanding balance of the DFS Loan at the
time of renegotiation was $13,166,217. The debt bears interest at 12% per
annum.
5. LEASE OBLIGATIONS
The Company leases various pieces of medical equipment (primarily from
DFS), at interest rates ranging from 11.5% to 13.2% 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, 1999 (excluding amounts relating to
subleased equipment) are:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ending Capital Lease Operating
December 31, Obligations Leases
2000 $1,122,494 $944,920
2001 1,083,560 1,032,272
2002 930,955 1,036,298
2003 324,382 892,171
2004 253,791 379,570
Thereafter 951,717 1,365,000
------- ---------
Total minimum lease/debt payments 4,666,899 $5,650,231
==========
Less amounts representing interest 1,182,861
---------
Present value of minimum capital lease payments 3,484,038
Less current portion of obligations 766,338
-------
$2,717,700
==========
</TABLE>
The carrying value of property, plant and equipment under capital lease
obligations was $4,141,858 and $5,397,235 at December 31, 1999 and 1998,
respectively.
Rent expense was $814,250, $678,858 and $723,136 for fiscal 1999, 1998 and
1997, respectively.
F-13
<PAGE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
State and
Federal Local Total
December 31, 1999:
Current $ 8,147 $ 25,210 $ 33,357
Deferred (856,940) (174,752) 1,031,692)
Tax benefit of NOL
carryforwards 1,245,266) (168,901) (1,414,167)
--------- -------- ----------
$(2,094,059) $(318,443) $(2,412,502)
=========== ========= ===========
December 31, 1998:
Current $ 48,325 $ 97,661 $ 145,986
Deferred (48,325) - (48,325)
------- --------- -------
$ - $ 97,661 $ 97,661
========== ========== ===========
December 31, 1997:
Current $ - $ 43,039 $ 43,039
Deferred - - -
----------- ---------- ---------
$ $ 43,039 $ 43,039
=========== ========== ========
</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,
---------------------------------------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
Statutory Federal income tax rate $70,579 34.0 $768,206 34.0 $(258,830) (34.0)
State income taxes - net of Federal
benefit 16,639 8.0 64,456 2.9 28,406 3.7
Other - net (170,703) (82.2) 50,351 2.2 (242,474) (31.9)
Valuation allowance - - (785,352) (34.8) 515,937 67.9
Elimination of valuation
allowance (2,329,017) (1,121.98) - - - -
---------- --------- -------- ------ ------- ----
Actual income tax $(2,412,502) (1,162.18) $97,661 4.3$ 43,039 5.7
=========== ========= ======= ===== ======== ===
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects (at 41%) of significant items comprising the Company's net
deferred tax position as of December 31, 1999 and 1998 are as follows:
F-14
<PAGE>
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1999 1998
Deferred tax liabilities:
Difference between financial reporting and tax basis of
property, plant and equipment $307,803 $211,737
Restructuring charges - 15,187
------- ------
307,803 226,924
------- -------
Deferred tax assets:
Federal and State tax NOL carryforwards 1,414,167 1,707,639
Non cash compensation 809,240 792,947
Provision for bad debts 482,130 145,345
Restructuring charges 20,552 9,881
Federal AMT tax credit carryforward 56,472 48,325
Other 19,426 -
------ ------
2,801,987 2,704,137
Valuation allowances - (2,428,888)
--------- ----------
Total deferred tax assets - net 2,801,987 275,249
--------- -------
Net deferred tax asset $2,494,184 $ 48,325
========== ==========
</TABLE>
The Company has recorded a net deferred tax asset of $2,494,184,
reflecting the benefit of approximately $3,663,000 in federal loss
carryforwards that expire in varying amounts between December 31, 2006
and December 31, 2013. Realization of this net deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration
of the loss carryforwards. The Company had taxable income of over
$2,000,000 in fiscal 1998 and estimates that taxable income will be over
$1,000,000 in fiscal 1999. Although realization of this net deferred tax
asset is not assured, management believes it is more likely than not
that all of the net deferred tax asset will be realized through future
profitable operations.
Deferred income tax assets and liabilities are offset when the income
taxes relate to the same fiscal authority. The following amounts are
shown in the consolidated balance sheet as of December 31, 1999 and
1998:
December 31,
1999 1998
Deferred tax assets
Current $ 968,028 $ 48,325
Non-current 1,833,959 -
--------- ------
Deferred tax liabilities 2,801,987 48,325
--------- ------
Current - -
Non-current 307,803 -
------- ------
Net deferred tax asset $2,494,184 $ 48,325
========== ==========
F-15
<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:
<TABLE>
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997
Per- Per- Per-
Income Shares Share Loss Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Basic EPS
Net Income (Loss) $1,449,968 1,135,699 $1.28 $1,978,703 1,051,189 $1.88 $(804,305) 618,782 $(1.30)
Add:
Preferred Dividends - - 183,066 - - -
Effect of Dilutive
Securities
Series D Stock - - - 1,003,101 - -
Stock Options - 25,744 - 63,816 - -
Series C Stock - - - 28,084 - -
-------------------- ------------------- ------------------
Diluted EPS
Net Income (Loss $1,449,968 1,161,433 $1.25 $2,161,769 2,146,190 $1.01 $(804,305) 618,782 $(1.30)
================================ ============================== ===============================
</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 Weighted
1996 Stock Average
1991 Directors' Purchase Other Exercise
Plan Plans Plan Options Prices
---- ----- ---- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,060 15,000 - 140,000 $9.04
Options granted at exercise prices
ranging from $7.50 to $10.09 per shar 64,860 2,500 2,880 - 10.21
Options forfeited at exercise prices
ranging from $7.50 to $16.90 per share (7,075) (2,500) - - 11.78
------- ------- ----- -------
Balance at December 31, 1997 64,845 15,000 2,880 140,000 9.23
====== ====== ===== =======
Options granted at exercise prices
ranging from $9.10 to $125.00 per share - 14,500 86,750 85,000 20.90
Options exercised - - - (5,000) 7.50
Options forfeited at exercise prices
ranging from $10.60 to $50.00 per share (4,027) (9,000) - - 17.64
------ ------ ------ --------
Balance at December 31, 1998 60,818 20,500 89,630 220,000 14.53
====== ====== ====== =======
Options granted at exercise prices
ranging from $8.10 to $15.00 per share - - 55,450 20,000 10.77
Options forfeited at exercise prices
ranging from $9.70 to $17.20 per share (319) (1,000) (63,000) - 16.81
---- ------ ------- ------
Balance at December 31, 1999 60,499 19,500 82,080 240,000 $13.47
====== ====== ====== =======
F-16
<PAGE>
Options exercisable at December 31,
1999 (exercisable at prices ranging
from $7.50 to $50.00 per share) 31,850 10,800 25,023 213,750
====== ====== ====== =======
Weighted average exercise prices $10.24 $14.09 $11.69 $9.24
====== ====== ====== =====
Remaining contractual life 7 years 8 years 9 years 5 years
======= ======= ======= =======
</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 set forth in the following
table.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, 1999 December 31, 1998 December 31, 1997
Net income (loss) available to
common shareholders - as reported $1,449,968 $1,978,703 $(804,305)
========== ========== =========
- pro forma $1,211,266 $1,908,106 $(970,051)
========== ========== =========
Net income (loss) per
common share - Basic - as reported $1.28 $ 1.88 $ (1.30)
===== ========== =========
- pro forma $1.07 $ 1.82 $ (1.57)
===== ========== =========
Net income (loss) per
common share - Diluted -as reported $1.25 $ 1.01 $ (1.30)
===== ========== =========
-pro forma $1.04 $ .97 $ (1.57)
===== ========== =========
</TABLE>
For SFAS Statement No. 123 purposes, the weighted average fair values of
the Company's stock options granted in fiscal 1999, 1998 and 1997 were
$10.77, $20.90 and $10.21 per share, respectively. The fair values were
estimated using the Black-Scholes option valuation model with the
following weighted average assumptions:
1999 1998 1997
Risk-free interest rate 5.41% 5.41% 6.00%
Expected volatility 90% 90% 102%
Expected life, in years 4 4 4
As of December 31, 1999, 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 (*) 209,477
1991 Plan 60,499
1996 Directors' Plan 75,000
1997 Omnibus Plan and Employee Stock Purchase Plan 500,000
Other Options 240,000
-------
1,084,976
=========
F-17
<PAGE>
(*) 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 an aggregate of approximately 634,120 shares of
Common 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 209,477 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 (i.e.,
approximately 209,477 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 2000.
1991 Plan
The 1991 Stock Option Plan (the "1991 Plan") provided for the issuance
of stock options exercisable to purchase up to 70,000 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 75,000 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 2,500 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 500 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 paid in any year,
these stock options will, nonetheless, be granted to each non-employee
director for his services for such
F-18
<PAGE>
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 2,500 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) 500,000 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 60,000 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.
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
F-19
<PAGE>
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) 500,000 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 75,000 shares of Common Stock over a five year
period at a cash exercise price of $7.50 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 75,000 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
5,000 shares of Common Stock over a five year period at a cash exercise
price of $7.50 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 aggregate of 27,000 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 50,000
shares of Common Stock at a cash exercise price of $7.50 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 25,000 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 5,000 shares of Common
Stock over a five-year period at a cash exercise price of $10.625 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 15,000 shares of Common Stock at
an exercise price of $75.00 per share (with respect to 5,000 of the
shares subject to the options), $100.00 per share (with respect to 5,000
of the shares subject to the options), and $125.00 per share (with
respect to 5,000 of the shares
F-20
<PAGE>
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 50,000 shares of
Common Stock, at an exercise price of $9.0625 per share (with respect to
5,000 of the shares subject to the options), $10.3125 per share (with
respect to 40,000 of the shares subject to the options), $12.8125 per
share (with respect to 2,000 of the shares subject to the options),
$12.50 per share (with respect to 1,000 of the shares subject to the
options) and $14.6875 (with respect to 2,000 shares subject to the
options). In connection with the issuance of the 5,000 and 40,000
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 2,000, 1,000
and 2,000 options, the Company recorded a non-cash compensation charge
of $47,197 in October 1998.
In addition, during fiscal 1998, a director was granted stock options
immediately exercisable for a ten-year period to purchase an aggregate
of 15,000 shares of Common Stock at an exercise price of $10.00 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 5,000 shares of Common
Stock at an exercise price of $9.6875 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.
During fiscal 1999, two investor relations firms were granted stock
options exercisable for a five-year period. One such firm was granted
options to purchase an aggregate of 5,000 shares of Common Stock at an
exercise price of $15.00 per share (such options vested on July 1,
1999). The other firm was granted options to purchase an aggregate of
15,000 shares of Common Stock at an exercise of $8.10 per share (3,750
of such options vested immediately on October 15, 1999 with the
remaining balance vesting quarterly in equal installments from said
date). In connection with the issuance of these options, the Company
recorded an aggregate non-cash compensation charge of $90,366 of which
$39,740 was amortized into expense in fiscal 1999 with the remaining
balance to be amortized into expense in fiscal 2000.
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, 1999 and
1998, matching contributions were made by the Company in the amount of
$27,311 and $16,994, respectively.
10. RELATED PARTY AND CERTAIN OTHER TRANSACTIONS
Due from Officer - At December 31, 1999 and 1998, 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 leased the MRI
equipment at such facility from DFS. DMR was owned by MR General
Associates, as the general partner ("MR Associates"), and DFS, as a
limited partner. MR Associates in turn was 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
F-21
<PAGE>
$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, real estate 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 15,000 shares of
Common Stock at an exercise price per share equal to $10.00 (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 (which was
renegotiated into a long-term liability in September 1999), and the
Company's $4,000,000 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 1999 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 Lessees: 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 1999, MRILM, MDI
and KMDI paid the Company approximately $886,193, $5,828,972 and
$1,337,318, respectively, in fees for services previously rendered. In
addition, revenues generated to the Company by MRILM, MDI and KMDI
accounted for approximately 4%, 20% and 3%, respectively, of the
Company's total revenues in fiscal 1999. For fiscal 1999, MRILM, MDI and
KMDI paid Dr. Braff approximately $85,528, $222,000 and $98,855,
respectively, in fees for professional services rendered by him on their
behalf. Such entities have continued to be Medical Lessees of the
Company's in fiscal 2000. Prior to October 1997, Dr. Braff was also a
majority shareholder and officer of another of the Company's Medical
Lessees, Edgewater Diagnostic Imaging, P.A., which paid the Company
approximately $1,400,000 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).
11. SEGMENT INFORMATION
The Company currently operates in two industry segments (i) diagnostic
imaging and (ii) physician management/consulting and clinical research
operations. The diagnostic imaging segment primarily involves operating
fixed site diagnostic imaging facilities. The physician
management/consulting and clinical reserach segment, which commenced
operations during the second quarter of fiscal 1998, consists of
providing management and consulting services to independent physician
practices and providing clinical research opportunities to such
practices and others.
F-22
<PAGE>
The following table shows net revenues and operating income by industry
segment for the years ended December 31, 1999 and 1998. Assets are not
identified by industry segment. Operating income consists of revenues
less direct operating expenses. All corporate operating expenses have
been allocated to the diagnostic imaging segment:
December 31,
1999 1998
Net revenues:
Diagnostic imaging $20,757,013 $15,866,057
Physician management/consulting and
clinical research 1,195,271 585,000
--------- -------
Total $21,952,284 $16,451,057
=========== ===========
Operating income:
Diagnostic imaging $(352,465) $2,376,285
Physician management/consulting and
clinical research 584,604 362,315
------- -------
Total $232,139 $2,738,600
======== ==========
12. CONCENTRATION OF REVENUES
For the year ended December 31, 1999, the Company had four Medical
Lessees which accounted for more than 5% of its total revenues: Monmouth
Diagnostic Imaging, P.A. ("MDI"), Edgewater Diagnostic Imaging, P.A.
("EDI"), Rittenhouse Square Imaging Associates, L.P. ("RSIA") and Wayne
MRI, P.A. ("WYN") which accounted for approximately 20%, 8%, 7% and 6%
of total revenues in fiscal 1999, respectively. For the year ended
December 31, 1998, the Company had six Medical Lessees which accounted
for more than 5% of its total revenues: MDI, EDI, WYN, RSIA, M.R.
Radiology Imaging of Lower Manhattan, P.C. ("MRILM") and Kings Medical
Diagnostic Imaging, P.C. ("KMDI") which accounted for approximately 27%,
14%, 14%, 9% 6% and 6% of total revenues in fiscal 1998, respectively.
For the year ended December 31, 1997, the Company had five Medical
Lessees which accounted for more than 5% of its total revenues: MDI,
EDI, WYN, RSIA, and KMDI which accounted for approximately 30%, 18%,
17%, 15% and 12% of total revenues in fiscal 1997, respectively. To the
extent the Company were to lose any of its existing Medical Lessees, the
impact on revenues and operations would not be materially affected
because the Company believes it will be readily able to replace any such
Medical Lessees.
13. 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, 1999, 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-23
<PAGE>
14. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial information
for the years ended December 31, 1999 and 1998:
NET EARNINGS (LOSS)
QUARTER NET BASIC DILUTED
ENDED REVENUES AMOUNT PER SHARE PER SHARE
----- -------- ------ --------- ---------
3-31-99 $6,022,502 $445,755 $.39 $.33
6-30-99 5,750,799 516,403 .46 .38
9-30-99 5,384,878 633,091 .56 .47
12-31-99 4,794,105 (145,281) (.13) (.13)
-- -- -- --------- -------- ---- ----
$21,952,284 $1,449,968 $1.28 $1.25
=========== ========== ===== =====
3-31-98 $3,198,641 $305,840 $.31 $.27
6-30-98 3,304,013 509,292 .49 .45
9-30-98 3,257,547 392,430 .37 .36
12-31-98 6,690,856 771,141 .68 .44
-- -- -- --------- ------- --- ----
$16,451,057 $1,978,703 $1.88 $1.01
=========== ========== ===== =====
The Company's operating results were adversely affected during the
latter half of fiscal 1999 by The New Jersey Automobile Cost Reduction
Act of 1998 which was implemented in the second quarter of fiscal 1999.
This Act requires the pre-certification of MRI and other diagnostic
imaging procedures reimbursable through automobile insurance carriers
before each procedure is performed. This requirement has caused
significant delays and decreases in MRI and other diagnostic imaging
referrals during the latter half of fiscal 1999 at various of the
Company's New Jersey facilities.
F-24
<PAGE>
HealthCare Integrated Services, Inc. and Subsidiaries SCHEDULE A
Allowance for Doubtful Accounts Receivable
At December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
A B C D E
Additions Change
Balance at Charged to Netted Balance at
January 1, Costs and Against December 31,
Description 1999 Expenses Revenue Deductions 1999
- ------------------------------------------ ------------- ------------- ---------------------------
Procedure Claims $5,677,833 $ - $383,727 $ - $6,061,560
Wholesale Accounts 354,358 - - 22,239 332,119
Direct Services 148,269 695,537 - - 843,806
---------------- ------------- ------------- ---------------------------
Totals-December 31, 1999 $6,180,460 $695,537 $383,727 $22,239 $7,236,765
================ ============= ============= ===========================
Additions Change
Balance at Charged to Netted Balance at
January 1, Costs and Against December 31,
Description 1998 Expenses Revenue Deductions 1998
- ------------------------------------------ ------------- ------------- ---------------------------
Procedure Claims $4,555,584 $ - $1,122,249 $ - $5,677,833
Wholesale Accounts 421,400 - - 67,042 354,358
Direct Services - 148,269 - - 148,269
---------------- ------------- ------------- ---------------------------
Totals-December 31, 1998 $4,976,984 $148,269 $1,122,249 $67,042 $6,180,460
================ ============= ============= ===========================
Additions Change
Description Balance at Charged to Netted Balance at
January 1, Costs and Against December 31,
1997 Expenses Revenue Deductions 1997
- ------------------------------------------ ------------- ------------- ---------------------------
Procedure Claims $3,847,347 $ - $708,237 $ - $4,555,584
Wholesale Accounts 471,150 - - 49,750 421,400
Direct Services - - - - -
---------------- ------------- ------------- ---------------------------
Totals-December 31, 1997 $4,318,497 $ - $708,237 $49,750 $4,976,984
================ ============= ============= ===========================
</TABLE>
Column Summary:
(A) Fiscal year opening balance for the allowance for doubtful accounts
receivable.
(B) Amounts charged to bad debt expense, as indicated on the consolidated
statements of operations, associated with Wholesale Accounts and Direct
Services accounts receivable.
(C) Amounts netted against revenues associated with Procedure Claims. (D)
Recoveries on fully reserved Wholesale Accounts.
(E) Fiscal year ending balance for the allowance for doubtful accounts
receivable as indicated on the consolidated balance sheets.
Note:
The reconciliation of the increase in allowance for doubtful accounts reported
in the consolidated statements of cash flow equals column B plus column C less
column D. For fiscal 1998, there is a reconciling amount resulting from the
Company's closure of an MRI facility for which the Company recorded an
additional bad debt expense attributed to accounts receivable of approximately
$63,000. This amount is captured in the line item entitled gain on sale of
property, plant and equipment.
May 14, 1999
Ulises C. Sabato, M.D.
106 Grand Avenue
Englewood, New Jersey 07701
RE: HEALTHCARE IMAGING SERVICES, INC., (THE COMPANY)/
ULISES C. SABATO, M.D. CONSULTING AGREEMENT
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, 1998. 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 May 1, 1999 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, MD
- --------------------
Ulises Sabato, MD
Date: May 14, 1999
Exhibit 21.1
<TABLE>
<CAPTION>
HEALTHCARE INTEGRATED SERVICES, INC
Year Ended December 31, 1999
<S> <C> <C>
Names under which
Name of Subsidiary State of Incorporation do business
1. HealthCare Imaging Services
of Wayne, Inc. New Jersey N/A
2. HealthCare Imaging Services
of Rittenhouse Square, Inc. Pennsylvania N/A
3. HealthCare Imaging Services
of Catonsville, Inc. Maryland N/A
4. HIS PPM Co. Delaware N/A
5. HIS Imaging LLC Delaware Monroe Diagnostic
Imaging, Mainland
Diagnostic Imaging,
Echelon Diagnostic
Imaging, Bloomfield
Diagnostic Imaging
6. HIS Clinical Research Co., LLC Delaware N/A
7. Clinicure.com, LLC Delaware N/A
</TABLE>
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 27, 2000,
appearing in this Annual Report on Form 10-K of the Company for the year ended
December 31, 1999.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> $645,389
<SECURITIES> 0
<RECEIVABLES> 13,806,760
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,729,312
<PP&E> 16,646,922
<DEPRECIATION> 8,892,082
<TOTAL-ASSETS> 39,129,119
<CURRENT-LIABILITIES> 5,617,727
<BONDS> 0
0
63
<COMMON> 11,357
<OTHER-SE> 16,727,574
<TOTAL-LIABILITY-AND-EQUITY> 39,129,119
<SALES> 0
<TOTAL-REVENUES> 21,952,284
<CGS> 0
<TOTAL-COSTS> 21,720,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 207,584
<INCOME-TAX> (2,412,502)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,449,968
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.25
</TABLE>
