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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10 - K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____.
Commission file number 0-19897
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SMT HEALTH SERVICES INC.
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(Exact name of registrant as specified in charter)
Delaware 25-1672183
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(State or other jurisdiction of incorporation (I.R.S. Employer
Identification No.) or organization)
10521 Perry Highway
Wexford, Pennsylvania 15090
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412-933-3300
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Warrants to Purchase Preferred Stock
Value $.01 Per Share Common Shares Purchase Rights
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
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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 was approximately $41.0 million based upon the closing trading price
of the Common Stock on the National Association of Securities Dealers, Inc.
Automated Quotations System on March 19, 1997.
As of March 19, 1997, the Registrant had 5,685,080 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III incorporate information by reference from the Registrant's
definitive Proxy Statement filed with the Commission within 120 days after
the close of the Registrant's fiscal year.
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PART I
ITEM 1. BUSINESS
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General
SMT Health Services Inc. ("SMT"), a Delaware Corporation formed in 1991, and
its subsidiaries (collectively, the "Company") are primarily engaged in the
business of operating mobile Magnetic Resonance Imaging (MRI) units ("Mobile
Units"). The Company, through its subsidiaries, currently operates eighteen
Mobile Units, including a unit purchased in February 1996, two new units
purchased from another mobile provider in March 1996 and the addition of
four new units late in the third quarter and early in the fourth quarter of
1996. The Company's mobile MRI fleet currently services healthcare
providers located in Pennsylvania, North Carolina, West Virginia, Kentucky,
Virginia, South Carolina and Ohio. The Company announced in February 1997
that it intends to purchase and begin operation of its nineteenth mobile
unit during April 1997. The MRI equipment is transported in specially
designed vans that are driven to the healthcare provider's facility where
the imaging occurs. The Company typically charges fees on a fee-per-scan
basis. For financial information regarding the Company, please see Item 6
"Selected Financial Data" and the Consolidated Financial Statements included
in Item 8, which information is incorporated herein by reference.
Current Operations
The Company's mobile MRI operations continue to grow. In 1994, healthcare
costs came under great scrutiny and healthcare market forces began their own
healthcare reform. This reform continues, and mobile diagnostic imaging has
benefitted from such market reform of the healthcare system as shared
equipment is a key to containing healthcare costs while still delivering
advanced and cost effective medical technology. As hospitals continue to
look for ways to reduce capital expenditures and contain costs, SMT and
shared mobile diagnostic imaging units/systems allow hospitals to add or
increase the range of quality, state-of-the-art diagnostic services with no
capital expenditure by providing an outsourcing alternative. Further, many
states, including those in which the Company operates, have strengthened
their Certificate of Need ("CON") review systems, whereby healthcare
providers must justify a need in a community before the state will permit
capital expenditures for medical equipment. As a result of CON review
systems, hospitals and other healthcare providers are less able to install
fixed site facilities thus providing an opportunity for mobile suppliers
whose equipment will be shared among many hospitals (see Government
Regulation).
Unit Purchases and Upgrades
The Company upgraded one of its .5 Tesla Signas to a 1.0 Tesla Horizon unit.
The new unit was financed at a net total cost of approximately $2.0 million
and was delivered in late February 1996. The Company financed the purchase
of this new unit with a 60 month dollar-out lease (bargain purchase option
of one dollar) requiring monthly payments of approximately $44,000.
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ITEM 1. BUSINESS (continued)
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The Company contracted with several new hospital clients and purchased a new
Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The
cost of this new unit approximated $1.9 million which was financed with a 60
month loan requiring monthly payments of approximately $41,000.
In April 1996, the Company upgraded one of the units purchased from another
mobile provider (See Note 16 of the Company's Consolidated Financial
Statements incorporated herein by reference) to a Siemens 1.0 Tesla Impact
unit. The new unit was financed at a net total cost of approximately $1.9
million. The Company financed this new unit with a 60 month loan requiring
monthly payments of approximately $43,000.
In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens
1.0 Tesla Impact unit. The new unit was financed at a net total cost of
approximately $2.0 million with a 60 month dollar-out lease requiring
monthly payments of approximately $43,000.
The Company in May 1996 signed an agreement with Siemens Medical Systems to
upgrade the second unit purchased from another mobile provider (see Note 16
of the Company's Consolidated Financial Statements incorporated herein by
reference) and to purchase a new unit during the fourth quarter of 1996.
Delivery of the upgraded unit occurred in July 1996 and the new unit was
delivered and began operation on October 1, 1996. The upgrade's net cost
approximated $1.9 million and the Company financed approximately $1.7
million with a 60 month finance agreement requiring monthly payments of
approximately $36,000. The Company's new unit cost approximately $1.9
million and the Company financed approximately $1.7 million requiring a
monthly payment of approximately $37,000.
During September 1996, the Company upgraded an older unit to a new Siemens
1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which
was financed with a 60 month loan requiring monthly payments of
approximately $39,000.
The Company purchased and took delivery of two new GE 1.0 Tesla Horizon
units in late September 1996. These units were purchased at a cost of
approximately $1.8 million each and the Company financed approximately $1.6
million and $1.5 million with 60 month finance agreements requiring monthly
payments of approximately $34,000 and $32,000, respectively.
The Company completed a previously negotiated upgrade of a .5 Tesla Signa to
a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net
cost of approximately $1.5 million with a 60 month finance agreement
requiring monthly payments of approximately $32,000.
On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto
Community Health Network (the "Network") for approximately $390,000 and
signed new service contracts with six South Carolina hospitals which are
members of the Network. This new unit represents the Company's eighteenth
mobile MRI unit and the seventh new unit acquired during 1996.
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ITEM 1. BUSINESS (continued)
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In December 1996, the Company upgraded the mobile MRI unit purchased from
the Network to a new 1.0T Horizon. The new unit was financed at a net cost
of approximately $1.4 million with a 60 month finance agreement requiring
monthly payments of approximately $30,000.
Lease Refinancing
During July 1996, the Company refinanced two of its Mobile MRI Units to more
favorable lease terms. The refinancing of the two units will reduce the
Company's annual debt service approximately $200,000.
Equipment
All of the Company's mobile MRI equipment is financed through capital leases
and finance agreements. Generally, the Company orders its equipment from the
manufacturer while simultaneously contracting with healthcare providers for
its use, thereby reducing the Company's risk.
The Company expects that future acquisitions of equipment will be made
pursuant to capital leases or purchase financing and the Company expects to
utilize working capital of $200,000 to $400,000 per unit to fund initial
down payments on the purchases, financing the balance of $1.5 million to
$1.6 million over typically a 60 month term.
MRI Equipment. Magnetic resonance imaging involves the use of high strength
magnetic fields and radio waves to produce cross-sectional images of the
anatomy. MRI and other medical diagnostic imaging systems facilitate the
diagnosis of disease and disorders at an early stage, often minimizing the
amount and cost of care needed to stabilize or cure the patient and
frequently obviating the need for invasive diagnostic procedures, such as
exploratory surgery. Diagnostic imaging systems are based on the ability of
energy waves to penetrate human tissue and generate images of the body which
can be displayed either on film or on a video monitor.
The major components of an MRI system are a large magnet, radio wave
equipment, and a computer for data storage and image processing. During an
MRI study, a patient lies on a table which is then placed into the magnet.
The patient spends approximately 15 to 45 minutes inside the magnet,
depending upon the type of diagnostic study, during which time images of
multiple planes are acquired. Images obtained from an MRI examination are
displayed on a computer screen in the form of a cross-section of the organ
or tissue. This information can be stored on magnetic media for future
access or printed on film for interpretation by a physician and retention in
the patient's files.
Other diagnostic imaging techniques include CAT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, mammography and conventional x-ray.
Available evidence suggests that MRI has advantages over other diagnostic
imaging methods, leading to its increased use. Except for ultrasound, these
other methods use ionizing radiation. MRI does not use ionizing radiation
and is thought to be risk-free for most patients. In addition, MRI provides
superior soft-tissue contrast, without artifacts from bony structures that
are sometimes apparent with x-ray based imaging techniques.
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ITEM 1. BUSINESS (continued)
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In addition to the absence of ionizing radiation, MRI offers several
significant advantages to CAT scanning. MRI has the ability to obtain
images of equally high resolution in multiple planes without moving the
patient. In certain cases, particularly those involving the nervous system,
MRI provides superior image resolution. In addition, the presence or amount
of certain abnormal tissue masses which may be undetected utilizing CAT
scanning may be detected utilizing MRI. This factor is important in the
early diagnosis of cancer, multiple sclerosis and other diseases.
Research is currently being conducted for additional uses of MRI and the
Company believes more applications for MRI may be discovered in the future.
Contrast agents enhance the use of MRI in the detection of neurological
lesions, including specific types of brain tumors. Contrast agents also
enhance images of the post-operative spine, and are under investigation for
use in the liver and other organ systems. MRI's role in the evaluation of
cardiac disease and diseases of the bone marrow and joints is also on the
increase. New technological developments are expected to extend the
clinical uses of this technology and to increase the number of scans
performed by the Company's customers. In October 1995, Medicare began to
reimburse MR Angiography (MRA) procedures on a limited basis. MRA utilizes
MRI technology to view blood flow of the head and neck. Prior to October
1995, MRA procedures were considered experimental and were not reimbursed by
Medicare. It is expected that additional MRA procedures will be approved by
Medicare in the near future.
The use of advanced imaging technologies has grown significantly in the
United States during the last several years due to increasing physician
acceptance of the value of advanced imaging technologies in the early
diagnosis of disease, the expanding applications of MRI (partially because
they do not involve ionizing radiation) and the growing patient base
attributable to an aging population. Hospitals and other healthcare
providers are facing competitive pressures to provide these technologies and
related services despite strict budgetary limitations and are increasingly
utilizing third parties such as the Company to provide the necessary
facilities and related services due to the substantial equipment and
personnel costs.
Changes in Medicare reimbursement systems have resulted in declining profit
margins for many hospitals and other healthcare providers, thereby reducing
capital available to purchase new and expensive equipment. In addition,
many medical professionals have become increasingly aware of the risks of
medical malpractice suits and believe that such risks would be reduced by
utilizing state-of-the-art medical technology and related services.
MRI has undergone a significant expansion since it became commercially
available to healthcare providers in 1983. Numerous significant
developments have occurred since that time, and further developments are
expected primarily in the computer software. MRI units are in general
easily upgraded and, therefore, can remain abreast of technological changes
through software updates. The Company has user agreements with the MRI
manufacturers which state, among other things, that such manufacturers will
provide software updates at no additional charge during the term of such
agreements. However, the development of new technologies or refinements of
existing ones might make the Company's existing equipment technologically or
economically obsolete or cause a reduction in the value of the Company's
equipment or reduce the need for its equipment.
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ITEM 1. BUSINESS (continued)
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All of the Company's MRI equipment is located in Mobile Units. The MRI
equipment is installed by the manufacturer in a specifically constructed van
jointly designed by the van's manufacturer and the equipment manufacturer.
The van is designed to provide medical facilities comparable to those found
in fixed-site MRI facilities.
Equipment Maintenance
Timely, effective service is essential to maintaining high utilization rates
on the Company's mobile MRI equipment. Should the Company experience
greater than anticipated malfunctions of its equipment or should it be
unable to promptly obtain the service necessary to keep its equipment
functioning effectively, its business would be adversely affected. The
Company's business also might be adversely affected if its suppliers stopped
providing maintenance service because, although other service providers are
available, it is uncertain whether or how effectively such other service
providers could provide equipment maintenance.
The Company contracts with the MRI equipment manufacturers for comprehensive
maintenance programs on its equipment to minimize downtime (the period of
time equipment is unavailable during scheduled use hours because of
malfunctions). These maintenance contracts are long-term in nature (greater
than five years), commencing upon the expiration of the applicable warranty
period. The equipment is generally warranted by the equipment manufacturer
for a specified period of time, usually one year to eighteen months from the
date of purchase. During the warranty period and maintenance contract term,
the Company receives uptime guarantees (a guarantee that the equipment will
function for a specified percentage of scheduled use hours.) However,
these guarantees are not expected to substantially compensate the Company
for loss of revenue for downtime.
The Company also carries a business interruption insurance policy, which
provides for an aggregate $1.0 million of coverage for its diagnostic
equipment, to help protect itself from unexpected long-term equipment
failures which would cost the Company more than the deductible amount.
Healthcare Providers
Many healthcare providers do not own MRI equipment because of insufficient
patient volume to justify the costs associated with the acquisition and
operation of such equipment. Depending upon type, features and options
selected, the MRI equipment costs between $1.6 million and $2.2 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
in-house diagnostic imaging equipment may still contract for the use of the
Company's services to supplement in-house imaging equipment primarily to
service patient backlogs or to have access to more state-of-the-art
equipment.
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ITEM 1. BUSINESS (continued)
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Among the reasons for such use of the Company's equipment are elimination of
the need to recruit and employ qualified technicians, avoidance of the risk
of technological obsolescence of the equipment, provision of short-term
mobile services to allow the customer to learn the technology, establishment
of a patient base before an in-house unit is installed, provision of
additional coverage when patient demand exceeds in-house capacity, lack of a
suitable interior location, reduction of the risks of medical malpractice
suits by utilizing state-of-the-art medical technology and related services
and changes in third-party reimbursement systems.
Marketing
The Company's executive officers currently spend a portion of their time
marketing the Company's services. In addition, the Company's regional vice
presidents spend a portion of his or her time attempting to attract
additional business. The Company currently has four marketing personnel,
including two hired during 1996, to market the Company's mobile MRI business
to referring physicians and existing customers.
A significant marketing resource for the Company has been existing customer
referrals. Additionally, the Company is the preferred vendor of services for
Amerinet, which is a nonprofit consortium of approximately 3,000 hospitals
and other healthcare providers nationwide.
The Company intends to concentrate much of its marketing efforts in
Pennsylvania, West Virginia, North Carolina, Virginia, Kentucky, Ohio, South
Carolina, and certain other southern states.
Competition
The healthcare industry in general, and the market for mobile diagnostic
imaging services in particular, is highly competitive. In addition to
direct competition from other diagnostic imaging providers, the Company must
compete with larger healthcare providers as well as private clinics and
radiology practices that own diagnostic imaging equipment and with equipment
manufacturers which sell equipment to healthcare providers for in-house
installation.
In addition, existing healthcare providers who are customers of the Company
may purchase equipment if their volume of patients increases to the point
that it becomes cost effective to own and operate their own equipment,
although the Company believes that the large capital expenditure required to
purchase such equipment and CONs (see Government Regulation) may discourage
many hospitals from doing so.
Several competitors operate fixed-site centers and/or Mobile Units in the
Company's primary service areas. Moreover, certain of these competitors may
have substantially greater financial resources than those of the Company,
which may give them advantages in negotiating equipment acquisitions and
responding quickly to new demand. The Company believes that it competes
effectively against other fixed-site and/or mobile providers based on its
ability to provide high quality equipment at competitive prices and because
of its reputation for service and reliability.
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ITEM 1. BUSINESS (continued)
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MRI competes with less expensive imaging devices and procedures which may
provide similar information to the physician. Alternative imaging
technology includes CAT scans, nuclear medicine, radiography/fluoroscopy,
ultrasound, mammography, and conventional x-ray. The cost of a particular
study depends upon the complexity of the procedure, the length of time of
equipment utilization and whether the procedure requires introduction of
contrast agents into the body. The Company believes that MRI's significant
benefits justify any pricing differential between MRI and other modalities.
Diagnostic imaging does not require proprietary information, trade secrets
or similar non-public intellectual property. Consequently, there are no
significant barriers to entry other than the costs of the equipment, hiring
of qualified technicians and management and, where applicable, Certificate
of Need regulations and other regulatory constraints (see Government
Regulation).
The diagnostic imaging industry is highly fragmented. Consolidation of the
diagnostic imaging industry has begun and is expected to continue into the
foreseeable future as companies acquire and merge and as numerous smaller,
inefficient companies discontinue business.
Reimbursement
The Company's revenues are currently derived from payments by hospitals
pursuant to mobile service contracts between the Company and the hospitals.
Under existing laws and regulations of certain states, the Company, as an
outside supplier, is prohibited from directly billing most hospital
inpatients or outpatients, or their insurers, for the services provided by
the Company.
Payments made by the hospitals are generally subject to the various laws,
regulations and practices of governmental and commercial insurance programs,
including Medicare, Medicaid and Blue Cross and Blue Shield Plans, because
the insurers' reimbursement practices indirectly affect the level of fees
the Company may charge. However, hospital payment obligations to the
Company under the service contracts are not directly conditioned upon the
hospital's receipt or level of reimbursement from the third party payor or
the patient.
Payments for Company Services to Hospital Patients. Medicare, which was
enacted as part of the Social Security Act of 1965, and frequently amended
since then, provides for the payment of certain healthcare benefits,
including inpatient and outpatient hospital services, to persons who are 65
years of age or older, disabled or who qualify for the End Stage Renal
Disease program. Beginning October 1, 1983, Medicare implemented a
prospective payment system ("PPS") for most inpatient hospital services.
Under PPS, reimbursement for the operating costs of inpatient services was
shifted from a reasonable and allowable cost-based system to a system
providing a fixed payment for each Medicare discharge without regard to the
actual cost incurred. Each patient is classified into one of approximately
490 diagnosis-related groups ("DRG") and payment is made according to the
DRG. With certain exceptions, the PPS payment is not adjusted for variations
in length of stay or intensity or utilization of services. Consequently,
the DRG reimbursement received by the hospital for inpatient services
rendered to a Medicare beneficiary may not be adequate to cover its costs of
providing services.
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ITEM 1. BUSINESS (continued)
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Under PPS, payment for the Company's services furnished to an inpatient is
included in the DRG payment to the hospital. The Medicare patient is also
responsible for reimbursing the hospital for certain co-insurance and
deductible amounts for the inpatient services furnished.
Since 1985, only minimal increases in the Medicare PPS rates have been
authorized by Congress. In addition, payments to hospitals by Medicare have
been subject to automatic reductions from time to time under the Balanced
Budget and Emergency Deficit Control Act of 1987 (the "Gramm-Rudman Act").
The OMNIBUS Budget Reconciliation Act of 1993 ("OBRA 1993") calls for a
reduction in spending by Medicare of $55.8 billion over a five year period
beginning October 1, 1993, including payments for inpatient hospital and
outpatient care.
Beginning October 1, 1991, Medicare phased in a PPS system to reimburse
hospitals for a portion of their capital costs incurred in providing
services to Medicare beneficiaries. Previously, such capital costs were
reimbursed on a reasonable cost basis. This new reimbursement system will
have varying impacts on hospitals, including those hospitals with which the
Company has contracted, in terms of their capabilities to acquire MRI and
other diagnostic equipment and provide services that may compete with those
of the Company.
While a PPS system has not been implemented for hospital outpatient
services, beginning October 1, 1988, payment to hospitals for outpatient
radiology services, including MRI technical services provided by the
Company, became subject to certain limitations. Under the Omnibus Budget
Reconciliation Act of 1987, Medicare payment is limited to the lesser of (a)
the lower of the hospital's costs or charges or (b) a "blended amount" of
50% of the hospital's specific costs and 50% percent of the Medicare fee
schedule amount applicable to similar services furnished in a physician's
office. The Omnibus Budget Reconciliation Act of 1986 prohibited mobile
vendors, such as the Company, from billing Medicare directly for services to
Medicare outpatients. This "rebundling" was designed to provide a basis for
the future implementation of a PPS system for hospital outpatients. Such
changes in the reimbursement system for outpatient services may lead to
further reductions in payments by Medicare which could adversely affect the
Company's charge levels.
During 1995 and 1996, Congress and the President debated a balanced budget
amendment which called for balancing the federal budget in seven years. To
date, such debate has included discussions of reducing the rate of growth of
Medicare, Medicaid and Social Security. Such debate continues and the
Company is not able to predict the outcome of the final budget compromise,
the effect of the final budget compromise on Medicare and Medicaid
reimbursements nor the effect of these proposed changes on the Company's
operations.
Medicaid is a joint federal and state program, administered primarily by the
states, which is designed to provide reimbursement for healthcare services
to certain medically and financially needy individuals. Medicaid
reimbursement principles vary among states, although they are generally
based on Medicare reimbursement principles, including PPS and rebundling of
services provided by vendors, such as the Company, for payment purposes.
Medicaid payments to hospitals in many states have been lower than Medicare
reimbursements and, in recent years, the adequacy of Medicaid payment rates
has been successfully challenged by providers in various states, including
Pennsylvania. However, because of the fiscal difficulties which many states
are experiencing, there
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ITEM 1. BUSINESS (continued)
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can be no guarantee that the payments made by the states for healthcare
services will be adequate to cover the costs incurred by providers or will
not adversely affect the Company's level of charges.
Blue Cross and Blue Shield Plans and other commercial insurers provide third
party reimbursement to hospitals for inpatient and outpatient services to
their subscribers on the basis of various formulas. Renegotiation of such
formulas and reductions in reimbursement may indirectly affect charge levels
or payment by the hospitals for the Company's mobile services, although it
is not possible to predict the effect of such changes at this time.
Other Reimbursement Matters. Many insurance companies, employers and other
payors are increasing their use of managed care plans such as health
maintenance organizations ("HMOs") and preferred provider organizations
("PPOs") as a means of controlling their healthcare costs.
In addition to contracting with selected healthcare providers to provide
healthcare services, often at a discount or on a capitation basis, such
plans engage in strict utilization review activities to more closely control
the utilization of services by their subscribers. The Company has begun
discussions with certain HMOs and PPOs. However, there can be no certainty
that the Company will be able to contract with such HMOs or PPOs and there
can be no assurance that the increased use of managed care plans in the
Company's service areas will not affect its level of charges or the demand
for its services.
Numerous changes have been made in governmental and commercial insurance
programs in recent years in an effort to reduce the extent to which these
third-party payors absorb increases in medical costs. Some third-party
payors have also experienced difficulties in meeting their payment
obligations whether on a timely basis or otherwise. In addition, a number
of bills proposing to regulate, control or alter the methods of financing
and delivering healthcare, including proposals for a national health
insurance program, have been discussed and introduced in Congress and
various state legislatures. The effect of any of these proposals or changes
by existing insurers in their reimbursement methodologies on the healthcare
industry and the Company cannot be determined at this time.
Government Regulation
General. The provision of diagnostic imaging services is subject to a
number of federal, state and local laws, regulations and rules, some of
which are very complex. Although the Company believes that it is currently
in compliance with applicable laws, regulations and rules, some of such laws
are broadly written and subject to little or no interpretation by courts or
administrative authorities. Hence, there can be no assurance that a third
party or governmental agency will not contend that certain aspects of the
Company's operations or procedures are not in compliance with such laws,
regulations or rules or that state agencies or courts would interpret such
laws, regulations and rules in the Company's favor. The sanctions for
failure to comply with such laws, regulations or rules could be denial of
the right to conduct business, significant fines and/or criminal penalties.
The Federal Health Insurance Portability and Accountability Act, enacted in
August 1996, expanded the
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ITEM 1. BUSINESS (continued)
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Civil and Criminal sanctions for violations of such laws and provided for
increased governmental and private enforcement programs. Additionally, an
increase in the complexity or substantive requirements of such laws,
regulations or rules could adversely affect the Company's business.
Certificate of Need. In addition, several states in which the Company
operates have CON laws and regulations that control and regulate the
establishment of healthcare facilities and services and the acquisition and
operation by hospitals and other providers of major equipment such as MRI
units and other diagnostic imaging equipment. In several states in which
the Company operates, a hospital or the Company may need a CON before the
Company can provide its diagnostic imaging services. CON regulations could
inhibit the expansion of the Company's business. Pennsylvania's CON law
expired in December 1996 and a new CON law has not been enacted. While
discussions of a new CON law are on-going, it is not known whether the
Pennsylvania legislature will adopt a new CON law. However, the
Pennsylvania Department of Health issued a Policy Statement on December 14,
1996 addressing its intent to strictly enforce the licensing requirements
which continue in effect under the Healthcare Facilities Act.
Practice of Medicine. The establishment, marketing and operation of the
diagnostic imaging units are subject to laws prohibiting the practice of
medicine by non-physicians. The Company's employees provide only the
technical services relating to the diagnostic procedures (under the
supervision of licensed physicians) and the related non-medical
administrative support services. Professional medical services, such as the
reading of the diagnostic imaging studies and related diagnosis, are
separately provided by licensed physicians. The Company does not employ any
physicians to provide medical services. There can be no assurance, however,
that state authorities or courts will not determine that the Company's
services and/or relationships with providers constitute the unauthorized
practice of medicine by the Company.
Fraud and Abuse Laws. The Social Security Act and certain provisions of
state law provide civil and criminal penalties for persons who knowingly and
willfully solicit, pay, offer or receive any remuneration, directly or
indirectly, as an inducement to make a referral of a patient for services or
items for which payment may be made under the Medicare or Medicaid programs.
Often termed "fraud and abuse" or "anti-kickback" laws, the provisions have
been broadly interpreted by the courts.
The Office of Inspector General of the Department of Health and Human
Services ("HHS") has issued regulations specifying certain business
arrangements and payment practices involving providers or other entities,
such as the Company, which will not be considered prohibited activities.
Commonly termed "safe harbor regulations," the regulations set forth certain
standards which, if satisfied, will ensure that the arrangement will not be
subject to criminal prosecution or civil sanctions under the fraud and abuse
laws. Failure to satisfy the safe harbors in and of itself does not render
an arrangement illegal. The Company believes it is in compliance with the
safe harbor regulations applicable to its current operations.
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ITEM 1. BUSINESS (continued)
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One principal focus of the fraud and abuse laws has been on arrangements in
which profit distributions are made by a partnership or other business
venture for health-related items or services to investors who make or are
otherwise in a position to influence referrals of Medicare or Medicaid
patients to the venture. Where such arrangements exist, a question is
raised as to whether the profit distributions are illegal payments in
exchange for referrals. Certain safe harbors set forth criteria which, if
met, will insure that investors in business ventures for health-related
items or services will not be subject to scrutiny under the fraud and abuse
laws.
One safe harbor involves investments in publicly traded companies with
tangible assets of more than $50 million. At present, the Company does not
satisfy this safe harbor.
Another safe harbor covers investment interests in small entities. The
conditions for compliance with this safe harbor include requirements that no
more than 40% of the investment interests of each class of investments in
the entity may be held by persons who are in a position to make or influence
referrals (including hospitals and physicians), furnish items or services to
the entity or otherwise generate business of the entity, so-called "tainted
investors," and that no more than 40% of the entity's gross revenues may
come from referrals, items or services furnished or business otherwise
generated by "tainted investors." Unless a large percentage of the
Company's Common Stock is held by "tainted investors," it would appear that
investments in the Company will fall within the safe harbor for investment
interests.
None of the Company's mobile MRI activities are carried out through
partnerships or other ventures with hospitals, physicians or other third
parties. The Company believes that its investments in partnerships which
operated the cardiac care centers complied with current fraud and abuse
laws. Such investments were sold in June 1995.
There can be no assurance that enforcement agencies or courts will determine
that any existing arrangements comply with all applicable laws and
regulations.
Other Patient Referral Restrictions. Pennsylvania, as well as other states
in which the Company operates, prohibits the referral of Medicaid patients
for services or items by a provider in which the referring physician has an
ownership interest. Certain states do not restrict patient referrals but do
require the disclosure to a patient by the referring physician of a
financial interest in a facility or vendor to which the patient is being
referred for services or items.
Stark II. The Omnibus Budget Reconciliation Act of 1993, enacted new
federal anti-referral legislation, more commonly know as "Stark II" after
its prime sponsor, Rep. Fortney "Pete" Stark (D. Calif.). Effective January
1, 1995, Stark II bans referrals by physicians of Medicare and Medicaid
patients to entities for certain designated health services, including MRI
services, if a physician or immediate family member has a prohibited
financial relationship with the entity providing the service. A financial
relationship is generally defined as an ownership or investment interest in,
or compensation arrangement with the entity, subject to certain exceptions.
Penalties include nonpayment for services rendered pursuant to a prohibited
referral, civil money penalties and fines and possible exclusion from the
Medicare and Medicaid programs. The Company believes it is currently in
compliance with the requirements of Stark II. However, there can be no
assurance
-12-
<PAGE>
ITEM 1. BUSINESS (continued)
--------
that enforcement agencies or courts will determine that existing
arrangements comply with all applicable laws and regulations.
Other Requirements Concerning Licensing, Permits and Approvals. Most states
do not currently license MRI providers such as the Company. Hospitals with
which the Company has contracted are subject to a variety of regulations and
standards of state licensing and other authorities and accrediting bodies
such as the Joint Commission for the Accreditation of Healthcare
Organizations ("JCAHO"). As an outside vendor, the Company may be required
to comply with such regulations and standards to enable the hospitals with
which it has contracted to maintain their permits, approvals and
accreditation.
During January 1997, the Company received Accreditation with Commendation
from the Joint Commission for the Accreditation of Healthcare Organizations
("JCAHO").
There can be no assurance that future changes in the laws and regulations
relating to the delivery of healthcare items and services may require the
Company or any venture involving the Company to obtain and maintain certain
governmental approvals for continued operations. It is not possible to
predict the effect of such changes in the law on the Company at this time.
For the most part, the Company's employees need not have special licenses.
Drivers of trucks must have certain special driving licenses. MRI
technicians are not required to have licenses in any of the states in which
the Company does business. However, many states are holding discussions to
require such licensing. The Company believes that any such licensing
requirement would not have an adverse impact on the Company. Beginning in
1995, MRI technologists were required to meet certain continuing education
requirements. The Company and its employees are fully complying with this
requirement.
Freestanding Healthcare Centers
During 1991 and 1992, the Company initiated what it then believed was a
natural progression into the operation of outpatient full service diagnostic
imaging centers and freestanding radiation therapy facilities (outpatient
healthcare centers). The Company's expansion into these businesses was
based upon the belief that (i) numerous opportunities existed to develop or
acquire outpatient healthcare facilities due to new regulatory changes
enacted (see "Fraud and Abuse Laws" and "Other Patient Referral
Restrictions"), (ii) once mature, the healthcare facilities it developed or
acquired could generate substantial incremental earnings and (iii)
freestanding healthcare facilities would complement the Company's current
mobile MRI business. During 1992, the Company acquired one full-service
freestanding diagnostic imaging center and developed one freestanding
radiation oncology facility. However, through December 31, 1993, these
outpatient healthcare centers operated below expectation and incurred
substantial losses while the Company's core mobile business sustained an
increase in revenues and profit. Further, with continued uncertainty in the
healthcare industry surrounding the Clinton Administration's efforts to
reform healthcare, the Company has seen an increase in the demand for its
mobile MRI services. Based upon continued growth and profitability of its
core mobile MRI business, as well as the belief that the Company's capital
and other resources were insufficient to properly support continued growth
in its core mobile
-13-
<PAGE>
ITEM 1. BUSINESS (continued)
--------
MRI business and the opening of outpatient healthcare centers, the decision
was made in December 1993 to sell the freestanding full-service diagnostic
imaging center and the freestanding radiation oncology center.
The Company sold substantially all of the assets of the Auburn Regional
Center for Cancer Care on October 31, 1994. The sale price of the Auburn
Regional Center for Cancer Care was approximately $1.3 million comprised of
$400,000 in cash and the assumption of certain liabilities of the Center.
The Company remains obligated on approximately $270,000 of capital leases as
of December 31, 1996. The buyer has agreed to use its best efforts to have
the Company released from these leases and has secured its obligations to
the Company to perform on these leases through a pledge of certain assets in
favor of the Company (see Note 3 and Note 13 of the Company's Consolidated
Financial Statements incorporated herein by reference).
On June 30, 1995, the Company completed the sale of substantially all of the
assets of its remaining freestanding diagnostic imaging center, Airport
Regional Imaging Center ("Airport Center"), located in Coraopolis,
Pennsylvania for a total sale price of approximately $300,000, including
cash and net trade receivables. Although the buyer assumed all future
operating liabilities of the Airport Center, the Company remains obligated
on approximately $600,000 of capital leases as of December 31, 1996. The
buyer has agreed to use its best efforts to have the Company released from
these leases and has secured its obligations to the Company to perform on
these leases through a pledge of stock and certain assets in favor of the
Company (see Note 3 and Note 13 of the Company's Consolidated Financial
Statements incorporated herein by reference).
On June 30, 1995, in conjunction with the sale of the Airport Center, the
Company sold its majority ownership and general partner rights in four
cardiac care partnerships for a total sale price of $300,000 comprised of
$200,000 in cash and a $100,000, thirty-month note. The Company recognized
a pre-tax gain on this sale of $48,219. The partnerships, which constituted
approximately seven percent of the Company's revenues, had total assets of
approximately $1.4 million, comprised primarily of diagnostic equipment and
accounts receivable, and total liabilities of approximately $1.2 million
comprised primarily of capital lease obligations associated with the
diagnostic equipment.
Tractor Leases
Prior to July 1, 1995, the Company subleased certain truck cabs from Shared
Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an
independent third party leasing company. Effective July 1, 1995, SME
released the Company from its obligations under ten long-term subleases in
exchange for the issuance to SME of 120,000 unregistered Common Shares
valued at $3 per share, the weighted average closing price for the stock for
the prior thirty trading days. The Company received an opinion from an
independent financial advisor that the transaction was fair to the Company
and its shareholders. At the same time, with the concurrence of the third
party leasing company, the Company assumed SME's obligations under its
original lease and modified that lease by (1) extending the lease term by
one additional year and (2) adding one additional truck cab to the schedule
of leased property with a corresponding increase in base rental payments.
The $360,000
-14-
<PAGE>
ITEM 1. BUSINESS (continued)
--------
value of the shares represents the present value of the excess of the
sublease payments over the original lease payments. The Company has
capitalized the $360,000 and is amortizing this prepaid rent over a period
which approximates the lease term. SME was one hundred percent beneficially
owned by certain officers/directors and a former director/consultant of the
Company who own approximately 14% of the Company's outstanding Common
Shares.
Insurance
SMT carries workers' compensation insurance, comprehensive and general
liability coverage, business interruption insurance, and fire and allied
perils coverage in amounts deemed adequate by management.
While the Company's Mobile Units are at a customer's facility, they operate
only under the direction of licensed physicians on the customer's staff who
direct the procedures, supervise the Company's technologists and interpret
the results of the examinations. The Company requires that the licensed
physicians carry malpractice insurance to cover their individual practices.
Currently, there are no known biological hazards associated with MRI.
However, there is a risk of harm to a patient who has a ferrous material or
a cardiac pacemaker within his or her body. Patients are carefully screened
to safeguard against this risk. To protect against possible exposure for
professional liability, the Company maintains a professional liability
policy to cover all of its operations. There is no assurance that the
insurance coverage maintained by the Company, now or in the future, will be
adequate.
Employees
As of December 31, 1996, the Company had 96 full-time employees, including
six executive personnel, six accounting, marketing, administrative and
clerical personnel, seven managers, 59 imaging technologists and eighteen
drivers. The Company also employs 21 part-time employees. None of the
Company's employees are represented by labor organizations and the Company
is not aware of any activity seeking such representations. The Company
considers its relationships with its employees to be excellent.
ITEM 2. PROPERTIES
----------
The Company owns no real property and leases approximately 5,500 square feet
of office space in Wexford, Pennsylvania. The lease for the Company's
principal facility expires on April 30, 1999.
-15-
<PAGE>
ITEM 3. LEGAL MATTERS
-------------
The Company had been named as a defendant along with a hospital which
contracts for the Company's MRI services, in a claim filed by a woman who
alleged to have incurred partial paralysis as a result of being mishandled
during an MRI procedure. The claim had been filed for $6.0 million in
damages. This claim was settled by the Company's insurance company in
November 1996 with no admission of liability by the Company and no financial
effect to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1996.
Executive Officers of the Registrant
The following persons are the current executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- --- -----------------------------------
<S> <C> <C>
Jeff D. Bergman 42 President, Chief Executive Officer,
Chairman of the Board & Director
Daniel Dickman 50 Executive Vice President, Chief
Operating Officer, Secretary &
Director
David Spindler 45 Senior Vice President of Clinical
Operations & Marketing
David A. Zynn 33 Chief Financial Officer, Treasurer
& Assistant Secretary
</TABLE>
Mr. Bergman has been Chief Executive Officer, Chairman of the Board,
President and a Director of the Company since its formation in 1991 and held
the same positions with the Company's predecessor since 1987. From 1979 to
1982, he was employed by BOC-AIRCO as a Marketing Representative for the
Corporate Steel Division. In 1983, Mr. Bergman joined Mobile Diagnostech,
Inc. ("MDI"), a provider of mobile CAT scanners and MRI equipment and as a
developer and manager of fixed-site oncology centers. Mr. Bergman received
his B.S.B.A. from Robert Morris College. In 1987, Mr. Bergman left MDI and
formed the Company. Mr. Bergman is also an official in the National
Football League. Mr. Bergman officiated Super Bowl XXXI in New Orleans, LA
in January 1997.
-16-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Continued)
Mr. Dickman has been Executive Vice President, Chief Operating Officer,
Secretary and a Director of the Company since 1991 and held the same
positions with the Company's predecessor since 1988. From 1985 to 1987, Mr.
Dickman was responsible for the management and day-to-day operations of
Mobile Diagnostech, Inc.'s ("MDI") MRI equipment and CAT scanners. In 1987,
Mr. Dickman joined the Company to manage the Company's equipment routes. He
has over 12 years' experience in healthcare management consulting and
systems design, and was formerly employed by Blue Cross of Western
Pennsylvania as Manager of Hospital Consulting. Mr. Dickman received his
B.S.B.A. from Notre Dame University and his M.B.A. from Gannon University.
Mr. Spindler has been Vice President of Clinical Operations and Marketing
for the Company since 1991 and held the same positions with the Company's
predecessor since 1988. From 1979 to 1984, Mr. Spindler was a Sales
Representative with BOC-AIRCO (a major supplier of cryogens for MRI
systems). In 1984, he joined M.G. Industries where he was an Account
Representative. In 1986, Mr. Spindler joined Helium Technologies where he
was a Division Manager. Mr. Spindler received his B.S.B.A. from Slippery
Rock University and his M.B.A. from Robert Morris College. Mr. Spindler is
also a Captain in the United States Army Reserves.
Mr. Zynn has been Chief Financial Officer, Treasurer and Assistant Secretary
since September 1991. From January 1986 to December 1989 and August 1990 to
August 1991, Mr. Zynn was employed by KPMG Peat Marwick LLP in several
capacities, first as a staff accountant and finally as an audit manager and
a national instructor of auditing and accounting. From January 1990 to
August 1990, Mr. Zynn was employed by Black Box Incorporated as the Manager
of Financial Reporting. Mr. Zynn is a certified public accountant and a
member of the Healthcare Financial Management Association and American
Management Association. Mr. Zynn received his B.S.B.A. from Indiana
University of Pennsylvania.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
---------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The following table sets forth the range of high and low prices of the
Common Stock (SHED) and Warrants (SHEDW) from January 1, 1995 through
December 31, 1996. On November 3, 1995 and November 16, 1995, respectively,
the Company's Common Stock and Warrants began to trade on the NASDAQ
National Market System. Prior to trading on the NASDAQ National Market
System, the Company's Common Stock and Warrants traded on the NASDAQ Small
Cap Market. For the period through January 1, 1995 through October 31,
1995, the table sets forth the range of high and low closing bid prices of
the Common Stock and Warrants. For the period November 1, 1995 through
December 31, 1996, the table sets forth the range of high and low trading
prices of the Common Stock and Warrants. Such prices represent inter-dealer
quotations, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
COMMON STOCK AND WARRANTS
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
------------ -------- ------ -----
<S> <C> <C> <C> <C>
Quarter ended March 31, 1995 3 1/16 2 9/16 3/8
Quarter ended June 30, 1995 3 7/8 2 5/8 7/16 1/4
Quarter ended Sept. 30, 1995 4 5/8 3 5/8 11/16 5/16
Quarter ended Dec. 31, 1995 4 7/8 3 7/8 23/32 15/32
Quarter ended March 31, 1996 4 9/16 3 3/4 7/16 1/4
Quarter ended June 30, 1996 10 3/4 4 1/16 3 7/8 3/8
Quarter ended Sept. 30, 1996 8 5/8 5 3/8 2 3/4 13/16
Quarter ended Dec. 31, 1996 8 5/8 6 5/8 2 1/16 7/8
</TABLE>
The Company has not paid out cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future on the Common
Stock. Cash dividends, if any, which may be paid in the future to holders
of the Common Stock will be payable when, if and as declared by the Board of
Directors of the Company, based upon the Board's assessment of, among other
things, the financial condition of the Company, its earnings, need for
funds, capital requirements and other factors, including any applicable
laws.
The Company estimates that as of December 31, 1996 there were approximately
1,550 beneficial holders of the Common Stock.
-18-
<PAGE>
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
--------------------------------------------------
STOCKHOLDER MATTERS (continued)
-------------------
Recent Sales of Unregistered Securities
---------------------------------------
As additional compensation in connection with the initial public offering,
the Company granted to the Company's Initial Public Offering underwriter an
option to purchase options which covered 120,000 units, each unit consisted
of 1.05 shares of Common Stock and one Company Warrant to purchase 1.05
shares of Common Stock. The Option was exercisable until March 4, 1997 and
entitled the underwriter to purchase each unit at an exercise price equal to
$5.94, subject to adjustment in certain events. The underwriter
subsequently transferred the Options to principles of the underwriter
(Transferees), who exercised the Options during 1996 resulting in net
proceeds to the Company of approximately $719,000. During August 1996, one
of the Transferrees exercised 24,000 Warrants to purchase 25,200 shares of
Common Stock of the Company resulting in additional proceeds to the Company
of approximately $168,000.
In February 1994, the Board of Directors granted additional vested options
to purchase 42,000 shares of the Company's Common Stock at an exercise price
of $1.78 per share, the fair market value of the Common Stock at the date of
grant, to two non-management members of the Board of Directors. During June
and September 1996, the two non-management members of the Board of Directors
(one now a former director), exercised the 42,000 options and sold 42,000
shares of Common Stock received upon the option exercise. The Company
realized net proceeds of approximately $75,000 from the exercise of the
42,000 options.
On August 9, 1995, the Company adopted the 1995 Director Warrant Plan (the
"Plan") pursuant to which eligible directors received unregistered warrants
to purchase Common Stock (the "Directors' Warrants"). The Plan allows for
issuance of warrants to purchase up to 700,000 shares of Common Stock.
On August 9, 1995, warrants to purchase up to 500,000 shares of Common Stock
at an initial exercise price of $3.875 (the closing price of the Company's
stock on the date of issue) were issued to five directors pursuant to the
Plan. Separately, unregistered warrants to purchase 114,500 shares of
Common Stock at an initial exercise price of $4.01 were also issued to an
outside director, who was also a consultant to the Company, who was
ineligible to participate in the Plan.
During May 1996, the outside director who was also a consultant to the
Company exercised the 114,500 Warrants and sold 114,500 shares of Common
Stock. The Company received cash proceeds of approximately $459,000 related
to the exercise of such Warrants.
During January 1997, the Company's three outside directors each exercised
25,000 Director Warrants and sold 26,750 shares of Common Stock (after
adjustment for the January 1997 7% Common Stock dividend). The Company
received cash proceeds of approximately $291,000 as a result of the exercise
of the 75,000 Director Warrants.
-19-
<PAGE>
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
--------------------------------------------------
STOCKHOLDER MATTERS (Continued)
-------------------
Recent Sales of Unregistered Securities (continued)
---------------------------------------
In October 1995, the Company signed an agreement retaining Commonwealth
Associates ("Commonwealth") as its investment banking firm. Commonwealth, a
New York-based investment banking firm specializing in serving the financial
needs of emerging growth companies, had been engaged to assist the Company
in establishing a long-term financial strategy and in evaluating possible
transactions involving other mobile diagnostic providers. In addition to a
cash retainer, the Company granted to Commonwealth 100,000 five-year
Warrants to purchase the Company's Common Stock at $4.47, the closing bid
price of the Common Stock on the day the Agreement was executed. The
agreement with Commonwealth expired in April 1996. During July and October
1996, Commonwealth or a designated employee of Commonwealth exercised the
100,000 Warrants in a net transaction and the Company issued to Commonwealth
or the designated employee an aggregate of 36,061 shares of Common Stock of
the Company.
All of the above Warrants, options and shares which were privately placed
were issued without registration in reliance upon Section 4(2) of the
Securities Act of 1933, as amended.
-20-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth the consolidated financial data and operating
information of the Company. The following data should be read in conjunction
with the Company's Consolidated Financial Statements and accompanying footnotes
to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Earnings Data:
Revenues $19,212,353 $15,157,845 $13,282,185 $11,906,319 $ 8,735,137
Depreciation and
amortization 4,724,909 3,679,246 3,163,606 2,755,824 2,070,095
Interest 2,041,247 1,757,551 1,637,556 1,715,529 1,567,712
Write-down of leased
medical equipment -- -- -- 625,000 --
Income (loss) from
continuing operations
before income taxes 3,588,861 1,851,217 635,758 (105,217) 211,288
Income (loss) attributable
to Common Stockholders
from continuing operations 2,410,861 1,373,217 542,258 (93,067) 198,486
Net income (loss) from
continuing operations per
Common Share (1) $.61 $.46 $.20 ($ .04) $.08
Weighted average
Common Shares
outstanding (1) 3,232,505 2,770,230 2,705,388 2,641,188 2,258,128
December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
Consolidated Balance
Sheet Data:
Working capital
(deficit) $ 587,040 $ 405,349 ($ 251,536) ($ 421,086) $ 1,956,009
Total assets 39,497,563 23,347,805 20,622,953 18,391,871 18,739,079
Long-term debt and
capital lease
obligations less
current portion 20,859,964 12,709,905 12,618,013 11,077,532 9,477,846
Minority interests -- -- 145,188 165,356 122,435
Stockholders' equity (2) 11,399,543 5,401,653 3,653,312 3,243,054 5,553,613
</TABLE>
(1) Weighted average shares outstanding for 1996 and 1995 have been calculated
using the Modified Treasury Stock Method. Weighted average Common Shares
outstanding for all periods presented have been adjusted to reflect a 1995 5%
Common Stock dividend and a 7% Common Stock dividend paid January 1997 (See Note
2 and Note 12 to the Company's Consolidated Financial Statements included in
Item 8, which information is incorporated herein by reference).
(2) During the periods presented, the Company did not pay any cash dividends on
its Common Stock.
-21-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Any statements released by the Company that are forward-looking are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward-looking statements
involve risks and uncertainties which may affect the Company's business and
prospects, including economic, competitive, governmental, technological and
other factors discussed in the Company's filings with the Securities and
Exchange Commission.
Results of Operations
- ---------------------
The following table sets forth, for the period indicated, the percentages which
the items in the Statement of Earnings bear to revenue and the dollar increase
(decrease) of such items as compared to the prior year.
<TABLE>
<CAPTION>
Percentage of Revenue Increase (Decrease)
----------------------- -------------------
Year Ended December 31,
-----------------------
1996 1995
Versus Versus
1996 1995 1994 1995 1994
----------------- ---------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% $4,055,000 $1,876,000
---- ---- ---- ---------- ----------
Costs & expenses:
Operating 33% 36% 44% 884,000 (496,000)
Depreciation and
amortization 24% 24% 24% 1,046,000 516,000
S, G & A 15% 16% 14% 405,000 578,000
Interest 11% 12% 13% 284,000 120,000
Other ( 2%) -- -- ( 300,000) --
---- ---- ---- ---------- ----------
Total costs & expenses 81% 88% 95% 2,319,000 718,000
---- ---- ---- ---------- ----------
Income from continuing
operations before taxes,
minority interests and
gain on sale 19% 12% 5% 1,736,000 1,158,000
Minority interests -- -- -- ( 50,000) ( 9,000)
---- ---- ---- ---------- ----------
Income from continuing
operations before taxes
and gain on sale 19% 12% 5% 1,786,000 1,167,000
Gain on sale of partnership
interests -- -- -- ( 48,000) 48,000
---- ---- ---- ---------- ----------
Income from continuing
operations before
income taxes 19% 12% 5% 1,738,000 1,215,000
Income taxes 6% 3% 1% 700,000 384,000
---- ---- ---- ---------- ----------
Income from continuing
operations 13% 9% 4% 1,038,000 831,000
Discontinued operations, net -- -- ( 1%) -- 132,000
---- ---- ---- ---------- ----------
Net income 13% 9% 3% $1,038,000 $ 963,000
==== ==== ==== ========== ==========
</TABLE>
-22-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
1996 Versus 1995
----------------
The Company achieved a considerable increase in profitability during 1996.
Net income during 1996 increased $1,038,000, or 76%, to $2,411,000 (or $.61
per share) from $1,373,000 (or $.46 per share) during 1995 (see Note 2 of
the Company's Consolidated Financial Statements included in Item 8, which
information is incorporated herein by reference, for a discussion of the
Modified Treasury Stock Method of computing earnings per share). The
earnings per share data for both periods has been adjusted to reflect the 7%
Common Stock dividend paid January 14, 1997 to all shareholders of record on
January 10, 1997 (See Note 12 of the Company's Consolidated Financial
Statements included in Item 8, which information is incorporated herein by
reference). The increase in profitability is principally due to increased
revenues attributed to new units placed into service in late 1995, seven
additional units placed into service throughout 1996, the upgrade of four
units to newer technology in 1996, as well as increased utilization of the
Company's mobile MRI units. Lower financing costs and higher down payments
on new and upgraded mobile MRI units have also contributed to the increased
profitability during 1996. The Company operated an average of approximately
14 units during 1996.
Revenues during 1996 increased $4,055,000, or 27%, to $19,212,000 compared
to $15,158,000 in 1995. Excluding 1995 revenues of approximately $548,000
related to the Company's cardiac partnerships, which were sold on June 30,
1995, mobile MRI revenues increased approximately 32%. This increase in
revenue was primarily attributed to the aforementioned new units placed into
service during late 1995, the seven additional units placed into service
during 1996, the upgrade of four units to newer technology in 1996 and the
increased utilization of the Company's existing mobile MRI units. Revenues
derived from hospitals which the Company serviced in both comparable periods
increased approximately 13% in 1996 compared to 1995 primarily as a result
of increased MRI procedures. During 1996, the Company performed 45,185 MRI
scans, representing an increase of 12,103 scans, or 37%, over the 33,082 MRI
scans during 1995. Average scans per day per unit increased .5 to 10.9
scans per day during 1996 compared to 10.4 during 1995. The average fee per
scan for 1996 approximated $408 for 1996 versus $435 for 1995. The $27, or
6% decrease in average fee per scan primarily related to discounted fees
provided to customers based upon higher scan volumes.
Operating expenses increased $884,000, or 16%, to $6,280,000 during 1996
compared to $5,396,000 in 1995. Excluding approximately $179,000 of
operating expenses associated with the cardiac partnerships which were sold
on June 30, 1995, mobile MRI operating expenses increased $1,063,000
primarily due to approximately $1,350,000 of operating expenses associated
with the Company's new units purchased in late 1995 and the seven units
added during 1996, partially offset by a decrease of approximately $287,000,
or 6%, in operating expenses of units in operation for both comparable
periods. This 6% decrease is primarily a result of $141,000 savings on
state sales tax on certain units, $122,000 savings on lower maintenance and
cryogen contracts, $64,000 savings on
-23-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
1996 Versus 1995 (continued)
----------------
the rental of tractors used to transport the MRI units and $42,000 savings
on general repairs and maintenance costs, partially offset by higher payroll
costs for operating personnel. Operating expenses per scan decreased $24,
or 15%, to approximately $139 compared to $163 per scan during 1995.
Depreciation and amortization expenses increased $1,046,000, or 28%, in 1996
to $4,725,000 from $3,679,000 in 1995. This increase was primarily due to
depreciation expense associated with the Company's new units purchased
during late 1995, the seven additional units placed into service in 1996, as
well as the four units upgraded during 1996.
Selling, general and administrative costs for 1996 increased $405,000 to
$2,877,000, or 15% of revenues, compared to $2,472,000, or 16% of revenues
in 1995. The increase is primarily due to an approximate $200,000 increase
in executive compensation and costs related to the Company's management
bonus plan. The remaining increase is due to higher corporate expenses such
as travel, insurance and costs associated with the Company's Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO")
accreditation.
Interest expense for 1996 increased $284,000 to $2,041,000 from $1,758,000
in 1995, primarily as a result of the new units purchased during late 1995,
the seven additional units placed into service in 1996 as well as the four
units upgraded during 1996. However, interest expense decreased as a
percentage of revenue to 11% in 1996 compared to 12% of revenue in 1995.
This decrease as a percentage of revenue is primarily due to higher down
payments on new and upgraded mobile MRI units as well as more favorable
lease terms obtained on unit financings and refinancings during 1995 and
1996.
Other expense in 1996 reflects a $300,000 net state sales tax refund. The
refund is the result of sales tax paid to a certain state over a period of
time which the Company determined (by obtaining a private letter ruling from
the state) was actually exempt from such tax. The Company obtained formal
notice of the refund in September 1996 and received the cash refund in
January 1997.
The Company reported net income of $2,411,000, or $.61 per share, in 1996
versus $1,373,000, or $.46 per share, in 1995. Income tax expense for 1996
was $1,178,000, an effective tax rate of approximately 33%, as compared to
income tax expense of $478,000, an effective tax rate of approximately 26%,
for 1995. Income tax expense for 1996 reflects a net $105,000 deferred tax
benefit resulting from an adjustment to the Company's federal net operating
loss carryforward (see Note 4 of the Company's Consolidated Financial
Statements included in Item 8, which information is incorporated herein by
reference). Excluding the $105,000 tax adjustment, the Company's effective
tax rate for 1996 approximated 36%. The increase in income tax expense
reflects the significant increase in profitability of the Company during
1996.
-24-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
1995 Versus 1994
----------------
The Company realized a significant increase in profitability during 1995.
Net income during 1995 increased $963,000, or 235%, to $1,373,000 (or $.46
per share) from $410,000 (or $.15 per share) during 1994. (Please refer to
Note 2 of the Company's Consolidated Financial Statements included in Item
8, which information is incorporated herein by reference, for a discussion
of the Modified Treasury Stock Method of computing earnings per share). The
earnings per share data for both periods has been adjusted to reflect the 7%
Common Stock dividend paid January 14, 1997 to all shareholders of record on
January 10, 1997 (See Note 12 of the Company's Consolidated Financial
Statements included in Item 8, which information is incorporated herein by
reference). The increase in profitability is primarily due to increased
revenues, lower costs due to increased utilization of the Company's units,
the impact of a cost reduction program begun in 1994 and lower financing
costs.
Revenues during 1995 increased $1,876,000, or 14%, to $15,158,000 in
comparison to $13,282,000 in 1994. Revenues, excluding $548,000 and
$1,018,000 for 1995 and 1994, respectively, related to the Cardiac and
Nuclear SPECT partnerships which the Company sold on June 30, 1995 (see Note
14 of the Company's Consolidated Financial Statements included in Item 8,
which information is incorporated herein by reference), increased 19% from
1994 to 1995. This increase is primarily due to increased utilization of
the Company's MRI units. Revenues of existing units increased approximately
8% in 1995 compared to 1994. Further, the Company operated an average of
ten units during 1995 versus nine units in 1994. During 1995, the Company
performed 33,082 MRI scans, representing an increase of 7,587 scans, or 30%,
over the 25,495 scans performed during 1994. Average scans per day averaged
10.4 during 1995 compared to approximately 9.0 scans per day during 1994.
The average fee per scan for 1995 approximated $435 versus $476 per scan
during 1994. The $41, or 9% decrease in average fee per scan is primarily
due to discounted fees provided to customers based upon higher scan volumes.
Operating expenses during 1995 decreased $496,000, or 8%, to $5,396,000
compared to $5,892,000 in 1994. This decrease was primarily due to various
cost containment measures implemented during late 1994 and early 1995, as
well as the purchase and upgrade during November 1994 of a Mobile Unit which
had previously been leased on an annual basis by the Company pursuant to an
operating lease (accordingly, its lease payment was treated entirely as an
operating expense). As a result of the purchase and upgrade, the lease
costs were treated as depreciation and interest expenses. Operating expenses
of existing units decreased approximately 2% in 1995 compared to 1994,
excluding the aforementioned lease adjustment. During 1994 and early 1995,
the Company renegotiated its mobile unit maintenance contracts, property
insurance rates and several other major operating expenditures resulting in
annual cost savings of approximately $250,000. Operating expense per unit
decreased $68, or 29%, to $163 from $231 per scan during 1994.
-25-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
1995 Versus 1994 (continued)
----------------
Depreciation and amortization expense increased $516,000, or 16%, to
$3,679,000 in 1995 from $3,164,000 in 1994. The increase was primarily due
to higher depreciation expense associated with the Company's new units
purchased in February and September of 1995 as well as its upgraded and
refinanced units.
Selling, general and administrative costs for 1995 increased $578,000 to
$2,472,000, or 16% of revenues, compared to $1,894,000, or 14% of revenues
for 1994. The increase was primarily due to increased marketing expenses,
increases in professional expenses related to the Company's shareholder
rights plan and various securities filings and increased compensation costs
related to the Company's management bonus plan.
Interest expense for 1995 increased $120,000 to $1,758,000 from $1,638,000
but decreased as a percentage of revenue to 12% of revenue versus 13% of
revenue in 1994. The increase in interest expense primarily reflects the
interest payments on the two new units purchased during 1995. The decrease
in interest expense as a percentage of revenues reflects the more favorable
lease terms obtained on the units refinanced during 1994 and 1995.
Income tax expense for 1995 was $478,000 as compared to income tax expense
of $94,000 for 1994. This increase reflects the significant increase in
profitability of the Company during 1995 (see Note 4 of the Company's
Consolidated Financial Statements included in Item 8, which information is
incorporated herein by reference).
Liquidity and Capital Resources
-------------------------------
During 1996, the Company's cash provided by operations was $7,441,000 as
compared to $5,541,000 during 1995. This increase of $1,900,000 is
primarily due to approximately $2,084,000 of increased income before
depreciation and amortization and $1,288,000 of deferred income tax expense,
partially offset by a $545,000 increase in accounts and notes receivable and
a $471,000 increase in other current assets. The increase in other current
assets is primarily due to a sales tax refund receivable which was collected
in January 1997.
The Company used cash in investing activities during 1996 of $2,567,000,
primarily related to down payments and deposits on the purchase of new MRI
units totaling approximately $2,977,000 as well as the purchase of a mobile
MRI company in March 1996 for approximately $643,000 (see Note 16 of the
Company's Consolidated Financial Statements included in Item 8, which
information is incorporated herein by reference) partially offset by a
reduction of $1,200,000 in the amount of restricted cash related to
equipment financing.
-26-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
The Company used cash in financing activities during 1996 of approximately
$2,573,000 primarily related to $4,800,000 of principal payments under loan
agreements and capital leases partially offset by approximately $2,227,000
received upon exercise of stock options and warrants during 1996. The
Company experienced a net increase in unrestricted cash and cash equivalents
of approximately $2,302,000 during 1996 and maintained an unrestricted cash
balance at December 31, 1996 of approximately $4,643,000. The Company also
maintained a restricted cash balance of $400,000 at December 31, 1996.
The Company's trade accounts receivable balance increased by $667,000 to
$1,726,000 at December 31, 1996, primarily due to higher service revenues
during the fourth quarter of 1996. In the experience of the Company,
average accounts receivable collections typically do not exceed 40 days, as
there are no billings subject to traditional third-party payors, and the
accounts receivable balance turned over approximately fourteen times during
1996. Approximately 29% of the Company's billings and collections are
processed through Hospital Shared Services ("HSS"), a representative of
certain hospitals. As a fee for these services, HSS retains approximately
2.5% of gross billings to these hospitals and the Company records the
service revenues and related receivables net of such fees.
At December 31, 1996, the Company had a working capital surplus of $587,000.
In addition, the Company's cash flow from operations totaled $7,441,000 for
1996 and the Company continues a positive cash flow. Further, $6,350,000 of
the $7,238,000 of current liabilities relate to the current portion of
capital leases and long-term debt which will be due over the next twelve
months, as opposed to current assets of $7,825,000 which are highly liquid
and turn over frequently. The Company has been able to meet all past debt
service obligations, currently is able to meet all such obligations, and
anticipates it will continue to meet such obligations. As in the past,
management anticipates that such obligations will be funded by the revenues
generated by the Mobile Units.
To date, the Company has financed its equipment acquisitions and working
capital requirements with loans and leases, from internal cash flow and
capital contributions. As of December 31, 1996, the Company was a party to
leases and loans covering all of its mobile MRI units. The aggregate
outstanding principal balance of all such leases and loans was approximately
$27,210,000 at December 31, 1996.
The Company's mobile MRI operation grew at a record pace during 1996. In
1994, healthcare costs came under great scrutiny and the healthcare market
forces began their own healthcare reform. This reform continues, and mobile
diagnostic imaging has benefited from such market reform of the healthcare
system as shared equipment is a key to containing healthcare costs while
still delivering advanced and cost effective medical technology. As
hospitals continue to look for ways to reduce
-27-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
capital expenditures and contain costs, SMT and shared mobile diagnostic
imaging units/systems allow hospitals to add or increase the range of
quality, state-of-the-art diagnostic services with no capital expenditure by
providing an outsourcing alternative. Further, many states, including those
in which the Company operates, have strengthened their Certificate of Need
("CON") review systems, whereby healthcare providers must justify a need in
a community before the state will permit capital expenditures for medical
equipment. As a result of CON review systems, hospitals and other
healthcare providers are less able to install fixed site facilities thus
providing an opportunity for mobile suppliers whose equipment will be shared
among many hospitals.
The Company upgraded one of its .5 Tesla Signa units to a 1.0 Tesla Horizon
unit. The new unit was financed at a net total cost of approximately $2.0
million and was delivered in late February 1996. The Company financed the
purchase of this new unit with a 60 month dollar-out lease requiring monthly
payments of approximately $44,000.
The Company contracted with several new hospital clients and purchased a new
Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The
cost of this new unit approximated $1.9 million which was financed with a 60
month loan requiring monthly payments of approximately $41,000.
On March 21, 1996, the Company purchased certain assets of a mobile provider
which operated mobile units in the state of North Carolina (the "Seller").
The purchase price approximated $600,000 in cash [net of negotiated trade-in
value of approximately $500,000 (which approximated the purchase price of
the units acquired) for two of the Seller's mobile MRI units] in exchange
for MRI Programs including Certificate of Need licenses or exemptions and
certain customer service contracts.
In April 1996, the Company upgraded one of the units purchased from the
Seller to a Siemens 1.0 Tesla Impact unit with a net total cost of
approximately $1.9 million. The Company financed this new unit with a 60
month loan requiring monthly payments of approximately $43,000.
In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens
1.0 Tesla Impact unit. The new unit was financed at a net total cost of
approximately $2.0 million with a 60 month dollar-out lease requiring
monthly payments of approximately $43,000.
The Company in May 1996 signed an agreement with Siemens Medical Systems to
upgrade the second unit purchased from the Seller and to purchase a new unit
during the fourth quarter of 1996. Delivery of the upgraded unit occurred in
July 1996 and is currently contracted to provide temporary interim services
to hospitals through July 1997. The new unit was delivered and began
operation on October 1, 1996. The upgrades net cost approximated $1.9
million and the Company financed approximately $1.7 million with a 60 month
finance agreement requiring monthly payments of
-28-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
approximately $36,000. The Company's new unit cost approximately $1.9
million and the Company financed approximately $1.7 million requiring a
monthly payment of approximately $37,000.
During September 1996, the Company upgraded an older unit to a new Siemens
1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which
was financed with a 60 month loan requiring monthly payments of
approximately $39,000.
The Company purchased and took delivery of two new GE 1.0 Tesla Horizon
units in mid-to-late September 1996. These units were purchased at a cost
of approximately $1.8 million each and the Company financed approximately
$1.6 million and $1.5 million with 60 month finance agreements requiring
monthly payments of approximately $34,000 and $32,000, respectively.
The Company completed a previously negotiated upgrade of a .5 Tesla Signa to
a 1.0 Tesla Horizon in November 1996. The new unit was financed at a net
cost of approximately $1.5 million with a 60 month finance agreement
requiring monthly payments of approximately $32,000.
On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto
Community Health Network (the "Network") for approximately $390,000 and
signed new service contracts with six South Carolina hospitals which are
members of the Network. The Company began servicing the new hospitals
immediately with the MRI unit purchased from the Network and subsequently
upgraded the purchased unit to a new 1.0 Tesla Horizon in December 1996.
The upgraded unit was financed at a net cost of approximately $1.4 million
with a 60 month finance agreement requiring monthly payments of
approximately $30,000. This new unit represents the Company's eighteenth
mobile MRI unit and the seventh new unit acquired during 1996.
The Company has outstanding a letter-of-credit totaling $400,000 related to
equipment financing at a freestanding diagnostic imaging center which it
sold in June 1995 and on which it remains obligated (see Note 3 and Note 10
of the Company's Consolidated Financial Statements incorporated herein by
reference).
In November 1994, the Company issued a letter-of-credit in the amount of
$270,000 related to the purchase and financing of a new Mobile Unit. The
lessor holding this letter-of-credit allowed the letter-of-credit to
terminate October 31, 1996.
In relation to a refinancing of four Mobile Units in February and March
1995, the Company issued two letters-of-credit in the aggregate amount of
$930,000. In February 1996, the lessor holding one of the letters-of-credit
totaling $330,000 allowed the letter-of-credit to expire.
-29-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
On July 31, 1996, the Company refinanced two MRI units which had previously
been refinanced in March 1995 to more favorable lease terms. The new leases
totaled approximately $2.3 million (net of a $150,000 down payment) in the
aggregate and are being financed over a thirty-six month period at an
interest rate of 9.25%. The refinancing resulted in annual cash flow
savings to the Company of approximately $200,000. As a result of this
refinancing, the $600,000 letter-of-credit which had been issued in March
1995 was terminated.
During 1996, the Company signed long-term contracts with approximately 22
new customers and extended for an additional two to three years
approximately 27 existing customer contracts. As of December 31, 1996, the
Company serviced approximately 75 total customers.
At December 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $8.2 million and
$10.1 million, respectively, which are available to offset future federal
and state taxable income through 2010 and 1999, respectively (See Note 4 of
the Company's Consolidated Financial Statements).
The Company had been named as a defendant, along with the hospital which
contracts for the Company's MRI services, in a claim filed by a woman who
alleged to have incurred partial paralysis as a result of being mishandled
during an MRI procedure. The claim had been filed for $6.0 million in
damages. The claim was settled by the Company's insurance company in
November 1996 with no admission of liability and no financial effect to the
Company.
On January 14, 1997, the Company paid a 7% Common Stock dividend to all
shareholders of record on January 10, 1997 (See Note 12 of the Company's
Consolidated Financial Statements incorporated herein by reference).
The Company received Accreditation with Commendation from the Joint
Commission for the Accreditation of Healthcare Organizations ("JCAHO") in
January 1997.
During January through March 4, 1997, approximately 1,677,000 Warrants were
exercised and the Company issued approximately 1,882,000 shares of its
Common Stock. The Company received net cash proceeds of approximately $11.7
million as a result of such Warrant exercises (See Note 18 of the Company's
Consolidated Financial Statements incorporated herein by reference).
-30-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------
Liquidity and Capital Resources (continued)
-------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. In
summary, SFAS 125, as amended by SFAS 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS 125
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
is effective beginning January 1, 1997 with certain provisions delayed to
January 1, 1998 as a result of SFAS 127. Earlier or retroactive application
is not permitted. The Company does not anticipate a material impact
resulting from adoption of these pronouncements.
Management believes that the healthcare industry continues to be in a period
of consolidation characterized by mergers, joint ventures, acquisitions,
sales of all or part of healthcare companies or their assets, and other
partnering and investment transactions of various structures and sizes
involving healthcare companies. The Company continues to evaluate new
opportunities that allow for the expansion of its business through the
acquisition of additional Mobile Units in geographic proximity to its
existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other healthcare companies, has
participated from time to time and is participating in preliminary
discussions with third parties regarding a variety of potential
transactions, and the Company has considered and expects to continue to
consider and explore potential transactions of various types with other
healthcare companies. However, no assurances can be given as to whether any
such transactions may be consummated or, if so, when.
-31-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SMT Health Services Inc. and Subsidiaries
Independent Auditors' Report of KPMG Peat Marwick LLP .................. 33
Consolidated Balance Sheets as of December 31, 1996 and 1995............ 34
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1995 and 1994 .................................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 .................................... 38
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994 .................... 40
Notes to Consolidated Financial Statements.............................. 41
-32-
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
SMT Health Services Inc.:
We have audited the accompanying consolidated balance sheets of SMT Health
Services Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. In connection with our audits of the consolidated
financial statements, we also have audited the consolidated financial
statement schedule as of and for the years ended December 31, 1996, 1995 and
1994, as listed in Item 14. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SMT
Health Services Inc. and subsidiaries as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
consolidated 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.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 31, 1997, except as to Note 18 which is as of March 4, 1997
-33-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
- -----
CURRENT ASSETS:
Cash and cash equivalents - unrestricted $ 4,643,158 $ 2,341,519
Cash and cash equivalents - restricted (Note 10) 400,000 1,600,000
Accounts receivable - no allowance for doubtful accounts 1,726,442 1,059,567
Notes receivable - current portion 52,240 47,760
Receivable from the sale of leases secured by equipment -
current portion (Note 3) 387,999 342,789
Other current assets 615,257 249,961
----------- -----------
Total current assets 7,825,096 5,641,596
----------- -------------
PROPERTY AND EQUIPMENT:
Equipment 200,709 174,556
Furniture and fixtures 43,055 59,712
Vehicles 162,915 125,103
Leasehold improvements 28,495 27,915
Leased medical equipment 35,932,207 22,167,551
----------- -----------
Total property and equipment 36,367,381 22,554,837
Less accumulated depreciation and amortization (6,734,353) (6,613,759)
----------- -----------
Property and equipment, net 29,633,028 15,941,078
----------- -----------
OTHER ASSETS:
Notes receivable - noncurrent -- 52,240
Receivable from the sale of leases secured by equipment -
noncurrent (Note 3) 490,591 878,590
Contract and license acquisition costs, net of accumulated
amortization of $889,000 and $788,000, respectively 631,933 109,260
Deposits and other assets 594,915 506,041
Deferred income taxes, net of valuation allowance
of $103,000 at December 31, 1995 (Note 4) 322,000 219,000
----------- -----------
Total other assets 2,039,439 1,765,131
----------- -----------
TOTAL ASSETS $39,497,563 $23,347,805
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-34-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 363,682 $ 270,277
Accrued wages and related taxes 111,664 57,823
Current portion of long-term debt and capital
lease obligations 6,349,962 4,380,930
Other current liabilities 412,748 527,217
----------- -----------
Total current liabilities 7,238,056 5,236,247
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS - less current portion 20,859,964 12,709,905
----------- -----------
Total liabilities 28,098,020 17,946,152
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value; authorized
10,000,000 shares; issued and outstanding
3,695,030 and 2,654,400, respectively 36,950 26,544
Cumulative Convertible Preferred Stock;
$0.01 par value; authorized 994,600 shares;
no shares issued and outstanding -- --
Additional paid-in capital (Note 5) 12,081,614 6,636,070
Retained earnings/(accumulated deficit) (719,021) (1,260,961)
----------- -----------
Total Stockholders' equity 11,399,543 5,401,653
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $39,497,563 $23,347,805
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-35-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
--------------- ------------ ----------------
<S> <C> <C> <C>
REVENUES:
Service revenue $19,021,954 $15,020,428 $13,235,019
Interest income 190,399 137,417 47,166
----------- ----------- -----------
Total revenues 19,212,353 15,157,845 13,282,185
----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses - third parties 6,279,915 5,216,121 5,054,997
Operating expenses - lease expenses -
related parties -- 180,000 837,000
Depreciation and amortization 4,724,909 3,679,246 3,163,606
Selling, general and administrative 2,877,421 2,472,023 1,894,037
Interest - third parties 2,005,429 1,671,013 239,193
Interest - related parties 35,818 86,538 1,398,363
Other (Note 17) (300,000) -- --
----------- ----------- -----------
Total costs and expenses 15,623,492 13,304,941 12,587,196
----------- ----------- -----------
Income from continuing operations before
income taxes, minority interests and gain
on sale 3,588,861 1,852,904 694,989
Minority interests in earnings of
subsidiaries (Note 14) -- 49,906 59,231
----------- ----------- -----------
Income from continuing operations before
income taxes and gain on sale 3,588,861 1,802,998 635,758
Gain on sale of partnership interests -- 48,219 --
----------- ----------- -----------
Income from continuing operations
before income taxes 3,588,861 1,851,217 635,758
Income taxes (Note 4) 1,178,000 478,000 93,500
----------- ----------- -----------
Net income from continuing operations 2,410,861 1,373,217 542,258
----------- ----------- -----------
Discontinued operations:
Loss on disposal of discontinued operations,
net of tax benefit of $102,000 and $68,000
in 1995 and 1994, respectively -- (198,000) (132,000)
Extraordinary item, debt forgiveness, net of
income tax expense of $102,000 -- 198,000 --
----------- ----------- -----------
-- -- (132,000)
----------- ----------- -----------
Net income $ 2,410,861 $ 1,373,217 $ 410,258
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-36-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Earnings (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
----- ------ -----
<S> <C> <C> C>
Earnings (Loss) per Common
Share (Note 2):
Primary:
Continuing operations $ .61 $ .46 $ .20
Discontinued operations -- -- (.05)
----- ----- ------
Earnings Per Common Share $ .61 $ .46 $ .15
===== ===== ======
Fully Diluted:
Continuing operations $ .59 $ .46 $ .20
Discontinued operations -- -- (.05)
----- ----- ------
Earnings Per Common Share $ .59 $ .46 $ .15
===== ===== ======
</TABLE>
See Notes to Consolidated Financial Statements.
-37-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $2,410,861 $ 1,373,217 $ 542,258
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Depreciation and amortization 4,724,909 3,679,246 3,163,606
Negative amortization on capital lease obligations -- 5,521 51,017
Minority interests in subsidiaries -- 49,906 59,231
Deferred income tax expense 1,288,000 288,000 48,500
Gain on sale of partnership interests -- (48,219) --
Other -- 10,467 110,658
Changes in assets and liabilities of continuing
operations:
Accounts and notes receivable (544,660) 17,705 143,231
Other current assets (470,751) 12,182 (72,347)
Accounts payable and other (21,064) 143,049 (14,348)
Accrued wages and related taxes 53,841 10,134 8,073
---------- ----------- ------------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 7,441,136 5,541,208 4,039,879
---------- ----------- ------------
NET CASH USED IN DISCONTINUED
OPERATING ACTIVITIES -- (64,264) (410,108)
---------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,441,136 5,476,944 3,629,771
---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (2,977,334) (269,354) (234,833)
Payment for purchase of acquired entities,
net of cash acquired (642,840) -- (44,000)
Net change in cash restricted for equipment
financing purposes 1,200,000 (1,131,500) (270,000)
Net cash received for sale of partnership interests -- 122,854 --
Net cash received for sale of discontinued entities -- 110,000 380,183
Other (146,472) (212,409) (92,496)
---------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (2,566,646) (1,380,409) (261,146)
---------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
-38-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt and capital leases:
Continuing operations:
Third parties (4,735,551) (3,241,524) (633,485)
Related parties (64,329) (329,627) (2,593,808)
Discontinued operations:
Third parties -- -- (254,612)
Related parties -- (27,807) (182,918)
Issuance of Common Stock from exercise of stock
options and warrants 2,227,029 -- --
Other -- (4,562) 116,505
---------- ------------ ----------
NET CASH USED IN FINANCING ACTIVITIES (2,572,851) (3,603,520) (3,548,318)
---------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,301,639 493,015 (179,693)
CASH AND CASH EQUIVALENTS - (unrestricted) -
Beginning of year 2,341,519 1,848,504 2,028,197
---------- ------------ ----------
CASH AND CASH EQUIVALENTS - (unrestricted) -
End of year $4,643,158 $2,341,519 $ 1,848,504
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-39-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Retained
Common Stock Preferred Stock Additional Earnings/ Total
----------------------------- --------------------- Paid-In (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
------------ --------------- ------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES - December 31, 1994 2,408,000 $24,080 -- -- $ 5,940,858 ($2,311,626) $ 3,653,312
Stock Dividend (Note 12) 120,400 1,204 -- -- 321,348 (322,552) --
Issuance of Common Stock (Note 9) 120,000 1,200 -- -- 358,800 -- 360,000
Exercise of Stock Options 6,000 60 -- -- 15,064 -- 15,124
Net Income -- -- -- -- -- 1,373,217 1,373,217
--------- ------- ------- ------------ ----------- ----------- -----------
BALANCES - December 31, 1995 2,654,400 26,544 -- -- 6,636,070 (1,260,961) 5,401,653
Exercise of Stock Options and
Warrants (Notes 5 and 7) 793,500 7,935 -- -- 2,219,094 -- 2,227,029
Tax Adjustment Regarding Stock
Option and Warrant Exercises
(Notes 4, 5 and 7) -- -- -- -- 1,360,000 -- 1,360,000
Stock Dividend (Note 12) 247,130 2,471 -- -- 1,866,450 (1,868,921) --
Net Income -- -- -- -- -- 2,410,861 2,410,861
--------- ------- ------- ------------ ----------- ----------- -----------
BALANCES - December 31, 1996 3,695,030 $36,950 -- $ -- $12,081,614 ($ 719,021) $11,399,543
========= ======= ======= ============ =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-40-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. ORGANIZATION
------------
SMT Health Services Inc. and its wholly-owned subsidiaries (the "Company")
are engaged primarily in providing medical diagnostic imaging services to
hospitals, physicians and patients. The Company, through its subsidiaries,
operates eighteen mobile Magnetic Resonance Imaging (MRI) Units ("MRI
Units") in Pennsylvania, West Virginia, North Carolina, Virginia, South
Carolina, Kentucky and Ohio. The Company began operation of seven new MRI
units during 1996, including four MRI units which began operations during
the last four months of the year.
The Company's Common Stock and Warrants (Note 18) trade on the National
Association of Securities Dealers, Inc. Automated Quotations Systems
(NASDAQ) National Market System under the symbols "SHED" and "SHEDW",
respectively.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Consolidation Policy: The consolidated financial statements include the
--------------------
accounts of SMT Health Services Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Revenue Recognition: Revenue from diagnostic imaging services is
-------------------
recognized as patient services are performed.
Service Agreements: The Company provides services directly to hospitals
------------------
under Mobile MRI Service Agreements which expire at various times between
1997 and 2002 and accordingly, bills and collects the fees for such services
directly from the hospitals. Approximately 29% of the Company's billings
and collections under these service contracts are processed through Hospital
Shared Services (HSS), a representative of certain hospitals. As a fee for
these services, HSS retains approximately 2.5% of gross billings to these
hospitals and, accordingly, the Company records related revenues on a net
basis. Such fees totaled approximately $150,000, $146,000 and $120,000 for
1996, 1995 and 1994, respectively.
Cash and Cash Equivalents: Cash equivalents include highly-liquid
--------------------------
investments with original maturities of ninety days or less.
Property and Equipment: Property and equipment are stated at cost
-----------------------
and are depreciated using the straight-line method over the estimated
useful lives of the related assets, which is generally five years. Leased
medical equipment is being amortized to its estimated residual value using
the straight-line method over the lease or finance term of generally five
years.
-41-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
Contract and License Acquisition Costs: Contract acquisition costs
---------------------------------------
primarily represent the value of mobile service contracts acquired relating
to the purchase of VA-MRI in November 1994 (Note 9) and are being amortized
over an approximate four-year period which approximates the lives of the
contracts.
License acquisition costs represent the value of Certificate of Need
licenses acquired in March 1996 (Note 16) and are being amortized over a ten
year period.
Income Taxes: The Company files a consolidated federal income tax return.
-------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Net Earnings Per Common and Common Share Equivalent: The net earnings
---------------------------------------------------
per common and common share equivalent are calculated using the weighted
average common and common share equivalents outstanding during the year,
except where anti-dilutive. Common share equivalents include shares issuable
upon the exercise of stock options, rights and warrants less the number of
shares assumed purchased with the proceeds available from the assumed
exercise of the options, rights and warrants.
The Treasury Stock Method of reflecting the use of proceeds from options and
warrants may not adequately reflect potential dilution if options and
warrants to acquire a substantial number of Common Shares (greater than 20%
of the number of Common Shares outstanding for the period for which the
computation is being made) are outstanding. In such instances, the Modified
Treasury Stock Method must be utilized.
The Company's options and warrants to acquire Common Shares exceeded 20% of
the number of Common Shares outstanding for 1996 and 1995 and accordingly,
the Treasury Stock Method has been modified in determining the dilutive
effect of the options and warrants on earnings per share data for those
years.
-42-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
For purposes of the earnings per share calculation, the Modified Treasury
Stock Method resulted in adjusted net income for the year ended 1996 of
approximately $3,435,000 and adjusted shares outstanding of 5,668,000,
resulting in earnings per Common Share of $.61 for the year ended December
31, 1996 after giving effect to a seven percent (7%) Common Stock dividend
paid to shareholders in January 1997 (Note 12). Actual net income for the
year ended December 31, 1996 of $2,410,861 divided by the actual weighted
average shares outstanding for the year of 3,232,505 resulted in earnings
per Common Share of $.75 for the year ended December 31, 1996.
The Modified Treasury Stock Method resulted in adjusted net income for the
year ended 1995 of approximately $2,699,000 and adjusted shares outstanding
of approximately 5,884,000, resulting in earnings per Common Share of $.46
for the year ended December 31, 1995. Actual net income for the year ended
December 31, 1995 of $1,373,217 divided by the actual weighted average
shares outstanding for the year of 2,770,230 resulted in earnings per Common
Share of $.50 for the year ended December 31, 1995. The 1995 earnings per
share calculations have reflected a retroactive adjustment to reflect the
January 1997 7% stock dividend (Note 12).
Earnings per share for the year ended December 31, 1994 were not subject to
the Modified Treasury Stock Method as this method was anti-dilutive.
Accordingly, weighted average shares outstanding were 2,705,400 for 1994.
The weighted average shares outstanding for 1994 reflect a retroactive
adjustment increasing the weighted average shares outstanding by 297,400
shares to reflect the July 1995 5% and January 1997 7% stock dividends as if
such dividends had occurred at the beginning of the respective period (Note
12).
Fully diluted earnings per Common Share for 1996 were $.59 reflecting the
higher year-end stock price. Fully diluted earnings per Common Share were
anti-dilutive in 1995 and 1994.
Certain Concentrations and Significant Risks and Uncertainties: The Company
---------------------------------------------------------------
is engaged primarily in providing mobile MRI services to small-to-medium-
sized hospitals in Pennsylvania, West Virginia, North Carolina, Virginia,
South Carolina, Kentucky and Ohio.
-43-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
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.
Certain Significant Estimates: The Company operates mobile MRI units which
------------------------------
are capital intensive and subject to changes in technology. The Company
primarily finances such equipment over a 48 to 60 month period and
depreciates the equipment over the respective finance period to an estimated
residual value which typically approximates 20% of the original cost of the
equipment. The useful lives and residual values estimated by management are
considered significant estimates. During 1995 and 1996, the Company upgraded
its fleet of mobile MRI units to newer state-of-the-art technology.
Management does not currently anticipate significant technological advances
which could materially affect its estimates.
The Company is not dependent on any one customer or geographic region as a
source of its revenues. However, the Company utilizes the services of HSS
to process approximately 29% of its billings and collections (Note 2 -
Service Agreements).
Long-Lived Assets: Effective January 1, 1996, the Company adopted Statement
------------------
of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
In accordance with SFAS 121, management evaluates long-lived assets and
related intangible assets for impairment whenever events or circumstances
indicate the carrying amount may not be recoverable. No evidence existed
which indicated any long-lived assets and related intangible assets were
impaired and, therefore no write-down of recorded assets was necessary.
Financial Instruments: Management believes that the carrying values of its
----------------------
financial instruments approximates their fair values and any differences
which may exist between the carrying values and fair values are not
material.
Stock-Based Compensation: During 1996, the Company adopted SFAS 123,
-------------------------
Accounting for Stock-Based Compensation. As permitted for under SFAS 123,
the Company has elected to continue to follow the guidance of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
in accounting for its stock-based employee compensation arrangements.
Because the Company elected
-44-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
the disclosure-only method available under SFAS 123, the adoption of SFAS
123 did not have any impact on the Consolidated Financial Statements (Note
7).
Common Stock Dividend: On January 14, 1997, a 7% Common Stock dividend was
----------------------
paid to shareholders of record at the close of business on January 10, 1997.
All stock related data in the Consolidated Financial Statements reflect the
stock dividend for all periods presented (Note 12).
Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS
------------------------------------
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Capital lease and loan obligations $27,209,926 $17,090,835
Less current portion 6,349,962 4,380,930
----------- -----------
$20,859,964 $12,709,905
=========== ===========
</TABLE>
Future minimum lease payments under capital leases and maturities of long-term
debt as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending Long-Term Capital Lease
December 31, Debt Obligations
----------- ----------- --------------
<S> <C> <C>
1997 $2,037,232 $ 5,792,078
1998 2,223,518 5,537,301
1999 2,291,825 4,686,822
2000 2,476,641 3,098,604
2001 1,107,289 1,440,719
---------- -----------
20,555,524
Less amounts representing interest (3,482,103)
-----------
$10,136,505 $17,073,421
=========== ===========
</TABLE>
-45-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued)
------------------------------------
As of December 31, 1996, the cost and accumulated amortization of property
securing capital lease and loan obligations were $35,932,000 and $6,508,000,
respectively. Interest rates under the long-term debt and capital leases
ranged from approximately 8.0% to 13.5%.
On July 31, 1996, the Company refinanced two MRI units which had previously
been refinanced in March 1995 to more favorable lease terms. The new leases
totaled approximately $2.3 million (net of a $150,000 down payment) in the
aggregate and are being financed over a thirty-six month period at an
interest rate of 9.25%. The refinancing resulted in annual cashflow savings
to the Company of approximately $200,000 (Note 10).
The Company upgraded one of its .5 Tesla Signa units to a 1.0 Tesla Horizon
unit. The new unit was financed at a net total cost of approximately $2.0
million and was delivered in late February 1996. The Company financed the
purchase of this new unit with a 60 month dollar-out (bargain purchase
option of one dollar) lease requiring monthly payments of approximately
$44,000.
The Company contracted with several new hospital clients and purchased a new
Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The
cost of this new unit approximated $1.9 million which was financed with a 60
month loan requiring monthly payments of approximately $41,000.
In April 1996, the Company upgraded one of the units purchased from another
mobile provider (Note 16) to a Siemens 1.0 Tesla Impact unit. The new unit
was financed at a net total cost of approximately $1.9 million. The Company
financed this new unit with a 60 month loan requiring monthly payments of
approximately $43,000.
In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens
1.0 Tesla Impact unit. The new unit was financed at a net total cost of
approximately $2.0 million with a 60 month dollar-out lease requiring
monthly payments of approximately $43,000.
The Company in May 1996 signed an agreement with Siemens Medical Systems to
upgrade the second unit purchased from another mobile provider (Note 16) and
to purchase a new unit during the fourth quarter of 1996. Delivery of the
upgraded unit occurred in July 1996 and the new unit was delivered and began
operation on October 1, 1996. The upgrade's net cost approximated $1.9
million and the Company financed approximately $1.7 million with a 60 month
finance agreement requiring monthly payments of approximately $36,000. The
Company's new unit cost approximately $1.9 million and the Company financed
approximately $1.7 million requiring a monthly payment of approximately
$37,000.
-46-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued)
------------------------------------
During September 1996, the Company upgraded an older unit to a new Siemens
1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which
was financed with a 60 month loan requiring monthly payments of
approximately $39,000.
The Company purchased and took delivery of two new GE 1.0 Tesla Horizon
units in September 1996. These units were purchased at a cost of
approximately $1.8 million each and the Company financed approximately $1.6
million and $1.5 million with 60 month finance agreements requiring monthly
payments of approximately $34,000 and $32,000, respectively.
The Company completed a previously negotiated upgrade of a .5 Tesla Signa to
a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net
cost of approximately $1.5 million with a 60 month finance agreement
requiring monthly payments of approximately $32,000.
On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto
Community Health Network (the "Network") for approximately $390,000 and
signed new service contracts with six South Carolina hospitals which are
members of the Network. This new unit represents the Company's eighteenth
mobile MRI unit and the seventh new unit acquired during 1996.
In December 1996, the Company upgraded the mobile MRI unit purchased from
the Network to a new 1.0 Tesla Horizon. The new unit was financed at a net
cost of approximately $1.4 million with a 60 month finance agreement
requiring monthly payments of approximately $30,000.
The long-term debt and capital lease obligations balance includes
approximately $880,000 of capital lease obligations due to third parties
related to the equipment at the Auburn Regional Center for Cancer Care and
Airport Regional Imaging Center which the Company had treated as
discontinued operations and sold in October 1994 and in June 1995,
respectively. Accordingly, the Company has recorded an offsetting
receivable for the lease receivables due from the purchaser of the centers.
Such lease receivables are secured by the equipment and accounts receivable
of the centers (Note 13).
The Company leases certain tractors for the transportation of Mobile Units.
Operating lease expenses related to such tractor rentals totaled $346,000,
$313,000 and $257,000 for 1996, 1995 and 1994 respectively. Prior to July
1, 1995, the Company rented certain tractors from Shared Mobile Enterprises
(Note 9).
-47-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued)
------------------------------------
The future minimum lease payments (excluding variable mileage costs of $.063
per mile) required under these operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------
<S> <C>
1997 $ 349,300
1998 326,700
1999 326,700
2000 326,700
2001 169,600
Thereafter 3,300
----------
Total $1,502,300
==========
</TABLE>
Note 4. INCOME TAXES
------------
Income tax expense attributable to income from continuing operations for the
years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------------------------------ ----------------------------- -----------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
----------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ -- $ 10,000 $ -- $1,014,000 $254,000 $44,000 $1,014,000 $264,000 $44,000
State (110,000) 180,000 45,000 274,000 34,000 4,500 164,000 214,000 49,500
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
($110,000) $190,000 $45,000 $1,288,000 $288,000 $48,500 $1,178,000 $478,000 $93,500
========== ======== ======= ========== ======== ======= ========== ======== =======
</TABLE>
In addition to the deferred tax expense disclosed above, approximately
$1,360,000 of deferred tax benefits were allocated to equity in connection
with the tax deductions generated by the exercise of certain stock options and
warrants.
-48-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
NOTE 4. INCOME TAXES (continued)
------------
The difference between the Company's effective income tax rate and its
statutory rate is reconciled below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ---------
<S> <C> <C> <C>
Income tax expense at statutory rate $1,220,213 $629,414 $ 216,158
Increase (reduction) in income taxes
resulting from:
State and local income taxes,
net of Federal income tax benefit 110,000 137,000 32,670
Change in state net operating loss
carryforward rules (61,000) -- (90,000)
Decrease in valuation allowance (103,000) (312,000) (72,500)
Other items 11,787 23,586 7,172
---------- --------- ---------
$1,178,000 478,000 $ 93,500
========== ========= =========
</TABLE>
The components of the net deferred tax asset recognized in the December 31,
1996 and 1995 consolidated balance sheets of the Company are presented
below:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,518,800 $1,415,794
Non-deductible accrued expenses 75,000 139,291
Other 19,000 37,203
---------- ----------
3,612,800 1,592,288
Deferred tax liabilities:
Diagnostic medical equipment, principally
due to differences in depreciation (3,290,800) (1,270,288)
---------- ----------
322,000 322,000
Less valuation allowance -- (103,000)
---------- ----------
Net deferred tax asset $ 322,000 $ 219,000
========== ============
</TABLE>
-49-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 4. INCOME TAXES (continued)
------------
Deferred income taxes are provided to account for temporary differences
between financial statement accounting and income tax reporting and relate
principally to differences in reporting for diagnostic medical equipment,
depreciation and net operating loss carryforwards. The net change in the
total valuation allowance for the years ended December 31, 1996 and 1995 was
a decrease of $103,000 and a decrease of $312,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate relation of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits for these deductible differences. The
amount of the deferred tax asset considered realizable, however, could be
reduced if estimates of future taxable income during the carryforward period
are reduced.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,200,000 which are available
to offset future federal taxable income through 2010. The Company has
approximately $10,100,000 of available carryforwards as of December 31, 1996
for state purposes which are available principally through 1999.
Note 5. STOCKHOLDERS' EQUITY
--------------------
In accordance with the Company's March 1992 Initial Public Offering, the
Company issued Warrants to purchase shares of Common Stock of the Company.
Pursuant to the Warrant Agreement, the outstanding Warrants have been
recapitalized to reflect the July 1995 5% and January 1997 7% Common Stock
dividends (Note 12). Accordingly, the outstanding Warrants' exercise price
of $7.00 entitled the holder to purchase 1.1235 shares of Common Stock of
the Company (Note 18).
As additional compensation in connection with the initial public offering,
the Company granted to the Company's Initial Public Offering underwriter an
option to purchase options which covered 120,000 units, each unit consisted
of 1.05 shares of Common Stock and one Company Warrant to purchase 1.05
shares of Common Stock. The Option was exercisable until March 4, 1997 and
entitled the underwriter to purchase each unit at an exercise price equal to
$5.94, subject to adjustment in certain events. The underwriter
subsequently transferred the Options to principles of the underwriter
(Transferees), who exercised the Options during 1996 resulting in net
proceeds to the Company of approximately $719,000. During August 1996, one
of the Transferees exercised 24,000 Warrants to purchase 25,200 shares of
Common Stock of the Company resulting in additional proceeds to the Company
of approximately $168,000. As a result of the 7% Common Stock dividend paid
in January 1997 (Note 12), the remaining 96,000 underwriter Warrants were
convertible to 107,856 shares of Common Stock.
-50-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 5. STOCKHOLDERS' EQUITY (continued)
--------------------
On August 9, 1995, the Company adopted the 1995 Director Warrant Plan (the
"Plan") pursuant to which eligible directors received unregistered warrants
to purchase Common Stock (the "Directors' Warrants"). The Plan allows for
issuance of warrants to purchase up to 700,000 shares of Common Stock.
On August 9, 1995, warrants to purchase up to 500,000 shares of Common Stock
at an initial exercise price of $3.875 (the closing price of the Company's
stock on the date of issue) were issued to five directors pursuant to the
Plan. Separately, unregistered warrants to purchase 114,500 shares of
Common Stock at an initial exercise price of $4.01 were also issued to an
outside director, who was also a consultant to the Company, who was
ineligible to participate in the Plan.
During May 1996, the outside director who was also a consultant to the
Company exercised the 114,500 Warrants and sold 114,500 shares of Common
Stock. The Company received cash proceeds of approximately $459,000 related
to the exercise of such Warrants.
During January 1997, the Company's three outside directors each exercised
25,000 Director Warrants and sold 26,750 shares of Common Stock (after
adjustment for the January 1997 7% Common Stock dividend - Note 12). The
Company received cash proceeds of approximately $291,000 as a result of the
exercise of the 75,000 Director Warrants.
Pursuant to the 1995 Director Warrant Plan, the Director Warrants have been
recapitalized to reflect the January 1997 7% Common Stock dividend (Note
12). Accordingly, the outstanding Director Warrants' exercise price of
$3.875 now entitles the holder to purchase 1.07 shares of Common Stock of
the Company. As of January 31, 1997, 425,000 Director Warrants to purchase
454,750 shares of Common Stock of the Company were outstanding.
In October 1995, the Company signed an agreement retaining Commonwealth
Associates ("Commonwealth") as its investment banking firm. Commonwealth, a
New York-based investment banking firm specializing in serving the financial
needs of emerging growth companies, had been engaged to assist the Company
in establishing a long-term financial strategy and in evaluating possible
transactions involving other mobile diagnostic providers. In addition to a
cash retainer, the Company granted to Commonwealth 100,000 five-year
Warrants to purchase the Company's Common Stock at $4.47, the closing bid
price of the Common Stock on the day the Agreement was executed. The
agreement with Commonwealth expired in April 1996. During July and October
1996, Commonwealth or a designated employee of Commonwealth exercised the
100,000 Warrants in a net transaction and the Company issued to Commonwealth
or the designated employee an aggregate of 36,061 shares of Common Stock of
the Company.
-51-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 5. STOCKHOLDERS' EQUITY (continued)
--------------------
In November 1995, the Company adopted a Preferred Stock Purchase Rights Plan
(the "Rights Plan") which contains provisions to protect the Company in the
event of an unsolicited offer to acquire control of the Company on terms
which the Company's Board of Directors determines not to be in the best
interest of the Company.
The Rights Plan provides for the distribution to shareholders of one right
for each share of Company Common Stock outstanding. When exercisable, each
right will entitle shareholders to buy one one-hundredth of a newly issued
share of the Company's Class A Series One Preferred Stock at an exercise
price of $22.00. Each right has terms designed to make it substantially the
economic equivalent of one share of Common Stock. Shareholders of record as
of the close of business on November 8, 1995 and thereafter will receive the
rights. The rights will expire on November 30, 2005, unless further
extended, and will be subject to redemption by the Board of Directors at
$.01 per right at any time prior to the first date upon which they become
exercisable. The rights themselves have no voting power, nor will they
entitle a holder to receive dividends.
Note 6. PREFERRED STOCK
---------------
The Company is authorized to issue 994,600 shares of preferred stock
("Preferred Stock") issuable in series. The Company had one authorized
series of 5,400 Preferred Shares, par value $.01, designated as Series A
Preferred Stock, which was converted to Common Stock in July 1993.
Note 7. STOCK OPTION PLANS
------------------
The Company's 1991 and 1996 Employee Stock Option Plans (the "Employee
Plans") currently provide for the granting of options to employees to
purchase up to 1,110,125 shares of the Company's Common Stock at the fair
market value at the date of grant. Options granted to employees may either
be incentive stock options (as defined in the Internal Revenue Code of 1986,
as amended) or non-qualified stock options and expire ten years from date of
grant.
-52-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 7. STOCK OPTION PLANS (continued)
------------------
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Number Price Per Share
-------- ---------------
<S> <C> <C>
Balance - December 31, 1993 145,514 $3.11
Granted 203,179 $1.28 - $2.00
Exercised -- --
Expired -- --
-------
Balance - December 31, 1994 348,693 $1.28 - $3.11
Granted 431,349 $2.30 - $3.56
Exercised -- --
Expired -- --
-------
Balance - December 31, 1995 780,042 $1.28 - $3.56
Granted 309,770 $3.92 - $6.43
Exercised (439,900) $1.28 - $3.11
Expired (10,480) $3.11
--------
Balance - December 31, 1996 639,432 $1.28 - $6.43
========
</TABLE>
All of the above outstanding options are non-qualified options.
At December 31, 1996, options to purchase 639,432 shares were exercisable
and no additional shares were available for future grant in accordance with
the Employee Plans.
The total number of options to purchase shares of Common Stock and the
exercise prices of any options which were granted pursuant to the Employee
Plan prior to July 1995 have been adjusted to reflect the July 1995 5%
Common Stock dividend (Note 12).
In January 1997, the Company granted a 7% Common Stock dividend. The
aforementioned number of options to purchase shares of Common Stock and the
exercise prices of such options reported above have been adjusted to reflect
the January 1997 dividend (Note 12).
The Company's 1991 Director Stock Option Plan for non-employee directors
(the "Directors' Plan") currently provides for the granting of options to
non-employee directors to purchase up to 112,350 shares of the Company's
Common Stock at the fair market value on the date of grant. Under the
Directors' Plan, each eligible director automatically receives options to
purchase 2,247 shares of the Company's Common Stock on December 31 of each
year. Options granted under the Directors' Plan may be exercised within ten
years of the date of grant and while the recipient of the option is a
director of the Company.
-53-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 7. STOCK OPTION PLANS (continued)
------------------
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Number Price Per Share
---------- ---------------
<S> <C> <C>
Balance - December 31, 1993 21,294 $1.66 - $3.00
Granted 10,647 $2.06
Exercised -- --
Expired -- --
-------
Balance - December 31, 1994 31,941 $1.66 - $3.00
Granted 8,547 $4.09
Exercised (6,000) $1.66 - $3.00
Expired (300) $1.66 - $3.00
-------
Balance - December 31, 1995 34,188 $1.66 - $4.09
Granted 6,741 $7.94
Exercised (23,100) $1.66 - $4.09
Expired (2,100) $4.09
-------
Balance - December 31, 1996 15,729 $1.66 - $7.94
=======
</TABLE>
As of December 31, 1996, options to purchase 15,729 shares of Common Stock
were exercisable under the Directors' Plan and 65,484 shares were available
for future grant in accordance with the Director Plan.
The total number of options to purchase shares of Common Stock and the
exercise prices of any options which were granted pursuant to the Directors'
Plan prior to July 1995 have been adjusted to reflect the July 1995 5%
Common Stock dividend (Note 12).
In February 1994, the Board of Directors granted additional vested options
to purchase 42,000 shares of the Company's Common Stock at an exercise price
of $1.78 per share, the fair market value of the Common Stock at the date of
grant, to two non-management members of the Board of Directors. During June
and September 1996, the two non-management members of the Board of Directors
(one now a former director), exercised the 42,000 options and sold 42,000
shares of Common Stock received upon the option exercise. The Company
realized net proceeds of approximately $75,000 from the exercise of the
42,000 options.
In January 1997, the Company granted a 7% Common Stock dividend. The
aforementioned number of options to purchase shares of Common Stock and the
exercise prices of such options reported above have been adjusted to reflect
the January 1997 dividend (Note 12).
-54-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 7. STOCK OPTION PLANS (continued)
------------------
SFAS 123 requires companies who continue to apply APB Opinion No. 25 to
account for their stock-based employee compensation arrangements to provide
pro forma net income and earnings per share as if the fair value based
method had been used to account for compensation cost (Note 2). The per
share weighted average fair value of stock options granted during 1996 and
1995 approximated $393,000 and $672,000 on the date of grant using the Black
Scholes option - pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate
of 7.05%, expected volatility of the stock 33%, and expected life of three
years; 1995 - expected dividend yield 0.0%, risk-free interest rate of
7.05%, expected volatility of the stock of 33%, an expected life of three
years. Accordingly, pro forma net income and earnings per share would have
been $2,017,000 ($.54 per share) and $771,000 ($.37 per share) for the years
ended December 31, 1996 and 1995, respectively, if the Company had accounted
for its stock based employee compensation arrangements using the fair value
method. The 1995 and 1996 effects of applying SFAS 123 for providing pro
forma disclosures are not likely to be representative of the effects on pro
forma net income and earnings per share for future years because the number
of option grants and the fair value assigned to the grants could differ.
Note 8. BENEFIT PLANS
-------------
The Company maintains an annual bonus plan for key executives and employees
which is based primarily upon the pre-tax earnings of the Company. The
Company expensed approximately $584,000, $348,000 and $115,000 for the
program during 1996, 1995 and 1994, respectively.
The Company maintains and administers an employee savings plan pursuant to
Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The
Company contributed approximately $34,000, $18,000 and $18,000 to the Plan
in 1996, 1995 and 1994, respectively.
Note 9. RELATED PARTY TRANSACTIONS
--------------------------
A former shareholder/director of the Company was also a consultant to the
Company and the Company had entered into a five-year consulting agreement
with him through November 1996 pursuant to which he was to receive a fee of
$75,000 per year. On March 27, 1996, the Company prepaid the remaining
$50,000 due under the Consulting Agreement and terminated the Consultant
Agreement. Fees paid to this former shareholder/director totaled
approximately $75,000 for each of the past three years.
-55-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 9. RELATED PARTY TRANSACTIONS (continued)
--------------------------
Prior to July 1, 1995, the Company subleased certain truck cabs from Shared
Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an
independent third party leasing company. Effective July 1, 1995, SME
released the Company from its obligations under ten long-term subleases in
exchange for the issuance to SME of 120,000 unregistered Common Shares
valued at $3 per share, the weighted average closing price for the stock for
the prior thirty trading days. The Company received an opinion from an
independent financial advisor that the transaction was fair to the Company
and its shareholders. At the same time, with the concurrence of the third
party leasing company, the Company assumed SME's obligations under its
original lease and modified that lease by (1) extending the lease term by
one additional year and (2) adding one additional truck cab to the schedule
of leased property with a corresponding increase in base rental payments.
The $360,000 value of the shares represents the present value of the excess
of the sublease payments over the original lease payments. The Company has
capitalized the $360,000 and is amortizing this prepaid rent over a period
which approximates the lease term. SME was one hundred percent beneficially
owned by certain officers/directors and a former director/consultant of the
Company who owned approximately 14% of the Company's outstanding Common
Shares. Total rental expense paid to SME for the years ended December 31,
1995 and 1994 were approximately $180,000 and $257,000, respectively (Note
3).
Certain shareholders/officers of the Company, who own approximately 14% of
the outstanding Common Stock of the Company, also collectively owned 50% of
the outstanding capital stock of Upstate MRI, Inc., a.k.a., Virginia MRI,
Inc. ("VA MRI"), which owned and operated a Mobile Unit which provided
service in Virginia and North Carolina. The Company and the
shareholders/officers of the Company guaranteed the lease on such Mobile
Unit.
On June 1, 1993, the Company entered into a one-year operating lease with VA
MRI where the Company leased the VA MRI Mobile Unit ("VA Mobile Unit") and
related service contracts in return for a monthly rental of $58,000, which
lease was renewed on June 1, 1994. A previously negotiated management
agreement between VA MRI and the Company, pursuant to which the Company
received $5,000 per month in administrative fees, plus reimbursement of all
expenses, in return for managing the operations of VA MRI was terminated.
On November 14, 1994, the Company purchased the VA Mobile Unit in
consideration for the assumption of all of VA MRI's lease obligations
totaling approximately $400,000 (approximate fair market value of the
equipment). In addition, VA MRI transferred and assigned to the Company its
rights in the service contracts related to the VA Mobile Unit in
consideration for the forgiveness of the remaining approximately $50,000
owed to the Company pursuant to a note and the payment by the Company of
$44,000. The Company capitalized the approximately $94,000 as contract
acquisition costs which are being amortized over the term of the service
contracts which approximates four years (Note 2).
-56-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 9. RELATED PARTY TRANSACTIONS (continued)
--------------------------
In addition, on November 14, 1994, upon completion of the VA Mobile Unit
purchase, the Company traded in the VA Mobile Unit and upgraded this Unit to
a General Electric 1.0 Tesla Signa which the Company has financed with a 66
month lease requiring monthly payments of approximately $41,000. This new
lease transfers the ownership of such Mobile Unit to the Company at the
completion of the lease. The original VA Mobile Unit lease assumed by the
Company has been terminated in conjunction with this transaction.
A certain director of the Company is a director of, consultant to and
shareholder of DVI Inc., the parent of DVI Financial Services Inc. ("DVI").
During 1992 and 1993, the Company entered into numerous leasing transactions
with DVI pertaining to both continuing and discontinued operations involving
total financing of approximately $15.6 million. During 1994, the Company
did not enter into any new leases with DVI and refinanced with third parties
$3.2 million of leases held by DVI. During the first quarter of 1995, the
Company refinanced its remaining leases with DVI, totaling approximately
$6.5 million, with third-party lease companies. Interest rates under
financing agreements with DVI ranged from 11% to 14%. During 1996, the
Company financed the acquisition of a new mobile MRI unit with DVI. The
Company and DVI entered into a 60 month capital lease financing
approximately $1.5 million at an interest rate of approximately 9.5%. Total
payments to DVI during 1996, 1995 and 1994 with respect to capital lease
obligations were approximately $100,000, $440,000 and $3.9 million,
respectively, including $36,000, $87,000, and $1.4 million, respectively, of
interest expense associated with such capital leases.
In March 1995, DVI sold 368,000 shares of the Company's Common Stock which
it had received during the Company's Initial Public Offering, pursuant to
registration statements under the Securities Act of 1933, as amended (the
"Securities Act").
Note 10. COMMITMENTS AND CONTINGENCIES
-----------------------------
The lease for the Company's principal facility expires in April 1999. Rent
expense for the Company's principal facility was $76,000, $76,000 and
$69,000 for 1996, 1995 and 1994, respectively. Future minimum lease
payments under this lease are as follows:
<TABLE>
<CAPTION>
Year Ended Future Minimum
December 31, Lease Payments
------------ --------------
<S> <C>
1997 87,900
1998 87,900
1999 29,300
--------
Total $205,100
========
</TABLE>
-57-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 10. COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------
Pursuant to capital lease obligations (Note 3) and related maintenance
contracts, which begin upon expiration of the manufacturer's warranty period
of generally 12 to 18 months and which contracts expire at various dates
through the year 2001, the Company is currently obligated to pay
approximately $118,000 per month for maintenance of equipment.
In November 1992, the Company issued a letter-of-credit in the amount of
$198,500 pursuant to a lease transaction related to its freestanding full-
service diagnostic imaging center (Note 13). In exchange for restructuring
the terms of the debt of this Center, the Company increased the outstanding
letter-of-credit to an aggregate $400,000.
In November 1994, the Company issued a letter-of-credit in the amount of
$270,000 related to the purchase and financing of a new Mobile Unit. The
lessor holding this letter-of-credit allowed the letter-of-credit to
terminate on October 31, 1996.
In relation to the refinancing of four Mobile Units in February and March
1995 (Note 3), the Company issued two letters-of-credit in the aggregate
amount of $930,000. In February 1996, the lessor holding one of the
letters-of-credit totaling $330,000 allowed the letter-of-credit to expire.
On July 31, 1996, the Company refinanced two MRI units which had previously
been refinanced in March 1995 to more favorable lease terms. As a result of
this refinancing, the $600,000 letter-of-credit which had been issued in
March 1995 was terminated (Note 3).
The Company must maintain a cash balance of $400,000 on deposit with the
bank which issued the aforementioned letter-of-credit.
Note 11. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The Company entered into various capital leases or financing arrangements
(including new units and unit upgrades) aggregating approximately
$15,135,000, $4,800,000 and $4,350,000 during 1996, 1995 and 1994,
respectively. These amounts were recorded as obligations under capital
leases and as leased diagnostic medical equipment.
The Company refinanced various capital leases during 1996, 1995 and 1994
aggregating approximately $2,474,000, $7,092,000 and $3,231,000,
respectively.
Interest paid during 1996, 1995 and 1994 was approximately $2,062,000,
$1,736,000 and $1,474,000, respectively.
Taxes paid during 1996, 1995 and 1994 approximated $240,000, $71,000 and
$46,000.
-58-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 12. COMMON STOCK DIVIDENDS
----------------------
On July 10, 1995, the Company issued 120,400 Common Shares in conjunction
with a 5% Common Stock dividend for all shareholders of record on June 30,
1995. As a result of the stock dividend, approximately $323,000 was charged
to accumulated deficit and, in accordance with Accounting Principles Board
Opinion 15, Earnings Per Share, (APB 15), the Company reflected the 5%
Common Stock dividend in calculating earnings per share for 1994.
On January 14, 1997, the Company issued 247,130 Common Shares in accordance
with a 7% Common Stock dividend for all shareholders of record on January
10, 1997. The December 31, 1996 financial statements have been adjusted to
reflect this post balance sheet equity activity (Note 2). Further, in
accordance with APB 15, the Company has reflected the 7% Common Stock
dividend in calculating earnings per share for all periods presented (Note
2).
In accordance with the Company's Warrant Agreement, the Company's publicly-
traded Warrants were recapitalized to reflect the Common Stock dividend. As
a result, each Warrant certificate entitled the holder to purchase 1.1235
shares of stock for $7.00. In July 1995, the Company issued a similar 5%
Common Stock dividend. Such publicly traded warrants expired on March 4,
1997 (Note 18).
Note 13. DISCONTINUED OPERATIONS
-----------------------
On December 30, 1993, the Company formally adopted a plan to sell its
freestanding full-service diagnostic imaging center and its radiation
oncology center during 1994 and 1995.
The following table presents net revenues, net losses from discontinued
operations, net losses on disposal of discontinued operations and selected
balance sheet information relating to the freestanding full-service
diagnostic imaging and radiation oncology businesses as of, and for the
years ended, December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Net revenues $821,000 $1,660,077
Loss from discontinued operations -- --
Loss on disposal of discontinued operations,
net of tax benefit of $68,000 in 1994 -- 132,000
Accounts receivable, net -- 148,189
Leased medical equipment, net -- 1,305,897
Leasehold improvements, net -- 277,176
Deferred costs, net -- 197,297
Other assets, net -- 137,291
Accounts payable and accrued expenses -- 88,154
Long-term debt and capital lease obligations -- 1,305,728
Reserve for loss on discontinued operations -- 456,302
</TABLE>
-59-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 13. DISCONTINUED OPERATIONS (continued)
-----------------------
The Company sold substantially all of the assets of the Auburn Regional
Center for Cancer Care on October 31, 1994. The sale price of the Center
was approximately $1.3 million comprised of $400,000 in cash and the
assumption of the Center's liabilities. The Company remains obligated on
approximately $270,000 of capital leases as of December 31, 1996. The buyer
has agreed to use its best efforts to have the Company released from these
leases and has secured its obligations to the Company to perform on these
leases through a pledge of certain assets in favor of the Company (Note 3).
The Company had previously established a discontinued operations reserve and
accordingly, no gain or loss was recorded as a result of this sale.
In January 1995, the Company restructured the majority of the long-term debt
and capital lease obligations of the freestanding imaging center resulting
in debt forgiveness of approximately $300,000, a lower interest rate and
extension of the term to 66 months, including interest only payments for the
first six months. The debt forgiveness was considered in determining the
adequacy of the reserve for loss on discontinued operations as of December
31, 1994. In relation to this debt restructuring, the Company increased the
letter-of-credit outstanding to $400,000 (Note 10).
On June 30, 1995, the Company completed the sale of substantially all of the
assets of its remaining freestanding diagnostic imaging center, Airport
Regional Imaging Center ("Airport Center"), located in Coraopolis,
Pennsylvania for a total sale price of approximately $300,000, including
cash and net trade receivables. Although the buyer assumed all future
operating liabilities of the Airport Center, the Company remains obligated
on approximately $600,000 of capital leases as of December 31, 1996. The
buyer has agreed to use its best efforts to have the Company released from
these leases and has secured its obligations to the Company to perform on
these leases through a pledge of stock and certain assets in favor of the
Company (Note 3). The Company had previously established a discontinued
operations reserve and accordingly, no gain or loss was recognized as a
result of this sale.
Note 14. SALE OF PARTNERSHIP INTERESTS
-----------------------------
On June 30, 1995, in conjunction with the sale of the Airport Center which
had been treated as a discontinued operation (Note 13), the Company sold its
majority ownership and general partner rights in four cardiac care
partnerships for a total sale price of $300,000 comprised of $200,000 in
cash and a $100,000, thirty-month note. The Company recognized a pre-tax
gain on this sale of $48,219. The partnerships, which constituted
approximately seven percent of the Company's revenues, had total assets of
approximately $1.4 million, comprised primarily of diagnostic equipment and
accounts receivable, and total liabilities of approximately $1.2 million
comprised primarily of capital lease obligations associated with the
diagnostic equipment.
-60-
<PAGE>
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
Note 15. LITIGATION
----------
The Company had been named as a defendant, along with a hospital which
contracts for the Company's MRI services, in a claim filed by a woman who
alleged to have incurred partial paralysis as a result of being mishandled
during an MRI procedure. The claim had been filed for $6.0 million in
damages. The claim was settled by the Company's insurance company in
November 1996 with no admission of liability by the Company and no financial
effect to the Company.
Note 16. ACQUISITION
-----------
On March 21, 1996, the Company purchased certain assets of a mobile provider
which operated mobile units in the state of North Carolina (the "Seller").
The purchase price approximated $600,000 in cash [net of negotiated trade-in
value of approximately $500,000 (which approximated the purchase price of
the units acquired) for two of the Seller's mobile MRI units] in exchange
for MRI Programs including Certificate of Need licenses or exemptions and
certain customer service contracts. The Company traded-in and upgraded one
of the purchased units to newer technology in April 1996 and traded-in and
upgraded the second unit during July 1996 (Note 3).
Note 17. SALES TAX REFUND
----------------
During September 1996, the Company received formal notification of a state
sales tax refund of approximately $300,000, net of expenses. The refund is
the result of sales tax paid to a certain state over a period of time which
the Company determined (by obtaining a private letter ruling from the state)
was actually exempt from such tax. Payment of the refund was received in
January 1997.
Note 18. SUBSEQUENT EVENT
----------------
During January through March 4, 1997 (the Warrants expired at 5:00 p.m. on
March 4, 1997) 1,677,000 Warrants (Note 5) were exercised and the Company
issued 1,882,000 shares of Common Stock of the Company. The Company
received net cash proceeds of approximately $11.7 million as a result of
such Warrant exercises. The Warrants ceased trading on March 5, 1997.
-61-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information set forth above in Part I under the caption "Executive
Officers of the Registrant" is incorporated herein by reference. The other
information required by this item is incorporated herein by reference to the
information set forth under the captions "Election of Directors", "Board of
Directors and Certain Board Committees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement
(the "Proxy Statement") for the May 7, 1997, Annual Meeting of Stockholders
filed or to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated herein by reference to
the information set forth in the second paragraph under the caption "Board
of Directors and Certain Board Committees" and the information set forth
under the caption "Executive Compensation and Other Information" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is incorporated herein by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated herein by reference to
the information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement.
-62-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial statements, financial statement schedules and exhibits not listed
have been omitted where the required information is included in the
consolidated financial statements or notes thereto, or is not applicable or
required.
(a) (1) A listing of the consolidated financial statements, notes and
independent auditors' report required hereunder is set forth in Item
8 of this Report on Form 10-K.
(2) Financial Statement Schedule:
The following are included in this Report:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Reference
- ----------- ---------
<S> <C> <C>
3.1 Certificate of Incorporation of SMT, as amended Incorporated herein by reference is Exhibit 3.1 to
Registration Statement No. 33-44329 on Form S-1 (the "Form S-1")
3.2 By-Laws of SMT Incorporated herein by reference is Exhibit 3.2 to
the Form S-1.
4.1 Warrant Agreement dated March 11, 1992 Incorporated herein by reference is Exhibit 4.2 to
SMT's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1992.
4.2 Rights Agreement between SMT Health Incorporated herein by reference is Exhibit 1 to
Services Inc. and American Stock Transfer the Registrant's Registration Statement on Form
and Trust Company dated November 8, 1995 8-A Amendment No. 1, filed on December 6, 1995.
10.1 Lease for SMT's facility Incorporated herein by reference is Exhibit 10.01
to SMT's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1994.
10.2* Employment Agreements with Jeff D. Bergman Incorporated herein by reference are Exhibit 10.41 to SMT's
Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994 and Exhibit 10.01 to the Company's Form 10-Q for
the Quarterly Period Ended September 30, 1996.
</TABLE>
__________________
*Denotes management agreement or compensatory plan or arrangement.
-63-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.3* Employment Agreements with Daniel Dickman Incorporated herein by reference are Exhibit 10.41 to SMT's
Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1994 and Exhibit 10.02 to the Company's Form 10-Q
for the Quarterly Period Ended September 30, 1996.
10.4* 1996 Employee Stock Option Plan Filed herewith.
10.5* 1991 Employee Stock Option Plan (as amended Incorporated herein by reference is Exhibit 10.04
on April 27, 1995) to the Company's Form 10-Q for the Quarter Ended June 30, 1995.
10.6* 1991 Directors Stock Option Plan for Non- Incorporated herein by reference is Exhibit 10.05
Employee Directors (as amended April 27, to the Company's Form 10-Q for the Quarter
1995) Ended June 30, 1995.
10.7* SMT Profit Sharing Plan Incorporated herein by reference is Exhibit 10.30
to SMT's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1992.
10.8 Master Security Agreement, dated October 6, Incorporated herein by reference is Exhibit 10.42
1992, between U.S. Concord, Inc. and Airport to SMT's Annual Report on Form 10-K for the
Regional Imaging Center, L.P. , including Fiscal Year Ended December 31, 1992.
exhibits thereto
10.9 Lease renewal and upgrade dated March 15, Incorporated herein by reference is Exhibit
1993, between SMT Health Services Inc. and 10.03 to the Company's Form 10-Q for the Quarter
GE Medical Systems Ended September 30, 1994.
10.10 Master Equipment Lease Agreement dated as Incorporated herein by reference is Exhibit 10.06
of September 15, 1994, between Financing for to the Company's Form 10-Q for the Quarter
Science International, Inc. and SMT Health Ended September 30, 1994.
Services Inc., including exhibits thereto
10.11 Master Maxi-service Agreement Number Incorporated herein by reference is Exhibit 10.07
dated October 6, 1994, by and between GE to the Company's Form 10-Q for the Quarter Ended
Medical Systems and SMT Health Services September 30, 1994.
Inc., including exhibits thereto
10.12 Asset Purchase Agreement between Universal Incorporated herein by reference is Exhibit 10.08
Treatment Centers, Inc. and SMT Health to the Company's Form 10-Q for the Quarter Ended
Services Inc., dated as of October 31, 1994, September 30, 1994.
including schedules thereto
10.13 Master Equipment Lease dated November 21, Incorporated herein by reference is Exhibit 10.31
1994, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the
tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
</TABLE>
__________________
*Denotes management agreement or compensatory plan or arrangement.
-64-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.14 Master Equipment Lease dated January 26, Incorporated herein by reference is Exhibit 10.32
1995, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the
tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
10.15 Master Equipment Lease dated January 26, Incorporated herein by reference is Exhibit 10.33
1995, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the
tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
10.16 Master Equipment Lease dated February 3, Incorporated herein by reference is Exhibit 10.34
1995, by and between Copelco Capital, Inc. to SMT's Annual Report on Form 10-K for the
and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
10.17 Master Equipment Lease dated February 20, Incorporated herein by reference is Exhibit 10.35
1995, by and between Heller Financial Leasing, to SMT's Annual Report on Form 10-K for the
Inc. and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
10.18 Master Equipment Lease dated February 20, Incorporated herein by reference is Exhibit 10.36
1995, by and between Heller Financial Leasing, to SMT's Annual Report on Form 10-K for the
Inc. and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994.
thereto
10.19 Loan Modification Agreement dated January 1, Incorporated herein by reference is Exhibit 10.37
1995, by and between Airport Regional Imaging to SMT's Annual Report on Form 10-K for the
Center, L.P. and Marine Midland Business Loans, Fiscal Year Ended December 31, 1994.
Inc., formerly known as U.S. Concord, Inc.
10.20 Master Lease/Service Agreement, Agreement Incorporated herein by reference is Exhibit 10.01
Number 8003 dated March 28, 1995 by and to the Company's Form 10-Q for the Quarter Ended
between G.E. Medical Systems and SMT June 30, 1995.
Health Services Inc.
10.21 Agreement of Purchase and Sale By and Incorporated herein by reference is Exhibit 10.02
Between Airport Regional Imaging Center, to the Company's Form 10-Q for the Quarter Ended
L.P. and SMT Cardiac Corp., as Seller and June 30, 1995.
C.F. Services, Inc. and C.F. Airport Health
Services, Inc. as Buyers (and related schedules;
Equipment Sublease by and between Airport
Regional Imaging Center, L.P. and C.F.
Airport Health Services, Inc. dated June 30,
1995; Credit Agreement dated June 30, 1995;
Security Agreement dated June 30, 1995;
Pledge of Securities Agreement dated June
30, 1995; and Continuing Agreement of
Guaranty and Suretyship including Authority
to Confess Judgment after Default)
</TABLE>
-65-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.22 Agreement between Shared Medical Enterprises Incorporated herein by reference is Exhibit 10.03
and SMT Health Services Inc. dated July 1, 1995 to the Company's Form 10-Q for the Quarter
Ended June 30, 1995.
10.23 Loan and Security Agreement, Agreement Incorporated herein by reference is Exhibit 10.01
Number 130-0001386-000 dated September to the Company's Form 10-Q for the Quarter
27, 1995 by and between Siemens Credit Ended September 30, 1995.
Corporation and SMT Health Services Inc.
10.24* Employment Agreements with David A. Zynn Incorporated herein by reference is Exhibit 10.04 to the
Company's Form 10-Q for the Quarterly Period Ended
September 30, 1996 and Exhibit 10.44 to SMT's Annual Report on
Form 10-K for Fiscal Year Ended December 31, 1995.
10.25* Employment Agreements with David Spindler Incorporated herein by reference is Exhibit 10.03 to the
Company's Form 10-Q for the Quarterly Period Ended
September 30, 1996 and Exhibit 10.45 to SMT's Annual Report on
Form 10-K for Fiscal Year Ended December 31, 1995.
10.26* Warrant Agreement dated August 9, 1995 by Incorporated herein by reference is Exhibit 10.46
and between SMT Health Services Inc. and to the Company's Annual Report on Form 10-K for
Mark A. DeSimone the Fiscal Year Ended December 31, 1995.
10.27* Warrant Agreement dated August 9, 1995 by Incorporated herein by reference in Exhibit 10.47
and among Jeff D. Bergman, Daniel Dickman, to SMT's Annual Report on Form 10-K for the
Gerald Cohn, Alan Novich and David J. Malone Fiscal Year Ended December 31, 1995.
10.28 Agreement of Purchase and Sale Between Incorporated herein by reference is Exhibit 10.49
Trans-Carolina Imaging, LLC, as Seller, and to SMT's Annual Report on Form 10-K for the
SMT Mobile V Corp., as Buyer dated as of Fiscal Year Ended December 31, 1995.
February 27, 1996
10.29 Engagement Letter by and among SMT Health Incorporated herein by reference is Exhibit 10.02
Services Inc. and Commonwealth Associates to the Company's Form 10-Q for the Period Ended
September 30, 1995.
10.30 Warrant Agreement by and among SMT Health Incorporated herein by reference is Exhibit 10.03
Services Inc. and Commonwealth Associates to the Company's Form 10-Q for the Period Ended
September 30, 1995.
10.31 Promissory Note and Loan and Security Incorporated herein by reference is Exhibit 10.52
Agreement by and between Siemens Credit to SMT's Annual Report on Form 10-K for the
Corporation and SMT Health Services Inc. Fiscal Year Ended December 31, 1995.
dated February 9, 1996
</TABLE>
__________________
*Denotes management agreement or compensatory plan or arrangement.
-66-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.32 Amended Schedule of Leased Equipment by Incorporated herein by reference is Exhibit 10.53
and between Laurel Capital Corporation and to SMT's Annual Report on Form 10-K for the
SMT Health Services Inc. dated January 4, 1996 Fiscal Year Ended December 31, 1995.
10.33* SMT Health Services Inc. 1995 Directors Incorporated herein by reference is Exhibit 10.54
Warrant Plan to SMT's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1995.
10.34 Master Equipment Lease dated August 28, 1996 Incorporated herein by reference is Exhibit 10.05
by and between SMT Health Services Inc. and to the Company's Form 10-Q for the Quarterly
DVI Financial Services Inc. Period Ended September 30, 1996
10.35 Loan and Security Agreement dated September Incorporated herein by reference is Exhibit 10.06
11, 1996 by and between Siemens Credit to the Company's Form 10-Q for the Quarterly
Corporation and SMT Health Services Period Ended September 30, 1996
10.36 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.07
September 26, 1996 by and between Laurel to the Company's Form 10-Q for the Quarterly
Capital Corporation and SMT Health Services Period Ended September 30, 1996
Inc.
10.37 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.08
July 26, 1996 by and between Laurel Capital to the Company's Form 10-Q for the Quarterly
Corporation and SMT Health Services Inc. Period Ended September 30, 1996
10.38 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.09
July 26, 1991 by and between Laurel Capital to the Company's Form 10-Q for the Quarterly
Corporation and SMT Health Services Inc. Period ended September 30, 1996
(Lease 2166)
10.39 Finance Lease and Security Agreement dated Filed herewith.
December 15, 1996 by and between Laurel
Capital Corporation and SMT Health Services Inc.
10.40 Agreement of Purchase and Sale between Palmetto Filed herewith.
Community Health Network and SMT Health
Services Inc.
11.1 Computation of Earnings Per Share Filed herewith.
21.1 List of Subsidiaries Filed herewith.
23.1 Consent of Independent Public Accountants Filed herewith.
27.1 Financial Data Schedule Filed herewith.
99.1 Press Release dated March 17, 1997 Filed herewith.
</TABLE>
__________________
*Denotes management agreement or compensatory plan or arrangement.
-67-
<PAGE>
PART V
SMT will furnish to the Commission upon request copies of any instruments not
filed herewith, if any, which authorize the issuance of long-term obligations
of SMT not in excess of 10% of SMT's total assets on a consolidated basis.
(b) During the quarter ended December 31, 1996, SMT filed no report on
Form 8-K.
(c) SMT hereby files as exhibits to this Form 10-K the exhibits set forth in
Items 14(a)(3) hereof which are not incorporated by reference.
(d) SMT hereby files as financial statement schedules to this Form 10-K the
financial statement schedules set forth in Item 14(a)(2) hereof.
-68-
<PAGE>
SMT HEALTH SERVICES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
<TABLE>
<CAPTION>
Balance at Additions Additions Balance
Beginning Charged to Charged to at End
Descriptions of Period Costs & Expenses Other Accounts Deductions of Period
- ---------------------------- ---------- ---------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994
Provision for loss on
disposal of discontinued
operations $1,400,000 $200,000 $ -- $1,144,000 $456,000
========== ======== ====== ========== =========
Valuation allowance
related to deferred
tax assets $ 487,500 $ -- $ -- $ 72,500 $415,000
========== ======== ====== ========== =========
Allowance for doubtful
accounts $ 13,000 $ -- $ -- $ 13,000 $ --
========== ======== ====== ========== =========
Year Ended
December 31, 1995
Provision for loss on
disposal of discontinued
operations $ 456,000 $ -- $ -- $ 456,000 $ --
========== ======== ====== ========== =========
Valuation allowance
related to deferred
tax assets $ 415,000 $ -- $ -- $ 312,000 $ 103,000
========== ======== ====== ========== =========
Year Ended
December 31, 1996
Valuation allowance
related to deferred
tax assets $ 103,000 $ -- $ -- $ 103,000 $ --
========== ======== ====== ========== =========
</TABLE>
-69-
<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 in the city of Pittsburgh,
Commonwealth of Pennsylvania, on March 20, 1997.
SMT HEALTH SERVICES INC.
By: /s/ Jeff D. Bergman
---------------------------------------
Jeff D. Bergman, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on March 20, 1997.
Signature Title
--------- -----
Principal Executive Officer:
/s/ Jeff D. Bergman
----------------------------
Jeff D. Bergman President, Chief Executive Officer and
Director
Principal Financial and
Accounting Officer:
/s/ David A. Zynn
----------------------------
David A. Zynn Chief Financial Officer, Treasurer, Chief
Accounting Officer and Assistant Secretary
Directors:
/s/ Gerald L. Cohn /s/ Alan Novich
---------------------------- --------------------------
Gerald L. Cohn Alan Novich
/s/ Daniel Dickman /s/ David J. Malone
---------------------------- --------------------------
Daniel Dickman David J. Malone
-70-
<PAGE>
LAUREL CAPITAL CORPORATION
FINANCE LEASE
3810 McKnight East Drive
Pittsburgh, PA 15237
[412] 366-6440
Finance Lease No. 2205
This Lease, made this 9th day of December 1996 by and between LAUREL CAPITAL
CORPORATION ("Lessor") and SMT HEALTH SERVICES INC.("Lessee").
1. LEASE AGREEMENT. Lessor hereby leases to Lessee, and Lessee hereby rents
from Lessor, all the machinery, equipment and other personal property
(individually "Item of Equipment" and collectively"Equipment") described in
Equipment Lease Schedules which are or may from time to time hereafter be
executed by Lessor and Lessee and attached hereto or incorporated herein by
reference ("Schedules") upon the terms and conditions set forth in this Lease,
as supplemented, as regards each Item of Equipment, by the terms and conditions
set forth in the Schedule identifying that Item of Equipment. Whenever reference
is made herein to "this Lease", it shall be deemed to include each of the
several Schedules and the Insurance Schedule(s)referred to herein all of which
constitute one undivided lease of the Equipment.
2. TERM.
(a) The obligations under this Lease commence upon the written acceptance
hereof by Lessor and shall end upon full performance and observance of each and
every term, condition and covenant set forth in this Lease and any extensions
hereof. The rental term for Equipment listed in each Schedule shall commence on
the date indicated on such Schedule and shall terminate on the last day of the
term stated in such Schedule.
(b) In the event Lessor shall make payments on the Equipment prior to the
commencement date of the rental term as indicated on the Schedule, Lessee shall
pay interim rental payments from the date of such payments by Lessor to the
commencement date of the rental term. The interim rental payments shall be
based on the daily equivalent of two (2.00%) percent over the prime interest
rate (fully floating) as announced from time to time by PNC Bank, National
Association. Interim rental payments are due monthly.
3. RENT. The rent, including interim rental payments, for the Items of
Equipment described in each Schedule shall be the amount stated in such
Schedule. Rent is an absolute obligation of Lessee due upon the inception of
each rental or interim rental term and payable as specified in each particular
Schedule irrespective of any claims, demands, set-offs, actions, suits or
proceedings that Lessee may have or assert against Lessor or any supplier of
Equipment. Rent and interim rent shall be payable to Lessor at its office, 3810
McKnight East Drive, Pittsburgh, Pennsylvania 15237, or at such other place as
Lessor or its assigns may designate in writing to Lessee from time to time.
4. DELINQUENT RENT PENALTY. If Lessee shall fail to pay any rent, interim
rent installment or other amount due hereunder within ten (10)days after the due
date and until all sums due hereunder have been declared due and payable in
accordance with Paragraph 24, Lessee shall pay to Lessor a late charge of five
(5%) percent of such amount due for each month or part thereof for which said
rent or other sums shall be
<PAGE>
delinquent. After all sums are declared due and payable in accordance with
Paragraph 24, Lessee shall pay interest at the rate of fifteen (15%) percent per
annum or the maximum contract rate permitted by law, whichever is less, on such
accelerated sums from the date of acceleration until paid, and whether or not
judgment hereon has been entered.
5. DELIVERY AND INSTALLATION. Lessee will select the type, quantity and
supplier of each Item of Equipment and in reliance thereon such Equipment will
then be ordered by Lessor from such supplier or Lessor may at its option elect
to accept an assignment of any existing purchase order. Lessor shall not be
liable for loss or damage occasioned by any cause, circumstance or event of
whatsoever nature, including, but not limited to, failure of or delay in
delivery, delivery to wrong location, delivery of improper equipment or property
other than the Equipment, damage to the Equipment, governmental regulations,
strikes, embargoes or other causes, circumstances or events whether of a like or
unlike nature. Lessee, at its expense, will pay all transportation, packing,
installation, testing and other charges in connection with the delivery,
installation and use of each Item of Equipment. In the event that the cost of
any Item of Equipment differs from the price set forth in the purchase order
therefor, the monthly rental shall be changed accordingly to fully reflect any
such difference. In the event that Lessee fails or refuses to accept delivery
of the Equipment within ninety (90) days following the execution of the Lease
(unless such period is extended by an agreement between Lessor and Lessee in
writing), Lessor may terminate the Lease and Lessee will remit to the Lessor an
amount equal to the down payment and installments previously paid by the Lessor
to the vendor or supplier of the Equipment, together with interest accrued
thereon at the highest contractual rate enforceable against Lessee under
applicable law but never at a rate higher than fifteen (15%) percent per annum.
Lessor shall assign to Lessee without recourse all of Lessor's interest in and
to the Equipment under the vendor purchase agreements.
6. WARRANTY OF LESSEE'S QUIET POSSESSION. Lessor warrants and covenants that
so long as Lessee faithfully performs this Lease, Lessee, subject to the
disclaimer of warranties set forth immediately below, shall be entitled to
quietly possess and use the Equipment without interference.
7. DISCLAIMER OF WARRANTIES. EXCEPT FOR THE WARRANTIES SET FORTH ABOVE,
LESSOR, NOT BEING THE MANUFACTURER OF THE EQUIPMENT NOR THE MANUFACTURER'S
AGENT, MAKES NO EXPRESS OR IMPLIED WARRANTY OF ANY KIND WHATSOEVER WITH RESPECT
TO THE EQUIPMENT. THIS DISCLAIMER OF WARRANTIES INCLUDES BUT IS NOT LIMITED TO
ANY WARRANTY REGARDING: THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR
ANY PARTICULAR PURPOSE; THE DESIGN OR CONDITION OF THE EQUIPMENT; THE QUALITY OR
CAPACITY OF THE EQUIPMENT; THE WORKMANSHIP OF THE EQUIPMENT; COMPLIANCE OF THE
EQUIPMENT WITH THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT
PERTAINING THERETO; PATENT INFRINGEMENT; OR LATENT DEFECTS; it being agreed that
all such risks, as between Lessor and Lessee, are to be borne by the Lessee.
Lessor is not responsible or liable for any direct, indirect, incidental or
consequential damage to, or loss resulting from, the installation, operation or
use of any Item of Equipment or any product manufactured thereby.
8. NATURE OF EQUIPMENT. Not withstanding anything to the contrary contained
in this Agreement, including the characterization of this Agreement as a lease,
the parties hereto acknowledge and agree that, legal title to each Item of
Equipment leased hereunder shall be with the Lessee. Each Item of Equipment
shall remain personal property, notwithstanding the manner in which it may be
affixed to any real property. Lessee will otherwise take all action required to
keep the Equipment free and clear of all levies, liens and encumbrances which
result from any act or omission of the Lessee. Lessor assumes no liability and
makes no representation as to the treatment by Lessee of this Lease, the
Equipment, or to the rental payments for
<PAGE>
financial statement or tax purposes.
9. LOCATION OF EQUIPMENT. Each Item of Equipment shall be placed into service
at the location specified in Exhibit B, Location of Equipment attached to the
Schedule. Lessee shall promptly provide written notice to Lessor of any and all
location changes.
10. LESSOR'S RIGHT OF INSPECTION. Lessor and its agents shall have the right
during business hours to enter upon the premises where any Item of Equipment is
located (to the extent Lessee can permit) for the purpose of inspection.
11. USE OF EQUIPMENT. Lessee must use the Equipment in a careful and proper
manner in conformity with (i) all statutes and regulations of each governmental
authority having jurisdiction over the Lessee and/or the Equipment and its use,
and (ii) all policies of insurance relating to the Equipment and/or its use. In
addition, Lessee shall not (i)use any Item of Equipment in any manner that would
impair the applicability of manufacturer's warranties or render any Item of
Equipment unfit for its originally intended use; nor (ii) permit anyone other
than authorized and competent personnel to operate any Item of Equipment.
12. ALTERATIONS. Without the prior written consent of Lessor, which consent
shall not be unreasonably withheld, Lessee shall not make any alterations,
modifications or attachments to the Equipment. All alterations, modifications
and attachments of whatsoever kind or nature made to any Item of Equipment must
be removed without damaging the functional capabilities or economic value of the
affected Item of Equipment upon the termination of the Lease. Under no
circumstances shall any such alteration, modification or attachment be
encumbered by Lessee.
13. MAINTENANCE AND REPAIRS. Lessee shall at its own expense and without
authority to bind Lessor maintain each Item of Equipment in good mechanical
condition and running order, normal wear and tear excepted. Immediately upon
installation, Lessee shall provide to Lessor a perfected first lien security
interest in any and all replacement parts.
14. RISK OF LOSS, DAMAGE AND THEFT.
(a) All risk of loss, damage, theft or destruction, partial or complete, to
any Item of Equipment incurred or occasioned by any cause, circumstance or event
of whatever nature will be borne by Lessee from and after delivery of each Item
of Equipment to a carrier FOB point of origin. Lessee shall promptly notify
Lessor of any theft of or loss or damage to the Equipment.
(b) Neither total nor partial loss of use or possession of any Item of
Equipment shall abate the rent.
(c) An Item of Equipment shall be deemed subjected to total loss when (i) it
has disappeared regardless of the reason for disappearance or (ii) when it has
sustained physical damage and the estimated cost of repair exceeds 75% of the
fair market value (as determined by an independent appraiser chosen by Lessor)
on the date of damage. Lessee's duty to pay rent for any Item of Equipment
subjected to total loss shall be discharged by paying to Lessor the sum of the
then unpaid principal plus accrued interest plus the purchase option at the
price specified on the Schedule plus any applicable prepayment penalty plus all
costs associated with releasing the Lessor's security interest plus any other
sums then due and payable under the Lease. The amount of applicable insurance
proceeds, if any, actually received by Lessor shall be subtracted from the
amount for which Lessee is liable under this Paragraph 14.
<PAGE>
(d) Lessee shall cause any Equipment subjected to partial loss to be restored
to original capability. Lessor shall, upon receiving satisfactory evidence of
restoration, promptly pay to Lessee the proceeds of any insurance or
compensation received by Lessor, by reason of such partial loss, provided
however, that Lessor shall release such proceeds, to the extent such proceeds
have been received by Lessor, in advance of restoration to the extent necessary
to purchase materials or make progress payments upon the submission of
appropriated work orders, invoices, estimates, or other satisfactory
documentation.
(e) Lessor shall not be obligated to undertake the collection of any claim
against any person for either total or partial loss of any Item of Equipment.
After Lessee discharges its obligations to Lessor under either 14(c) or 14(d)
above, Lessee may, for Lessee's own account, proceed to recover from third
parties and shall be entitled to retain any amount recovered. Lessor shall
supply Lessee with any necessary assignment of claim.
15. INDEMNIFICATION.
(a) Non-tax Liability. Lessee assumes liability for, and hereby agrees to
------------------
indemnify, protect and hold harmless, Lessor, its agents, servants, employees,
officers, successors and assigns from and against, any and all liabilities,
obligations, losses, damages, injuries, claims, demands, penalties, actions,
costs and expenses, including reasonable attorney's fees, of whatsoever kind and
nature, arising out of (i) the manufacture, installation, use,
condition(including, but not limited to, latent and other defects and whether or
not discoverable by Lessee or Lessor), operation, ownership, selection,
delivery, leasing, removal or return of any Item of Equipment, regardless of
where, how and by whom operated, or (ii) any failure on the part of Lessee to
perform or comply with any covenantor condition of this lease.
(b) Direct Tax Costs. In addition to all other rents payable hereunder, the
-----------------
Lessee agrees to indemnify, protect and hold harmless Lessor, its agents,
servants, employees, officers, successors and assigns from and against any and
all taxes, license fees, assessments and other governmental charges, fees, fines
or penalties of whatsoever kind or character and by whomsoever payable, which
are levied, assessed, imposed or incurred during the lease term, (i) on or
relating to each Item of Equipment, including any tax on the sale, ownership,
use, leasing, shipment, transportation, delivery or operation thereof, (ii) on
the exercise of any option, election or performance of an obligation by the
Lessee hereunder, (iii) of the kind generally referred to in items (i) and (ii)
above which may remain unpaid as of the date of delivery of any Item of
Equipment to the Lessee irrespective of when the same may have been levied,
assessed, imposed or incurred, and (iv) by reason of all gross receipts,
business and occupation, and like taxes on or measured by rents payable
hereunder levied by any state or local taxing authority having jurisdiction
where any Item of Equipment is located. The Lessee agrees to comply with all
state and local laws requiring the filing of ad valorem tax returns relating to
each Item of Equipment. Any statements for such taxes received by the Lessor
shall be promptly forwarded to the Lessee. This subparagraph shall not be
deemed to obligate the Lessee to pay (i) any taxes, fees, assessments and
charges which may have been included in the Lessor's cost of each Item of
Equipment as set forth in Schedule(s) hereto, or (ii) any income or like taxes
against the Lessor on or measured by the net income from the rents payable
hereunder. The Lessee shall not be obligated to pay any amount under this
subparagraph so long as it shall, at its expense and in good faith and by
appropriate proceedings, contest the validity or the amount thereof unless such
contest would adversely affect the title of the Lessee, or any security interest
of Lessor, to an Item of Equipment or would subject any Item of Equipment to
forfeiture or sale. The Lessee agrees to indemnify the Lessor against any loss,
claim, demand and expense including legal expense resulting from such nonpayment
or contest.
(c) Indemnity Payment. The amount payable pursuant to subparagraphs 15(a)
------------------
and 15(b) shall be
<PAGE>
payable upon demand of the Lessor accompanied by a statement describing in
reasonable detail such loss, liability, injury, claim, expense or tax and
setting forth the computation of the amount so payable.
(d) Survival. The indemnities and assumptions of liabilities and obligations
---------
provided for in this Paragraph 15 shall continue in full force and effect
notwithstanding the expiration or other termination of this Lease.
16. LESSEE'S ASSIGNMENT. Without the prior written consent of the Lessor,
Lessee shall not bail, hypothecate, transfer or dispose of any Item of Equipment
or any interest in this Lease nor impair the Lessor's title to the Equipment.
Lessee shall not assign this Lease, nor shall this Lease or any rights under
this Lease or in any Item of Equipment inure to the benefit of any trustee in
bankruptcy, receiver, creditor, or other successor of Lessee whether by
operation of law or otherwise, without prior written consent of the Lessor.
17. LESSOR'S ASSIGNMENT. All rights of Lessor hereunder and in any Item of
Equipment may be assigned, pledged, mortgaged, transferred, or otherwise
disposed of, either in whole or in part, without notice to Lessee. No such
assignee shall be obligated to perform any duty, covenant, or condition required
to be performed by Lessor under the terms of this Lease. Such assignee shall
have all rights, powers and remedies given to Lessor by this Lease, and upon
notice to Lessee, shall be named as loss payee or co-insured under all policies
of insurance maintained pursuant to Paragraph 18 hereof. If Lessor assigns this
Lease or the monies due or to become due hereunder or any other interest herein,
Lessee agrees not to assert against Lessor's assignee any defense, set-off,
recoupment, claim or counterclaim which Lessee may have against Lessor, whether
arising under this Lease or any other transaction between Lessor and Lessee.
Subject to Paragraph 16 hereof and this Paragraph 17, this Lease inures to the
benefit of, and is binding upon, the heirs, legatees, personal representatives,
successors and assigns of the parties hereto.
18. INSURANCE. Lessee will at its own expense insure each Item of Equipment in
compliance with the terms and conditions of the Insurance Schedule(s) attached
hereto or incorporated herein by reference inform satisfactory to Lessor with
insurance carriers approved by Lessor and in an amount not less than one hundred
five (105%) percent of the unpaid principal balance due hereunder. The proceeds
of any insurance policy due by reason of theft or loss of or damage to any Item
of Equipment shall be applied as provided in Paragraph 14 hereof. In addition
to the compliance with the terms and conditions of the Insurance Schedule(s) and
the other terms and conditions of this Paragraph 18, the Lessee shall comply
with the following conditions:
(a) Lessee, prior to the inception of any rental term, shall deliver to
Lessor all required policies of insurance or in the alternative certificates of
insurance (in triplicate);
(b) Lessee shall cause each insurer to agree by endorsement on the policies
or certificates of insurance or by an independent instrument furnished Lessor
that each such insurer will give at least thirty (30) days written notice to
Lessor before any such policy or policies of insurance will be altered or
cancelled for any reason, including without limitation, failure of the Lessee to
pay premiums;
(c) All coverage required by the Insurance Schedule(s) must be in effect when
Lessor takes delivery or causes delivery to be made FOB point of origin;
(d) All insurance policies must indicate that the Lessor is an additional
insured for all aspects of liability insurance coverage and is loss payee for
all aspects of insurance coverage relating to the theft or loss of or damage to
Equipment and the proceeds of any public liability or property damage insurance
shall
<PAGE>
be applied first to the extent of the Lessor's liability;
(e) Lessee will furnish renewal policies or renewal certificates of insurance
(in triplicate) listing Lessor as an additional insured and/or loss payee, as
required by this Lease, no later than thirty(30) days prior to the expiration of
any insurance coverage required hereby.
19. ADDITIONAL DOCUMENTS. If Lessor shall so request, Lessee shall execute and
deliver to Lessor such documents, including without limitation, UCC Financing
and Continuation Statements, as Lessor shall deem necessary or desirable for
purposes of continuing this Lease or recording or filing to protect the interest
of Lessor in each Item of Equipment. Any such filing or recording shall not be
deemed evidence of any intent to create a security interest.
20. FURNISHING FINANCIAL INFORMATION. During the term of this Lease and any
extensions or renewals hereof, Lessee will furnish to Lessor:
(a) Within forty five (45) days after the end of each of the first three
quarterly periods of Lessee's fiscal year, a balance sheet and statement of
income of Lessee as at the close of such quarterly period from the beginning of
the fiscal year to the date of such statement, prepared in accordance with
generally accepted accounting principles, consistently applied, and in such
reasonable detail as Lessor may request, certified as true, complete and correct
by an authorized officer of the Lessee.
(b) As soon as practicable, but in any event within ninety (90)days after the
end of each fiscal year, a copy of its annual audit prepared by a certified
public accountant selected by Lessee and satisfactory to Lessor.
(c) In a timely manner such financial statements, reports and other
information as the Lessee shall send from time to time to its stockholders
and/or file with the Securities and Exchange Commission and/or other materials
which Lessor shall reasonably request.
21. PERFORMANCE OF OBLIGATIONS OF LESSEE BY LESSOR. If Lessee fails to
promptly perform any of its obligations under this Lease, Lessor may perform the
same for the account of Lessee without waiving Lessee's failure as a default.
All sums paid or expense or liability incurred by Lessor in such performance
(including reasonable legal fees) together with interest thereon at the highest
contractual rate enforceable against Lessee, but never at a higher rate than
15% per annum simple, shall be payable by the Lessee upon demand as additional
rent.
22. PURCHASE OPTION. Provided Lessee is not in default hereunder, Lessee may
purchase all, but not less than all, of the Items of Equipment listed on each
individual Schedule at the price specified in such Schedule at the end of the
rental term. The purchase of the Items of Equipment shall occur AS IS, WHERE
IS, WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER except that Lessor
shall deliver title to the Items of Equipment free of any lien or encumbrance
created by any act of the Lessor. In the event the Lessee fails to exercise its
purchase option, Lessee will return those Items of Equipment not purchased,
freight and insurance prepaid, to Lessor(or Lessor's nominee) at a location
designated by Lessor. If Lessee fails to exercise its purchase option and fails
to return any Item of Equipment, then at Lessor's option this Lease may be
extended on a month-to-month basis, with rent payable on the first of each
month, at the rate applicable during the lease term just ended.
23. EVENTS OF DEFAULT. Any of the following events or conditions shall
constitute an Event of Default hereunder and entitle the Lessor, at its option,
to avail itself of the remedies more fully set forth
<PAGE>
in Paragraph 24 hereof:
(a) Non-payment by Lessee of any rent or other amount provided for in this
Lease when the same becomes due whether by acceleration or otherwise;
(b) Failure of the Lessee to perform any of the non-monetary obligations,
terms or conditions of this Lease within thirty (30) of receipt of written
notification thereof from Lessor;
(c) The Lessee shall commence a voluntary case or other proceeding seeking
liquidation, reorganization, or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect, or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or the taking
possession by any official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of its creditors,
or shall fail generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing;
(d) If an involuntary case or other proceeding should be commenced against
Lessee seeking liquidation, reorganization or other relief with respect to it or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect, or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain undismissed
and unstayed for a period of thirty (30) days;
(e) The occurrence of any event described in this Paragraph 23(c) through (d)
hereof with respect to any guarantor or any other party liable for payment or
performance of this Lease;
(f) Any certificate, statement, representation, warranty or financial
statement heretofore or hereafter furnished pursuant to or in connection with
this Lease by or on behalf of Lessee or any guarantor or other party liable for
payment or performance of this Lease is false in any material respect at the
time as of which the facts therein set forth were stated or certified, or omits
any substantial contingent or unliquidated liability or claim against Lessee or
any such guarantor or other party, or, upon the date of execution of this
document or any Schedule, there shall have been any materially adverse change in
any of the facts disclosed by any such certificate, statement, representation or
warranty, which shall not have been disclosed in writing to Lessor at or prior
to the time of the execution of this document or such Schedule.
24. REMEDIES. Upon the happening of any Event of Default hereunder, the rights
and duties of the parties shall be as set forth in this Paragraph 24.
(a) Upon Lessor's demand, the Equipment shall be promptly delivered to
Lessor, at that place or those places designated by Lessor. If Lessee does not
so deliver the Equipment, Lessee shall make the Equipment available for retaking
and authorizes Lessor, its employees and agents to enter the premises of the
Lessee and any other premises (insofar as Lessee can permit) for the purpose of
retaking. In the event of retaking, Lessee expressly waives all rights to
possession and all claims for injuries suffered through or loss caused by
retaking. Any repossession accomplished under this Paragraph 24(a)shall not
release Lessee from liability for damages of Lessor sustained by reason of
Lessee's default hereunder.
(b) Lessor may revoke Lessee's privilege of paying rent in installments and,
upon Lessor's demand, the Lessee shall promptly pay to Lessor the portion of the
rent then remaining unpaid plus all other sums due and unpaid.
<PAGE>
(c) Lessor may sell or release the Equipment or any part thereof, at public
auction or by private sale or lease at such time or times and upon such terms as
Lessor may determine, free and clear of any rights of Lessee and, if notice
thereof is required by law, any notice in writing of such sale or lease by
Lessor to Lessee not less than ten (10) days prior to the date thereof shall
constitute reasonable notice thereof to Lessee. All proceeds of the sale or
releasing, or both (less (i) all expenses incurred in retaking the Equipment,
making necessary repairs to the Equipment and enforcing this Lease, (ii) all
damages that Lessor shall have sustained by reason of Lessee's default, and
(iii) reasonable attorney's fees)shall be credited against Lessee's liability
hereunder as and when received by Lessor. Sums in excess of Lessee's liability
shall belong to Lessee. The Lessee shall be liable for any deficiency.
(d) The provisions of this Paragraph 24 shall not prejudice Lessor's right to
recover or prove damages for unpaid rent accrued prior to default, or bar an
action for a deficiency as herein provided, and the bringing of an action with
an entry of judgment against Lessee shall not bar the Lessor's right to
repossess any or all Items of Equipment.
(e) Lessor's remedies shall be available to Lessor's successors and assigns,
shall be in addition to all other remedies provided bylaw, and may be exercised
concurrently or consecutively. LESSEE WAIVES ANY AND ALL RIGHTS TO NOTICE AND
TO JUDICIAL HEARING WITH RESPECT TO THE REPOSSESSION OF THE EQUIPMENT BY LESSOR
IN THE EVENT OF A DEFAULT HEREUNDER BY LESSEE. LESSEE HEREBY WAIVES ANY RIGHT
TO DEMAND A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING INSTITUTED BY
THE LESSOR OR THE LESSEE IN CONNECTION WITH THIS LEASE.
25. GOVERNING LAW AND CONSENT OF JURISDICTION. This Lease has been executed
and delivered in the Commonwealth of Pennsylvania. The laws and decisions of
said Commonwealth will govern and control the construction, enforceability,
validity and interpretation of this Lease, and of all agreements, instruments
and documents, heretofore, now or hereafter executed by Lessee and delivered to
Lessor pertaining or relating to this Lease or the transactions contemplated
herein. The parties agree that any action or proceeding arising out of or
relating to this Lease may be commenced in the Court of Common Pleas of
Allegheny County, Pennsylvania, or in the United States District Court for the
Western District of Pennsylvania and Lessee agrees that, in addition to any
other manner of service prescribed bylaw or rule of court, a summons and
complaint commencing an action or proceeding in either such Court shall be
properly served upon Lessee and shall confer personal jurisdiction if served
personally or by United States registered mail, return receipt requested, to the
Lessee at the address indicated below.
26. JUDGMENT BY CONFESSION. LESSEE HEREBY EMPOWERS THE PROTHONOTARY OR ANY
ATTORNEY OF ANY COURT OF RECORD WITHIN THE UNITED STATES OR ELSEWHERE TO APPEAR
FOR LESSEE AND, WITH OR WITHOUT ONE OR MORE DECLARATIONS FILED, ENTER A JUDGMENT
OR JUDGMENTS AGAINST LESSEE IN FAVOR OF LESSOR, AS OF ANY TERM, FOR THE SUM THEN
DUE AND PAYABLE UNDER THIS LEASE, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION
OF 15%FOR COLLECTION; WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION,
AND INQUISITION AND EXTENSION UPON ANY LEVY IS HEREBY WAIVED AND CONDEMNATION
AGREED TO, AND THE EXEMPTION OF ALL PROPERTY FROM LEVY AND SALE ON ANY EXECUTION
HEREON IS ALSO HEREBY EXPRESSLY WAIVED AND NO BENEFIT OF EXEMPTION SHALL BE
CLAIMED UNDER OR BY VIRTUE OF ANY EXEMPTION LAW NOW IN FORCE OR WHICH MAY
HEREAFTER BE ENACTED.
27. CONFLICT OF PROVISIONS. In the event of any conflict of provisions between
any Schedule and
<PAGE>
any other document, the provisions of the Schedule shall control.
28. AMENDMENTS AND WAIVERS. This document, the Schedule(s) and Insurance
Schedule(s) executed by Lessor and Lessee constitute the entire agreement
between Lessor and Lessee with respect to the Equipment and the subject matter
of this Lease. No term or provision of this Lease may be changed, waived,
amended or terminated except by a written agreement signed by both Lessor and
Lessee, except that Lessor may insert on the appropriate Schedule the serial
number of any Item of Equipment after delivery thereof. No express or implied
waiver by Lessor of any Event of Default hereunder shall in any way be, or be
construed to be, a waiver of any future or subsequent Event of Default whether
similar in kind or otherwise.
29. NOTICES. Except as otherwise provided in Paragraph 28 above, service of
all notices under this Lease shall be sufficient if given personally or mailed
to the party involved at its respective address set forth in the most recent
Schedule relating hereto, or at such address as such party may otherwise provide
in writing from time to time. Any such notice mailed to such address shall be
effective three(3) business days from the date of deposit in the United States
mail, duly addressed with first class postage prepaid.
30. GENDER; NUMBER. Whenever the context of this Lease requires, the neuter
gender includes the masculine and the feminine, and the singular number includes
the plural. Whenever the word Lessor is used herein, it shall include all
assignees of Lessor. If there is more than one Lessee named in this Lease, the
liability of each shall be joint and several.
31. TITLES. The titles to the paragraphs of this Lease are solely for the
convenience of the parties, and are not an aid in the interpretation of the
instrument.
32. SEVERABILITY OF PROVISIONS. If any provision of this Lease is held invalid
or unenforceable, the remaining provisions will not be affected thereby, and to
this end the provisions of this Lease are declared severable.
33. LESSEE RIGHT TO SUBLEASE. Lessor acknowledges and agrees that Lessee will
sublease the Equipment to SMT Mobile V Corp., or to any other wholly owned
subsidiary of Lessee upon prior written notice to Lessor, for the purpose of
providing magnetic resonance imaging services under certain Magnetic Resonance
Imaging Service Agreements. Lessee shall execute and assign to Lessor such
documents between Lessee and Sublessee as Lessor may reasonably request to
protect Lessor's rights under this Lease. Lessee acknowledges and agrees that in
no event shall any such sublease relieve Lessee from its obligations under this
Lease.
34. ADDITIONAL SECURITY. Lessee covenants and agrees that on or before the
commencement date of the rental term for the Equipment as designated in the
Schedule, Lessee will provide or cause to be provided to Lessor, in form and
substance satisfactory to Lessor an assignment of any and all Magnetic Resonance
Imaging Service Agreements, or similar agreements, now existing or hereinafter
acquired, to be serviced by the Equipment leased hereunder, and a first security
interest in any and all payments due thereunder. Lessee will promptly provide
written notice to Lessor of any additions, deletions, amendments, or
substitutions to any such agreements. Lessee also covenants and agrees to
provide, or cause to be provided to Lessor, upon Lessor's request, a Letter of
Credit inform and substance satisfactory to Lessor. WITNESS the due execution
hereof with the intent to be legally bound.
<PAGE>
ATTEST/WITNESS: LESSEE: SMT HEALTH SERVICES INC.
ADDRESS: 10521 Perry Highway
Wexford, PA 15090
By By /s/ David A. Zynn
----------------------- ---------------------------------
Title Title CFO / Treasurer
--------------------- ------------------------------
Accepted at Pittsburgh, Pennsylvania by:
LAUREL CAPITAL CORPORATION
By /s/ Bill Zopf
---------------------------------
Title
------------------------------
<PAGE>
LAUREL CAPITAL CORPORATION
3810 McKnight East Drive
Pittsburgh, PA 15237
GUARANTY
December 9, 1996
Dear Sirs:
For value received, Undersigned jointly and severally unconditionally guarantee
to you and become surety to you for the full and prompt performance by SMT
Health Services Inc.; 10521 Perry Highway; Wexford, PA 15090; herein called
"Obligor", of all obligations which Obligor presently or hereafter may have to
you, and payment when due of all sums presently or hereafter owing by Obligor to
you, and agree to indemnify you against any losses you may sustain and expenses
you may incur in the enforcement of this agreement.
For the purposes of this guaranty and indemnity, all sums owing to you by
Obligor shall be deemed to have become immediately due and payable if (a)
Obligor defaults in any of its obligations to you;(b) a petition under any
provisions of the Bankruptcy Code, as amended, or for the appointment of a
receiver of any part of the property of Obligor be filed against Obligor, and be
not dismissed within thirty days; (c) such a petition is filed by Obligor;
(d)Obligor make a general assignment for the benefit of creditors, suspends
business or commits any act amounting to a business failure, or (e) an
attachment be levied or tax lien be filed against any of Obligor's property.
This shall be a continuing guaranty and indemnity and, irrespective of the lack
of any notice to or consent of the Undersigned, their obligations hereunder
shall not be impaired in any manner whatsoever by any (a) new agreements or
obligations of Obligor with you; amendments, extensions, modifications, renewals
or waivers of default as to any existing or future agreements or obligations of
Obligor or third parties with or to you, or extensions of credit by you to
Obligor; (b) adjustments, compromises or releases of any obligations of
Obligor, Undersigned or other parties, or exchanges, releases or sales of any
security of Obligor, Undersigned or other parties; (c) fictitiousness,
incorrectness, invalidity or unenforce-ability, for any reason, of any
instrument or writing, or acts of commission or omission by you or Obligor; (d)
compositions, extensions, moratoria or other relief granted to Obligor pursuant
to any statute presently in force or hereafter enacted, or (e) interruptions in
the business relations between you and Obligor. Notice of your
acceptance hereof, of default and non-payment by Obligor or any other parties,
of presentment, protest and demand, and of all other matters of which
Undersigned otherwise might be entitled, is waived.
The obligations hereunder of Undersigned are both joint and several, and shall
be binding upon their respective heirs and personal representatives. The
failure of any person to sign this guaranty and indemnity shall not affect the
liability hereunder of any signer thereof. The death or release from liability
hereunder of any of Undersigned shall not relieve the others from liability
hereunder. Each of Undersigned may terminate his obligations hereunder as to
then future transactions between you and Obligor by registered mail notice to
you at your above-stated address, provided, however, that such termination shall
not affect either his liability hereunder with respect to any obligations of
Obligor to you incurred prior to your receipt of such notice, or the continuing
liability of such of the others of Undersigned as have not given such
<PAGE>
notice.
This guaranty and indemnity is assignable, shall be construed liberally in your
favor and shall inure to the benefit of your successors and assigns. If Obligor
should default in the performance of any of Obligor's obligations to you, and if
any third party makes any payment to you with respect thereto, such third party
shall, to the extent thereof, be subrogated to all of your rights against
Undersigned hereunder. Legal rights and obligations hereunder shall be
determined in accordance with the laws of the Commonwealth of Pennsylvania.
UNDERSIGNED HEREBY EMPOWER THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF
RECORD WITHIN THE UNITED STATES OR ELSEWHERE TO APPEAR FOR THEM AND, WITH OR
WITHOUT ONE OR MORE DECLARATIONS FILED, ENTER A JUDGMENT OR JUDGMENTS AGAINST
THEM OR ANY OF THEM IN FAVOR OF YOU, AS OF ANY TERM, FOR THE SUM THEN DUE AND
PAYABLE UNDER THIS AGREEMENT OF GUARANTY, WITH COSTS OF SUIT AND ATTORNEY'S
COMMISSION OF 15% FOR COLLECTION; WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF
EXECUTION, AND INQUISITION AND EXTENSION UPON ANY LEVY IS HEREBY WAIVED AND
CONDEMNATION AGREED TO, AND THE EXEMPTION OF ALL PROPERTY FROM LEVY AND SALE ON
ANY EXECUTION HEREON IS ALSO HEREBY EXPRESSLY WAIVED AND NO BENEFIT OF EXEMPTION
SHALL BE CLAIMED UNDER OR BY VIRTUE OF ANY EXEMPTION LAW NOW IN FORCE OR WHICH
MAY HEREAFTER BE ENACTED.
This Guaranty has been executed and delivered in the Commonwealth of
Pennsylvania. The laws and decisions of said Commonwealth will govern and
control the construction, enforceability, validity and interpretation of this
Guaranty, and of all agreements, instruments and documents, heretofore, now or
hereafter executed by Undersigned and delivered to Lessor pertaining or relating
to this Guaranty or the transactions contemplated herein. The parties agree
that any action or proceeding arising out of or relating to this Guaranty may be
commenced in the Court of Common Pleas of Allegheny County, Pennsylvania, or in
the United States District Court for the Western District of Pennsylvania and
Undersigned agrees that, in addition to any other manner of service prescribed
by law or rule of court, a summons and complaint commencing an action or
proceeding in either such Court shall be properly served upon Undersigned and
shall confer personal jurisdiction if served personally or by United States
registered mail, return receipt requested, to the Undersigned at the address
indicated below.
Very truly yours,
CORPORATE GUARANTORS:
SMT MOBILE V CORP.
Attest:
By By David A. Zynn - VP/Treas
------------------------- ---------------------------------------
Title Title
Address: 10521 Perry Highway
----------------------------
Wexford PA 15090
----------------------------
<PAGE>
(Corporate Seal)
<PAGE>
CONDITIONAL ASSIGNMENT AND SECURITY AGREEMENT
- ---------------------------------------------
This Conditional Assignment and Security Agreement ("Agreement") dated
December 9 , 1996 is entered into between SMT Health Services Inc.
("Assignor"/"Lessee"/"Sublessor"), SMT Mobile V Corp. ("Sublessee") and Laurel
Capital Corporation ("Assignee/Lessor").
This Agreement is entered into with reference to the following mutually agreed
to facts:
1. WHEREAS, Assignor and Assignee have entered into that certain Master
Equipment Lease ("Lease") dated December 9 , 1996 providing for the lease of
the personal property described in the Lease ("Equipment");
2. WHEREAS, Assignor desires to sublease the Equipment pursuant to the terms
of a sublease dated December 9 , 1996 entered into between Assignor and
Sublessee ("Sublease").
NOW, THEREFORE, FOR VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged, the above parties, hereby agree to the following
terms and conditions:
1. Consent to Sublease. Assignee hereby consents to Assignor's Sublease of
--------------------
the Equipment to Sublessee under the terms and conditions as provided herein.
2. Conditional Assignment. Assignor hereby conditionally assigns and grants
-----------------------
to Assignee a security interest in and all of its rights flowing from and under
the Lease and Sublease including without limitation the Equipment; provided,
--------
however, Assignee does not hereby assume duties, liabilities or obligations of
- -------
Assignor under the Sublease.
3. Conditional Nature of Assignment. Assignee hereby acknowledges and agrees
---------------------------------
that so long as there exists no default of any of the terms of the Lease and/or
Sublease, Assignor shall have the right to enjoy all of the rights, benefits and
privileges arising under the Sublease.
4. Default. Upon or at any time after the occurrence of a breach under any
--------
of the terms, provisions or conditions as defined in the Lease and/or Sublease,
Assignee may, at its election, exercise any and all rights under the Lease
and/or Sublease, in addition to all of its rights under the Lease and/or
Sublease, in addition to all of its rights and remedies as a Secured party under
the Uniform Commercial Code.
5. Term. This Agreement shall remain in full force and effect so long as any
-----
of the obligations, liabilities and debtness of Assignor to Assignee, whether
arising under the Lease or otherwise, remain outstanding.
<PAGE>
6. Assignment. Assignee shall have the right to assign all of its rights
-----------
under this Agreement. Assignor and Sublessee shall not have any right to assign
this Agreement without the prior written consent of Assignee.
7. Amendment of Sublease. The Sublease shall not be changed, altered or
-----------------------
modified in any manner, except by the prior written consent of Assignee.
8. Subordination. Sublessee acknowledges that the Sublease is in all
--------------
respects subject and subordinate to the Lease, including without limitation, the
rights of Assignee to repossess the equipment and void the Sublease in the event
of a default by Assignor under the Lease.
9. Amendment. This Agreement shall not be released, discharged, changed or
-----------
modified in any manner, except by the prior written consent of Assignee.
10. Waiver. No waiver of any right hereunder shall be deemed a waiver or
-------
forfeiture of such right as to future matters.
11. California Law. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
LAUREL CAPITAL CORPORATION SMT HEALTH SERVICES INC.
"Assignee/Lessor" "Assignor/Lessee/Sublessor"
By: /s/ Bill Zopf By: /s/ David A. Zynn
-------------------------- --------------------------------
Title: Title: VP / Treas
----------------------- ----------------------------
- ------------------------------ -----------------------------------
(Print Name) (Print Name)
SMT MOBILE V CORP.
"Sublessee"
By: /s/ Dan Dickman
-------------------------------
Title: VP
----------------------------
-----------------------------------
(Print Name)
<PAGE>
LAUREL CAPITAL CORPORATION
LESSOR
SCHEDULE OF LEASED EQUIPMENT 3810 MCKNIGHT EAST DRIVE
PITTSBURGH, PA 15237
SCHEDULE NO. 2205-1
------
- -------------------------------------------------------------------------------
LESSEE (COMPLETE NAME AND ADDRESS) SUPPLIER (COMPLETE NAME AND ADDRESS)
SMT Health Services Inc. 1) GE Medical Systems; P.O. Box 414
10521 Perry Highway Milwaukee, WI 53201
Wexford, PA 15090
2) Ellis & Watts
P.O. Box 44010
Cincinnati, OH 45244
- -------------------------------------------------------------------------------
1. This schedule of leased equipment ("Schedule") is hereby made a part of the
lease between the undersigned Lessor and the undersigned Lessee dated
December 9, 1996. All terms and conditions of said lease are incorporated
----------------
herein by reference.
2. The equipment subject to the to the lease is:
- -------------------------------------------------------------------------------
QUANTITY DESCRIPTION AND SERIAL NUMBER PRICE
- --------------------------------------------------------------------------------
See Attached Schedule of Equipment, Exhibit "A"
Include all taxes levied at the time of sale, or include
in block 4.E. below, whichever is appropriate in
jurisdiction where equipment is located.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE TOTAL EQUIPMENT COST INCLUDING TAXES LEVIED AT THE TIME OF SALE IS:
$1,399,125.69
- --------------------------------------------------------------------------------
3. Equipment shall be located at See Attached Schedule of Location of
------------------------------------
Equipment, Exhibit "B" and shall not be removed therefrom without Lessor's
----------------------
prior written consent.
4. The original term of the lease as to the equipment described in this
Schedule is 5 years commencing on December 15, 1996 and terminating on
----- -----------------
December 15, 2001 unless sooner terminated under the terms of the lease. As
- -----------------
rent for the equipment, Lessee shall pay total rent of $1,773,330.00 as follows:
-------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
A B C D E F G
Security Number and Date these Amt. of Tax on Total payment Date these
Deposit type payments payment payment (D+E) payments
(If any) of payments commence (if any) terminate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monthly 60 12/15/96 29,555.50 0.00 29,555.50 10/15/2001
--------- ---------------- ---------------- ----------- --------------- -----------------
Quarterly
------- ---------------- ---------------- ----------- --------------- -----------------
Annually
------- ---------------- ---------------- ----------- --------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
5. Lessee may, pursuant to Section 22 Purchase Option of the Lease Agreement,
purchase all but not less than all of the Items of Equipment listed hereon
for $1.00 at the end of the rental term.
6. By executing and delivering to Lessor, the Lessee Acceptance form attached
hereto, Lessee warrants, covenants and agrees that (a) Lessee has received
all Equipment described in this Schedule at the location described in 3
hereof; (b) Lessee has duly inspected and accepts such Equipment without
reservations; (c) Lessee is unconditionally bound to pay to Lessor the Total
Rent and other payments due under the Lease, whether or not any Equipment
described herein may now be or hereafter become unsatisfactory in any
respect; and (d) Notwithstanding anything contained herein, Lessor and Lessee
shall continue to have all rights which either of them might otherwise have
with respect to Equipment described herein against any manufacturer or seller
of said Equipment or any part thereof.
- --------------------------------------------------------------------------------
ADDITIONAL REMARKS:
Lessee paid the first and last monthly rental payments in advance.
- --------------------------------------------------------------------------------
SIGNATURES - IN INK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date ___ December 11 ________, 1996 Date ___ December 11 ________, 1996
Lessee: (Full legal name)
Lessor: LAUREL CAPITAL CORPORATION
SMT HEALTH SERVICES INC.
By /s/ Bill Zopf By /s/ David A. Zynn
-------------------------------- ---------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AGREEMENT OF PURCHASE AND SALE
BETWEEN
PALMETTO COMMUNITY HEALTH NETWORK
as Seller
AND
SMT HEALTH SERVICES INC.
as Buyer
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. PURCHASE AND SALE OF ASSETS................................................1
---------------------------
1.1 Transfer of Assets....................................................1
------------------
1.2 No Assumed Liabilities................................................1
----------------------
2. PURCHASE PRICE; ADDITIONAL PAYMENT; CLOSING AND DELIVERIES...............2
------------------------------------------------------------
2.1 Purchase Price........................................................2
--------------
2.2 Closing and Closing Date..............................................2
------------------------
2.3 Deliveries of the Seller..............................................2
------------------------
2.4 Deliveries of Buyer...................................................2
-------------------
3. REPRESENTATIONS AND WARRANTIES OF SELLER...................................3
----------------------------------------
3.1 Standing..............................................................3
--------
3.2 Power; Authorization..................................................3
--------------------
3.3 Validity; Binding Nature..............................................3
------------------------
3.4 Title to Assets and Certificates of Need..............................3
----------------------------------------
3.5 Effect of Agreement...................................................3
-------------------
3.6 Contracts and Other Instruments.......................................4
-------------------------------
3.7 Litigation............................................................4
----------
3.8 Equipment.............................................................4
---------
3.9 Compliance with Applicable Law........................................4
------------------------------
3.10 Proprietary Rights...................................................4
------------------
3.11 Books and Records....................................................4
-----------------
4. REPRESENTATIONS AND WARRANTIES OF BUYER....................................5
---------------------------------------
4.1 Standing..............................................................5
--------
4.2 Corporate Power; Authorization........................................5
------------------------------
4.3 Validity; Binding Nature..............................................5
------------------------
4.4 Effect of Agreement...................................................5
-------------------
5. POST-CLOSING COVENANTS.....................................................5
----------------------
5.1 Allocation of Purchase Price..........................................5
----------------------------
5.2 Noncompetition........................................................6
--------------
5.3 Delivery of Assets....................................................6
------------------
6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER...........................6
------------------------------------------------
6.1 Accuracy of Representations and Warranties............................6
------------------------------------------
6.2 Consents and Proceedings..............................................6
------------------------
6.3 Satisfaction of Obligations...........................................6
---------------------------
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION................7
-----------------------------------------------------------
7.1 Survival of Representations and Warranties............................7
------------------------------------------
7.2 Indemnification.......................................................7
---------------
-i-
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
7.3 Indemnification with Respect to Third-Party Claims....................7
--------------------------------------------------
8. NOTICE.....................................................................7
------
9. LAWS GOVERNING; ARBITRATION................................................9
---------------------------
10. MISCELLANEOUS..............................................................9
-------------
10.1 Counterparts; Telecopy...............................................9
----------------------
10.2 Assignment...........................................................9
----------
10.3 Entire Agreement.....................................................9
----------------
10.4 Interpretation......................................................10
--------------
10.5 Expenses............................................................10
--------
10.6 No Presumption Against the Draftsman................................10
------------------------------------
10.7 Public Announcements................................................10
--------------------
10.8 Waivers.............................................................10
-------
10.9 Partial Invalidity..................................................11
------------------
10.10 Incorporation by Reference.........................................11
--------------------------
-ii-
<PAGE>
INDEX OF SCHEDULES
Schedules
1.1 Assets
3.4 Exceptions to Title
3.6 Leases and Contracts
4.4 Consents Required for Buyer
5.1 Allocation of Purchase Price
-iii-
<PAGE>
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT is dated as of the ____ day of October, 1996, between
Palmetto Community Health Network, a South Carolina corporation ("Seller") and
SMT Health Services Inc., a Delaware corporation ("Buyer");
RECITALS
--------
WHEREAS, Seller owns and operates one (1) mobile Magnetic Resonance Imaging
("MRI") unit ("Mobile Unit") in South Carolina and desires to sell and transfer
its Mobile Unit, including substantially all of the assets used in connection
therewith, including those listed in Schedule 1.1 hereto (collectively, the
"Assets"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
and transfer to Buyer, on the terms and conditions hereinafter set forth, the
Assets;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth and each act done pursuant hereto, the parties hereto,
intending to be legally bound, do represent, warrant, covenant and agree as
follows:
1. PURCHASE AND SALE OF ASSETS.
---------------------------
1.1 Transfer of Assets.
------------------
Upon satisfaction of all conditions to the obligations of the parties
contained herein, Seller shall sell, convey, transfer and assign to Buyer, and
Buyer shall purchase from Seller, at the Closing, the Assets, free and clear of
all claims, liabilities, encumbrances and liens of any kind whatsoever.
Schedule 1.1 sets forth a description of the Assets.
1.2 No Assumed Liabilities.
----------------------
The Buyer will not assume or become liable for any liabilities, debts,
payables or other obligations of the Seller of any kind or nature, whether fixed
or contingent and whether known or unknown, or any liabilities, debts, payables
or other obligations of any kind or nature arising from or relating to any of
the Assets, and the Seller hereby expressly agrees to disclaim and deny any such
liability or responsibility of the Buyer and to indemnify the Buyer pursuant to
Section 7.2 in respect of any such liabilities, debts, payables or other such
obligations.
<PAGE>
2. PURCHASE PRICE; ADDITIONAL PAYMENT; CLOSING AND DELIVERIES.
------------------------------------------------------------
2.1 Purchase Price.
--------------
At the Closing, Buyer shall acquire and accept the Assets from Seller
and shall pay to Seller the amount of Three Hundred Ninety Thousand Dollars
($390,000) (the "Purchase Price").
2.2 Closing and Closing Date.
------------------------
The consummation of the transfer and delivery of the Assets to Buyer
and the receipt of the consideration therefor by Seller shall constitute the
"Closing." Unless otherwise mutually agreed to by the parties in writing, the
Closing shall take place at 10:00 a.m. on October ___, 1996. The date and time
of the Closing shall constitute the "Closing Date."
2.3 Deliveries of the Seller.
------------------------
At Closing, the Seller will deliver the following to Buyer:
(i) all bills of sale, deeds, assignments and other conveyance and
transfer documentation reasonably required to transfer, free and
clear of all mortgages, liens, pledges, security interests,
encumbrances and claims of any type, all of Seller's legal title
to the Assets, including, without limitation, the Mobile Unit; and
(ii) any other documents reasonably requested by Buyer to confirm the
accuracy of the representations and warranties and the performance
of the agreements of the Seller hereunder.
2.4 Deliveries of Buyer.
-------------------
At Closing, the Buyer will deliver the following to the Seller:
(i) a wire transfer to Seller in the amount of the Purchase Price;
and
(ii) any other documents reasonably requested by the Seller to confirm
the accuracy of the representations and warranties and the
performance of the agreements of the Buyer hereunder.
-2-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF SELLER.
----------------------------------------
Seller represents and warrants to Buyer as follows:
3.1 Standing.
--------
Seller is a corporation duly organized, validly existing and in good
standing under the laws of South Carolina and has all the requisite power and
authority to carry on its business as now conducted and to own, lease and
operate its properties and assets.
3.2 Power; Authorization.
--------------------
The execution, delivery and performance by the Seller of this
Agreement, and all instruments and documents to be delivered by the Seller
hereunder: (a) are within the Seller's power and authority; (b) have been duly
authorized by all necessary or proper action on the part of the Seller,
including the requisite consent of the shareholders of Seller where required;
(c) are not in contravention of any provision of the Seller's articles or
certificate of incorporation; (d) to the best of Seller's knowledge, after due
inquiry, do not violate or conflict with any law or regulation, or any order,
award, judgment or decree of any court or governmental instrumentality
applicable to the Seller; (e) do not conflict with or result in the breach of,
or constitute a default under, any indenture, mortgage, deed or trust, lease,
agreement or other instrument to which the Seller is a party or by which the
Seller or the Assets are bound; (f) do not result in the creation or imposition
of any pledge, lien, mortgage, security interest, claim or charge of any kind or
nature ("Lien") upon the Assets and; (g) do not require the consent or approval
of any governmental body, agency, authority or any other person other than those
that have been obtained.
3.3 Validity; Binding Nature.
------------------------
This Agreement and all instruments and documents to be delivered by
the Seller hereunder each have been or will be duly executed and delivered by
the Seller, and each now, and thereupon, will constitute the legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as the same may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws
relating to or affecting the rights of creditors generally and principles of
equity.
3.4 Title to Assets and Certificates of Need.
----------------------------------------
Except as set forth on Schedule 3.4 attached hereto, Seller has good
------------
and marketable title to all of the Assets free and clear of all mortgages,
liens, pledges, security interests, encumbrances and claims of any type.
3.5 Effect of Agreement.
-------------------
The execution, delivery and performance of this Agreement by Seller
and the consummation of the transactions contemplated hereby will not require
the consent, approval or authorization of any governmental authority or third
party.
-3-
<PAGE>
3.6 Contracts and Other Instruments.
-------------------------------
The only contracts and other instruments by which Seller is bound, and
pursuant to which it has any rights or obligations in connection with the
Assets, are those contracts listed on the attached Schedule 3.6, copies of each
------------
of which have been delivered to the Buyer. To the best of Seller's knowledge,
after due inquiry, neither Seller nor any other party is in default with respect
to any such contract or instrument.
3.7 Litigation.
----------
There are no actions, suits or proceedings pending or, to the best of
Seller's knowledge, after due inquiry, threatened against or affecting Seller at
law or in equity, or before or by any governmental or nongovernmental
commission, board, agency or other body, nor does Seller know of any facts which
would provide a basis for any such action, suit or proceeding.
3.8 Equipment.
---------
The Assets are in good repair and operating condition. To the best of
Seller's knowledge, after due inquiry, there are no actions pending or
threatened by any governmental regulatory agency with respect to the compliance
of the Assets or said equipment with applicable ordinances or regulations.
SELLER HEREBY DISCLAIMS ANY WARRANTY OR FITNESS FOR USE OR MERCHANTABILITY.
Seller hereby further disclaims any and all warranties pertaining to the
conditions of the Assets, other than as stated in and limited to the first
sentence of this Section 3.8. Seller agrees to assist Buyer in enforcing any
warranties made by the manufacturer of the Assets; provided, however, that
Buyer will reimburse Seller with any third-party out-of-pocket costs incurred by
Seller at Buyer's request in complying with this provision.
3.9 Compliance with Applicable Law.
------------------------------
The conduct of Seller's business does not violate or infringe any
laws, statutes, ordinances or regulations in any material respect.
3.10 Proprietary Rights.
------------------
Seller has not received notice of, and it has no knowledge of, the
infringement by it of any right or patent, trademark, trade name, copyright or
other proprietary right of third parties relating to the Assets.
3.11 Books and Records.
-----------------
The books, records and work papers of Seller with respect to the
Assets are complete and correct in all material respects, have been maintained
in accordance with good business practices and accurately reflect the basis for
the financial condition and the results of operations of Seller.
-4-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
---------------------------------------
Buyer represents and warrants to Seller as follows:
4.1 Standing.
--------
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of Pennsylvania and in good standing under the laws of
South Carolina and has all the requisite power and authority to carry on its
business as now conducted, to enter into this Agreement and to consummate the
transactions contemplated hereby.
4.2 Corporate Power; Authorization.
------------------------------
The execution, delivery and performance by the Buyer of this
Agreement, and all instruments and documents to be delivered by the Buyer
hereunder: (i) are within the Buyer's corporate power and authority; (ii) have
been duly authorized by all necessary or proper corporate and governmental
action on the part of the Buyer; (iii) are not in contravention of any provision
of the Buyer's articles or certificate of incorporation or bylaws; and (iv) do
not violate or conflict with any law or regulation, or any order, award,
judgment or decree of any court or governmental instrumentality applicable to
the Buyer.
4.3 Validity; Binding Nature.
------------------------
This Agreement and all instruments and documents to be delivered by
the Buyer hereunder have each been or will be duly executed and delivered by the
Buyer, and each now, and thereupon, will constitute the legal, valid and binding
obligation or the Buyer, enforceable against the Buyer in accordance with its
terms, except as the same may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws
relating to or affecting the rights of creditors generally and principles or
equity.
4.4 Effect of Agreement.
-------------------
The execution, delivery and performance of this Agreement by Buyer and
the consummation of the transactions contemplated hereby will not require the
consent, approval or authorization of any governmental authority or third party,
except as set forth on Schedule 4.4 hereto.
------------
5. POST-CLOSING COVENANTS.
----------------------
5.1 Allocation of Purchase Price.
----------------------------
The Purchase Price shall be allocated among the Assets as set forth in
Schedule 5.1 hereto. The Seller and Buyer shall file all tax returns and tax
- ------------
reports in accordance with and based upon such allocation and shall take no
position in any tax return, tax proceeding or tax audit which is inconsistent
with such allocation.
-5-
<PAGE>
5.2 Noncompetition.
--------------
For the "Resticted Period" (as hereinafter defined), neither the
Seller nor any "affiliate of the Seller" will, directly or indirectly, build,
acquire, invest in, assist in the development or manage any mobile MRI
diagnostic program in the states of Georgia, Maryland, North Carolina, Ohio,
Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. At the
Closing, the Seller will enter into a separate agreement to this effect with
SMT. The term "Resticted Period shall mean the earlier of (a) the fifth (5th)
anniversary of the date of this Agreement or (b) the date on which the Company
is no longer providing service under any the ageements listed, from time to
time, in Schedule A to the Support Services Agreement between the parties of
even date herewith. "Affiliate of the Seller" shall mean any person
controlling, controlled by or under common control with the Seller. Control
shall mean the ability to direct the actions of a person.
5.3 Delivery of Assets.
------------------
The parties will cooperate in good faith to ensure the timely delivery
on the Closing Date of the Assets of Buyer. The Assets will be delivered to
Buyer.
6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
------------------------------------------------
The obligations of Buyer hereunder shall be subject to the following
conditions, any or all of which may be waived in writing by Buyer:
6.1 Accuracy of Representations and Warranties.
------------------------------------------
Each of the representations and warranties of the Seller contained
herein and in any other document delivered to Buyer in connection with this
transaction shall be true and correct in all respects (except where any such
representation or warranty is unqualified in which case it shall be true and
correct in all material respects) on and as of the Closing Date with the same
effect as though made on and as of such date and Seller shall have performed and
complied in all material respects with each of the agreements, covenants,
stipulations, terms and conditions contained herein and required to be performed
or complied with by them on or prior to the Closing Date.
6.2 Consents and Proceedings.
------------------------
The Seller shall have obtained all of the consents, authorizations,
orders or approvals required in order to consummate the transactions
contemplated hereby, including the consent of [insert name of lienholder on the
Assets] (to the extent required to satisfy indebtedness owed to [insert name of
lienholder on the Assets]).
6.3 Satisfaction of Obligations.
---------------------------
The Seller shall have taken all necessary actions to deliver to Buyer
title to the Assets, at Closing, free and clear of all mortgages, liens,
pledges, security interests, encumbrances and
-6-
<PAGE>
claims of any type, including, without limitation, all indebtedness owed to
[insert name of lienholder on the Assets].
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
-----------------------------------------------------------
7.1 Survival of Representations and Warranties.
------------------------------------------
All representations, warranties, covenants, stipulations,
certifications, indemnities and agreements contained herein shall survive the
consummation of the transactions provided for in this Agreement.
7.2 Indemnification.
---------------
(i) Seller shall defend, indemnify and hold Buyer harmless from and
against any and all claims, liabilities, damages, losses and expenses,
including reasonable attorneys' fees and expenses and costs of suit
("Losses"), arising out of or resulting from (i) any and all inaccurate
representations or breaches of covenants and warranties and stipulations
and agreements and certifications made by or on behalf of such Seller in
this Agreement or in any document delivered hereunder; or (ii) any
occurrence prior to the Closing Date and not disclosed herein or in
documents delivered hereunder; or (iii) any use of the Assets on or prior
to the Closing Date.
(ii) Buyer shall defend, indemnify and hold Seller harmless from and
against any and all Losses arising out of any and all inaccurate
representations and warranties and out of any and all breaches of
covenants, agreements and certifications made by or on behalf of Buyer in
this Agreement or in any document delivered by Buyer hereunder or pursuant
to this transaction.
7.3 Indemnification with Respect to Third-Party Claims.
--------------------------------------------------
Seller shall have full responsibility and authority (including payment
of legal fees) for the disposition of any action, suit or proceeding brought by
a third party against Buyer for which Buyer is entitled to indemnification
pursuant to Section 7.2(i). However, Buyer shall have the right, at the Buyer's
sole expense, to be represented by counsel of its choosing and with whom counsel
for Seller shall confer in connection with the defense of any such action, suit
or proceeding. Seller and Buyer shall render to each other such assistance as
may reasonably be requested in order to ensure the proper and adequate defense
of any such action, suit or proceeding.
8. NOTICE.
------
All notices and other communications hereunder shall be in writing and
delivered by one of the following methods of delivery (i) personally, (ii) by
registered or certified mail, return receipt requested, postage prepaid, (iii)
by overnight courier (maintaining delivery records), or
-7-
<PAGE>
(iv) by legible facsimile transmission (followed by overnight courier), in all
cases addressed as follows:
To Seller:
----------
Palmetto Community Health Network
900 C. Main Street
Conway, SC 29526
Facsimile: 803-248-0342
Attn: Edward V. Schlaefer, FACHE
Executive Director
With a copy to:
Gambrell & Stolz
One Peachtree Center, Suite 4300
303 Peachtree Street, N.E.
Atlanta, GA 30308
Facsimile: 404-221-6501
Attn: Tobin N. Watt, Esquire
To Buyer:
---------
SMT Health Services Inc.
10521 Perry Highway
Wexford, PA 15090
Facsimile: 412-933-3311
Attn: David A. Zynn, Chief Financial Officer
With a copy to:
Buchanan Ingersoll Professional Corporation
One Oxford Centre, 20th Floor
301 Grant Street
Pittsburgh, PA 15219
Facsimile: (412) 562-1041
Attn: Ronald Basso, Esquire
or to such address as such party may indicate by a notice delivered to the other
parties hereto. Notice shall be deemed received the same day (when delivered
personally), five (5) days after mailing (when sent by registered or certified
mail), the next business day (when sent by facsimile transmission or when
delivered by overnight courier). Any party to this Agreement may change its
address to which all communications and notices may be sent hereunder by
addressing notices of such change in the manner provided.
-8-
<PAGE>
9. LAWS GOVERNING; ARBITRATION.
---------------------------
The construction, interpretation and enforcement of this Agreement and the
rights of the parties hereunder shall be governed by the internal laws of the
Commonwealth of Pennsylvania without regard to any jurisdiction's conflicts or
choice of law provisions.
Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by arbitration in Pittsburgh, Pennsylvania,
in accordance with the Rules of the American Arbitration Association for
Commercial Arbitration, and the decision in such arbitration shall be final and
conclusive on the parties and judgment upon such decision may be entered in any
court having jurisdiction thereof. Seller and Buyer agree that such location is
the most convenient forum for both parties. Buyer and Seller will share equally
the total expense of such arbitration; but each party shall bear its own legal,
accounting and other similar fees and expenses.
The parties retain the right to seek and obtain interim relief from a court
of competent jurisdiction pending receipt of an award in accordance with this
Section 9, or temporary restraining orders or other emergency, temporary or
preliminary equitable relief to preserve the status quo by enjoining or
restraining a party hereto pending final and binding arbitration hereunder and
the parties hereto acknowledge and agree to the right to seek such relief.
10. MISCELLANEOUS.
-------------
10.1 Counterparts; Telecopy.
----------------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which when taken together shall
constitute one and the same instrument. Delivery of executed signature pages
hereof by facsimile transmission shall constitute effective and binding
execution and delivery hereof.
10.2 Assignment.
----------
This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
10.3 Entire Agreement.
----------------
This Agreement and the documents referenced herein contain the entire
agreement between the parties and wholly cancel, terminate and supersede any and
all previous or contemporaneous oral agreements, negotiations, commitments and
writings between the parties hereto with respect to such subject matter. No
change, modification, termination, notice of termination, discharge or
abandonment of this Agreement or any of the provisions hereof or thereof, nor
any representation, promise or condition relating to this Agreement, shall be
binding upon the parties hereto unless made in writing and signed by the parties
hereto, except that termination or notices of termination which may be effected
pursuant to the terms of this
-9-
<PAGE>
Agreement by either party to this Agreement, shall be binding if made in writing
and signed by the applicable party.
10.4 Interpretation.
--------------
Articles, titles and headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of any of the provisions of this Agreement. All
references to sections, subsections or schedules contained in this Agreement are
references to the sections and subsections of this Agreement. All references to
the word "including" shall have the meaning represented by the phrase "including
without limitation."
10.5 Expenses.
--------
Except as otherwise expressly provided herein, Seller and Buyer each
will pay all costs and expenses, including any and all legal and accounting
fees, of its performance and compliance with all agreements and conditions
contained herein on its part to be performed or complied with.
10.6 No Presumption Against the Draftsman.
------------------------------------
There shall be no presumption against any party on the ground that
such party was responsible for preparing this Agreement or any part hereof.
10.7 Public Announcements.
--------------------
Neither Buyer nor Seller shall, without the approval of the other
party (which may not be unreasonably withheld), make any press release or other
public announcement concerning the transactions contemplated by this Agreement,
except as and to the extent that such party shall be so obligated by law
(including any legal obligation imposed on Seller in connection with its status
as a publicly-held corporation), in which case the other party shall be advised
and Buyer and Seller shall use their reasonable efforts to cause a mutually
agreeable release or announcement to be issued.
10.8 Waivers.
-------
Any term or provision of this Agreement may be waived, or the time for
its performance may be extended, by the party or parties entitled to the benefit
thereof, but any such waiver must be in writing and must comply with the notice
provisions contained in Section 8. The failure of any party hereto to enforce
at any time any provision of this Agreement shall not be construed to be a
waiver of such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of any party thereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
-10-
<PAGE>
10.9 Partial Invalidity.
------------------
Wherever possible, each provision hereof shall be interpreted in such
a manner as to be effective and valid under applicable law, but in case any one
or more of the provisions contained herein shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had never been contained herein unless the deletion of such provision
or provisions would result in such a material change as to cause the completion
of the transactions contemplated hereby to be unreasonable.
10.10 Incorporation by Reference.
--------------------------
Any and all schedules referred to herein or attached hereto are
incorporated herein by reference thereto as though fully set forth at the point
referred to in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
SELLER:
WITNESS: PALMETTO COMMUNITY HEALTH NETWORK
By: /s/ Edward V. Schlaefer
- --------------------------------- ----------------------------------------
Edward V. Schlaefer, FACHE
Executive Director
BUYER:
WITNESS: SMT HEALTH SERVICES INC.,
By: /s/ David A. Zynn
- --------------------------------- ----------------------------------------
Authorized Officer
-11-
<PAGE>
SMT
EPS Calculation- Modified Treasury Stock Method
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Exercise Assumed Tax
Assumptions Shares Price Proceeds Benefit
<S> <C> <C> <C> <C>
Net income $2,410,861
Common Shares Outstanding 3,232,505
20% of Common Shares Outstandi 646,501
Common Stock Equivalent (Aggregate):
Warrants-IPO 1,683,950 $7.00 $11,787,650
Effect of 5% & 7% Dividend 207,968
Options- employees
1993 Grant 129,764 $3.09 $400,971 $134,890
1994 Grant 54 $1.27 $69 $91
1995 Grant 39,322 $2.29 $90,047 $51,885
1995 Grant- #2 160,500 $3.55 $569,775 $140,999
1996 Grant 42,479 $4.19 $177,987 $27,803
1996 Grant #2 267,500 $6.39 $1,709,325 ($30,896)
Options- Directors:
1992 Grant 2,247 $2.99 $6,719 $2,414
1993 Grant 2,247 $1.66 $3,730 $3,460
1994 Grant 2,247 $2.05 $4,606 $3,154
1995 Grant 2,247 $4.07 $9,145 $1,565
1996 Grant 6,741 $7.91 $53,321 ($4,365)
Warrants-Directors
All 500,000 $3.88 $1,940,000 $381,500
Effect of 7% Dividend 35,000
Other 0 $4.01 $0
Warrants- Commonwealth 0 $4.47 $0
Underwriter options 0 $5.94 $0
Underwriter Warrants (Unit) 0 $7.00 $0
5% dividend on Warrants 0
Total CSE Aggregate 3,082,266 $16,753,345 $712,500 $17,465,845
Average and Quarter End Market Value:
Average Closing Bid $6.06
Quarter End Closing Bid $7.94
<CAPTION>
Computation: Primary Fully Diluted
----------- -------------
<S> <C> <C>
Total Proceeds $17,465,845 $17,465,845
Application of assumed proceeds:
Toward repurchase of o/s $3,917,796 $5,133,218
Toward Paydown of debt $13,548,049 $12,332,627
$17,465,845 $17,465,845
Adjustment to Net Income:
Net income $2,410,861 $2,410,861
Interest expense reduction:
Debt paydown * avg. int
rate*tax eff $1,024,233 $932,347
Adjusted Net Income $3,435,094 $3,343,208
Adjustments to Shares Outstanding:
Actual shares o/s 3,232,505 3,232,505
Net additional shares 2,435,765 2,435,765
Adjusted shares o/s 5,668,270 5,668,270
Earnings Per Share:
Before adjustment $0.75 $0.75
After adjustment $0.61 $0.59
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES
OF
SMT HEALTH SERVICES INC.
(A Delaware Corporation)
SMT Investment Inc. ................................... Delaware corporation
SMT Management Corp. ............................. Pennsylvania corporation
SMT Cardiac Corp. ................................ Pennsylvania corporation
SMT Mobile I Corp. ............................... Pennsylvania corporation
SMT Mobile III Corp. ............................. Pennsylvania corporation
SMT Mobile IV Corp. .............................. Pennsylvania corporation
SMT Mobile V Corp. ............................... Pennsylvania corporation
SMT Mobile VI Corp. .............................. Pennsylvania corporation
SMT Mobile VII Corp. ............................. Pennsylvania corporation
SMT Mobile VIII Corp. ............................ Pennsylvania corporation
SMT Mobile IX Corp. .............................. Pennsylvania corporation
SMT Mobile X Corp. ............................... Pennsylvania corporation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
-------------------------------
The Board of Directors
SMT Health Services Inc.:
We consent to incorporation by reference in the registration statement (No.
33-44329) on Form S-3, registration statement (No. 33-61600) on Form S-8,
registration statement (No. 33-61602) on Form S-8, registration statement (No.
33-86920) on Form S-3, and registration statement (No. 33-80571) on Form S-3 of
SMT Health Services Inc. of our report dated January 31, 1997, except as to Note
18 which is as of March 4, 1997, relating to the consolidated balance sheets of
SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related schedule, which report appears in the
December 31, 1996 annual report on Form 10-K of SMT Health Services Inc.
Pittsburgh, Pennsylvania
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1996 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,043,158
<SECURITIES> 0
<RECEIVABLES> 1,726,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,825,096
<PP&E> 36,367,381
<DEPRECIATION> 6,734,353
<TOTAL-ASSETS> 39,497,563
<CURRENT-LIABILITIES> 7,238,056
<BONDS> 0
0
0
<COMMON> 36,950
<OTHER-SE> 11,362,593
<TOTAL-LIABILITY-AND-EQUITY> 39,497,563
<SALES> 19,021,954
<TOTAL-REVENUES> 19,212,353
<CGS> 0
<TOTAL-COSTS> 13,582,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,041,247
<INCOME-PRETAX> 3,588,861
<INCOME-TAX> 1,178,000
<INCOME-CONTINUING> 2,410,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,410,861
<EPS-PRIMARY> .61
<EPS-DILUTED> .59
</TABLE>
<PAGE>
Exhibit 99.1
Contact: David Zynn, CFO James K. White, Managing Director
SMT Health Services Inc. Kehoe, White, Savage & Company, Inc.
(412) 933-3300 (310) 437-0655
http://www.smthealth.com
SMT HEALTH SERVICES INC.
ANNOUNCES 99.5% WARRANT CONVERSION
Pittsburgh, PA, March 17, 1997--SMT Health Services Inc. (NASDAQ/NMS: SHED)
today announced that 1,677,000, or 99.5%, of the publicly-traded warrants
(SHEDW) were converted to Common Stock on or before March 4, 1997, the Warrant
expiration date. As a result of the Warrant conversions, the Company issued
1,882,000 shares of Common Stock and received proceeds of approximately $11.7
million.
The Company's total Common Shares outstanding as of the date of this
announcement totaled approximately 5,685,000 and the Company maintained a total
cash balance of approximately $18.0 million.
SMT Health Services Inc., through its current fleet of eighteen mobile MRI
units, provides diagnostic imaging services to healthcare providers in
Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Ohio and
Kentucky.
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