<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1996
REGISTRATION NO. 333-4034
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
DIAGNOSTIC HEALTH SERVICES, INC.
(Name of small business issuer in its charter)
DELAWARE 8071 22-2960048
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization)
2777 STEMMONS FREEWAY SUITE 1525 DALLAS, TEXAS 75207 (214) 634-0403
(Address and telephone number of principal executive offices and principal
place of business)
------------
MAX W. BATZER CHAIRMAN AND CHIEF EXECUTIVE OFFICER DIAGNOSTIC HEALTH SERVICES,
INC. 2777 STEMMONS FREEWAY, SUITE 1525 DALLAS, TEXAS 75207 (214) 634-0403
(Name, address and telephone number of agent for service)
------------
Copies to:
SHAHE SINANIAN, ESQ. STEPHEN H. KAY, ESQ.
GREENBERG, TRAURIG, HOFFMAN, SQUADRON, ELLENOFF, PLESENT
LIPOFF, ROSEN & QUENTEL , P.A. & SHEINFELD, LLP 551
153 EAST 53RD STREET FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10176
(212) 801-9200 (212) 661-6500
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED (1) PRICE PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................... 3,450,000 $6.00 $20,700,000 $7,137.93
- ---------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value, issuable upon
exercise of April 1996
Warrants................ 100,000 $6.25 $625,000 $215.52
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Totals.................. $21,325,000 $7,353.45
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</TABLE>
(1) Includes 450,000 shares of Common Stock which may be purchased by the
Underwriters pursuant to an over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
----------------
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS, FILED AS PART OF REGISTRATION STATEMENT, OF
INFORMATION REQUIRED BY FORM SB-2
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION LOCATION IN PROSPECTUS
------------------------- -------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors................... Prospectus Summary; Risk
Factors
4. Use of Proceeds..................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Principal and Selling
Stockholders
8. Plan of Distribution................................ Outside Front Cover Page;
Underwriting
9. Legal Proceedings................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management; Principal and
Selling Stockholders; Certain
Transactions
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Management; Principal and
Selling Stockholders
12. Description of Securities........................... Dividend Policy; Description of
Securities
13. Interests of Named Experts and Counsel.............. Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Part II of Registration
Statement
15. Organization Within Last Five Years................. Not Applicable
16. Description of Business............................. Cover Page; Prospectus Summary;
The Company; Use of Proceeds;
Dividend Policy;
Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Principal and
Selling Stockholders; Certain
Transactions; Description of
Securities; Index to Financial
Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION LOCATION IN PROSPECTUS
------------------------- -------------------------------
<S> <C> <C>
17. Management's Discussion and Analysis or Plan of
Operation........................................... The Company; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business
18. Description of Property............................. Business
19. Certain Relationships and Related Transactions...... Certain Transactions
20. Market for Common Equity and Related Matters........ Outside Front Cover Page;
Dividend Policy; Market Price
of Common Stock; Description of
Securities; Underwriting
21. Executive Compensation.............................. Management
22. Financial Statements................................ Index to Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure................. Not Applicable
24. Indemnification of Officers and Directors........... Management; Description of
Securities; Part II of
Registration Statement
25. Other Expenses of Issuance and Distribution......... Underwriting; Part II of
Registration Statement
26. Recent Sales of Unregistered Securities............. Part II of Registration
Statement
27. Exhibits............................................ Exhibits to Registration
Statement
28. Undertakings........................................ Part II of Registration
Statement
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) 2,500,000 shares of
Common Stock to be offered by the Company, plus 500,000 shares to be offered by
Selling Stockholders, plus 450,000 shares available from the Company pursuant to
the Underwriters' over-allotment option (the "Offering"), and (ii) 100,000
shares of Common Stock purchasable upon exercise of warrants issued by the
Company in April 1996 (the "Warrant Shares"). The Warrant Shares are offered by
certain holders of such securities (the "Warrantholders") and not for the
account of the Company. See "Certain Transactions" and "Underwriting." Following
the Prospectus included in this Registration Statement are certain pages of the
Prospectus relating to the Warrant Shares, including alternate front and back
cover pages, an alternate "The Offering" section of the "Prospectus Summary,"
and sections entitled "Concurrent Sales By Company and Selling Stockholders" and
"Warrantholders." All other sections of the Prospectus for this Offering, other
than "Underwriting," are to be used in the Prospectus relating to the Warrant
Shares. All references in this Prospectus to the "Offering" will be changed to
the "Company Offering" in the Prospectus relating to the Warrant Shares. In
addition, cross-references in this Prospectus shall be adjusted in the
Prospectus for the Warrantholders to refer to the appropriate alternate
Prospectus pages.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 6, 1996
3,000,000 SHARES
[LOGO] DIAGNOSTIC HEALTH SERVICES, INC.
COMMON STOCK
Of the 3,000,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by Diagnostic Health Services, Inc. (the "Company" or "DHS") and
500,000 shares are being sold by certain selling stockholders (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares offered by the Selling Stockholders.
The Common Stock of the Company is included for trading on the Nasdaq
National Market ("Nasdaq") under the symbol "DHSM." On May 1, 1996, the last
sale price of the Common Stock as reported on Nasdaq was $5.875 per share. See
"Price Range of Common Stock."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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- ---------------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
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Total (3) ....................... $ $ $ $
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- ---------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain civil liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated to be
approximately $330,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any, on the same terms and conditions as the shares offered hereby. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Rodman & Renshaw, Inc., New York, New
York, on or about , 1996.
-----------
RODMAN & RENSHAW, INC.
The date of this Prospectus is , 1996
<PAGE>
[MAP SHOWING LOCATION OF DHS HOSPITAL CLIENTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN
UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES
MAY ENGAGE IN PASSIVE MARKET MARKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise indicated, all financial and share information set
forth in this Prospectus assumes (i) a public offering price of $5.875 per
share, (ii) an aggregate of 3,412,039 shares of Common Stock reserved for
issuance pursuant to outstanding options and warrants, and pursuant to earn-out
agreements with former stockholders of subsidiaries, are not issued, and (iii)
no exercise of the Underwriters' over-allotment option. All references to
fiscal years refer to the fiscal year of the Company ending December 31. Unless
the context otherwise requires, all references in this Prospectus to the
"Company" or "DHS" refer to Diagnostic Health Services, Inc., its subsidiaries
and predecessors. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to,
those discussed in "Risk Factors."
THE COMPANY
Diagnostic Health Services, Inc. is a leading outsource provider of medical
services to hospitals, physicians' offices and other healthcare facilities
primarily in the Midwest and South Central United States. DHS provides
radiology and cardiology diagnostic services and equipment, as well as
departmental management services to healthcare facilities on an in-house and
shared basis. The Company also provides skilled allied healthcare personnel on
a temporary basis to perform a variety of functions in hospitals, long-term
care facilities, physicians' offices, clinics and home healthcare settings. DHS
is committed to offering a broad range of services in a manner responsive to
the healthcare industry's increased focus on cost containment without
compromising the quality of patient care.
The market for the Company's services consists of hospitals, physicians and
other healthcare providers. According to the American Hospital Association and
the American Medical Association, there are more than 5,000 hospitals and
18,300 physician group practices in the United States. In the Company's core
twelve-state Midwestern and South Central U.S. market, the Company estimates
that there are approximately 2,300 hospitals, approximately 11% of which are
currently serviced by the Company. Additional potential customers include long-
term care facilities, sub-acute care facilities and the expanding managed care
marketplace.
Cost containment pressures in the healthcare industry have led providers to
seek innovative methods of reducing the cost of delivering effective
healthcare. Hospitals and other healthcare institutions have contended with the
demands of physicians and patients for current technology and qualified
clinical support, while faced with the constraints of limited capital and
changing healthcare economics. To address these issues, providers have
increasingly turned to outsourcing various services. This trend began with non-
clinical support functions, such as custodial services and billing and
collection, and has now extended to clinical and other patient care services.
By outsourcing clinical and management services, healthcare providers are able
to reduce overhead costs and ease administrative burdens, while obtaining
access to current technology, clinical support, departmental management
services and allied healthcare personnel.
The Company currently provides shared diagnostic services, and staffs,
equips, operates and/or manages in-house radiology or cardiology departments,
for approximately 850 customers. The Company has achieved this market presence
through internal growth and strategic acquisitions. The Company's strategy is
to capitalize, within its business lines, on its demonstrated ability to reduce
the costs of providing radiology and cardiology services and to consolidate
providers of these services. The Company intends to implement this strategy by
continuing its aggressive acquisition and development program with a strong
geographic focus, cross-marketing its service lines across its customer base to
generate internal growth, pursuing the conversion of shared service
arrangements to in-house service agreements, and offering ancillary services to
complement its core radiology and cardiology services. The Company also intends
to pursue acquisitions of other service providers, as this highly fragmented
sector of the healthcare industry continues to consolidate.
3
<PAGE>
In addition to diagnostic services, the Company provides, on a temporary
basis, allied healthcare personnel, including radiology technicians, physical
and occupational therapists and home healthcare professionals in its primary
market area and in Mexico City. Demand for such temporary personnel arises from
hiring freezes, the need to replace vacationing or sick personnel and other
short-term needs. These services are complementary to the Company's core
business and afford the Company the opportunity to expand the services provided
to existing customers and to establish new client relationships.
Since 1991, the Company has significantly expanded the breadth of its
radiology and cardiology services. From 1991 to 1995, through internal growth
and the acquisition of twelve local service providers, the Company's gross
revenues increased from approximately $3.5 million to approximately $17.1
million, and income from operations increased from approximately $0.4 million
to $1.7 million. During the same period, the Company's customer base increased
from 323 to 846. Since December 31, 1995, the Company has consummated one
additional business acquisition and has entered into a letter of intent to
acquire a Texas-based company providing cardiac imaging and monitoring
services.
The Company was incorporated in Texas in 1983 and was reincorporated in
Delaware in 1992. Its principal office is located at 2777 Stemmons Freeway,
Suite 1525, Dallas, Texas 75207, and its telephone number is (214) 634-0403.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... 2,500,000 shares
Common Stock Offered by Selling
Stockholders................................ 500,000 shares
Common Stock to be Outstanding after the
Offering.................................... 7,558,302 shares (1)
Use of Proceeds............................. Repayment of certain outstanding debt, acquisitions,
capital expenditures and working capital.
NASDAQ Common Stock Symbol.................. "DHSM"
NASDAQ Warrants Symbol...................... "DHSMW"
</TABLE>
- --------
(1) Does not include (i) 1,375,000 shares of Common Stock issuable at $6.25 per
share upon exercise of publicly traded warrants issued in connection with
the Company's initial public offering in 1993, (ii) 1,296,484 shares of
Common Stock issuable upon exercise of outstanding options granted under
the Company's stock option plans, (iii) 609,678 shares of Common Stock
issuable upon exercise of other outstanding options and warrants and (iv)
130,877 shares of Common Stock reserved for issuance to certain former
stockholders of the Company's subsidiaries subject to such subsidiaries'
achievement of certain financial goals.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
(UNAUDITED) (1) (UNAUDITED)
---------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Gross revenues....................... $3,525 $6,567 $8,282 $11,508 $17,083 $3,675 $5,221
Operating expenses................... 3,122 6,146 8,900 10,811 15,336 3,364 4,406
Income (loss) from operations........ 403 422 (618) 697 1,747 312 815
Income (loss) before extraordinary
item............................ 312 314 (774) 613 1,228 257 459
Extraordinary item................... (5) (83) -- -- -- -- --
------ ------ ------ ------- ------- ------ ------
Net income (loss).................... $ 317 $ 398 $ (774) $ 613 $ 1,228 257 459
====== ====== ====== ======= ======= ====== ======
SELECTED PER SHARE DATA:
Income (loss) before extraordinary
item............................ $ 0.17 $ 0.12 $(0.21) $ 0.13 $ 0.23 $ 0.05 $ 0.08
Extraordinary item................... 0.01 0.03 -- -- -- -- --
------ ------ ------ ------- ------- ------ ------
Net income (loss) (2)................ $ 0.18 $ 0.15 $(0.21) $ 0.13 $ 0.23 $ 0.05 $ 0.08
====== ====== ====== ======= ======= ====== ======
Weighted average common shares
outstanding (3)..................... 1,797 2,594 3,630 4,601 5,409 5,025 5,944
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED (4)
AT DECEMBER 31, ------- ---------------
1995 (UNAUDITED)
--------------- -----------------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital........................ $ 506 $ 116 $ 9,839
Total assets........................... 19,292 22,442 30,881
Short-term debt........................ 2,863 3,252 1,968
Long-term debt......................... 5,662 6,136 2,484
Stockholders' equity................... 8,906 9,791 23,167
</TABLE>
- --------
Note: Numbers may not add due to rounding.
(1) In December 1995, the Company issued 240,000 shares of Common Stock in
exchange for all of the outstanding common stock of Advanced Diagnostic
Imaging, Inc. ("ADI"). The transaction has been accounted for as a pooling
of interests and, accordingly, the Company's 1994 and 1995 audited
consolidated financial statements have been restated to include the
accounts and operations of ADI. See Note 11 to the Financial Statements
appearing elsewhere in this Prospectus. For purposes of this presentation,
the Company's 1991, 1992 and 1993 results of operations also have been
restated to include this pooling transaction. These restated results of
operations are unaudited. Excluding the restating effect of the ADI
pooling, the Company's gross revenues were $2,833,246, $5,713,241 and
$7,354,035 for the years ended December 31, 1991, 1992 and 1993,
respectively; net income (loss) was $47,965, $30,837 and ($748,968) for the
years ended December 31, 1991, 1992 and 1993, respectively; and primary
earnings (loss) per share was $0.03, $0.01 and ($0.21) for the years ended
December 31, 1991, 1992 and 1993, respectively. The foregoing financial
information is derived from the Company's audited financial statements for
fiscal years 1991, 1992 and 1993.
(2) There was no dilutive effect to earnings per share for the years ended
December 31, 1991, 1992, 1993 and 1994, and for the three months ended
March 31, 1995 and 1996. Fully diluted earnings per share was $0.21 for the
year ended December 31, 1995.
(3) The fully-diluted weighted average common shares outstanding was 4,777,582
and 5,816,188 at December 31, 1994 and 1995, respectively, and 5,194,204
and 6,075,019 at March 31, 1995 and 1996, respectively.
(4) As adjusted to reflect the borrowing of $1.0 million of bank debt and the
issuance of $1.0 million of subordinated promissory notes (the "Bridge
Notes"), net of issuance costs, and the completion of this Offering and the
application of the estimated net proceeds thereof.
5
<PAGE>
RISK FACTORS
In evaluating an investment in the Common Stock offered hereby, prospective
investors should consider carefully, among other things, the following risk
factors as well as the other information contained in this Prospectus.
RISKS INHERENT IN GROWTH STRATEGY
A significant component of the Company's historical growth has come through
acquisitions of other healthcare service providers, and the Company intends to
continue to seek acquisition opportunities in the future. This growth strategy
is dependent on the continued availability of suitable acquisition candidates.
Other than a letter of intent with respect to the proposed acquisition of
Cardiac Concepts, Inc., the Company has no present commitments or agreements
with respect to any acquisitions, and there can be no assurance that the
Company will be able to identify or come to agreement with any future
acquisition candidates. The Company may also find itself in competition for
acquisition candidates with competitors who have greater financial and other
resources than the Company and who may be willing to pay higher prices for
acquisition targets. See "Business--Company Strategy" and "--CCI Letter of
Intent."
In addition, even if the Company is successful in consummating future
acquisitions, there can be no assurance that any such acquisitions will be
beneficial to the Company. Any growth or success through acquisitions will be
dependent upon a number of factors, including the Company's ability to
evaluate properly the potential benefits of each prospective acquisition, the
Company's ability to consummate the acquisition on terms favorable to the
Company, and the Company's ability to promptly and profitably integrate the
acquired operations and retain key personnel and customer relations.
Acquisitions also place significant demands on the Company's financial and
management resources, which can divert management's attention from other
business concerns. Furthermore, the Company generally records significant
amounts of goodwill in connection with acquisitions, and if the Company were
to determine that the carrying value of goodwill was impaired, the Company
would be required to write down such carrying value, which would result in a
charge to earnings that could have a material adverse effect on the Company's
financial results.
UNCERTAINTIES SURROUNDING DILUTIVE IMPACT OF AND CAPITAL REQUIREMENTS RELATING
TO GROWTH STRATEGY
In order to grow its business by means of acquisitions, the Company will
require significant capital resources, both for the payment of the cost of
acquiring businesses, and for the effective integration, operation and
expansion of the acquired businesses. In the past, the Company has utilized
its Common Stock as a means of making payment for acquired businesses.
Depending on the agreed-upon value of the acquired business and the value of
the Common Stock, the Company may be required to issue a large number of
additional shares of Common Stock, thereby diluting existing stockholders,
including investors in this Offering. Alternatively, to avoid such dilution,
or if the acquisition candidate is unwilling to accept Common Stock as all or
part of the consideration for the transaction, the Company might be required
to utilize more of its cash resources (if available), or may be required to
seek additional capital. There can be no assurance that such additional
capital, if and when required, will be available on terms acceptable to the
Company, if at all. If the Company is unable to obtain required capital
resources, its growth could be limited, and its existing operations could be
impaired. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DECREASE IN POTENTIAL ACQUISITION CANDIDATES
As the current consolidation trend in the healthcare services industry
continues, the Company can expect to encounter greater difficulty in
identifying suitable acquisition candidates, and in consummating acquisitions
of such businesses on terms favorable to the Company. Failure to identify and
consummate favorable acquisitions could have a material adverse effect on the
Company's business. See "Business--Company Strategy."
REDUCED CUSTOMER BASE DUE TO INDUSTRY CONSOLIDATION
As consolidation among healthcare providers continues, the Company's
customer base may be reduced either because customers are consolidated or
acquired by other entities, or because outsourcing decisions shift to
6
<PAGE>
individuals with whom the Company has not had a prior relationship. There can
be no assurance that the Company will be able to maintain relationships with
its customers following such an acquisition or consolidation. Any significant
reduction in the Company's customer base would have a material adverse effect
on the Company's business. See "Business--Sales and Marketing" and "--
Customers."
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use a substantial portion of the net proceeds of this
Offering to expand the Company's business, either through development of new
facilities, or by acquisition of other service providers. However, as of the
date of this Prospectus, except for a letter of intent relating to one
potential acquisition, the Company is not engaged in any discussions relating
to any acquisitions. As a result, a significant portion of the net proceeds of
this Offering will be available for acquisitions and projects that are not yet
identified, and the Board of Directors will have broad discretion with respect
to the application of such net proceeds. See "Use of Proceeds."
RELIANCE ON KEY EMPLOYEES
The Company is substantially dependent on the personal efforts and abilities
of Max W. Batzer (Chairman and Chief Executive Officer) and Brad A. Hummel
(President, Chief Operating Officer and Chief Financial Officer). See
"Management." Each is a substantial stockholder of the Company (see "Principal
and Selling Stockholders"), and has an employment agreement with the Company.
Mr. Batzer is not required to devote his full time to the affairs of the
Company, but is prohibited from engaging in any other business activities
which are competitive with the business of the Company, or which materially
interfere with the performance of his duties and responsibilities to the
Company. See "Management--Employment Agreements." The loss or unavailability
of either of these officers or certain other key employees for any significant
period of time could have a material adverse effect on the Company's business
prospects or earning capacity. In addition to $1,000,000 per individual of key
man life insurance payable to the Company's commercial lender pursuant to a
loan agreement, the Company maintains and is sole beneficiary of key man life
insurance policies on the lives of Messrs. Batzer and Hummel in the amount of
$500,000 per individual.
POTENTIAL FOR PROFESSIONAL LIABILITY CLAIMS
The nature of the Company's business and services entails the risk of
professional liability claims, which could arise, for example, out of faulty
testing procedures or mishandling of test results. This concern is heightened
as the Company is called upon to perform services that might be deemed to be
"invasive" in nature (entering or placing objects inside a patient's body).
The Company maintains professional liability insurance coverage with limits of
$1,000,000 per occurrence and $3,000,000 in the aggregate in respect of such
contingencies. However, there can be no assurance that claims will not be
asserted in the future, or that any damages assessed against the Company will
not exceed the limits of available insurance coverage. In addition, the
potential negative publicity that could arise from a professional liability
claim could have a material adverse effect on the Company, even if the Company
were ultimately to prevail in the defense of the claim.
POSSIBLE SHORTAGE OF QUALIFIED PERSONNEL
From time to time, the Company has experienced difficulties in obtaining
and/or retaining qualified healthcare professionals, and shortages of such
personnel may be expected from time to time in the future. The Company will be
competing for qualified personnel with numerous other healthcare providers,
many of whom have substantially greater financial and other resources than the
Company.
COMPETITION
Radiology and cardiology diagnostic services, as well as the provision of
allied healthcare professionals, are characterized by a high degree of
competition. This competition comes from a number of independent local
operators specializing in one or two clinical applications, and from a few
large diversified healthcare companies (primarily larger hospitals having the
resources and capability to provide shared diagnostic services to other
healthcare facilities) which provide these services as part of their overall
business. Although the Company
7
<PAGE>
believes that it has a competitive advantage over most of the small operators
(primarily because most of them do not provide the full range of services
offered by the Company, and do not have the same volume of revenues to absorb
necessary fixed overhead costs), the Company may be vulnerable to competition
from the larger healthcare companies, at least one of which can be found in
each of the Company's geographic markets, and all of which are substantially
larger and possess greater financial resources than the Company. There can be
no assurance that the Company will be able to compete successfully in its
markets.
GOVERNMENT REGULATION; POTENTIAL NATIONAL HEALTHCARE REFORM
Many aspects of the medical industry in the United States are presently
subject to extensive federal and state governmental regulation, including
reimbursement rates and policies imposed by Medicare and other third-party
reimbursement programs (from which the Company receives a material portion of
its revenues). Laws and regulations affecting the Company's business include
federal and state "kickback laws," conflict of interest laws (such as the
federal "Stark" legislation), and licensing requirements relating to the
operation of independent physiological laboratories and the handling of
nuclear materials. In addition, both the Clinton Administration and the
Congress have periodically asserted a need to overhaul or reform the nation's
healthcare system. Such legislative initiatives, if enacted, could impose
pressures on the pricing structures applicable to the Company's services. In
particular, there is a possibility that a significant portion of healthcare
services will be rendered and administered through managed care systems, which
could have the effect of forcing price concessions and reductions on the part
of service providers such as the Company. Moreover, healthcare reform could
also entail a greater analysis of each patient's need for diagnostic testing,
with the aim of reducing the total volume of testing and the overall cost of
medical care. Depending on the nature and extent of any new laws and/or
regulations, or possible changes in the interpretation of existing laws and/or
regulations, any such changes may have a material adverse effect on the
Company's revenues, operating margins and profitability. See "Business--
Government Regulation."
LIMITATIONS BROUGHT ON BY REIMBURSEMENT PROGRAMS
In 1994 and 1995, the Company derived approximately 7.2% and 4.9%,
respectively, of its total revenues from Medicare and Medicaid, and
approximately 4.3% and 2.2%, respectively, from other third-party indemnity
payors. In January 1992, the federal government implemented, through the
Medicare program, a resource-based relative value scale ("RBRVS") payment
methodology. Implementation of RBRVS reduced reimbursement rates for certain
of the Company's diagnostic procedures. Policymakers have from time to time
advocated that a RBRVS type of reimbursement system be imposed on private-
sector third-party payors. Implementation of such a program would reduce
reimbursements by private third-party payors, and would adversely affect the
Company's operating margins to the extent that costs on these procedures could
not be concomitantly reduced. There can be no assurance that some or any of
these reduced operating margins could be recouped through cost reductions or
otherwise.
TECHNOLOGICAL CHANGE AND OBSOLESCENCE
Diagnostic imaging technology is constantly undergoing development and
change. New technologies may be developed, or existing technologies refined,
which could render the Company's existing equipment technologically or
economically obsolete. Due to cost factors, competitive considerations or
other constraints, there can be no assurance that the Company will be able to
acquire or have access to any new or improved equipment that the Company may
need in order to serve its clients and customers.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and may continue to be highly
volatile, and could in the future be subject to wide fluctuations in response
to the timing and size of acquisitions, quarter to quarter variations in
operating results, changes in earnings estimates by analysts, market
conditions in the industry, prospects of healthcare reform, changes in
government regulation, and general economic conditions. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have been unrelated to the operating performance of
particular companies. Investors in the Common Stock must be willing to bear
the risk of such fluctuations in earnings and stock price. See "Price Range of
Common Stock."
8
<PAGE>
SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE
Of the Company's 7,558,302 shares of Common Stock that will be outstanding
upon completion of this Offering, 2,232,033 shares are "restricted securities"
under Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Ordinarily, under Rule 144, a person who has held
restricted securities for a period of two years may, every three months, sell
in ordinary brokerage transactions or in transactions directly with a market
maker an amount equal to the greater of one percent of the Company's then-
outstanding Common Stock or the average weekly trading volume during the four
calendar weeks prior to such sale. Rule 144 also permits the sale of shares
without any quantity limitations by a person who is not an affiliate of the
Company and has satisfied a three-year holding period. Of the 2,232,033
restricted shares, executive officers and directors holding an aggregate of
905,476 shares have agreed not to offer or sell such shares for a period of
180 days after the date of this Prospectus without the consent of Rodman &
Renshaw, Inc. ("Rodman") on behalf of the Underwriters. Of the remaining
1,326,557 restricted securities, 1,033,368 shares are now eligible or will be
eligible for sale under Rule 144 within 90 days from the date of this
Prospectus. Sales of Common Stock pursuant to Rule 144 may have a depressive
effect on the market price of the Common Stock.
The Company has reserved 1,902,009 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
stock option plans, and options for 1,296,484 of such shares are outstanding
as of the date of this Prospectus. The Company has further reserved 1,375,000
shares of Common Stock issuable at $6.25 per share upon exercise of publicly
traded warrants issued in connection with the Company's initial public
offering in 1993, 609,678 shares of Common Stock for issuance upon exercise of
other outstanding options and warrants, and 130,877 shares for issuance to
certain former stockholders of its subsidiaries subject to such subsidiaries'
achievement of certain financial goals. Other than the Company's publicly
traded warrants, substantially all of these options and warrants have an
exercise price that is substantially less than the offering price of the
Common Stock in this Offering. The existence of such options and warrants may
hinder future equity financing by the Company. Further, the holders of such
warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable
to the Company. In addition, the holders of warrants for 1,688,292 shares have
demand registration rights, and the holders of warrants for 97,000 additional
shares have "piggyback" rights in respect of future Common Stock registrations
by the Company, subject to exclusion (in whole or in part) from the
registration statement if inclusion is deemed to adversely affect the
Company's interests in that offering. See "Description of Securities" and
"Shares Eligible for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Certificate of Incorporation, By-Laws,
Delaware law and certain executive employment agreements could, together or
separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company, and limit the price that certain investors
might be willing to pay in the future for the Company's Common Stock. These
provisions include a classified board of directors and the issuance, without
further stockholder approval, of preferred stock with rights and preferences
which could be senior to the Common Stock. The Company is also subject to
Section 203 of the Delaware General Corporation Law, which may also inhibit a
change in control of the Company. See "Description of Capital Stock--Preferred
Stock," "-- Classified Board of Directors and Related Provisions," and "--
Delaware Anti-Takeover Law." In addition, the provisions of certain executive
employment agreements and stock option agreements may result in economic
benefits to the holders thereof upon the occurrence of a change in control.
See "Management--Employment Agreements" and "--Stock Option Plans."
NO ANTICIPATED DIVIDENDS
The Company has not previously paid any dividends on its Common Stock and
for the foreseeable future intends to continue its policy of retaining any
earnings to finance the development and expansion of its business. In
addition, the loan agreement between the Company and its commercial lender
prohibits the payment of dividends. See "Dividend Policy."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered by the Company at an assumed offering price of
$5.875 per share are estimated to be approximately $13,403,000 after deducting
the underwriting discounts and estimated offering expenses payable by the
Company ($15,875,000 if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any of the proceeds from the sale of
shares of Common Stock being offered by the Selling Stockholders.
The Company will utilize approximately $5.9 million of the net proceeds to
repay long-term debt owed to a commercial bank. Of such amount, $4.9 million
was originally borrowed in July 1995 and December 1995 in connection with two
business acquisitions and the refinancing of bank debt. See Note 10 to the
Financial Statements appearing elsewhere in this Prospectus. The remaining
$1.0 million was borrowed in April 1996, to provide the Company with
additional financing for capital expenditures and working capital. All of such
debt currently bears interest at rates ranging from 9.9% to 10.5% per annum,
and is payable in installments through December 1998.
An additional $1.0 million of net proceeds will be utilized by the Company
to repay subordinated promissory notes (the "Bridge Notes") in such aggregate
principal amount issued in April 1996. The Bridge Notes bear interest at the
rate of 10.0% per annum through March 31, 1997 and 12.0% per annum thereafter,
and are due on the earlier of the completion of this Offering or April 15,
2000. The Bridge Notes were issued to provide the Company with additional
financing for capital expenditures and working capital. See "Description of
Securities--Bridge Notes."
The balance of the estimated net proceeds of this Offering of approximately
$6.5 million will be utilized for working capital and general corporate
purposes, including business acquisitions and capital expenditures. To the
extent that the Company receives any proceeds from the exercise of the
Underwriters' over-allotment option, or from the exercise of outstanding
options or warrants, such proceeds, if any, will also be added to working
capital and used for general corporate purposes.
Other than a letter of intent with respect to the proposed acquisition of
Cardiac Concepts, Inc. (see "Business--CCI Letter of Intent"), the Company is
not engaged in discussions with any acquisition candidates and has not
determined the extent to which it will expand its business by acquisitions, as
contrasted with internal growth. As a result, a significant portion of the net
proceeds of the Offering will be available for acquisitions and projects that
are not yet identified, and the Board of Directors will have broad discretion
with respect to the application of such proceeds. The Company may not be able
to consummate acquisitions or identify and arrange projects that meet the
Company's requirements.
Pending specific allocation of the net proceeds of this Offering, the net
proceeds will be invested in interest-bearing savings accounts, certificates
of deposit, money market accounts, United States government obligations or
short-term interest-bearing obligations.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
Since January 22, 1996, the Company's Common Stock and Warrants have been
listed on the Nasdaq National Market. From June 23, 1993 to January 19, 1996,
the Common Stock and Warrants were listed on the Nasdaq SmallCap Market. At
all such times, the Common Stock has been listed under the symbol "DHSM." The
range of reported high bid and low bid quotations for the Common Stock on a
quarterly basis from January 1, 1994 through January 19, 1996, and the last
sale price from January 22, 1996 through May 1, 1996, is reflected in the
table below. These quotations reflect inter-dealer prices without adjustment
for retail mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
First Quarter............................................ $ 1 25/32 $ 7/8
Second Quarter........................................... 1 3/4 7/8
Third Quarter............................................ 2 1 11/16
Fourth Quarter........................................... 2 7/8 1 3/4
YEAR ENDED DECEMBER 31, 1995:
First Quarter............................................ $ 2 7/16 $ 1 7/8
Second Quarter........................................... 3 1/4 1 15/16
Third Quarter............................................ 4 1/2 2 15/16
Fourth Quarter........................................... 5 1/16 3 3/4
YEAR ENDED DECEMBER 31, 1996:
First Quarter *.......................................... $ 7 1/2 $ 4 7/8
Second Quarter (through May 1, 1996)..................... 6 5
</TABLE>
- --------
* From January 2, 1996 to January 19, 1996, the high and low bid prices of
the Common Stock on the Nasdaq SmallCap Market were $5 1/8 and $4 7/8.
On May 1, 1996, the last reported sale price for the Common Stock on the
Nasdaq National Market was $5 7/8, and the Company had 189 stockholders of
record as of that date.
DIVIDEND POLICY
The Company has not previously paid any dividends on its Common Stock and
for the foreseeable future intends to continue its policy of retaining any
earnings to finance the development and expansion of its business. In
addition, the Company's loan agreement with Texas Commerce Bank National
Association ("Texas Commerce Bank") prohibits the payment of dividends without
the bank's prior consent. In the future, the payment of dividends by the
Company on its Common Stock will also depend on the Company's financial
condition, results of operations and such other factors as the Board of
Directors of the Company may consider relevant.
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, (i) the capitalization
of the Company as of such date, (ii) the capitalization of the Company as of
such date giving pro forma effect to the borrowing of an additional $1.0
million of bank debt and the issuance of $1.0 million of Bridge Notes as of
March 31, 1996, and (iii) the pro forma capitalization of the Company, as
adjusted to reflect the sale of 2,500,000 shares of Common Stock by the
Company pursuant to this Offering and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt................................. $ 3,252 $ 3,252 $ 1,968
------- ------- -------
Long-term debt:
Lease obligations.............................. 1,990 1,990 1,990
Term debt...................................... 4,146 5,146 493
Bridge notes................................... -- 1,000 --
------- ------- -------
Total long-term debt.......................... 6,136 8,136 2,484
======= ======= =======
Stockholders' equity:
Preferred Stock, $.001 par value (3,000,000
shares authorized, no shares issued or
outstanding)................................... -- -- --
Common stock, $.001 par value (15,000,000 shares
authorized; 5,291,561 shares issued and
5,058,302 shares outstanding; 7,791,561 shares
issued and 7,558,302 shares outstanding pro
forma as adjusted) (1)......................... 5 5 8
Capital in excess of par value................. 9,444 9,444 22,818
Retained earnings.............................. 567 567 567
Treasury stock and other, at cost.............. (226) (226) (226)
------- ------- -------
Total stockholders' equity.................... 9,791 9,791 23,167
------- ------- -------
Total capitalization......................... $15,927 $17,927 $25,650
======= ======= =======
</TABLE>
- --------
Note: Numbers may not add due to rounding.
(1) Does not include (i) 1,375,000 shares of Common Stock issuable at $6.25
per share upon exercise of publicly traded warrants issued in connection
with the Company's initial public offering in 1993, (ii) 1,296,484 shares
of Common Stock issuable upon exercise of outstanding options granted
under the Company's stock option plans, (iii) 609,678 shares of Common
Stock issuable upon exercise of other outstanding options and warrants and
(iv) 130,877 shares of Common Stock reserved for issuance to certain
former stockholders of the Company's subsidiaries subject to such
subsidiaries' achievement of certain financial goals.
12
<PAGE>
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected statement of operations data for each of the two
years in the period ended December 31, 1995 and the balance sheet data at
December 31, 1994 and 1995 are derived from the Financial Statements of the
Company contained elsewhere in this Prospectus, which have been audited by
Moore Stephens Simonton, L.L.P. The statement of operations data for the years
ended December 31, 1991, 1992 and 1993 and the balance sheet data at December
31, 1991, 1992 and 1993 have been derived from unaudited restated consolidated
financial statements not included herein. The selected financial data as of
March 31, 1996 and for the three months ended March 31, 1995 and 1996 have
been derived from unaudited financial statements of the Company which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for such
periods. However, the results for the three months ended March 31, 1996 are
not necessarily indicative of the results to be expected for the entire year.
The data should be read in conjunction with the Financial Statements
(including the Notes thereto) and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
UNAUDITED (1)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
OPERATIONS DATA:
Gross revenues......... $3,525 $6,567 $8,282 $11,508 $17,083 $ 3,675 $ 5,221
Operating expenses:
Salaries and employee
benefits............... 1,553 3,435 5,074 6,754 9,450 2,020 2,633
Depreciation and
amortization........... 296 602 908 1,215 1,434 344 501
Other operating
expenses............... 1,273 2,109 2,918 2,843 4,452 1,000 1,271
------ ------ ------ ------- ------- ------- -------
Total operating
expenses............. 3,122 6,146 8,900 10,811 15,336 3,364 4,406
------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 403 422 (618) 697 1,747 312 815
Other expense (income). (6) (90) (101) (158) (98) (12) (79)
Interest expense....... 86 199 277 242 442 67 219
------ ------ ------ ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
items.................. 323 312 (794) 613 1,403 257 675
Income tax expense
(benefit).............. 11 (2) (20) -- 175 -- 217
------ ------ ------ ------- ------- ------- -------
Income (loss) before
extraordinary item..... 312 314 (774) 613 1,228 257 459
Extraordinary item..... (5) (83) -- -- -- -- --
------ ------ ------ ------- ------- ------- -------
Net income (loss)...... $ 317 $ 398 $ (774) $ 613 $ 1,228 $ 257 $ 459
====== ====== ====== ======= ======= ======= =======
SELECTED PER SHARE DATA:
Income (loss) before
extraordinary item.... $ 0.17 $ 0.12 $(0.21) $ 0.13 $ 0.23 $ 0.05 $ 0.08
Extraordinary item..... 0.01 0.03 -- -- -- -- --
------ ------ ------ ------- ------- ------- -------
Net Income (loss) (2).. $ 0.18 $ 0.15 $(0.21) $ 0.13 $ 0.23 $ 0.05 $ 0.08
====== ====== ====== ======= ======= ======= =======
Weighted average common
shares outstanding
(3)................... 1,797 2,594 3,630 4,601 5,409 5,025 5,944
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1996
------------------------------------ -----------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED (4)
------ ------ ------ ------- ------- ------- ---------------
UNAUDITED (1)
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Working capital........ $ 275 $1,120 $3,694 $ 2,215 $ 506 $ 116 $ 9,839
Total assets........... 2,676 5,713 9,348 11,607 19,292 22,442 30,881
Short-term debt........ 432 1,064 1,142 1,633 2,863 3,252 1,968
Long-term debt......... 676 1,371 1,535 1,164 5,662 6,136 2,484
Stockholders' equity... 971 2,353 5,956 7,748 8,906 9,791 23,167
</TABLE>
- -------
Note: Numbers may not add due to rounding.
(1) In December 1995, the Company issued 240,000 shares of Common Stock in
exchange for all of the outstanding common stock of Advanced Diagnostic
Imaging, Inc. ("ADI"). The transaction has been accounted for as a pooling
of interests and, accordingly, the Company's 1994 and 1995 audited
consolidated financial statements have been restated to include the
accounts and operations of ADI. See Note 11 to the Financial Statements
appearing elsewhere in this Prospectus. For purposes of this presentation,
the 1991, 1992 and 1993 results of operations have been restated to
include this pooling transaction. These restated results of operations are
unaudited. Excluding the restating effect of the ADI pooling, the
Company's gross revenues were $2,833,246, $5,713,241 and $7,354,035 for
the years ended December 31, 1991, 1992 and 1993, respectively; net income
(loss) was $47,965, $30,837 and ($748,968) for the years ended December
31, 1991, 1992 and 1993, respectively; and primary earnings (loss) per
share was $0.03, $0.01 and ($0.21) for the years ended December 31, 1991,
1992 and 1993, respectively. Excluding the restating effect of the ADI
pooling, the Company's working capital (deficit) was $(71,583), $593,540
and $3,335,003 at December 31, 1991, 1992 and 1993, respectively; total
assets were $2,323,132, $4,590,078 and $8,466,866 at December 31, 1991,
1992 and 1993, respectively; short-term debt was $432,224, $1,064,052 and
$1,108,189 at December 31, 1991, 1992 and 1993, respectively; long-term
debt was $519,441, $1,046,701 and $649,694 at December 31, 1991, 1992 and
1993, respectively; and stockholders' equity was $774,649, $1,914,578 and
$5,994,193 at December 31, 1991, 1992 and 1993, respectively. The
foregoing financial information is derived from the Company's audited
financial statements for fiscal years 1991, 1992 and 1993.
(2) There was no dilutive effect to earnings per share for the years ended
December 31, 1991, 1992, 1993 and 1994, and for the three months ended
March 31, 1995 and 1996. Fully diluted earnings per share was $0.21 for
the year ended December 31, 1995.
(3) The fully-diluted weighted average common shares outstanding was 4,777,582
and 5,816,188 at December 31, 1994 and 1995, respectively, and 5,194,204
and 6,075,019 at March 31, 1995 and 1996, respectively.
(4) As adjusted to reflect the borrowing of $1.0 million of bank debt and the
issuance of $1.0 million of Bridge Notes, net of issuance costs, and the
completion of this Offering and the application of the estimated net
proceeds thereof.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------- --------------------
1994 1995 1995 1996
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Gross revenues............................ 100.0% 100.0% 100.0% 100.0%
Operating expenses........................ 93.9 89.8 91.5 84.4
------ ------ --------- ---------
Operating income.......................... 6.1 10.2 8.5 15.6
Interest expense.......................... 2.1 2.6 1.8 4.2
Other expense (income).................... (1.4) (0.6) (0.3) (1.5)
------ ------ --------- ---------
Income before income taxes................ 5.3 8.2 7.0 12.9
Income tax expense........................ 0.0 1.0 0.0 4.1
------ ------ --------- ---------
Net income................................ 5.3% 7.2% 7.0% 8.8%
====== ====== ========= =========
</TABLE>
- --------
Note: Numbers may not add due to rounding.
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
Gross revenues increased by 42.1% to approximately $5,221,000 for the three
months ended March 31, 1996 from approximately $3,675,000 for the three months
ended March 31, 1995. This increase was due primarily to approximately
$1,285,000 derived from acquired businesses and approximately $261,000 from an
approximate 7.1% increase in revenues from existing and new customers
exclusive of revenues attributable to acquired businesses.
Operating expenses increased by 31.0% to approximately $4,406,000 for the
three months ended March 31, 1996 from approximately $3,364,000 for the three
months ended March 31, 1995, due to the Company's expanded operations. As a
percentage of gross revenues, total operating expenses decreased to 84.4% from
91.5%. This reduction is primarily attributable to efficient utilization of
personnel and resources resulting from the Company's integration of acquired
businesses. The Company has also experienced an increase in the number of in-
house contracts for the provision of radiology and cardiology services. These
contracts typically generate higher profit margins than the other services
provided by the Company.
Operating income increased by 161.4% to approximately $815,000 for the three
months ended March 31, 1996 from approximately $312,000 for the three months
ended March 31, 1995. As a percentage of gross revenues, operating income
increased to 15.6% for the three months ended March 31, 1996 from 8.5% for the
three months ended March 31, 1995.
Interest expense increased by 227.4% to approximately $219,000 for the three
months ended March 31, 1996 from approximately $67,000 for the three months
ended March 31, 1995, which was primarily attributable to additional loan and
lease liabilities assumed in connection with acquisitions in the third and
fourth quarters of 1995.
Other income is primarily gain realized upon disposition of equipment at the
end of its lease term, and interest earned on liquid investments.
14
<PAGE>
The Company's federal income tax net operating loss carryforwards were fully
utilized subsequent to the first quarter of 1995, and the Company recorded a
provision for federal income taxes of approximately $217,000 for the three
months ended March 31, 1996.
Net income increased by 78.4% to approximately $459,000 for the three months
ended March 31, 1996 from approximately $257,000 for the three months ended
March 31, 1995. This increase is primarily due to increased revenues and
continued consolidation resulting in efficient utilization of personnel and
equipment.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Gross revenues increased by 48.4% to approximately $17,083,000 in 1995 from
approximately $11,508,000 in 1994. This increase was due primarily to
$3,793,000 derived from acquired businesses and $1,782,000 from an approximate
15.5% increase in revenues from existing and new customers exclusive of
revenues attributable to acquired businesses.
Operating expenses increased by 41.9% to approximately $15,336,000 in 1995
from approximately $10,811,000 in 1994. As a percentage of gross revenues,
operating expenses decreased to 89.8% from 93.9%. The decrease was due to
increased efficiencies realized through consolidation of various overhead and
administrative functions, and absorption of fixed costs over an increased
revenue base.
Operating income increased by 150.7% to approximately $1,747,000 in 1995
from approximately $697,000 in 1994. As a percentage of gross revenues,
operating income increased to 10.2% in 1995 from 6.1% in 1994.
Interest expense increased by 82.6% to approximately $442,000 in 1995 from
approximately $242,000 in 1994, primarily as a result of new obligations
acquired in connection with 1995 acquisitions. As a percentage of gross
revenues, interest expense increased to 2.6% in 1995 from 2.1% in 1994.
Other income is primarily interest earned on liquid investments.
Net income increased by 100.3% to approximately $1,228,000 in 1995 from
approximately $613,000 in 1994. This increase is primarily due to increased
revenues and continued consolidation of the Company's administrative
functions.
LIQUIDITY AND CAPITAL RESOURCES
In June 1993, the Company received net proceeds of $4,699,500 from its
initial public offering. The Company has utilized all of such proceeds to fund
acquisitions, retire debt and lease financing liabilities, undertake new
marketing programs, purchase operating equipment, finance the start-up and
development of its Mexican operations, and for working capital.
On July 31, 1995, in conjunction with the Company's acquisition of the
midwest imaging operations of MICA Imaging, Inc. and the Company's refinancing
of its prior credit facilities, the Company entered into loan agreements with
Texas Commerce Bank, which include a one-year revolving credit facility
providing up to $1,000,000 in available credit (or, if less, 75% of the
Company's and its subsidiaries' eligible accounts receivable from time to
time). At March 31, 1996, the Company's outstanding borrowings under the
facility were $910,000. Pursuant to the same loan agreements, the Company
borrowed $4,750,000 in term loans. In December 1995, the Company borrowed an
additional $600,000 from Texas Commerce Bank in connection with the ADI
acquisition. These term loans are payable in monthly installments through
December 1998 and bear interest at varying rates, depending on the Company's
relative leverage from time to time. In April 1996, the Company borrowed an
additional $1,000,000 from Texas Commerce Bank for capital expenditures and
working capital. This term loan is payable in a single installment in July
1998, and bears interest at varying rates depending on the Company's relative
leverage from time to time. All of these loans (other than the revolving
credit facility) will be repaid out of the proceeds of this Offering. The
Company has also entered into various financing arrangements with commercial
leasing companies and equipment suppliers, which bear interest at rates
ranging from approximately 6.0% to 11.0%.
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At December 31, 1995, the Company was not in compliance with the minimum
current ratio covenant under its loan agreement with Texas Commerce Bank, and
the bank granted a waiver of such non-compliance as of that date. The Company
is currently in compliance with such covenant.
At March 31, 1996, the Company had approximately $830,000 in cash, and
working capital of $116,000. In April 1996, in addition to the $1,000,000 of
additional borrowings from Texas Commerce Bank described above, the Company
obtained an additional $1,000,000 in financing through the issuance of the
Bridge Notes. The Bridge Notes were issued to provide the Company with funds
for capital expenditures and working capital. See "Description of Securities--
Bridge Notes."
Based on the Company's operating plan, management believes that available
resources and funds generated from operations will be sufficient to meet the
Company's operating requirements and to fund proposed expansion of the
Company's business, through the close of the Company's fiscal year ending
December 31, 1996.
The Company has received from Texas Commerce Bank a commitment letter for a
credit facility (the "Credit Facility") which would, subject to completion of
the Offering, permit borrowings of up to $20 million, including up to $17.5
million for acquisitions (the "Acquisition Facility") and up to $2.5 million
for working capital (the "Working Capital Facility"). The Acquisition Facility
would terminate on June 30, 2001 and the Working Capital Facility would
terminate on June 30, 1998. Borrowings under the Credit Facility would be
secured by substantially all of the assets of the Company (including the
capital stock of the Company's subsidiaries) and would bear interest at one of
two variable rates selected by the Company based upon (i) the reserve adjusted
LIBOR rate plus a margin ranging from 1.75% to 2.50%, or (ii) the greater of
Texas Commerce Bank's prime rate or the federal funds rate plus 0.50%, plus a
margin ranging from 0.25% to 1.00%. There can be no assurance that the Company
will enter into a definitive agreement with respect to the proposed Credit
Facility on these or any other terms.
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business. General
operating expenses such as salaries and employee benefits are, however,
subject to normal inflationary pressures.
SEASONALITY
The Company's results of operations have, in some years, varied
significantly from quarter to quarter, for reasons particular to each quarter.
For instance, hospital admissions and doctor visits (and, therefore, the
Company's imaging revenues) are typically lower during holiday periods, and at
other times when physicians traditionally take their own vacations.
Conversely, revenues from the Company's allied healthcare services business
have generally increased in holiday periods, due to increased demand for
temporary personnel when regular staff is away.
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BUSINESS
THE COMPANY
Diagnostic Health Services, Inc. is a leading outsource provider of medical
services to hospitals, physicians' offices and other healthcare facilities
primarily in the Midwest and South Central United States. DHS provides
radiology and cardiology diagnostic services and equipment, as well as
departmental management services to healthcare facilities on an in-house and
shared basis. The Company also provides skilled allied healthcare personnel on
a temporary basis to perform a variety of functions in hospitals, long-term
care facilities, physicians' offices, clinics and home healthcare settings.
DHS is committed to offering a broad range of services in a manner responsive
to the healthcare industry's increased focus on cost containment without
compromising the quality of patient care.
The Company's goal is to enhance its position as a leading provider of
outsourced radiology and cardiology services in this highly fragmented market
segment, principally by development of its existing client base through
horizontal and vertical integration, and through continued acquisition of
other service providers.
MARKET OVERVIEW
The market for the Company's services consists of hospitals, physicians and
other healthcare providers. According to the American Hospital Association and
the American Medical Association, there are more than 5,000 hospitals and
18,300 physician group practices in the United States. In the Company's core
twelve-state Midwestern and South Central U.S. market, the Company estimates
that there are approximately 2,300 hospitals, approximately 11% of which are
currently serviced by the Company. Additional potential customers include
long-term care facilities, sub-acute care facilities and the expanding managed
care marketplace.
According to an article published in the Journal of the American College of
Radiology, in 1990 there were between 260 and 330 million radiological
procedures performed in the United States at a total cost estimated at between
$19 billion and $22 billion, of which not less than $7.9 billion was paid to
institutions for clinical services. Estimates are that the total expenditure
for radiological services in 1990 accounted for approximately 3.5% of total
spending on healthcare in the United States. Based on 1996 estimates by the
American Heart Association, the cost of diagnosing and treating cardiovascular
disease in the United States will be approximately $118 billion in 1996,
exclusive of the cost of therapeutic drugs and lost output; this represents
approximately 12% of current total healthcare spending in the United States.
There are approximately 14,700 board-certified cardiologists and 4,900 board-
certified cardiovascular surgeons in the United States.
Healthcare providers, including hospitals, have traditionally provided
healthcare services on a fee-for-service basis. This method of pricing
healthcare services is under pressure from both private and public sector
payors. Prospective pay mechanisms such as diagnostic related groups (DRGs)
and capitation, and the growing influence of managed care entities, have
significantly altered healthcare economics by fixing the cost of services.
Consolidation of hospital ownership and new patterns of hospital management
have transformed a relatively inefficient cost-plus environment into an
industry in which patient management is closely linked to financial
management. Cost containment pressures have led providers to seek innovative
methods to lower costs and gain efficiency without compromising standards of
care. Many healthcare providers have turned over the management of cost
centers such as pharmacies, emergency rooms, and custodial and food service
functions to outside entities in an effort to reduce overhead costs, ease
administrative burdens, and coordinate purchasing and equipment utilization
without compromising quality.
The Company's experience indicates that radiology and cardiology services
lend themselves to outsourcing. Outsourced services can be provided on both a
shared basis in which equipment and personnel are brought to numerous
healthcare facilities on a scheduled basis, and on an in-house basis in which
the service company provides dedicated equipment and personnel in the
healthcare facility. In many hospitals, radiology and cardiology service
disciplines such as ultrasound, nuclear medicine and CT scanning operate
independently. Each of these services is supported by its own physician
constituency, and requires costly instrumentation that is operated, processed
and maintained separately from other departmental hardware. These functions
are often
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provided by an allied professional whose skills are limited to one discipline.
This has resulted in excessive staffing and duplicative management functions,
and therefore greater cost and less efficiency. Hospitals are increasingly
recognizing the administrative and economic inefficiencies in this delivery
system for these services. Furthermore, this system does not provide the level
of quality that is increasingly being demanded, including a growing demand for
professional certification and accreditation of allied healthcare
professionals.
In addition to these widespread departmental inefficiencies, the Company has
also observed a substantial degree of fragmentation in the radiology and
cardiology services market. A substantial portion of these services continue
to be conducted by small, undercapitalized operators, who, in many cases, are
unable to absorb the substantial fixed costs inherent in these operations, and
are unable to acquire or access new technology as and when it becomes
available. These smaller operators may also be unable to obtain or update the
professional accreditations that are increasingly being required by their
customer base. The Company believes that these factors are contributing to an
increasing consolidation of outsource providers of radiology and cardiology
services. The Company intends to pursue its growth strategy by, among other
things, pursuing acquisitions in this highly fragmented market.
COMPANY STRATEGY
The Company's strategy is to capitalize, within its business lines, on its
demonstrated ability to reduce the costs of providing radiology and cardiology
services and to consolidate providers of these services. The Company intends
to implement this strategy by continuing its aggressive acquisition and
development program with a strong geographic focus, cross-marketing its
service lines across its customer base to generate internal growth, pursuing
the conversion of shared service arrangements to in-house service agreements,
and offering ancillary services to complement its core radiology and
cardiology services.
Acquisition and Development Program
The Company intends to pursue additional acquisitions to capitalize on
consolidation opportunities in the fragmented market for radiology and
cardiology services. Since January 1, 1992, the Company has completed twelve
acquisitions. Through consolidation, the Company believes that it can achieve
substantial economies of scale by spreading fixed costs over a broader revenue
base. The efficacy of this strategy has been demonstrated by the Company's
increased income as a percentage of revenues in 1994 and 1995, and in the
first quarter of 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Horizontal Integration
In addition to cost savings derived from elimination of duplicative general
and administrative expenses, the Company's acquisitions have enabled it to
develop capabilities in additional service modalities, which the Company has
been able to cross-market to customers purchasing the Company's existing
services. The Company has also succeeded in converting a number of shared
service relationships into in-house departmental service contracts. More than
85% of the Company's contracts for in-house services were developed in this
manner. The Company presently provides in-house departmental radiology or
cardiology services to 65 hospitals, and shared services to 176 additional
hospitals. In many cases, after beginning with one modality, the Company's
cross-marketing efforts have enabled it to expand the in-house contract
horizontally to include additional services. The Company has found that
expanding its business in this manner enhances revenues without significantly
increasing general and administrative expenses and personnel. Ultimately, the
Company believes that existing in-house departments, and others that the
Company intends to develop, can serve as platforms leading to a departmental
management model that is responsive to economic trends and cost containment
pressures.
Vertical Integration
The Company is positioned to operate within the emerging vertically
integrated networks of hospitals, specialists and/or primary care physicians
and other healthcare providers. These networks, which are developing in
several of the Company's geographic markets, seek to provide quality patient
care at reduced cost. Within these networks, the Company's shared service
capability represents an economically efficient means of providing access to
current technology with minimal cost and inconvenience to the healthcare
provider.
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Expand Affiliations with Hospital Management/Owner Groups
The Company presently provides in-house or shared services to approximately
100 hospitals that are part of for-profit or not-for-profit systems, or are
managed by multi-facility management companies. In several instances, the
Company's contractual relationship with one member of the group has led to
referrals of the Company to other members of the same group. This is an
economically efficient method for the Company to expand its customer base, and
the Company will seek to further capitalize on its existing relationships with
these multimember groups.
Geographic Focus
The Company has pursued a strong geographic focus in its acquisition and
development program. The Company's current operations are centered in the
Midwestern and South Central United States, extending north to Illinois, south
and west to Texas, northeast to Michigan and Ohio, and southeast to Louisiana
and Mississippi. This regional concentration increases the effectiveness of
marketing efforts, and facilitates the integration of acquired companies. The
Company expects that near-term expansion will occur in this area or in
contiguous states, although the Company will also consider expansion into
other regions on a selected basis.
COMPANY SERVICES
Radiology Diagnostics/Management Services
Radiology services encompass all of the imaging methods commonly used to
diagnose and recommend treatment of injuries and illnesses. Radiology services
have become an increasingly important economic element in the healthcare
delivery system. Advances in technology have led to a number of new diagnostic
modalities, expanding utilization while simultaneously creating technological
obsolescence. The typical hospital radiology department may include
capabilities in x-ray, diagnostic ultrasound, nuclear medicine, CT
(computerized tomography) scanning, and magnetic resonance imaging (MRI).
Diagnostic outcomes influence virtually every clinical discipline and affect
much of the course of patient management and cost of care. The ability to
provide these services efficaciously is dependant on skilled personnel and
current technology. Hospitals and other healthcare institutions have struggled
with the demands of physicians for current technology, while faced with the
constraints of limited capital, competing needs, and varied and changing
healthcare economics.
Until recently, the Company provided radiology services primarily on a
shared basis, with the Company bringing its equipment and personnel on a
scheduled basis to numerous healthcare facilities, and providing quality
assurance and measurement. While the Company continues to derive a significant
portion of its revenues from the provision of shared services, the marketplace
has evolved. As the utility and efficiency of diagnostic modalities such as
ultrasound imaging and nuclear medicine became more widely accepted, the
demand for access to these technologies increased. As a result, many of the
Company's shared service clients warranted full-time instrumentation and
personnel, leading to the establishment of the Company's in-house ultrasound
or nuclear medicine services.
In-house services may include: staffing and management of personnel;
selection, acquisition and maintenance of equipment; design and maintenance of
quality assurance and outcomes measurement programs; department accreditation
and certification programs; establishment and maintenance of regulatory
compliance programs; or any combination of these services. Typically, the
Company bills the client hospital, physician's office or healthcare facility
directly for its services. Pricing methods include volume-based fee-for-
service arrangements, monthly fee structures with banded minimum and maximum
fixed charges, and specific fees related to special project management.
Typically, services and equipment are provided under separate contracts, and
equipment contracts include fixed minimum payments structured to cover
equipment costs.
Cardiology Diagnostics/Management Services
Cardiology services encompass a variety of specialized imaging and non-
imaging applications designed to assist in the diagnosis and treatment of
heart disease. As a practice discipline, cardiology is delivered extensively
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in both the physician's office and hospital setting. Many of the non-invasive
diagnostic procedures, such as echocardiography (cardiac sonography), nuclear
and non-nuclear stress testing, monitoring (EKG, Holter, and pacemaker) and,
when space is sufficient, cardiac rehabilitation, can be conducted within the
physician's office. The Company provides the full range of these services.
Invasive cardiology, such as diagnostic and surgical cardiac catheterization
and pacemaker insertion, is principally conducted within a hospital, and the
Company provides support services for these procedures. As is the case with
radiology, these diagnostic services are dependent on skilled allied
healthcare professionals and require sophisticated, capital-intensive
instrumentation. As hospitals look to establish or enhance in-house cardiology
departments, the use of shared services and outside intellectual and financial
capital to develop invasive cardiology capability can significantly lower cost
and implementation time.
Other Allied Health Services
In addition to diagnostic services, the Company provides, on a temporary
basis, allied healthcare personnel including radiology technicians, physical
and occupational therapists and home healthcare professionals. Demand for such
temporary personnel arises from hiring freezes, the need to replace
vacationing or sick personnel and other short-term needs. The Company also has
an operating unit in the Federal District of Mexico City, which provides home
healthcare services to the expanding Mexican market for quality private
healthcare. These services are complementary to the Company's core business,
and provide the Company with opportunities to expand the services provided to
existing customers and to establish new client relationships. In the year
ended December 31, 1995, this portion of the Company's business generated
approximately $2.3 million in revenues, representing approximately 13.5% of
the Company's total revenues.
ACQUISITION STRATEGY
The Company has implemented an integrated growth strategy focused on
increasing revenues through acquisitions and internal growth within its core
geographic markets and adjoining territories, while continuing to achieve
profitability in existing and acquired operations through the implementation
of financial and operational controls. Generally, the Company seeks to acquire
established high-quality businesses in its geographical markets. In the
future, the Company may seek to acquire businesses which are substantially
larger than those that the Company has previously acquired. The Company
generally seeks to retain the operating management and sales personnel of each
acquired business while seeking to increase revenues through the addition of
complementary types of services and improving profitability through economies
of scale. The Company believes that management's industry experience and
operating systems make the Company an attractive acquiror, particularly for
those companies requiring access to capital and other resources.
Historically, the Company has utilized its Common Stock as consideration for
many acquisitions, so as to conserve cash to provide working capital for the
acquired businesses. In the future, the Company plans to continue to use
Common Stock as consideration for acquisitions, either alone or in combination
with cash, notes or other consideration. As of the date of this Prospectus,
the Company has an outstanding letter of intent respecting the proposed
acquisition of Cardiac Concepts, Inc. Other than such letter of intent, the
Company is not in negotiations with and has no agreements with respect to any
proposed acquisitions, and no assurance can be given that the Company will be
able to make acquisitions in the future. See "Risk Factors--Risks Inherent in
Growth Strategy."
In furtherance of its acquisition strategy, the Company has received from
Texas Commerce Bank a commitment letter for a credit facility (the "Credit
Facility") which would, subject to completion of the Offering, permit
borrowings of up to $20 million, including up to $17.5 million for
acquisitions (the "Acquisition Facility") and up to $2.5 million for working
capital (the "Working Capital Facility"). The Acquisition Facility would
terminate on June 30, 2001 and the Working Capital Facility would terminate on
June 30, 1998. Borrowings under the Credit Facility would be secured by
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiaries) and would bear interest at one of two variable
rates selected by the Company based upon (i) the reserve adjusted LIBOR rate
plus a margin ranging from 1.75% to 2.50%, or (ii) the greater of Texas
Commerce Bank's prime rate or the federal funds rate plus
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0.50%, plus a margin ranging from 0.25% to 1.00%. There can be no assurance
that the Company will enter into a definitive agreement with respect to the
proposed Credit Facility on these or any other terms.
CCI LETTER OF INTENT
The Company is party to a letter of intent with Cardiac Concepts, Inc.
("CCI"), which sets forth the terms and conditions of the proposed acquisition
of CCI by the Company. CCI is a Texas-based company providing cardiac imaging
and monitoring services. The terms of the letter of intent call for the
purchase of substantially all of the assets of CCI, subject to the assumption
of certain disclosed liabilities of CCI. In consideration for such
acquisition, the Company proposes to issue restricted shares of Common Stock
having an aggregate value of $150,000, valued based on the average reported
closing price of the Common Stock for a number of days prior to the date of
closing. The letter of intent also calls for the restructuring of certain
indebtedness of CCI owed to its affiliates, including the conversion of up to
$160,000 of such indebtedness into Common Stock valued in the manner described
herein. The letter of intent also contemplates the refinancing of CCI's
existing bank debt. The transaction is subject to numerous conditions
precedent, including the preparation of definitive documentation, completion
of due diligence, and obtaining certain third-party consents. The letter of
intent is non-binding, and there can be no assurance that the acquisition of
CCI will be consummated on these or any other terms.
SALES AND MARKETING
The Company conducts sales and marketing activities out of its Dallas
headquarters, and out of each of its seven divisional offices. The Company has
eight full-time employees primarily dedicated to sales and marketing
functions, under the overall supervision of a Senior Vice President. In
addition, two regional vice presidents and seven divisional managers devote
substantial portions of their time to customer relations and other marketing
functions. Substantially all of the sales and marketing employees have
clinical backgrounds, and each is knowledgeable with respect to the services
offered by the Company, so as to be able to promote and sell these services to
all different types and sizes of customers. All sales personnel are paid base
salaries, and certain of these personnel also receive a portion of their total
compensation in the form of commissions.
COMPETITION
Radiology and cardiology diagnostic services, as well as the provision of
allied healthcare professionals, are characterized by a high degree of
competition. This competition comes from a number of independent local
operators specializing in one or two clinical applications, and from a few
large diversified healthcare companies (primarily larger hospitals having the
resources and capability to provide shared diagnostic services to other
healthcare facilities) which provide these services as part of their overall
business. Although the Company believes that it has a competitive advantage
over most of the small operators (primarily because most of them do not
provide the full range of services offered by the Company, and do not have the
same volume of revenues to absorb necessary fixed overhead costs), the Company
may be vulnerable to competition from the larger healthcare companies, at
least one of which can be found in each of the Company's geographic markets,
and all of which are substantially larger and possess greater financial
resources than the Company. There can be no assurance that the Company will be
able to compete successfully in its markets.
SUPPLIERS
Although the Company has historically acquired most of its imaging and other
equipment through finance leases from Acuson Corporation and a small number of
other suppliers, the Company is not dependent upon any one supplier or group
of suppliers. While the Company has a preference for the equipment
manufactured by certain manufacturers, there are a number of manufacturers of
imaging equipment adequate for the Company's purposes, and an even greater
number of companies from whom such equipment can be leased. The Company
believes that alternate sources for its equipment and supply needs are readily
available at comparable costs, and that its relationships with its suppliers
are satisfactory.
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CUSTOMERS
In 1995, the Company rendered services and/or provided allied healthcare
professionals to 846 customers, consisting primarily of hospitals, clinics,
physicians' offices and other healthcare providers located in the Company's
geographic markets. Each of the Company's customers, irrespective of the
method by which they are served, has an agreement or contract specifying the
terms of service, including the nature of services, pricing, payment and other
material terms. The Company's agreements for in-house services typically have
durations of three to five years, and specify equipment and personnel
requirements, the scope and types of services to be provided, and the pricing
and payment structure.
In 1994 and 1995, no single customer of the Company accounted for more than
10% of the Company's total revenues, and the three largest customers of the
Company accounted in the aggregate for approximately 9% of the Company's
revenues in each of such years. In most cases, the hospital or healthcare
facility (which is the Company's customer) is the responsible payment party.
Third party payors accounted for only approximately 12% and 7% of the
Company's revenue in the years ended December 31, 1994 and December 31, 1995,
respectively. Although the Company is not substantially reliant upon third-
party payment mechanisms, many of the Company's customers are reliant on
third-party payment, and delays or difficulties in third-party payments could
adversely affect the receipt and timing of payments to the Company.
From 1991 to 1995, the Company's customer base increased from 323 (including
seven in-house agreements) to 846 (including 65 in-house agreements).
Customers in 1995 included 241 hospitals and 605 physicians' offices, clinics
and healthcare facilities in twelve states.
MANAGEMENT INFORMATION SYSTEMS
The Company has configured an information technology system that provides
real-time monitoring of services, procedures, and other business activities at
all of the Company's regional offices. This enables the Company to monitor
services, revenues and costs on a Company-wide basis. The Company has made
substantial investments in the development of this system, and all of the
Company's business offices are networked into the information technology
system and integrated with the Company's centralized processing system. This
system also contributes to the Company's sales and marketing efforts by
enabling the sales force to formulate realistic quotations and pricing
proposals to potential customers, and to provide management information
specific to existing customers. The Company believes that its information
technology system can support substantial growth without requiring significant
capital expenditures.
PATENTS OR TRADEMARKS
Although the Company relies upon sophisticated equipment, instrumentation
and technology, the Company does not own, license or otherwise rely upon any
patents or trademarks for the operation of its business. Other than corporate
names and the "TempTech Services" tradename for the Company's allied
healthcare services business, the Company does not own or utilize any
trademarks in its business.
GOVERNMENT REGULATION
Many aspects of the healthcare industry in the United States are presently
subject to extensive federal and state government regulation. Certain of these
laws and regulations are applicable to the Company's business. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with all applicable laws.
Federal Law
Federal law prohibits the offer, solicitation, payment or receipt of any
remuneration (direct or indirect, overt or covert, in cash or in kind) which
is intended to induce, or is in return for, the referral of patients for, or
the ordering of, items or services reimbursable by Medicare or Medicaid. The
law also prohibits remuneration
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intended to induce the purchasing of, or arranging for, or recommending the
purchase or order of any item, good, facility or service for which payment may
be made in whole or in part under those programs. Under this statute, known as
the "kickback law," an offense may be punished by criminal prosecution or by
excluding any of the parties to the transaction or arrangement from
participation in Medicare and Medicaid. The law is very broad and has been
interpreted to apply to otherwise legitimate investment interests if one
purpose of the offer of an opportunity to invest is to induce referrals from
the investors. Regulations implemented under the kickback law provide certain
"safe harbors" giving protection for certain categories of relationships.
Federal law also prohibits physicians from ordering or prescribing certain
designated healthcare services or items if the service or item is reimbursable
by Medicare or Medicaid and is provided by an entity with which the physician
has a financial relationship (including investment interests and compensation
arrangements). Because of the breadth of this law, known as the "Stark Law," a
number of exceptions are included in the statute. In addition, the Stark Law
does not restrict a physician from ordering an item or service not
reimbursable by Medicare or Medicaid, or an item or service that does not fall
within the categories designated in the law. An offense under the Stark Law is
punishable by an administrative fine and/or by exclusion from Medicare and
Medicaid. Further, payment for a service provided in violation of the Stark
Law may be denied or money paid may be recouped.
Many of the services that the Company performs are reimbursable by Medicare
or Medicaid, and are included in the Stark Law's list of designated healthcare
services. Therefore, the Company believes that the Stark Law applies to
certain of its business relationships, as does the federal kickback law. The
Company believes that it is in compliance with these laws.
Kickback Law
The breadth of the kickback law is such that virtually any financial
relationship between a practitioner and a healthcare provider, such as an
independent physiological laboratory, involving the offering of Medicare and
Medicaid services may trigger the application of that law. For example, if the
opportunity for a physician to provide interpretations pursuant to a personal
services agreement with the Company was conditioned upon an agreement that the
physician would refer his Medicare patients for diagnostic services to the
Company, the personal services agreement could be construed as an inducement
for the physician's referrals. However, the Company does not enter into any
professional services agreements for interpretation services with physicians
who refer to the Company for diagnostic testing. Further, when physicians
contract with the Company to provide diagnostic testing, excluding any
interpretation services, the Company often bills for the technical component
itself. In that case, nothing of value is exchanged between the referring
physician and the Company and the kickback law does not apply. In the
alternative, when the referring physicians purchase the diagnostic service
from the Company, the Company does not bill the Medicare or Medicaid programs
for the technical component. In these cases, the physicians are required to
disclose the amount charged by the Company for the technical component and the
physicians are reimbursed the amount charged or the Medicare RBRVS amount,
whichever is less. The Company believes that there is little, if any, risk
that its purchased diagnostic testing arrangements with physicians violate the
federal kickback law.
A substantial portion of the Company's business arrangements involve the
management and staffing of in-house diagnostic laboratories at hospitals. The
Company does not lease space from the hospitals with which it contracts and
does not bill any third party payors (including Medicare or Medicaid) or
individuals for the technical services provided at the hospitals'
laboratories. Therefore, the Company believes that the federal kickback law
does not apply to its contractual arrangements with hospitals to operate
diagnostic laboratories.
Stark Law
The Stark Law prohibits physicians from referring Medicare or Medicaid
patients to entities with which they have a financial relationship for the
provision of certain designated healthcare services. The services specified by
the Stark Law include ultrasound procedures which are provided by the Company
as the result of referrals from physicians who purchase the tests from the
Company. This relationship between the physician and the Company constitutes a
compensation relationship under the Stark Law. However, the Company believes
that
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its relationships with referring physicians qualify for the Stark Law's
exception for compensation relationships which involve payments made by
physicians for items or services at prices consistent with fair market value.
State Law
A number of states, including states in which the Company does business,
have laws and regulations similar to the federal kickback laws and Stark Law.
The Company believes that it is in compliance with all of such laws, although,
as is the case with federal law, there can be no assurance that changes in
such laws or the interpretation or enforcement of such laws will not have a
material effect on the Company.
The Company also operates in states that regulate and license independent
physiological laboratories (IPLs). In all states that currently have such
licensing requirements, the Company has received such licensure. Further, for
the last several years, the Health Care Financing Administration (HCFA) has
considered a federal requirement that all IPLs that provide services to
individuals covered under the Medicare or Medicaid programs be required to
obtain certification by HCFA. Currently, HCFA has not initiated the formal
rulemaking process for federal IPL certification, and the Company does not
anticipate that HCFA will require federal certification of IPLs in the near
future. However, in the event that HCFA will require federal certification of
IPLs in order to provide services to Medicare beneficiaries of Medicaid
recipients, the Company expects that it will meet the requirements to obtain
federal certification. However, the Company cannot guarantee with absolute
certainty that its IPLs will meet any future federal IPL certification
requirements. Failure to obtain federal certification could have a severe
adverse impact on the operations of the Company.
Potential National Healthcare Reform
Both the Clinton Administration and the Congress have periodically asserted
a need to overhaul or reform the nation's healthcare system. Such legislative
initiatives, if enacted, could impose pressures on the pricing structures
applicable to the Company's services. In particular, there is a possibility
that a significant portion of healthcare services will be rendered and
administered through "managed care" systems, which could have the effect of
forcing pricing concessions and reductions on the part of service providers
such as the Company. Moreover, healthcare reform could also entail a greater
analysis of each patient's need for diagnostic testing, with the aim of
reducing the total volume of testing and the overall cost of medical care. The
Company is unable to predict whether, when or to what extent any new laws or
regulations may be enacted, or existing laws or regulations may be modified,
any of which could have a material adverse effect on the Company's revenues,
operating margins and profitability.
ENVIRONMENTAL MATTERS
With the exception of the nuclear imaging services performed by the Company,
the Company's operations do not entail the handling, storage, use, transport
or disposal of any hazardous substances or hazardous materials within the
meaning of any environmental laws. The Company is not aware of any asbestos
abatement activity required with respect to any of its facilities, or any
underground storage tanks on any of the properties on which the Company's
facilities are located.
The Company's nuclear imaging services require the handling of radioactive
materials, either in the form of FDA-approved single-dose prepackaged
isotopes, or small lots of bulk materials which the Company mixes with other
materials to expand the half-life of the isotopes. As of the date of this
Prospectus, these nuclear imaging operations are conducted in the States of
Illinois, Indiana, Michigan and Louisiana. The State of Illinois requires a
separate permit for the handling of these radioactive materials, and Indiana,
Michigan and Louisiana are so-called "agreement states" which recognize
compliance with applicable guidelines of the federal Nuclear Regulatory
Commission. The Company believes that it holds all necessary permits required
by state and federal law, and that it is in compliance with all applicable
laws and regulations relating to the handling, storage, use, transport and
disposal of nuclear materials. Based on advice from its insurance carriers,
the Company believes that this limited handling of radioactive materials does
not warrant any special insurance.
24
<PAGE>
The Company has not experienced any environmental regulatory problems in the
past, and has not been subject to any fines, penalties or other liabilities
under any environmental laws or regulations. However, no assurance can be
given that future changes in such laws or regulations, or interpretations
thereof, or in the nature of the Company's operations, will not have a
material impact on the Company.
EMPLOYEES
As of March 31, 1996, the Company had 185 full-time employees and 154 part-
time employees, for a total of 339 employees. None of the Company's employees
are represented by any labor union or other collective bargaining unit. The
Company has not experienced any significant degree of employee turnover, and
the Company believes that its relations with its employees are satisfactory.
PROPERTIES
The Company maintains its headquarters in approximately 7,558 square feet of
leased office space in Dallas, Texas. Base rental at that facility is $12 per
square foot per year, and the lease expires in January 1999. The Company also
maintains regional offices at seven leased locations, ranging in size from
approximately 1,200 square feet to approximately 3,242 square feet, and at
rentals from $4 to $15 per square foot per year.
The Company believes that its existing premises will provide the Company
with adequate space for its current operations for the foreseeable future.
LITIGATION
The Company is subject to claims and suits in the normal course of its
business, for which the Company believes that it has adequate insurance. There
is no material litigation currently pending against the Company.
25
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Max W. Batzer (1)(2)............... 52 Chairman of the Board of Directors and
Chief Executive Officer
Brad A. Hummel..................... 39 President, Chief Operating Officer,
Chief Financial Officer and Director
James R. Angelica.................. 48 Senior Vice President and Director
Bonnie G. Lankford................. 40 Senior Vice President--Operations
Don W. Caughron.................... 40 Senior Vice President--Finance
Carol J. Gannon.................... 36 Senior Vice President--Clinical Services
Thomas M. Sestak (1)(2)............ 53 Director
Bo W. Lycke (1)(2)................. 50 Director
</TABLE>
- --------
(1) Member of the compensation committee
(2) Member of the audit committee
The following is a summary of the business experience of each executive
officer and director.
Max W. Batzer has been Chairman of the Board and Chief Executive Officer of
the Company since 1987, and a Director of the Company since its inception in
1983. From 1981 to 1991, Mr. Batzer was also President of General Hide & Skin
Corporation, a worldwide commodity trading organization headquartered in New
York City. In addition, from 1981 to 1988, Mr. Batzer was a director and
executive committee member of Simmons Airlines, Inc. (which was a publicly
traded company that was purchased by and is now a subsidiary of American
Airlines). Mr. Batzer holds a B.S.E. degree from The Wharton School at the
University of Pennsylvania, and an M.B.A. degree from the University of
Arizona.
Brad A. Hummel has been President and Chief Operating Officer of the Company
since January 1987, and Chief Financial Officer of the Company since February
1994, and was employed by the Company in other capacities from 1984 to 1986.
From 1981 to 1984, Mr. Hummel was an associate with Covert, Crispin and Murray
(a Washington, D.C. and London-based management consulting firm), and from
1979 to 1981, Mr. Hummel served as an executive assistant to United States
Senator John C. Culver. Mr. Hummel holds a bachelor's degree (with honors)
from the University of Iowa.
James R. Angelica was appointed a Director and Vice President-Sales of the
Company in September 1994, upon the consummation of the Company's acquisition
of Mobile Diagnostic Imaging, Inc. ("MDI"), and was promoted to Senior Vice
President in January 1996. From June 1991 through September 1994, Mr. Angelica
was the President and Chief Operating Officer of MDI. From June 1990 through
June 1991, Mr. Angelica was an Executive Vice President of Cost Management
Technologies, a third-party insurance claims administrator headquartered in
St. Louis. From May 1981 through January 1990, Mr. Angelica was an Executive
Vice President of Group Health Plan, a health insurance administrator
headquartered in St. Louis. Mr. Angelica holds a bachelor's degree in business
administration from Pacific University.
Bonnie G. Lankford has been Senior Vice President-Operations of the Company
since January 1996, and has been employed in other management capacities by
the Company at all times since 1985. Ms. Lankford has received a certification
in echocardiography from Grossmont College, and is a registered diagnostic
medical sonographer in both cardiology and obstetrics/gynecology.
Don W. Caughron has been Senior Vice President-Finance of the Company since
January 1996, and has been employed in other financial capacities with the
Company at all times since April 1994. From May 1993 to
26
<PAGE>
April 1994, Mr. Caughron was a self-employed accountant. From 1990 to 1993,
Mr. Caughron was Corporate Controller for Actuarial Computer Technology, Inc.,
a privately held Dallas-based actuarial computer software company. Mr.
Caughron is a Certified Public Accountant in the State of Texas, and a member
of the Texas Society of CPA's as well as the American Institute of CPA's. Mr.
Caughron holds a B.B.A. from Texas Tech University.
Carol J. Gannon was appointed Senior Vice President of Clinical Services in
January 1996, following the consummation of the Company's acquisition of
Advanced Diagnostic Imaging, Inc. ("ADI"). Ms. Gannon was the President and
Chief Operating Officer of ADI from April 1990 to December 1995. She is a
registered nurse with additional ultrasound registries in vascular technology
and cardiac sonography. From 1991 to 1995, she served on the Board of
Directors and the Executive Committee of the Society of Vascular Technology.
Ms. Gannon holds an Associate Degree in Nursing from Rochester (Minnesota)
Community College.
Thomas M. Sestak has been a Director of the Company since its inception in
1983, and was the Secretary of the Company from November 1987 to March 1993.
Mr. Sestak has also been employed since 1972 as the Chairman and Chief
Executive Officer of Standard Construction of San Francisco, Inc. Mr. Sestak
holds a B.S.E. degree from The Wharton School at the University of
Pennsylvania.
Bo W. Lycke was appointed a Director of the Company in April 1993. Since
February 1991, Mr. Lycke has been employed as Chairman of the Board and Chief
Executive Officer of American Medical Finance, Inc. and its affiliate,
National Financial Corporation, each of which is engaged in providing
financial services to various medical businesses. Mr. Lycke holds an M.B.A.
degree from the University of Goteborg, Sweden.
The Board of Directors of the Company is divided into three classes of an
equal (or as nearly equal as possible) number of Directors, with each Director
serving for a term of three years, and with elections for only one class of
directors to be held in each year. Mr. Hummel's seat next comes up for
election on or about November 15, 1996, Messrs. Batzer's and Angelica's seats
next come up for election on or about November 15, 1997, and Messrs. Sestak's
and Lycke's seats next come up for election on or about November 15, 1998.
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company to its Chief Executive Officer and each executive officer whose salary
and bonus exceeded $100,000 (the "Named Officers") during the past three
calendar years:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------------
RESTRICTED
OTHER STOCK OPTIONS/
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) AWARDS (#) SAR'S (#)
- ----------------- ---- ---------- --------- ------------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Max W. Batzer........... 1995 231,000 7,500 -- -- 75,000
Chairman and CEO 1994 173,666 -- -- -- 128,500
1993 175,354 -- -- -- 106,727
Brad A. Hummel.......... 1995 173,133 7,500 -- -- 30,000
President, COO and CFO 1994 127,750 -- -- -- 103,500
1993 115,654 -- -- -- 106,727
James R. Angelica (2)... 1995 89,824 -- 27,500 -- 27,000
Senior Vice President 1994 21,644 -- -- -- --
1993 -- -- -- -- --
</TABLE>
- --------
(1) Does not include benefits or perquisites in an aggregate amount, as to
each person, which is less than the lesser of $50,000 or 10% of the total
salary and bonus for the subject year.
(2) Represents compensation from commencement of Mr. Angelica's employment on
September 6, 1994.
A table indicating the stock options granted to executive officers and
directors is included under the heading "Stock Option Plans" below.
27
<PAGE>
The Company does not pay directors' fees. Rather, the Compensation Committee
of the Company's Board of Directors is authorized to consider the grant of
non-qualified stock options to members of the Board, consistent with the
Company's philosophy of incentivizing directors to foster, contribute to and
participate in the Company's growth.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Max W. Batzer, pursuant to
which Mr. Batzer is to serve as Chairman of the Board and Chief Executive
Officer of the Company through December 31, 2000. The employment agreement (as
amended) provides for a minimum base salary of $320,000 per annum, and
benefits comparable to those provided to other Company employees. Although Mr.
Batzer presently devotes his full business time to the Company, his employment
agreement permits him to engage in other business activities that are not
competitive with the business of the Company and that do not materially
interfere with his performance of his duties and responsibilities to the
Company. Mr. Batzer has not engaged in any outside business activities for the
past four years, and does not, as of the date of this Prospectus, have any
present intention of undertaking any outside business activities.
The Company has an employment agreement with Brad A. Hummel, pursuant to
which Mr. Hummel is to serve as President and Chief Operating Officer of the
Company through December 31, 2000. In February 1994, Mr. Hummel also assumed
the duties of Chief Financial Officer of the Company, upon the resignation of
the prior CFO. The employment agreement (as amended) provides for a minimum
base salary of $240,000 per annum, and benefits comparable to those provided
to other Company employees.
Each of Mr. Batzer's and Mr. Hummel's employment agreements grants to the
subject employee the right to elect, within one year after any change in
control of the Company, to terminate his employment on not less than 90 days'
prior written notice, and thereafter receive his salary and benefits for a
period of 24 months or to the scheduled expiration date of such employment
agreement (whichever is later). Such salary continuation is also applicable in
the event that the Company terminates such individual's employment (other than
"for cause") within one year after any change in control of the Company. For
purposes of such agreements, a "change in control" is deemed to occur at such
time as 20% of the total outstanding votes eligible to vote for directors of
the Company are owned (legally or beneficially) by any person (or group of
persons acting in concert) who was not a stockholder of the Company as of
March 13, 1996. Mr. Batzer and Mr. Hummel have waived this provision as
respects the sale of the Common Stock to the Underwriters in this Offering.
The Company also has employment agreements with James R. Angelica, Bonnie G.
Lankford and Carol J. Gannon. Mr. Angelica's employment agreement calls for
him to serve as a Senior Vice President of the Company through August 31,
1997, at a base salary of $85,000 per annum, and benefits comparable to those
provided to other Company employees. Ms. Lankford's employment agreement (as
amended) calls for her to serve as Senior Vice President-Operations of the
Company through December 31, 1996, at a minimum base salary of $95,000 per
annum, and benefits comparable to those provided to other Company employees.
Ms. Gannon's employment agreement calls for her to serve as Senior Vice
President-Clinical Services of the Company through December 31, 1998, and
provides for a fixed annual salary of $85,000 per annum, and benefits
comparable to those provided to other Company employees.
Any increases in the annual rates of compensation of Messrs. Batzer, Hummel
and Angelica under their employment agreements must be approved by a majority
of both the disinterested directors and the Compensation Committee of the
Company's Board of Directors.
STOCK OPTION PLANS
On April 15, 1992, the stockholders of the Company approved the Company's
1992 Stock Option Plan, as previously adopted by the Company's Board of
Directors (the "1992 Plan"), pursuant to which officers, directors, and/or key
employees and/or consultants of the Company can receive incentive stock
options and non-qualified stock options to purchase up to an aggregate of
903,509 shares of Common Stock (of which no more
28
<PAGE>
than 180,702 shares may be pursuant to qualified incentive stock options, and
no more than 722,807 shares may be pursuant to non-qualified stock options).
There are currently outstanding, under the 1992 Plan, stock options for an
aggregate of 877,984 shares of Common Stock at exercise prices ranging from
$0.93 to $2.62 per share, and expiring at various times from January 1998
through April 2003. The weighted average exercise price under such options is
$1.38 per share. The exercise prices applicable under such outstanding stock
options represent not less than 100% of the fair market value of the
underlying Common Stock as of the date that such options were granted, as
determined from the closing bid price or last sale price most recently quoted
in the over-the-counter "pink sheets" or on Nasdaq prior to the date that such
options were granted.
With respect to incentive stock options, the 1992 Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock),
and requires that all such options have an expiration date not later than that
date which is one day before the tenth anniversary of the date of the grant of
such options (or the fifth anniversary of the date of grant in the case of 10%
stockholders). However, with certain limited exceptions, in the event that the
option holder ceases to be associated with the Company, or engages in or is
involved with any business similar to that of the Company, such option
holder's incentive options immediately terminate. Pursuant to the 1992 Plan,
the aggregate fair market value, determined as of the date(s) of grant, for
which incentive stock options are first exercisable by an option holder during
any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the 1992 Plan requires that the
exercise price of all such options be at least equal to 100% of the fair
market value of the Common Stock on the date such option is granted, provided
that non-qualified options may be issued at a lower exercise price (but in no
event less than 85% of fair market value) if the net pre-tax income of the
Company in the full fiscal year immediately preceding the date of the grant of
such option (the "Prior Year") exceeded 125% of the mean annual average net
pre-tax income of the Company for the three fiscal years immediately preceding
such Prior Year. Non-qualified options must have an expiration date not later
than that date which is the day before the eighth anniversary of the date of
the grant of the subject option. However, with certain limited exceptions, in
the event that the option holder ceases to be associated with the Company, or
engages in or becomes involved with any business similar to that of the
Company, such option holder's non-qualified options immediately terminate.
The 1992 Plan further provides that non-qualified options may (but need not)
include a provision that, in the event of any change in control and management
of the Company or any sale of the business of the Company, except to the
extent that the subject option holder affirmatively elects, during a limited
period of time following such event, to permanently revoke and terminate the
subject non-qualified option (in whole or in part) and/or to reaffirm all or
any portion of such non-qualified option without giving effect to the
reduction in exercise price herein described, then the otherwise applicable
exercise price in respect of such option may thereafter be reduced (but not by
more than 50%) in the event that, and at such time(s) as, the subject option
holder thereafter exercises such option (or the non-revoked and non-reaffirmed
portion thereof, as the case may be). All but 82,000 of the 698,935
outstanding non-qualified options under the 1992 Plan contain such provision,
and this could have the effect of delaying or hindering potential change in
control or sale transactions, and/or providing additional compensation or
consideration to the subject option holders in connection with any such
transaction that may be consummated.
In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Nonqualified Stock Option Plan (the "1995 Non-
Qualified Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive non-qualified stock options to
purchase up to an aggregate of 500,000 shares of Common Stock. The exercise
price, expiration date and other terms of any options granted under the 1995
Non-Qualified Plan are substantially similar to the requirements applicable to
non-qualified options under the 1992 Plan. There are currently outstanding,
under the 1995 Non-Qualified Plan, stock options for an aggregate of
29
<PAGE>
418,500 shares of Common Stock at exercise prices ranging from $1.93 to $6.25
per share, and expiring at various times from December 2000 through January
2004. The weighted average exercise price under such options is $3.93 per
share. Of the 418,500 awarded options, 60,000 (exercisable at $5.25 per share)
are subject to certain contingencies relating to Company earnings, and 228,000
other options contain price reduction provisions based on a change in control
similar to those described in the immediately preceding paragraph.
The Company also maintains a 1995 Incentive Stock Option Plan ("the 1995
Incentive Plan"), as approved by the Company's stockholders on November 22,
1995, pursuant to which key employees of the Company can receive incentive
stock options to purchase up to an aggregate of 500,000 shares of Common
Stock. The requirements of the 1995 Incentive Plan are substantially identical
to the provisions of the 1992 Plan which are specifically applicable to
incentive stock options, except that the 1995 Incentive Plan will expire on
August 31, 2005 (after which date no further options may be granted under the
1995 Incentive Plan). To the date of this Prospectus, no options have been
granted under the 1995 Incentive Plan.
The following table lists information on stock options granted to each of
the Company's Named Officers and directors.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
GRANTED TO EXERCISE
TYPE OF NUMBER EMPLOYEES IN PRICE
NAME OPTION OF SHARES FISCAL YEAR PER SHARE EXPIRATION DATE
- ---- ------------- --------- ------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Max W. Batzer........... Incentive 5,082 1.6% $2.21 January 13, 1998
Non-qualified 101,645 32.5% $2.21 January 13, 2001
Incentive 3,500 1.2% $0.94 April 3, 1999
Non-qualified 75,000 24.8% $0.94 April 3, 2002
Non-qualified 50,000 16.6% $1.69 August 8, 2002
Incentive 5,000 1.7% $1.94 April 4, 2000
Non-qualified 50,000 16.7% $1.94 April 4, 2003
Non-qualified 20,000 6.7% $4.25 December 4, 2003
Brad A. Hummel.......... Incentive 5,082 1.6% $2.21 January 13, 1998
Non-qualified 101,645 32.5% $2.21 January 13, 2001
Incentive 3,500 1.2% $0.94 April 3, 1999
Non-qualified 50,000 16.6% $0.94 April 3, 2002
Non-qualified 50,000 16.6% $1.69 August 8, 2002
Non-qualified 30,000 10.0% $4.25 December 4, 2003
Thomas A. Sestak........ Non-qualified 101,645 N/A $2.21 January 13, 2001
Non-qualified 5,000 N/A $0.94 April 3, 2002
Non-qualified 50,000 N/A $1.69 August 8, 2002
Non-qualified 10,000 N/A $1.94 April 4, 2003
Non-qualified 15,000 N/A $4.25 December 4, 2003
Bo W. Lycke............. Non-qualified 2,000 N/A $0.94 April 3, 2002
Non-qualified 50,000 N/A $1.69 August 8, 2002
Non-qualified 10,000 N/A $1.94 April 4, 2003
Non-qualified 15,000 N/A $4.25 December 4, 2003
James R. Angelica....... Incentive 2,000 0.7% $1.94 April 4, 2000
Non-qualified 10,000 3.3% $1.94 April 4, 2003
Non-qualified 15,000 5.0% $4.25 December 4, 2003
</TABLE>
To the date of this Prospectus, a total of 1,500 incentive stock options
granted under the 1992 Plan have been exercised (none by executive officers or
directors) and no non-qualified stock options granted under the 1992 Plan or
the 1995 Non-Qualified Plan have been exercised.
30
<PAGE>
The following table sets forth all stock option exercises by Named Officers
and directors of the Company during the fiscal year ended December 31, 1995,
and the "value" (i.e., the amount by which the fair market value of the
underlying Common Stock exceeded the option exercise price) as of December 31,
1995 of all unexercised stock options then held by Named Officers and
directors of the Company. All of such stock options were then and now are
currently exercisable.
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON OPTIONS AT IN-THE-MONEY
NAME EXERCISE VALUE REALIZED FISCAL YEAR END OPTIONS AT FISCAL YEAR END
- ---- ----------- -------------- --------------- --------------------------
<S> <C> <C> <C> <C>
Max W. Batzer........... -- -- 310,227 $1,042,835
Brad A. Hummel.......... -- -- 240,227 $ 763,035
Thomas M. Sestak........ -- -- 181,645 $ 556,651
Bo W. Lycke............. -- -- 77,000 $ 234,720
James R. Angelica....... -- -- 27,000 $ 54,720
</TABLE>
CERTAIN TRANSACTIONS
In October 1989, Max W. Batzer, Thomas M. Sestak and Brad A. Hummel borrowed
$66,000, $10,000 and $33,000, respectively, from the Company. The proceeds of
these loans were utilized by Messrs. Batzer, Sestak and Hummel to purchase
shares of Common Stock. The loans were amended and restated as of January 1,
1993, such that the loans now bear simple interest at a certain bank's prime
rate (adjusted annually for purposes of the loans), with payment of all
principal and accrued interest due on December 31, 1997. Mr. Sestak's loan was
repaid in full in October 1993. Mr. Batzer's and Mr. Hummel's loans are non-
recourse, and are secured solely by shares of Common Stock having an aggregate
market value equal to 50% of the outstanding loan obligations (provided that
the number of shares pledged as collateral will never exceed the number of
shares (185,265 in the case of Mr. Batzer, and 92,633 in the case of Mr.
Hummel) purchased with the proceeds of the loans. The Company has retained a
right of first refusal in connection with any proposed sale of the pledged
shares while they remain subject to such pledge, although the Company is
prohibited, under its loan agreement with TCB, to redeem or purchase any
shares of Common Stock without TCB's prior consent.
In April 1996, the Company effected the private placement of $1,000,000 in
gross amount of units of its securities, consisting of an aggregate of
$1,000,000 in principal amount of Bridge Notes and five-year warrants (the
"Bridge Warrants") to purchase an aggregate of 50,000 shares of Common Stock
at an exercise price of $6.25 per share. An aggregate of $50,000 of Bridge
Notes and 2,500 Bridge Warrants were purchased by James R. Angelica, $100,000
of Bridge Notes and 5,000 Bridge Warrants were purchased by Thomas M. Sestak,
and $50,000 of Bridge Notes and 2,500 Bridge Warrants were purchase by Carol
J. Gannon. See "Description of Securities--Warrants" and "--Bridge Notes."
31
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of May 1, 1996, regarding the
beneficial ownership of Common Stock by (i) those persons known to the Company
to be the beneficial owners of more than 5% of the outstanding shares of
Common Stock, (ii) each of the Company's directors and executive officers,
(iii) all directors and executive officers as a group, and (iv) the Selling
Stockholders.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF BENEFICIAL
NATURE OF SHARES BENEFICIAL OWNERSHIP
BENEFICIAL BEING OWNERSHIP ------------------------------
NAME OF BENEFICIAL OWNER (1) OWNERSHIP OFFERED AFTER OFFERING BEFORE OFFERING AFTER OFFERING
- ---------------------------- ---------- ------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Max W. Batzer (2)............... 666,395 175,000 491,395 12.4% 6.2%
Thomas M. Sestak (3)............ 464,624 129,234 335,390 8.9% 4.3%
Brad A. Hummel (4).............. 312,538 66,000 246,538 5.9% 3.2%
Bo W. Lycke (5)................. 78,000 -- 78,000 1.5% 1.0%
James R. Angelica (6)........... 456,552 -- 456,552 8.9% 6.0%
Carol J. Gannon (7)............. 242,500 42,000 200,500 4.8% 2.7%
Don C. Caughron (8)............. 30,000 -- 30,000 * *
Bonnie G. Lankford (9).......... 91,153 3,242 87,911 1.8% 1.1%
Ronald P. Koepke................ 54,266 10,853 43,413 1.1% *
William Harrison................ 6,030 1,206 4,824 * *
Robert T. Byrns (10)............ 25,060 7,548 17,512 * *
Norman L. Davis and
Cheryl M. Davis, Joint
Tenants (11)................... 14,903 4,090 10,813 * *
The F&M Chance Family Trust
(Franklin S. Chance or Melba G.
Chance, Trustees).............. 33,158 5,000 28,158 * *
Linda Kaufman................... 50,800 16,104 34,696 1.0% *
Ellen Silverman................. 34,400 10,905 23,495 * *
Frederick A. Arnstein, Jr.,
Trustee f/b/o Frederick
Arnstein, Jr. (12)............. 3,940 1,083 2,857 * *
Robert Brinkman (12)............ 3,940 1,083 2,857 * *
Rexford Caruthers, Jr. (12)..... 3,940 1,083 2,857 * *
Jitendra K. Gupta (13).......... 912 251 661 * *
Rene S. Kincy (14).............. 10,984 1,919 9,065 * *
Michael T. Conklin and
Mary Susan Backer-Conklin (15). 1,258 346 912 * *
John M. Samet and Elizabeth
Schnabel Samet (16)............ 5,745 1,579 4,166 * *
Wenzel G. Vas (17).............. 7,729 2,124 5,605 * *
Aden Hillsman and Rita J.
Hillsman (18).................. 38,404 10,555 27,849 * *
Nancy W. Pompian and Stuart D.
Pompian (19)................... 16,802 3,518 13,284 * *
Wayne S. Schmidt and Margaret J.
Schmidt (20)................... 19,202 5,277 13,925 * *
All directors and executive
officers as a group (eight
persons)(2)(3)(4)(5)(6)(7)(8)(9) 2,341,762 415,476 1,926,286 38.5% 22.5%
</TABLE>
- --------
* less than 1%
(1) Addresses for Messrs. Batzer, Hummel, Lycke and Caughron, and for Ms.
Gannon and Ms. Lankford, are 2777 Stemmons Freeway, Suite 1525, Dallas,
Texas 75207; address for Mr. Sestak is 1226 Ninth Avenue, San Francisco,
California 94122; and address for Mr. Angelica is 9717 Landmark Parkway
Drive, St. Louis, Missouri 63127.
(2) Includes 310,227 shares which are subject to currently exercisable stock
options.
(3) Includes 452 shares held by Mr. Sestak as custodian for his minor
children, 181,645 shares which are subject to currently exercisable stock
options, and 5,000 shares which are subject to Bridge Warrants.
(4) Includes 240,227 shares which are subject to currently exercisable stock
options.
(5) Includes 77,000 shares which are subject to currently exercisable stock
options.
(6) All 370,252 outstanding shares are held jointly by Mr. Angelica and his
spouse, and total beneficial ownership includes 56,800 shares which are
subject to currently exercisable warrants held by Mr. Angelica and his
spouse, 27,000 shares which are subject to currently exercisable stock
options held by Mr. Angelica individually, and 2,500 shares which are
subject to Bridge Warrants held by Mr. Angelica individually. Mr. and
Mrs. Angelica have granted to Max W. Batzer a proxy, expiring September
5, 1997, to vote 370,252 shares owned by Mr. and Mrs. Angelica (a) as to
the election of directors, in such manner as Mr. Batzer may determine in
his sole discretion, and (b) as to all other matters, in the same manner
as the greatest plurality of votes otherwise cast or given by holders of
Common Stock with respect to the particular matter under consideration.
(7) Includes 2,500 shares which are subject to Bridge Warrants.
(8) Consists of 30,000 shares which are subject to currently exercisable
stock options.
32
<PAGE>
(9) Includes 87,911 shares which are subject to currently exercisable stock
options.
(10) Includes 1,250 shares which are subject to currently exercisable stock
options.
(11) Includes 2,000 shares which are subject to currently exercisable stock
options in the name of Mr. Davis individually.
(12) Includes 524 shares which are subject to currently exercisable warrants.
(13) Includes 121 shares which are subject to currently exercisable warrants.
(14) Includes 3,929 shares which are subject to currently exercisable
warrants, and 1,000 shares which are subject to currently exercisable
stock options.
(15) Includes 167 shares which are subject to currently exercisable warrants.
(16) Includes 764 shares which are subject to currently exercisable warrants.
(17) Includes 1,028 shares which are subject to currently exercisable
warrants.
(18) Includes 5,108 shares which are subject to currently exercisable
warrants. Mr. and Mrs. Hillsman have granted to Max W. Batzer a proxy
respecting 33,296 shares, on terms identical to the proxy granted by Mr.
and Mrs. Angelica and described in footnote (6) above.
(19) Includes 1,703 shares which are subject to currently exercisable
warrants, and 4,000 shares which are subject to currently exercisable
warrants in the name of Mr. Pompian individually.
(20) Includes 2,554 shares which are subject to currently exercisable
warrants. Mr. and Mrs. Schmidt have granted to Max W. Batzer a proxy
respecting 16,648 shares, on terms identical to the proxy granted by Mr.
and Mrs. Angelica and described in footnote (6) above.
Except for Messrs. Batzer, Sestak, Hummel, Lycke and Caughron, and Ms.
Gannon and Ms. Lankford, none of the listed persons has had any position,
office or other material relationship with the Company or any predecessor in
the past three years. See "Management."
33
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of (i) 15,000,000 shares of
Common Stock, par value $.001 per share, and (ii) 3,000,000 shares of
Preferred Stock, par value $.001 per share. As of May 1, 1996, an aggregate of
5,058,302 shares of Common Stock was outstanding. No shares of Preferred Stock
have been issued and are currently outstanding.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 3,000,000 shares of
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and
dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of
the shares constituting any series, without any further vote or action by the
shareholders. The issuance of Preferred Stock by the Board of Directors could
affect the rights of the holders of Common Stock. For example, such issuance
could result in a class of securities outstanding that would have preferences
with respect to voting rights and dividends, and in liquidation, over the
Common Stock, and could (upon conversion or otherwise) enjoy all of the rights
appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control
of the Company through merger, tender offer, proxy contest or otherwise by
making such attempts more difficult to achieve or more costly. The Board of
Directors may issue the Preferred Stock with voting and conversion rights that
could adversely affect the voting power of the holders of Common Stock. There
are no agreements or understandings for the issuance of Preferred Stock and
the Board of Directors has no present intention to issue Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of the dissolution, liquidation or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of all liabilities of the Company. All
outstanding shares of Common Stock are fully paid and nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire
or subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right
to purchase additional shares, and as a result, their percentage equity
interest in the Company would be reduced.
Pursuant to the Company's By-Laws, except for any matters which, pursuant to
the Delaware General Corporation Law ("Delaware Law"), require a greater
percentage vote for approval, the holders of one-third of the outstanding
Common Stock, if present in person or by proxy, are sufficient to constitute a
quorum for the transaction of business at meetings of the Company's
stockholders. Holders of shares of Common Stock are entitled to one vote per
share on all matters submitted to the vote of Company stockholders. Except as
to any matters which, pursuant to Delaware Law, require a greater percentage
vote for approval, the affirmative vote of the holders of a majority of the
Common Stock present in person or by proxy at any meeting (provided a quorum
as aforesaid is present thereat) is sufficient to authorize, affirm or ratify
any act or action, including the election of directors.
34
<PAGE>
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the Directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of Common
Stock would not be able to elect any Directors. The Board is empowered to fill
any vacancies on the Board created by the resignation, death or removal of
Directors.
In addition to voting at duly called meetings at which a quorum is present
in person or by proxy, Delaware Law and the Company's By-Laws provide that
stockholders may take action without the holding of a meeting by written
consent or consents signed by the holders of a majority of the outstanding
shares of the capital stock of the Company entitled to vote thereon. Prompt
notice of the taking of any action without a meeting by less than unanimous
consent of the stockholders will be given to those stockholders who do not
consent in writing to the action. The purposes of this provision are to
facilitate action by stockholders and to reduce the corporate expense
associated with annual and special meetings of stockholders. Pursuant to the
rules and regulations of the Commission, if stockholder action is taken by
written consent, the Company will be required to send to each stockholder
entitled to vote on the matter acted on, but whose consent was not solicited,
an information statement containing information substantially similar to that
which would have been contained in a proxy statement.
WARRANTS
Public Warrants
There are currently issued and outstanding warrants issued in connection
with the Company's initial public offering consummated in 1993 (the "Public
Warrants"), entitling the holders to purchase an aggregate of 1,375,000 shares
of Common Stock, subject to adjustment in certain circumstances. The following
is a brief summary of certain provisions of the Public Warrants.
Exercise Price and Terms. Each Public Warrant entitles the holder thereof
to purchase, at any time through June 22, 1998, one share of Common Stock at a
price of $6.25 per share, subject to adjustment in accordance with the anti-
dilution and other provisions referred to below. The Public Warrants may be
exercised at any time in whole or in part at the applicable exercise price
until the date of expiration. No fractional shares will be issued upon the
exercise of the Public Warrants.
The Company has the right to call the Public Warrants for redemption at
$0.05 per Public Warrant on 30 days' written notice if either (i) the prior
written consent of H.J. Meyers & Co., Inc. and Rodman & Renshaw, Inc. is
obtained, or (ii) the average closing bid price of the Common Stock, as
reported on Nasdaq, equals or exceeds $9.00 per share for 20 consecutive
trading days ending within 15 days of the date of the notice of redemption. In
the event the Company exercises the right to redeem the Public Warrants, such
Public Warrants will be exercisable until the close of business on the date
for redemption fixed in such notice. If any Public Warrant called for
redemption is not exercised by such time, it will cease to be exercisable and
the holder will be entitled only to the redemption price.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Public Warrants are subject to adjustment
upon the occurrence of certain events, including stock dividends, stock
splits, combinations or reclassification of the Common Stock, or sale by the
Company of shares of Common Stock (or other securities convertible into or
exercisable for Common Stock) at a price per share or share equivalent below
the lesser of the then-applicable exercise price of the Public Warrants or the
then-current market price of the Common Stock. Additionally, an adjustment
would be made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation, or
sale of all or substantially all of the assets of the Company, in order to
enable Public Warrant holders to acquire
35
<PAGE>
the kind and number of shares of stock or other securities or property
receivable in such event by a holder of that number of shares of Common Stock
that would have been issued upon exercise of the Public Warrant immediately
prior to such event. No adjustments will be made until the cumulative
adjustments in the exercise price per share amount to $0.05 or more. No
adjustment to the exercise price of the shares subject to the Public Warrants
will be made for dividends (other than stock dividends), if any, paid on the
Common Stock or for securities issued pursuant to the Company's stock option
plans or other employee benefit plans of the Company, or upon exercise of the
Public Warrants, the Underwriter Warrants or any other options or warrants
that were outstanding on June 22, 1993.
Underwriter Warrants
There are currently issued and outstanding Underwriter Warrants issued in
connection with the Company's initial public offering ("Underwriter
Warrants"), entitling the holders to purchase an aggregate of 156,646 shares
of Common Stock and 156,646 Public Warrants, subject to adjustment in certain
circumstances. The following is a brief summary of certain provisions of the
Underwriter Warrants.
Exercise Price and Terms. Each Underwriter Warrant entitles the holder
thereof to purchase, at any time through June 22, 1998, one unit consisting of
one share of Common Stock and one Public Warrant at a price of $5.53 per unit,
subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. The Underwriter Warrants may be exercised at any
time in whole or in part at the applicable exercise price until the date of
expiration. No fractional shares will be issued upon the exercise of the
Underwriter Warrants. The Public Warrants issuable upon exercise of the
Underwriter Warrants are substantially identical to the outstanding Public
Warrants, except that the Company does not have the right to call such Public
Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon exercise of the Underwriter Warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of the Common Stock or sale by
the Company of shares of Common Stock (or other securities convertible into or
exercisable for Common Stock) at a price per share or share equivalent below
the greater of the then-applicable exercise price of the Underwriter Warrants
or the then-current market price of the Common Stock. The adjustment
provisions of the Underwriter Warrants are otherwise substantially equivalent
to the adjustment provisions for the Public Warrants, as described immediately
above.
Bridge Warrants
As part of the Company's April 1996 private placement, the Company issued
Bridge Warrants entitling the holders thereof to purchase, at any time through
April 15, 2001, up to 50,000 shares of Common Stock at an exercise price of
$6.25 per share, subject to adjustment upon the occurrence of any stock
dividends, stock splits, combinations of shares or reclassification of the
Common Stock, or upon any consolidation or merger of the Company with or into
another corporation. The Company has the right to call the Bridge Warrants for
redemption at $0.01 per Bridge Warrant on 30 days' written notice if the
average market price of the Common Stock equals or exceeds $9.00 per share
(subject to adjustment in respect of the aforedescribed events) for any 20
trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption.
Bank Warrants
In conjunction with the Company's additional $1,000,000 loan from Texas
Commerce Bank in April 1996, the Company issued to Texas Commerce Bank
warrants (the "Bank Warrants") entitling the holders thereof to purchase up to
50,000 shares of Common Stock. The exercise price, adjustment provisions, call
provisions and other terms and conditions of the Bank Warrants are identical
to the terms and conditions of the Bridge Warrants.
36
<PAGE>
BRIDGE NOTES
In April 1996, the Company issued $1,000,000 principal amount of
subordinated Bridge Notes due on the earlier of the completion of any public
equity offering which results in the Company receiving gross proceeds of $15
million or more, or April 15, 2001. The Bridge Notes bear interest at the rate
of 10.0% per annum through March 31, 1997, and 12.0% per annum thereafter. The
Bridge Notes will be repaid in full out of the net proceeds of this Offering.
See "Use of Proceeds."
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes, and that the directors serve
staggered terms of three years each. See "Management." The purpose of the
classified board is to promote conditions of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors, by insuring that in the ordinary course, at least two-
thirds of the directors will at all times have at least one year's experience
as directors. However, the classified board structure may prevent stockholders
who do not approve of the policies of the Board of Directors from removing a
majority of the Board of Directors at a single annual meeting, because it will
normally take two annual meetings of stockholders to elect a majority of the
Board. Directors of the Company may be removed from office by stockholders
prior to the expiration of their terms only for cause.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware Law prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the
date of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date, the business combination is approved by the board of
directors and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the stockholder. An "interested stockholder" is a
person, who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
TRANSFER AND WARRANT AGENT
The transfer agent for the Common Stock, and the Warrant Agent for the
Public Warrants, is American Stock Transfer & Trust Company, New York, New
York.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,558,302 shares of Common Stock. Of these shares, the 2,500,000 shares of
Common Stock sold by the Company and the 500,000 shares of Common Stock sold
by the Selling Stockholders in this Offering, together with approximately
2,326,269 presently outstanding shares of Common Stock, will be freely
tradable without restriction or further registration under the Securities Act.
The remaining 2,232,033 shares of Common Stock held by existing stockholders
upon completion of this Offering are "restricted securities" as defined in
Rule 144 promulgated under the Securities Act, and may only be sold in the
public market if such shares are registered under the Securities Act or sold
in accordance with Rule 144 or another exemption from registration under the
Securities Act.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years, including persons who may be deemed "affiliates" (as defined in Rule
144) of the Company, will be entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock, or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain manner of sale limitations,
notice requirements and the availability of current public information about
the Company. A person who has not been an "affiliate" of the Company for the
90 days preceding a sale and who has beneficially owned restricted securities
for at least three years will be entitled to sell such shares in the public
market without restriction. Restricted securities properly sold in reliance
upon Rule 144 are thereafter freely tradeable without restrictions or
registration under the Securities Act, unless thereafter held by an
"affiliate" of the Company. For purposes of Rule 144, 1,742,616 of the
outstanding restricted shares of Common Stock (including 373,476 shares being
offered by Selling Stockholders in this Offering) have been beneficially owned
by their holders for over two years.
The Company is unable to estimate the amount, timing or nature of future
sales of outstanding Common Stock. Of the 2,232,033 restricted shares that
will be outstanding upon completion of this Offering, executive officers and
directors, holding an aggregate of 905,476 shares, have agreed that for a
period of 180 days from the date of this Prospectus, they will not offer for
sale, sell, solicit an offer to buy, contract to sell, distribute, grant any
option for the sale of or otherwise transfer of dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for any shares of Common Stock without the
prior written consent of Rodman on behalf of the Underwriters. Of the
remaining 1,326,557 restricted securities, 1,033,368 shares are now eligible
or will be eligible for sale under Rule 144 within 90 days from the date of
this Prospectus. See "Underwriting."
The Company has reserved 1,902,009 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
stock option plans, and options for 1,296,484 of such shares are outstanding
as of the date of this Prospectus. The Company has further reserved 1,375,000
shares of Common Stock issuable at $6.25 per share upon exercise of publicly
traded warrants issued in connection with the Company's initial public
offering in 1993, 609,678 shares of Common Stock for issuance upon exercise of
other outstanding options and warrants, and 130,877 shares for issuance to
certain former stockholders of its subsidiaries subject to such subsidiaries'
achievement of certain financial goals. Other than the Company's publicly
traded warrants, substantially all of these options and warrants have an
exercise price that is substantially less than the offering price of the
Common Stock in this Offering. The existence of such options and warrants may
hinder future equity financing by the Company. Further, the holders of such
warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable
to the Company. In addition, the holders of warrants for 1,688,292 shares have
demand registration rights, and the holders of warrants for 97,000 additional
shares have "piggyback" rights in respect of future Common Stock registrations
by the Company, subject to exclusion (in whole or in part) from the
registration statement if inclusion is deemed to adversely effect the
Company's interests in that offering. See "Description of Securities."
38
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Rodman & Renshaw, Inc. is acting as
Representative, have severally agreed to purchase from the Company and the
Selling Stockholders, and the Company and the Selling Stockholders have agreed
to sell to the Underwriters, the respective number of shares of Common Stock
set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- -----------------
<S> <C>
Rodman & Renshaw, Inc......................................
---------
Total.................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representative, have advised the Company that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share and
that such dealers may reallow a concession not in excess of $ per share to
certain other dealers who are members of the National Association of
Securities Dealers, Inc. After the public offering, the offering price and
other selling terms may be changed by the Underwriters. The Common Stock is
included for quotation on Nasdaq.
The Underwriters have been granted a 30-day overallotment option to purchase
from the Company up to an aggregate of 450,000 additional shares of Common
Stock exercisable at the public offering price less the underwriting discount.
If the Underwriters exercise such over-allotment option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares of
Common Stock to be purchased by it as shown in the above table bears to
3,000,000 shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby.
All executive officers and directors of the Company have agreed that for a
period of 180 days from the date of this Prospectus, they will not offer for
sale, sell, solicit an offer to buy, contract to sell, distribute, grant any
option for the sale of or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for any shares of Common Stock without the
prior written consent of Rodman on behalf of the Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or to contribute to certain payments that the Underwriters
may be required to make in respect thereof.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on Nasdaq may engage in passive market making transactions in
the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
during the two business day period before commencement of offers or sales of
the Common Stock offered hereby. The passive market making transactions must
comply with applicable volume and price limits and be identified as such. In
general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for such security. If all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded. Passive market making may
stabilize the market price of the Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
39
<PAGE>
The Company has agreed to pay Rodman a fee equal to 1.0% of the maximum
amount of any new credit facility obtained by the Company, including a
facility with Texas Commerce Bank, which is entered into with the assistance
of Rodman. Rodman received a fee of $3,500 in connection with Rodman's
placement, as a selected dealer, of $50,000 of securities in the Company's
April 1996 private placement.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby is
being passed upon for the Company by Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., New York, New York. Certain legal matters in connection
with the sale of the Common Stock offered hereby will be passed upon for the
Underwriters by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New
York.
EXPERTS
The audited consolidated financial statements of the Company included in
this Prospectus have been audited by Moore Stephens Simonton, L.L.P.,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In
addition, copies of such reports, proxy statements and other information
concerning the Company may also be inspected and copied at the library of the
NASDAQ National Market, 1735 K Street, N.W., Washington, D.C. 20006, upon
which the Common Stock of the Company is listed.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock offered pursuant to this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement and the documents
incorporated herein by reference, which may be examined without charge at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies thereof may be obtained
from the Company without charge upon written or oral request. Statements
contained in this Prospectus or in any document incorporated herein by
reference as to the contents of any contract or documents referred to herein
or therein are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 .................................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994 and 1995 and the three months ended March 31, 1995 and
1996..................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994 and 1995 and the three months ended March 31, 1996..... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994 and 1995 and the three months ended March 31, 1995 and
1996..................................................................... F-7
Notes to Financial Statements............................................. F-8
</TABLE>
The financial statements as of and for the periods ended March 31, 1995 and
1996 are unaudited.
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors Diagnostic Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Diagnostic
Health Services, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diagnostic
Health Services, Inc. and Subsidiaries at December 31, 1994 and 1995, and the
results of their operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
Moore Stephens Simonton, L.L.P.
Houston, Texas
March 1, 1996
F-2
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 278,319 $ 705,179 $ 830,144
Short-term investments................. 1,750,100 -- --
Accounts receivable:
Trade, net of allowance for doubtful
accounts
of $152,180, $114,817, and $110,664,
respectively............................ 2,219,511 2,810,912 3,401,826
Accrued interest and other............ 104,449 177,054 166,770
Stockholders.......................... 28,033 34,243 35,796
Employees............................. 50,032 56,795 59,515
Contracts receivable - current......... -- 434,008 690,808
Prepaid expenses....................... 266,108 397,807 592,318
Deferred tax asset..................... -- 55,023 55,023
----------- ----------- -----------
Total Current Assets.................. 4,696,552 4,671,021 5,832,200
----------- ----------- -----------
Property & Equipment:
Office furniture & equipment........... 484,392 654,970 670,365
Machinery & service equipment.......... 6,163,014 9,527,210 10,700,726
Leasehold improvements................. 10,686 19,009 34,975
Less: Accumulated depreciation and
amortization............................ (2,623,649) (3,705,988) (3,949,719)
----------- ----------- -----------
Total Property & Equipment............ 4,034,443 6,495,201 7,456,347
----------- ----------- -----------
Other Assets:
Deposits and other..................... 439,562 362,320 725,899
Deferred acquisition costs............. 89,725 57,523 83,602
Contracts receivable - long-term....... -- 1,458,481 1,886,784
Goodwill............................... 2,053,475 5,584,306 5,867,576
Noncompete agreements.................. 731,110 1,335,892 1,515,783
Less accumulated amortization......... (438,076) (673,215) (926,485)
----------- ----------- -----------
Total Other Assets.................... 2,875,796 8,125,307 9,153,159
----------- ----------- -----------
Total Assets.......................... $11,606,791 $19,291,529 $22,441,706
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................... $ 616,114 $ 1,070,915 $ 1,405,070
Accrued liabilities.................... 231,647 207,133 819,195
Current lease obligations.............. 362,167 759,079 734,204
Current portion of long-term debt...... 662,570 1,403,463 1,607,595
Notes payable.......................... 608,575 700,000 910,000
Federal income tax payable............. -- 23,965 240,506
----------- ----------- -----------
Total Current Liabilities............. 2,481,073 4,164,555 5,716,570
Long-term lease obligations............. 334,892 1,243,231 1,990,347
Long-term debt.......................... 829,530 4,418,396 4,146,064
Deferred rent........................... 20,240 -- 12,064
Other liabilities....................... 193,104 353,192 579,721
Deferred federal income taxes........... -- 205,961 205,961
----------- ----------- -----------
Total Liabilities..................... 3,858,839 10,385,335 12,650,727
----------- ----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value
authorized 15,000,000 shares; issued
5,033,453 shares in 1994, 5,206,361
shares in 1995 and 5,291,561 shares
in 1996; outstanding 4,800,194 shares
in 1994, 4,973,102 shares in 1995 and
5,058,302 shares in 1996............. 5,034 5,206 5,292
Preferred stock, $.001 par value,
authorized 3,000,000 shares;
zero shares issued and outstanding.... -- -- --
Additional paid-in capital............. 8,735,476 9,018,442 9,444,357
Retained earnings (deficit)............ (769,595) 108,118 566,953
Foreign currency translation........... (3,562) (6,171) (6,222)
Stock subscription receivable.......... (8,250) (8,250) (8,250)
Stockholder receivable................. (103,500) (103,500) (103,500)
Treasury stock (at cost)............... (107,651) (107,651) (107,651)
----------- ----------- -----------
Total Stockholders' Equity............ 7,747,952 8,906,194 9,790,979
----------- ----------- -----------
Total Liabilities & Stockholders'
Equity.................................. $11,606,791 $19,291,529 $22,441,706
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED)
----------------------
<S> <C> <C> <C> <C>
Gross revenues............... $11,508,140 $17,083,447 $3,675,456 $5,221,481
----------- ----------- ---------- ----------
Expenses:
General & administrative.... 792,952 1,112,212 199,918 317,603
Salaries & employee
benefits..................... 6,754,188 9,449,639 2,019,801 2,633,481
Legal & professional........ 107,271 231,063 50,727 33,787
Rent & utilities............ 182,407 290,464 71,870 76,648
Taxes & insurance........... 434,175 400,213 109,344 78,209
Technical operating
expenses..................... 1,380,222 2,380,849 547,321 770,522
Provision (credit) for
doubtful accounts............ (54,502) 37,529 20,868 (5,719)
Depreciation and
amortization................. 1,214,683 1,434,443 343,698 501,471
----------- ----------- ---------- ----------
Total operating expenses... 10,811,396 15,336,412 3,363,547 4,406,002
----------- ----------- ---------- ----------
Income from operations....... 696,744 1,747,035 311,909 815,479
----------- ----------- ---------- ----------
Other income (expense):
Other income................ 158,260 97,509 12,338 79,352
Interest expense............ (242,081) (441,928) (67,038) (219,455)
----------- ----------- ---------- ----------
Total other income
(expense).................... (83,821) (344,419) (54,700) (140,103)
----------- ----------- ---------- ----------
Income before taxes.......... 612,923 1,402,616 257,209 675,376
Income tax expense.......... -- 174,903 -- 216,541
----------- ----------- ---------- ----------
Net income................... $ 612,923 $ 1,227,713 $ 257,209 $ 458,835
=========== =========== ========== ==========
Net income per share:
Primary..................... $ 0.13 $ 0.23 $ 0.05 $ 0.08
=========== =========== ========== ==========
Fully Diluted............... $ 0.13 $ 0.21 $ 0.05 $ 0.08
=========== =========== ========== ==========
Weighted average common
shares outstanding
Primary..................... 4,601,461 5,408,643 5,025,100 5,944,142
=========== =========== ========== ==========
Fully Diluted............... 4,777,582 5,816,188 5,194,204 6,075,019
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE THREE MONTHS (UNAUDITED) ENDED MARCH 31, 1996
-----------------------------------------------------------------------------------------------------------------
ADDITIONAL RETAINED FOREIGN STOCK
COMMON PAID-IN EARNINGS CURRENCY SUBSCRIPTION STOCKHOLDER TREASURY
STOCK CAPITAL (DEFICIT) TRANSLATION RECEIVABLE RECEIVABLE STOCK TOTAL
--------- ------------- -------------- -------------------------------------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1994........ $4,379 $7,553,968 $(1,382,518) $ 0 $(8,250) $(103,500) $(107,651) $5,956,428
Shares issued in
connection with
the following
acquisitions:
Alpha.......... 24 (24) --
HomeCare....... 141 233,862 234,003
MDI............ 489 946,733 947,222
Options 1 937 938
exercised......
Foreign currency
translations... (3,562) (3,562)
Net Income...... 612,923 612,923
--------- ------------- -------------- ---------- ---------- ------------ ------------ -------------
Balance,
December 31,
1994........... 5,034 8,735,476 (769,595) (3,562) (8,250) (103,500) (107,651) 7,747,952
Shares issued in
connection with
the following
acquisitions:
Alpha.......... 24 (24) --
HomeCare....... 8 15,992 16,000
Medmark........ 24 41,644 41,668
Reliascan...... 13 24,987 25,000
HDI............ 84 199,917 200,001
SIS............ 18 (18) --
Options 1 468 469
exercised......
Foreign currency
translations... (2,609) (2,609)
Distributions... (350,000) (350,000)
Net Income...... 1,227,713 1,227,713
--------- ------------- -------------- ---------- ---------- ------------ ------------ -------------
Balance,
December 31,
1995........... $ 5,206 $ 9,018,442 $ 108,118 $ (6,171) $ (8,250) $ (103,500) $ (107,651) $ 8,906,194
Stock issued.... 86 425,915 426,001
Foreign currency
translation.... (51) (51)
Net Income...... 458,835 458,835
--------- ------------- -------------- ---------- ---------- ------------ ------------ -------------
Balance, March
31, 1996....... $ 5,292 $ 9,444,357 $ 566,953 $ (6,222) $ (8,250) $ (103,500) $ (107,651) $ 9,790,979
========= ============= ============== ========== ========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
------------------------
<S> <C> <C> <C> <C>
Cash Flows from
Operations:
Net income............. $ 612,923 $ 1,227,713 $ 257,209 $ 458,835
Adjustments to Reconcile
Net Income to
Net Cash Provided by
Operations:
Depreciation and
amortization............ 1,214,683 1,434,443 343,698 501,471
Deferred federal income
taxes................... -- 150,938 -- --
Deferred rent expense.. (6,747) (6,747) (1,687) 12,064
Foreign currency
translation............. (3,562) (2,609) (1,341) (51)
Increase in trade
receivable.............. (982,341) (591,401) (351,171) (548,058)
Increase in contracts
receivable.............. -- (1,892,489) (343,569) (685,103)
Increase in prepaid
expenses................ (134,425) (47,566) (146,258) (194,511)
Decrease (increase) in
other assets............ (249,557) 77,242 265,066 (363,579)
Increase in accounts
payable................. 25,512 432,385 88,998 334,155
Increase (decrease) in
accrued liabilities..... (125,973) (201,426) 100,669 612,062
Increase in income
taxes payable........... 5,843 23,965 -- 216,541
Increase (decrease) in
other liabilities....... 172,150 152,830 (5,661) 226,529
----------- ----------- ----------- -----------
Net Cash Provided by
Operations.............. 528,506 757,278 205,953 570,355
----------- ----------- ----------- -----------
Cash Flows from
Investing Activities:
Decrease in cash
investments............. 1,255,925 1,750,100 1,300,100 --
Cash payments for the
purchase of property.... (1,715,869) (211,669) (26,980) (92,473)
Acquisition of
businesses net of cash
acquired................ (120,538) (278,222) (278,222) (29,394)
Additional subsidiary
acquisition costs....... (32,943) (382,400) (40,657) (26,079)
Decrease (increase) in
other receivables....... (71,027) (72,605) 38,282 10,284
(Increase) in employee
receivables............. (36,211) (6,763) (14,851) (2,720)
(Increase) in
stockholder receivable.. (7,113) (6,210) (1,553) (1,553)
Decrease in minority
interest................ (9,766) (6,235) -- --
----------- ----------- ----------- -----------
Net Cash Provided by
(Used in) Investing
Activities........... (737,542) 785,996 976,119 (141,935)
----------- ----------- ----------- -----------
Cash Flows from
Financing Activities:
Proceeds from issuance
of common stock......... 938 469 937 --
Net borrowings on line
of credit............... 229,554 736,798 (158,252) 210,000
Principal payments on
long-term debt.......... (620,991) (562,681) (283,104) (303,292)
Principal payments on
capital lease
obligations............. (182,661) (941,000) (79,735) (210,163)
Distributions.......... -- (350,000) -- --
----------- ----------- ----------- -----------
Net Cash Used in
Financing Activities.... (573,160) (1,116,414) (520,154) (303,455)
----------- ----------- ----------- -----------
Net increase (decrease)
in cash................. (782,196) 426,860 661,918 124,965
Cash balance, beginning
of period............... 1,060,515 278,319 278,319 705,179
----------- ----------- ----------- -----------
Cash balance, end of
period.................. $ 278,319 $ 705,179 $ 940,237 $ 830,144
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
NOTE 1--ORGANIZATION
Organization--Diagnostic Health Services, Inc. ("DHS") and its subsidiaries
(collectively, with DHS, the "Company") provide medical outsourcing services
to hospitals, physicians' offices, managed care facilities and other health
care deliverers.
In 1993, DHS and a wholly-owned subsidiary, DHS Management Services
("DHSMS"), formed a wholly-owned subsidiary known as Diagnostic Health
Services de Mexico, S.A. de C.V. ("DHS-Mexico"). In February 1994, DHS-Mexico
and DHSMS acquired 88% of the outstanding common stock of HomeCare
International de Mexico, S.A. de C.V. ("HCIM"), and DHSMS acquired 100% of the
outstanding common stock of HomeCare International, Inc. ("HCI"). In the
fourth quarter of 1995, DHS-Mexico acquired the remaining 12% minority equity
interest in HCIM.
On September 6, 1994, DHSMS acquired 100% of the issued and outstanding
capital stock of Mobile Diagnostic Imaging, Inc. and St. Louis Mobile
Ultrasound, Inc. (collectively "MDI").
On March 9, 1995, effective as of January 1, 1995, DHSMS (through a new
wholly-owned subsidiary, HDI Acquisition Corp.) acquired the businesses of
three San Antonio, Texas-based companies which are in similar lines of
business as the Company. The acquisitions of Sector-Echos Inc. ("SEI"),
Cardio-Graphic Consultants, Inc. ("CGCI") and Heart Diagnostic Institutes,
Inc. ("HDII") were made for a combination of $352,000 in cash and 84,211
shares of DHS common stock. The Company acquired net assets of approximately
$659,000 including goodwill of approximately $399,000 in connection with the
acquisitions. The Company plans to merge the acquired businesses into another
wholly-owned subsidiary of DHSMS during 1996.
On July 31, 1995, the Company, through its wholly-owned subsidiary
Specialized Imaging Services Inc. ("SIS"), purchased substantially all of the
operating assets (exclusive of cash and accounts receivable) of the mobile
ultrasound and nuclear imaging division of MICA Imaging, Inc. ("MICA"). The
purchase included approximately $5,034,000 of various assets including
goodwill of approximately $2,528,000. The purchase price was approximately
$3,746,000 in cash, and SIS assumed liabilities of approximately $1,288,000.
Simultaneous with the closing of the MICA transaction, the Company and its
subsidiaries entered into a loan agreement with Texas Commerce Bank National
Association, providing for an acquisition loan in the principal amount of
$3,750,000, a term loan in the principal amount of $1,000,000, and a revolving
credit facility of up to $1,000,000 (or, if less, 75% of the Company's and its
subsidiaries' eligible accounts receivable from time to time). In connection
with the ADI acquisition described below, the Company obtained an additional
$600,000 term loan under the loan agreement. All of the loans under the loan
agreement are secured by substantially all of the assets of the Company and
its subsidiaries, bear interest at varying rates, and are repayable in
installments and at various times through December 5, 1998.
On December 7, 1995, the Company issued 240,000 shares of its common stock
in exchange for all of the outstanding common stock of an S corporation,
Advanced Diagnostic Imaging, Inc. ("ADI"). The transaction has been accounted
for as a pooling of interests and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts and operations
of ADI for all periods presented prior to the consummation of the
transactions.
F-8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 1--ORGANIZATION (CONTINUED)
The foregoing transactions and other acquisitions are discussed in Note 10
of these Notes to Financial Statements.
The following chart sets forth the corporate structure of the Company and
its subsidiaries at March 28, 1996:
<TABLE>
<CAPTION>
--------------------------------
DIAGNOSTIC HEALTH SERVICES, INC.
("DHS" OR THE "COMPANY")
--------------------------------
+
+
-----------------------------
DHS MANAGEMENT SERVICES, INC.
("DHSMS")
-----------------------------
+
+
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<S> <C> <C> <C> <C> <C> <C>
+ + + + + + +
+ + + + + + +
+ + + + + + +
----------------- --------------- ------------------- ------------- ----------------- -------------- ---------------
MOBILE DIAGNOSTIC HEART INSTITUTE SPECIALIZED IMAGING ALPHA SCANNING MOBILE DIAGNOSTIC DHS DE MEXICO, HDI ACQUISITION
SYSTEMS, INC. OF TULSA, INC. SERVICES INC. SERVICE, INC. IMAGING, INC. S.A. de C.V. CORP.
("MDS") ("HIT") ("SIS") ("ALPHA") ("MOBILE") ("DBS-MEXICO")
----------------- --------------- ------------------- ------------- ----------------- -------------- ---------------
+ + + +
+ + + +
++++++++++++++++++++ + + +
+ + + +
+ ++++++++++++++++++ + +
++++++++++++++++++++++++++++++++++++++++ + + +
+ + + +++++++++++++++++ +
+ + + + +
+ + + + +++++++++++++++++++
+ + + + + +
+ + + + + +
+ + + + + +
-------------- ---------------- ------------------- ---------------- ------------------ ----------------- ----------------
ADVANCED NEONATAL PEDIATRIC ST. LOUIS MOBILE HOMECARE CARDIO-GRAPHIC HEART DIAGNOSTIC
DIAGNOSTIC PEDIATRIC ECHOCARDIOGRAPHIC ULTRASOUND, INC. INTERNATIONAL de CONSULTANTS, INC. INSTITUTES, INC.
IMAGING, INC. ECHOCARDIOGRAPHY, DIAGNOSTIC IMAGING, ("SLM") MEXICO S.A. C.V. ("CGI") ("HDII")
("ADI") INC. ("NPE") INC. ("PEDI")
-------------- ---------------- ------------------- ---------------- ------------------ ----------------- ----------------
</TABLE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition--Revenues are recognized when services are performed and
are recorded at published charges, net of discounts and contractual
allowances. Revenues received under the Medicare program are subject to audit
and possible adjustment by the third party reimbursement agencies.
Prepaid Expenses--Prepaid expenses represent advance payments made or
liabilities incurred on various contracts and agreements with initial terms of
one year or less. The carrying amount of prepaid expenses is determined by
comparing the remaining period of the agreement to its initial cost.
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 or terms of leases, ranging from 3 to 7 years, whichever is
less.
Contracts Receivable--Contracts receivable represents future payments due on
long-term equipment and service agreements. Expected profits or losses on
contracts are based on the Company's estimates of total revenue values and
related costs upon installation. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments resulting
from such revisions are recorded in the periods in which the revisions are
made. Losses on contracts will be recorded in full as they are identified.
Goodwill--The excess of the aggregate purchase price over the fair market
value of net assets of businesses acquired is included in the accompanying
balance sheet as goodwill, and is amortized over a twenty-year period using
the straight-line method. The Company periodically evaluates whether changes
have occurred that would require revision of the remaining estimated useful
life of the assigned goodwill or impair the recoverability of the carrying
value of the goodwill. If such circumstances arise, the Company records an
impairment loss as the difference between the estimate of the related after-
tax income contribution, on a discounted basis, and the carrying value of the
goodwill. Any impairment loss would be reported as a component of income from
continuing operations before tax.
Noncompete Agreements--Noncompete agreements are amortized over the life of
the agreements, which range from two to five years.
F-9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets--In accordance with FAS Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"), the Company records impairment losses on long-lived assets
used in operations, including goodwill and intangible assets, when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the
carrying amounts of those assets. The adoption of SFAS 121 has had no material
impact on the Company's financial condition or results of operations.
Cash Equivalents--For purposes of the statement of cash flows, the Company
considers any short-term cash investment with a maturity of three months or
less to be a cash equivalent.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the use of the "liability method" of accounting for
income taxes. Deferred taxes are provided using the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment. The Company files consolidated income tax returns.
Earnings Per Share--Earnings per share has been computed by dividing net
income by the weighted average number of shares plus common stock equivalents
outstanding during the period. The primary weighted average common shares and
common shares equivalent at December 31, 1994 and 1995 were 4,601,461 and
5,408,643, respectively.
Reclassifications--Certain 1994 balances have been reclassified to conform
to the 1995 presentation.
NOTE 3--PREPAID EXPENSES
At December 31, prepaid expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
<S> <C> <C>
Prepaid insurance.......................................... $103,020 $ 32,903
Prepaid supplies........................................... 65,652 191,411
Other...................................................... 97,436 173,493
-------- --------
$266,108 $397,807
======== ========
</TABLE>
NOTE 4--NOTES PAYABLE
Notes payable consists of the following obligations at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
<S> <C> <C>
$1,000,000 line of credit with bank, with interest at
varying rates (10.75% at December 31, 1995), due July
31, 1996. Secured by substantially all of the assets of
the Company............................................. $ -- $700,000
$600,000 line of credit with bank, with interest at 9.5%,
payable interest only until due on May 1, 1996. Secured
by certain of the Company's accounts receivable and
furniture, fixtures and equipment....................... 229,544 --
Note payable to bank, with interest at 9.5%, due May 1,
1995. Secured by the assets of a subsidiary and a
shareholder guarantee................................... 58,251 --
Advance from sole shareholder of ADI, noninterest bearing
and due on demand....................................... 320,780 --
-------- --------
$608,575 $700,000
======== ========
</TABLE>
F-10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 4--NOTES PAYABLE (CONTINUED)
In November 1994, the Company entered into a three-year credit agreement
with a bank whereby the Company could borrow up to $600,000 under a revolving
credit note. It also provided for a $400,000 term note whose terms are
discussed in Note 5. An additional $200,000 line of credit was granted by the
same bank which was secured by a $200,000 certificate of deposit.
In July 1995, the Company entered in a one-year loan agreement with a bank
whereby the Company may borrow up to $1,000,000 under a revolving credit note.
This revolving note replaced the existing credit facility in place at that
time. The loan agreement (as amended) also provides for three separate term
notes totaling $5,350,000 in original principal amount, whose terms are
discussed in Note 5.
The Company's revolving credit and term note agreements contain certain
restrictive covenants which, among other things, (1) require the maintenance
of a minimum current ratio, (2) provide for a maximum funded debt ratio (as
defined in the loan agreement), (3) require the maintenance of a minimum fixed
charge coverage ratio (as defined in the loan agreement), and (4) place
certain restrictions on the Company's ability to declare or pay dividends,
make certain loans, advances or investments, or incur, create or assume
additional debt or other obligations.
At December 31, 1995, the Company was not in compliance with one of these
restrictive covenants, namely the requirement to maintain a minimum current
ratio of 1.20 to 1.00. The Company's current ratio at December 31, 1995 was
1.12 to 1.00. However, the bank has granted a waiver of such noncompliance as
of December 31, 1995.
NOTE 5--LONG-TERM DEBT
Long-term debt at year end consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- -----------
<S> <C> <C>
Term note payable to bank maturing July 1998, due in
monthly installments of $27,775 plus interest at
varying rates (10.75% at December 31, 1995);
secured by substantially all of the assets of the
Company............................................ $ -- $ 888,900
Note payable to bank in connection with the MICA
acquisition, maturing July 1998, due in monthly
installments of $62,500 plus interest, from March
5, 1996 through July 1998 with a balloon payment of
$2,000,000 at maturity, interest at varying rates
(10.125% at December 31, 1995); secured by
substantially all of the assets of the Company. -- 3,750,000
Note payable to bank in connection with the ADI
acquisition, maturing December 1998, due in monthly
installments of $16,667, plus interest at varying
rates (10.75% at December 31, 1995); secured by
substantially all of the assets of the Company..... -- 600,000
Term note payable to bank maturing November 1997,
due in monthly installments of $11,111, plus
interest at 9.5%; secured by certain accounts
receivable and other assets........................ 388,889 --
Note payable to bank maturing March 1995, bearing
interest at bank's certificate of deposit plus 1%;
secured by a certificate of deposit................ 150,000 --
Notes payable to financial institutions, with
interest from 7.0% to 8.5%, maturing through 1998,
requiring monthly payments of $1,046, including
principal and interest. Secured by vehicles........ 63,681 31,221
</TABLE>
F-11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 5--LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ----------
<S> <C> <C>
Notes payable to banks, with interest from 7.5% to
11.0%, maturing through 1996, requiring monthly
payments of $21,094, including principal and
interest. Secured by equipment..................... 161,202 --
Noncompete agreements, with monthly payments of
$22,303, including principal and interest of 6% to
9%, maturing through 1998.......................... 306,050 548,923
Note payable to individual in connection with HCI
acquisition; interest at 6%, due February 1996..... 19,130 2,815
Notes payable to bank, with monthly payments of
$20,510, including principal and interest of 7% to
10%, maturing through 1998. Secured by
substantially all of the assets of ADI............. 402,968 --
--------- ----------
1,491,920 5,821,859
Less current maturities........................... (662,570) (1,403,463)
--------- ----------
$ 829,350 $4,418,396
========= ==========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
DECEMBER 31,
--------------------
<S> <C>
1996............................................................ $1,403,463
1997............................................................ 1,527,910
1998............................................................ 2,889,703
1999............................................................ 783
----------
$5,821,859
==========
</TABLE>
NOTE 6--LEASES
The Company, as lessee, has entered into and/or assumed various non-
cancelable leases for machinery, service equipment, vehicles, and office
facilities. The following assets, subject to capital leases, are included in
the balance sheet under the corresponding asset categories at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Office furniture & equipment......................... $ 224,443 $ 325,399
Machinery & service equipment........................ 1,723,816 3,402,505
---------- ----------
1,948,259 3,727,904
Less: accumulated amortization..................... (774,010) (864,669)
---------- ----------
$1,174,249 $2,863,235
========== ==========
</TABLE>
The Company leases its office space under operating lease agreements that
include a deferred rental period. In accordance with generally accepted
accounting principles, rent expense is computed by the straight-line
amortization of the total lease payments.
F-12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 6--LEASES (CONTINUED)
Future minimum lease payments under non-cancelable leases at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
-------------------- ---------- ---------
<S> <C> <C>
1996.................................................. $ 914,692 $352,053
1997.................................................. 798,288 184,579
1998.................................................. 519,951 55,523
1999.................................................. 42,741 41,551
2000.................................................. 5,354 42,741
Thereafter............................................. -- 3,570
========== ========
Total minimum lease payments............................ 2,281,026 $680,017
========== ========
Less: amount representing interest.................... 278,716
----------
Present value of minimum lease payments................. 2,002,310
----------
Less: current portion................................. 759,079
----------
Long-term capital lease obligation...................... $1,243,231
==========
</TABLE>
Rent expense during the years ended December 31, 1994 and 1995 for all
operating leases was $416,967 and $727,371, respectively, and is included in
operating expenses.
NOTE 7--EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain employees.
These agreements arise primarily from contracts established at the time a
corporation is acquired through purchase by the Company. Future minimum
payments under the employment agreements are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
<S> <C>
1996.............................................................. $381,538
1997.............................................................. 341,665
1998.............................................................. 203,750
--------
Total........................................................... $926,953
========
</TABLE>
NOTE 8--INCOME TAXES
The consolidated provision for income taxes included in the statement of
operations for the year ended December 31, 1995 consisted of the following:
<TABLE>
<S> <C>
Currently payable.................................................. $ 23,965
Deferred:
Long-term 205,961
Current (benefit)................................................ (55,023)
--------
Total consolidated income tax provision............................ $174,903
========
</TABLE>
F-13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 8--INCOME TAXES (CONTINUED)
Net deferred tax assets and liabilities at December 31, 1995 consisted of
the following:
<TABLE>
<S> <C>
Deferred Tax Liabilities:
Property and equipment........................................... $215,161
Goodwill......................................................... 14,619
--------
Total deferred tax liabilities..................................... 229,780
--------
Deferred Tax Assets:
Receivable allowance............................................. 39,038
Accrued vacation................................................. 15,985
Noncompete agreements............................................ 23,819
--------
Total deferred tax assets.......................................... 78,842
--------
Net deferred tax liability..................................... $150,938
========
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate on continuing operations for the year ended December 31, 1995 follows:
<TABLE>
<S> <C>
Federal Statutory Rate.................................................. 35%
Premerger earnings of ADI............................................. (11)
Property and equipment................................................ 11
Utilization of tax loss carryforwards................................. (16)
Other, net............................................................ (7)
---
Effective tax rate...................................................... 12%
===
</TABLE>
At December 31, 1994, the Company had approximately $642,000 of net
operating losses for income tax purposes. These losses gave rise to
approximately $218,000 of deferred tax assets, which were fully realized in
1995.
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the year ended December 31, 1995 for interest was
approximately $442,000.
The Company acquired assets in exchange for the issuance of common stock and
the assumption of various liabilities in connection with the HDI acquisition.
Cash and noncash investing and financing activities related to the acquisition
consisted of the following:
<TABLE>
<S> <C>
Assets acquired.................................................... $932,482
Liabilities assumed................................................ (273,676)
Common stock issued................................................ (200,001)
--------
Total cash paid.................................................... 458,805
Fees and expenses.................................................. (106,805)
Less cash acquired................................................. (73,778)
--------
Net cash paid...................................................... $278,222
========
</TABLE>
F-14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
The MICA acquisition was effected simultaneously with the refinancing of
existing debt and the MICA acquisition loan. The total amount of the
transaction was $5,034,133, which included conversion to long-term debt of
$645,373 of revolving lines of credit. The Company incurred $382,400 in
acquisition costs and expenses in connection with the transaction.
Property and equipment acquired under capital leases for the year ended
December 31, 1995 was $1,134,878.
The Company issued 88,197 shares of common stock valued at $82,668 pursuant
to contingent stock bonus plans relating to various acquisitions, and in order
to acquire the remaining 12% minority interests in HCIM not previously owned
by the Company. The shares represent additional acquisition costs of the
acquired businesses.
NOTE 10--ACQUISITIONS
In February 1994, DHS-Mexico and DHSMS acquired 88% of the outstanding
common stock of HomeCare International de Mexico S.A. de C.V. ("HCIM") and
DHSMS acquired 100% of the outstanding common stock of HomeCare International,
Inc. ("HCI"). HCIM and HCI are collectively referred to as "HomeCare". The
purchase price included the issuance of 140,711 shares of DHS common stock in
exchange for net liabilities valued at approximately $40,000. In addition, the
Company entered into a noncompete agreement and a consulting agreement with a
previous stockholder of HomeCare that extends through December 31, 1997.
Pursuant to the consulting agreement, the former stockholder was granted an
option to purchase up to 60,000 shares of DHS common stock at a price of $1.84
per share, of which 44,000 options failed to vest in accordance with the terms
of such option; and the former stockholder became entitled to receive, on
January 1, 1996, a further option to purchase up to an additional 60,000
shares of DHS common stock at a price equal to fair market value at the close
of business on December 31, 1995, which option will be subject to similar
vesting requirements related to the profitability of the Company's Mexico
operations. The acquisition has been accounted for under the purchase method
of accounting with the purchase price being allocated to assets and
liabilities based upon their fair market value at the date of acquisition.
Goodwill of approximately $442,000, which includes $204,000 of capitalized
acquisition cost at December 31, 1994, was recorded as a result of this
transaction. In the fourth quarter of 1995, DHS-Mexico acquired the remaining
12% minority interest in HCIM, in exchange for 9,622 shares of DHS common
stock.
On June 28, 1994, SIS acquired the net assets of Medmark Associates, Inc.
("Medmark"), an Illinois-based company providing services similar to those
provided by the Company. SIS acquired net assets of approximately $64,000 in
exchange for cash of $89,000 and a noncompete agreement with a present value
of approximately $67,000. The purchase includes a contingent share agreement
providing for the issuance of up to 71,427 shares of DHS common stock, subject
to the acquired business achieving certain revenue goals. The Company
recognized goodwill of approximately $92,000 in connection with the
acquisition.
On August 20, 1994, effective August 1, 1994, Heart Institute of Tulsa, Inc.
("HIT", a wholly-owned subsidiary of DHSMS) acquired the net assets of
Reliascan Mobile Imaging, Inc. ("Reliascan"), a Tulsa, Oklahoma-based company
engaged in services similar to those provided by the Company. The Company
acquired net assets of approximately $40,000 in exchange for $150,000 and a
contingent payment agreement. The contingent payment agreement provides for
three annual payments, each in the maximum amount of $70,000 in cash and
$25,000 in shares of DHS common stock (valued at $1.9375 per share), subject
to the acquired business achieving certain revenue goals. The agreement also
provides for reduction or elimination of the cash payments and stock issuance
if the specified revenue goals are not met. The Company recognized goodwill of
approximately $136,000 in connection with the acquisition. Concurrent with the
acquisition, the Company
F-15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 10--ACQUISITIONS (CONTINUED)
entered into a non-competition and non-disclosure agreement with the former
owner of Reliascan valued at approximately $80,000.
On September 6, 1994, through a reverse triangular merger between MDI
Acquisition Corp. (a wholly-owned subsidiary of DHSMS) and Mobile Diagnostic
Imaging, Inc. ("Mobile"), DHSMS acquired 100% of the issued and outstanding
capital stock of Mobile and, indirectly, of its wholly-owned subsidiary, St.
Louis Mobile Ultrasound, Inc. (collectively, with Mobile "MDI"). The business
of MDI consists primarily of performing and rendering sonographic and
neurodiagnostic testing services for various medical applications, primarily
on a mobile basis to hospitals, clinics and other healthcare facilities in the
greater St. Louis, Chicago and Indianapolis metropolitan areas.
The Company acquired net assets of approximately $497,000 in exchange for
488,889 shares of DHS common stock and three-year warrants (expiring September
6, 1997) for the purchase of 75,000 additional shares of DHS common stock at
an exercise price of $3.00 per share. Simultaneous with the closing of the
acquisition, the Company entered into an employment agreement with James R.
Angelica (formerly the principal stockholder and President of Mobile) pursuant
to which he has agreed to serve as Vice President--Sales of the Company
through August 31, 1997, at a base salary of $85,000 per annum plus customary
benefits. Also simultaneous with the closing of the acquisition, Mobile
entered into a non-competition and non-disclosure agreement with Mr. Angelica
pursuant to which, among other things, Mr. Angelica has agreed not to compete
with Mobile or the Company for a period of five years, in consideration of
which Mobile has agreed to pay Mr. Angelica a total of $90,000 in equal
monthly installments from September 30, 1994 through August 31, 1997. The
Company recognized goodwill of approximately $1,011,000 in connection with the
acquisition.
Upon closing of the acquisition, Mr. Angelica was elected to the Board of
Directors of the Company for a term expiring on or about November 15, 1994.
Additionally, Mr. Angelica and his spouse have granted to Max W. Batzer (the
Chairman and Chief Executive Officer of the Company) a three-year proxy
(expiring September 5, 1997) to vote the 370,252 shares of common stock of the
Company acquired by them in the transaction. Such proxy directs that the
subject shares be voted (a) with respect to election of directors of the
Company, in such manner as Mr. Batzer may determine in his discretion, and (b)
as to all other matters, in the same manner as the greatest plurality of
votes, consents or ratifications otherwise cast or given with respect to the
particular matter. Mr. Batzer voted such shares, as well as his own shares, in
favor of Mr. Angelica's reelection as a Director at the 1994 annual meeting of
stockholders held on November 23, 1994.
On March 9, 1995, effective as of January 1, 1995, DHSMS (through a new
wholly-owned subsidiary, HDI Acquisition Corp.) acquired the businesses of
three San Antonio, Texas-based companies which are in similar lines of
business as the Company. The acquisitions of Sector-Echos Inc. ("SEI"),
Cardio-Graphic Consultants, Inc. ("CGCI") and Heart Diagnostic Institutes,
Inc. ("HDII") were made for a combination of $352,000 in cash and 84,211
shares of DHS common stock. The Company acquired net assets of approximately
$659,000 including goodwill of approximately $399,000 in connection with the
acquisitions. The Company plans to merge the acquired businesses into another
wholly-owned subsidiary of DHSMS during 1996.
On July 31, 1995, the Company, through DHSMS' wholly-owned subsidiary SIS,
purchased substantially all of the operating assets (exclusive of cash and
accounts receivable) of the mobile ultrasound and nuclear imaging division of
MICA Imaging, Inc. The purchase included approximately $5,034,000 of various
assets including goodwill of approximately $2,528,000. The purchase price was
approximately $3,746,000 in cash, and SIS assumed liabilities of approximately
$1,288,000.
Simultaneously with the closing of the MICA acquisition, the Company and its
subsidiaries entered into a loan agreement with Texas Commerce Bank National
Association, providing for an acquisition loan in the
F-16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 10--ACQUISITIONS (CONTINUED)
principal amount of $3,750,000, a term loan in the principal amount of
$1,000,000, and a revolving credit facility of up to $1,000,000 (or, if less,
75% of the Company's and its subsidiaries' eligible accounts receivable from
time to time). In connection with the ADI acquisition (see Note 11 below), the
Company obtained an additional $600,000 term loan under the loan agreement.
All of the loans under the loan agreement are secured by substantially all of
the assets of the Company and its subsidiaries, bear interest at varying
rates, and are repayable in installments and at various times through December
5, 1998.
NOTE 11--POOLING OF INTERESTS
On December 7, 1995, the Company issued 240,000 shares of its common stock
in exchange for all of the outstanding common stock of ADI. The transaction
has been accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of ADI for all periods presented prior to the
consummation of the transaction.
ADI was a Subchapter S corporation for income tax purposes and, therefore,
did not pay federal income taxes. ADI will be included in the Company's
federal income tax return effective November 30, 1995. Deferred income taxes
related to acquired net taxable temporary differences were not material.
For the year ended December 31, 1994, ADI previously reported gross revenues
and net income of $1,214,117 and $47,439, respectively. Adjustments to the
accounts of ADI to adopt accounting practices of the Company resulted in
adjusted gross revenues of $1,253,074 and adjusted net income of $86,396 for
the year ended December 31, 1994. For the eleven months ended November 30,
1995, ADI reported gross revenues and net income of $1,421,273 and $493,294,
respectively. Adjustments to the accounts of ADI to adopt accounting practices
of the Company resulted in adjusted gross revenues of $1,391,902 and adjusted
net income of $463,923 for the year ended December 31, 1995. Substantially all
of the required adjustments related to the conversion to the accrual basis of
accounting. During 1995, ADI distributed $350,000 to its sole shareholder. The
Company reported gross revenues and net income of $10,255,066 and $526,527
respectively for the year ended December 31, 1994. As a result of the pooling
of interests with ADI, the Company's 1994 financial statements have been
restated to reflect combined gross revenues and net income of $11,508,140 and
$612,923, respectively.
NOTE 12--RELATED PARTY TRANSACTIONS
In December 1993, the Company advanced $50,000 to a corporation with a
common director. The advance bears interest at 12% per annum and is to be
repaid in eleven monthly installments of $1,317, including interest, and a
final installment of all outstanding principal and interest, which is due and
payable in December 1994. The advance has been fully repaid.
A stockholder of the Company is a principal in a firm that provides
financial consulting services to the Company. Fees paid to the firm in 1994
and 1995 were $49,891 and $51,432, respectively.
NOTE 13--STOCKHOLDERS' EQUITY
On April 15, 1992, DHS adopted a stock option plan (the "1992 Plan") that
authorizes the granting of options to officers, directors and selected key
employees and/or consultants to acquire shares of DHS common stock. The
aggregate number of shares with respect to which qualified incentive options
may be granted shall not exceed 180,702 shares, with the exercise price being
not less than the fair market value at the date of grant. The aggregate number
of shares with respect to which non-qualified options may be granted shall not
exceed 722,807 shares. The exercise price for the non-qualified options shall
not be less than 85% of the fair market value at the date of grant.
Substantially all of the available options under the 1992 Plan have been
granted.
F-17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
NOTE 13--STOCKHOLDERS' EQUITY (CONTINUED)
In April 1995, in response to substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan (the "1995 Non-
Qualified Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive non-qualified stock options to
purchase up to an aggregate of 500,000 shares of the Company's common stock.
The exercise price, expiration date and other terms of any options granted
under the 1995 Non-Qualified Plan are substantially similar to the
requirements applicable to non-qualified options under the 1992 Plan. Through
December 31, 1995, the Company's Board of Directors had awarded, under the
1995 Non-Qualified Plan, stock options for an aggregate of 299,000 shares of
DHS common stock.
In November 1995, the stockholders of DHS approved the Company's 1995
Incentive Stock Option Plan (the "1995 Incentive Plan") as previously adopted
by DHS' Board of Directors. A total of 500,000 incentive stock options may be
issued from time to time to key employees of the Company under the 1995
Incentive Plan, on terms and conditions (including an exercise price not less
than fair market value on the date of grant) satisfying the requirements of
the Internal Revenue Code with respect to incentive stock options. Through
December 31, 1995, no options had been granted under the 1995 Incentive Plan.
NOTE 14--SUBSEQUENT EVENT--ACQUISITIONS
In January 1996, Mobile Diagnostic Systems, Inc. ("MDS", a wholly-owned
subsidiary of DHSMS) acquired all of the outstanding capital stock of two
affiliated Dallas, Texas-based businesses, Neonatal Pediatric
Echocardiography, Inc. ("NPE") and Pediatric Echocardiagraphic Diagnostic
Imaging, Inc. ("PEDI"), in exchange for an aggregate of 85,200 shares of DHS
common stock.
The Company is party to a letter of intent with Cardiac Concepts, Inc.
("CCI"), which sets forth the terms and conditions of the proposed acquisition
of CCI by the Company. CCI is a Texas-based company providing cardiac imaging
and monitoring services. The terms of the letter of intent call for the
purchase of substantially all of the assets of CCI, subject to the assumption
of certain disclosed liabilities of CCI. In consideration for such
acquisition, the Company proposes to issue restricted shares of DHS common
stock having an aggregate value of $150,000, valued based on the average
reported closing prices of the common stock for a number of days prior to the
date of closing. The letter of intent also calls for the restructuring of
certain indebtedness of CCI owed to its affiliates, including the conversion
of up to $160,000 of such indebtedness into DHS common stock valued in the
manner described herein. The letter of intent also contemplates the
refinancing of CCI's existing bank debt. The transaction is subject to
numerous conditions precedent, including the preparation of definitive
documentation, completion of due diligence, and obtaining certain third-party
consents. The letter of intent is non-binding, and there can be no assurance
that the acquisition of CCI will be consummated on these or any other terms.
F-18
<PAGE>
[PICTURE] An echocardiogram being performed on an infant
at a DHS managed facility.
An ultrasound image of
a 24-week-old fetus.
a procedure frequently [PICTURE] [LOGO]DHS
performed at DHS managed
radiology departments.
[PICTURE]
A DHS healthcare professional performing
a SPECT nuclear diagnostic procedure.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER TO SELL OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MAKE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Price Range of Common Stock............................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Business.................................................................. 17
Management................................................................ 26
Certain Transactions...................................................... 31
Principal and Selling Stockholders........................................ 32
Description of Securities................................................. 34
Shares Eligible for Future Sale........................................... 38
Underwriting.............................................................. 39
Legal Matters............................................................. 40
Experts................................................................... 40
Available Information..................................................... 40
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
DIAGNOSTIC HEALTH SERVICES, INC.
3,000,000 SHARES
COMMON STOCK
--------------
PROSPECTUS
--------------
RODMAN & RENSHAW, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[Alternate Page]
Subjection to Completion Dated , 1996
---------
PROSPECTUS
DIAGNOSTIC HEALTH SERVICES, INC.
100,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to the Offering (the "Offering") by certain selling
securityholders (the "Warrantholders") of 100,000 shares of Common Stock, par
value $.001 per share (the "Common Stock") of Diagnostic Health Services, Inc.,
a Delaware corporation (the "Company"), purchasable upon exercise of outstanding
Warrants (the "Warrant Shares"). The Warrant Shares offered hereby may be sold
from time to time by the Warrantholders, or by transferees, on or after the date
of this Prospectus, subject to contractual restrictions which provide that such
securities may not be sold for a period of six months after the closing of the
Company Offering (defined below) without the prior written consent of Rodman &
Renshaw, Inc. as representative of the several underwriters of the Company
Offering (the "Representatives"). See "Certain Transactions," "Risk Factors -
Shares Available for Future Sale," "Description of Securities" and
"Warrantholders."
No underwriting arrangements have been entered into by the Warrantholders. The
distribution of the Warrant Shares by the Warrantholders may be effected from
time to time in transactions on the Nasdaq National Market System, in negotiated
transactions, through the writing of options on the Warrant Shares, or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Warrantholders may effect
such transactions by the sale of the Warrant Shares to or through broker-
dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Warrantholders and/or the
purchasers of the Warrant Shares for whom such broker-dealers may act as agent
or to whom they may sell as principal, or both. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the
Warrantholders in connection with sales of the Warrant Shares.
The Warrantholders and intermediaries through whom the Warrant Shares are sold
may be deemed "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered and
any profits realized or commissions received may be deemed underwriting
compensation.
Other than the exercise price payable upon exercise of the Warrants, the
Company will not receive any proceeds from sales of the Warrant Shares. See
"Warrantholders."
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission with respect to an underwritten public
offering on behalf of the
<PAGE>
Company of 2,500,000 shares of Common Stock, plus 500,000 shares of Common Stock
on behalf of certain Selling Stockholders, plus up to 450,000 shares which may
be offered by the Company pursuant to the exercise of the Underwriters' over-
allotment option (the "Company Offering"). See "Concurrent Sales By Company and
Selling Stockholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
[Alternate Page]
THE OFFERING
Securities Offered ................. 100,000 shares of Common Stock,
$.001 par value per share, issuable
upon exercise of outstanding Bridge
Warrants and Bank Warrants (the
"Warrant Shares"). See "Description
of Securities," "Certain
Transactions," "Risk Factors-Shares
Available for Future Sale" and
"Description of Securities." No
underwriting arrangements have been
entered into by the Warrantholders.
See "Warrantholders."
Common Stock Outstanding after 7,558,302 shares
the Company Offering (1).............
Shares of Common Stock to be 7,658,302 shares
Outstanding After this Offering (1) .
Use of Proceeds...................... Other than the exercise price
payable upon exercise of the Bridge
Warrants and Bank Warrants, the
Company will not receive any
proceeds from the sale of the
Warrant Shares. Because the Company
is unable to predict the time at
which such Warrants will be
exercised, if ever, the Company has
not allocated the proceeds to any
particular purpose. See "Use of
Proceeds."
Trading Symbol....................... The Common Stock is traded on the
Nasdaq National Market under the
symbol DHSM.
(1) Does not include (i) 1,375,000 shares of Common Stock issuable at $6.25
per share upon exercise of publicly traded warrants issued in connection
with the Company's initial public offering in 1993, (ii) 1,296,484 shares
of Common Stock issuable upon exercise of outstanding options granted
under the Company's stock option plans, and (iii) 509,678 shares of Common
Stock issuable upon exercise of other outstanding options and warrants.
<PAGE>
[Alternate Page]
CONCURRENT SALES BY COMPANY AND SELLING STOCKHOLDERS
A registration statement under the Securities Act of 1933, as amended (the
"Act"), has been filed by the Company with the Securities and Exchange
Commission with respect to an underwritten public offering by the Company of
2,500,000 shares of Common Stock, plus 500,000 shares being offered through the
Underwriters by certain Selling Stockholders, plus 450,000 shares which may be
offered pursuant to exercise of the Underwriters' over-allotment option.
Concurrent sales of securities by the Company, the Selling Stockholders and
the Warrantholders would likely have an adverse effect on the market price of
the Common Stock. The Warrant Shares are subject to contractual restrictions
upon resale with the representative of the several Underwriters. See "Risk
Factors - Shares Available for Future Sale," "Description of Securities" and
"Warrantholders."
<PAGE>
[Alternate Page]
WARRANTHOLDERS
The following table sets forth the name of each person who is a
Warrantholder, the number of Warrant Shares and other shares of Common Stock
beneficially owned by each Warrantholder's account and the number of shares of
Common Stock such Warrantholder will own after the completion of this Offering.
Unless otherwise indicated, all beneficial ownership consists solely of Warrant
Shares. Except for Mr. Sestak, Mr. Angelica and Ms. Gannon, none of the listed
persons has had any position, office or other material relationship with the
Company or any predecessor in the past three years. See "Management."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
NAME PRIOR TO OFFERING AFTER OFFERING
Shares Percentage Shares Percentage
<S> <C> <C> <C> <C>
Thomas M. Sestak(1) 335,390 4.3% 330,390 4.2%
James R. Angelica(2) 456,552 6.0% 454,052 5.9%
Carol J. Gannon(3) 200,500 2.7% 198,000 2.6%
Jonathan E. Goldstein(4) 117,726 1.6% 115,226 1.5%
Peter Leers(5) 9,447 * 6,947 *
Katy Barker 2,500 * -- --
Carl S. Luikart 2,500 * -- --
Thomas A. Meyers 2,500 * -- --
Nelson Obus 2,500 * -- --
Mary C. Shanley 2,500 * -- --
Henry Solowiejczyk 2,500 * -- --
Mervin H. Warnpold 2,500 * -- --
Robert Dubin 1,250 * -- --
Leonard M. Amoroso and
Nancy Amoroso 1,250 * -- --
Felcor, Inc. (beneficial
owner: no controlling
stockholders) 2,500 * -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
NAME PRIOR TO OFFERING AFTER OFFERING
Shares Percentage Shares Percentage
<S> <C> <C> <C> <C>
Invest L'Inc. Partners, LLC
(beneficial owners: Robert J.
Skandalaris and Troy D.
Wiseman) 2,500 * -- --
Jensen Investments Inc.
(beneficial owner: no
controlling stockholders) 7,500 * -- --
Litchfield Asset Holdings,
Inc. (beneficial owner: H.
Sean Mathis) 2,500 * -- --
</TABLE>
- ----------
* less than 1%
(1) In addition to 5,000 Warrant Shares offered hereby, beneficial ownership
includes 153,293 outstanding shares, 452 shares held by Mr. Sestak as
custodian for his minor children, and 181,645 shares which are subject to
currently exercisable stock options.
(2) In addition to 2,500 Warrant Shares offered hereby, beneficial ownership
includes 370,252 outstanding shares held jointly by Mr. Angelica and his
spouse, 56,800 shares which are subject to currently exercisable warrants
held by Mr. Angelica and his spouse, and 27,000 shares which are subject
to currently exercisable stock options held by Mr. Angelica individually.
Mr. and Mrs. Angelica have granted to Max W. Batzer a proxy, expiring
September 5, 1997, to vote 370,252 shares owned by Mr. and Mrs. Angelica
(a) as to the election of directors, in such manner as Mr. Batzer may
determine in his sole discretion, and (b) as to all other matters, in the
same manner as the greatest plurality of votes otherwise cast or given by
holders of Common Stock with respect to the particular matter under
consideration.
(3) In addition to 2,500 Warrant Shares offered hereby, beneficial ownership
includes 198,000 outstanding shares.
(4) In addition to 2,500 Warrant Shares offered hereby, beneficial ownership
includes 110,226 outstanding shares, and 5,000 shares which are subject to
currently exercisable stock options.
(5) In addition to 2,500 warrant shares offered hereby, beneficial ownership
includes 6,947 outstanding shares.
<PAGE>
[Alternate Page]
Lock-Up Arrangements
The Warrantholders have agreed, prior to the closing of the Company Offering,
that they will not publicly sell, offer to sell, contract to offer to sell,
transfer, assign or pledge any of the Warrant Shares which are being registered
on their behalf by the Registration Statement of which this Prospectus forms a
part, for a period of six months from the closing of the Company Offering
without the prior written consent of Rodman & Renshaw, Inc., as representative
of the several Underwriters. See "Risk Factors - Shares Available for Future
Sale," "Description of Securities" and "Certain Transactions."
Plan of Distribution
The distribution of the Warrant Shares by the Warrantholders may be effected
from time to time in transactions on Nasdaq, in negotiated transactions, through
the writing of options on the Warrant Shares, or a combination of such methods
of sale, at fixed prices that may be changed, at market prices prevailing at the
time of the sale, at prices related to such prevailing market prices, or at
negotiated prices. The Warrantholders may effect such transactions by the sale
of the Warrant Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Warrantholders and/or the purchasers of the Warrant Shares for whom such
broker-dealers may act as agent or to whom they may sell as principal, or both.
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the Warrantholders in connection with sales of the Warrant Shares. No
underwriting arrangements have been entered into by the Warrantholders.
The Warrantholders and intermediaries through whom the Warrant Shares are sold
may be deemed "underwriters" within the meaning of the Securities Act with
respect to the securities offered and any profits realized or commissions
received may be deemed underwriting compensation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Ninth of the Certificate of Incorporation of Diagnostic Health
Services, Inc. (the "Registrant" or the "Company") eliminates the personal
liability of directors and/or officers to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director; provided that
such elimination of the personal liability of a director and/or officer of the
Registrant does not apply to (i) any breach of such person's duty of loyalty
to the Registrant or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) actions prohibited under Section 174 of the Delaware General Corporation
Law (i.e., liabilities imposed upon directors who vote for or assent to the
unlawful payment of dividends, unlawful repurchases or redemption of stock,
unlawful distribution of assets of the Registrant to the stockholders without
the prior payment or discharge of the Registrant's debts or obligations, or
unlawful making or guaranteeing of loans to directors and/or officers), or
(iv) any transaction from which the director derived an improper personal
benefit. In addition, Article Tenth of the Registrant's Certificate of
Incorporation, and Article IV of the Registrant's By-Laws, provides that the
Registrant shall indemnify its corporate personnel, directors and officers to
the fullest extent permitted by the Delaware General Corporation Law, as
amended from time to time.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than selling
commissions) which will be paid by the Registrant in connection with the
issuance and distribution of the securities being registered. With the
exception of the Registration fee, the NASD fee and the Nasdaq listing fee,
all amounts shown are estimates.
<TABLE>
<S> <C>
Registration fee................................................... $ 7,353
NASD fee........................................................... 2,650
Nasdaq listing fee................................................. 15,000
Blue Sky fees...................................................... 30,000
Printing and engraving expenses.................................... 75,000
Legal fees and expenses............................................ 120,000
Accounting fees and expenses....................................... 50,000
Transfer Agent fees and expenses................................... 5,000
Miscellaneous expenses............................................. 24,997
--------
Total.......................................................... $330,000
========
</TABLE>
None of the Registrant's existing stockholders who are included in this
registration statement will bear any of the foregoing expenses, although such
stockholders will be responsible for any commissions payable to their
respective brokers (if any) or to the Underwriters in connection with sale of
their respective shares.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the past three years, the Registrant has made the following issuances of
unregistered securities, all of which issuances were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof or as otherwise indicated herein. There were no underwriters, brokers
or finders employed in connection with any of these transactions. In each
transaction, the recipients of the securities represented their intentions to
acquire the securities for investment only and not with a view to the resale
or distribution thereof, and all securities described herein were issued with
appropriate restrictive legends for restricted securities.
A. In February 1994, the registrant issued an aggregate of 140,711 shares of
Common Stock as consideration for the acquisition of 84% of the outstanding
capital stock of HomeCare International de Mexico, S.A. de C.V. ("HCIM") and
100% of the outstanding capital stock of HomeCare International, Inc. ("HCI").
II-1
<PAGE>
In October 1995, the Registrant issued an additional 9,622 shares of Common
Stock to acquire the remaining 16% minority interest in HCIM. In connection
with this transaction, the Registrant provided to the former shareholders of
HCIM and HCI a copy of the Registrant's most recent quarterly report filed
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
B. In September 1994, the Registrant issued an aggregate of 488,889 shares
of Common Stock, and 100,000 common stock purchase warrants, as consideration
for the acquisition of all of the outstanding capital stock of Mobile
Diagnostic Imaging, Inc. ("MDI"). In connection with this transaction, the
Registrant provided to the former shareholders of MDI a copy of the
Registrant's most recent annual report and quarterly report filed under the
Exchange Act, and the former shareholders of MDI provided to the Registrant
information sufficient to enable the Registrant reasonably to determine that
the former shareholders had sufficient knowledge and experience in order to
fairly evaluate the risks of an investment in such securities of the Company.
C. In March 1995, the Registrant issued an aggregate of 84,211 shares of
Common Stock, as consideration for the acquisition of all of the outstanding
capital stock of Cardio-Graphic Consultants, Inc. and Heart Diagnostic
Institutes, Inc. (collectively, "HDI"). In connection with this transaction,
the Registrant provided to the former shareholders of HDI a copy of the
Registrant's most recent annual report and quarterly report filed under the
Exchange Act, and the former shareholders provided to the Registrant
information sufficient to enable the Registrant reasonably to determine that
the former shareholders had sufficient knowledge and experience in order to
fairly evaluate the risks of an investment in the Common Stock.
D. In December 1995, the Registrant issued an aggregate of 240,000 shares of
Common Stock, as consideration for the acquisition of all of the outstanding
capital stock of Advanced Diagnostic Imaging, Inc. ("ADI"). In connection with
this transaction, the Registrant provided to the former shareholder of ADI a
copy of the Registrant's most recent annual report and quarterly report filed
under the Exchange Act, and the former shareholder provided to the Registrant
information sufficient to enable the Registrant reasonably to determine that
such former shareholder was an "accredited investor" within the meaning of
Rule 506 under Regulation D promulgated under the Securities Act.
E. In January 1996, the Registrant issued an aggregate of 85,200 shares of
Common Stock, as consideration for the acquisition of all of the outstanding
capital stock of Neonatal Pediatric Echocardiography, Inc. and Pediatric
Echocardiographic Diagnostic Imaging, Inc. (collectively, "NPE/PEDI"). In
connection with this transaction, the Registrant provided to the two former
shareholders of NPE/PEDI copies of the Registrant's most recent annual report
and quarterly report filed under the Exchange Act, and the former shareholders
of NPE/PEDI provided to the Registrant information sufficient to enable the
Registrant reasonably to determine that such former shareholders had
sufficient knowledge and experience in order to fairly evaluate the risks of
an investment in the Common Stock.
F. Pursuant to a Contingent Share Agreement entered into in June 1992, the
Registrant issued, to the two former shareholders of Specialized Imaging
Services Inc. ("SIS"), (i) an aggregate of 5,476 shares of Common Stock in
November 1993, (ii) an aggregate of 7,017 shares of Common Stock in January
1995, and (iii) an aggregate of 10,727 shares of Common Stock in October 1995.
Such Contingent Share Agreement was entered into at the time of and in
connection with the Registrant's acquisition of SIS in June 1992. The former
shareholders of SIS (each of whom has remained in the continuous employ of the
Registrant since June 1992) were provided with access to all of the
Registrant's filings under the Exchange Act.
G. Pursuant to a Contingent Share Agreement entered into in November 1992,
the Registrant issued, to the four former shareholders of Alpha Scanning
Service, Inc. ("Alpha"), (i) an aggregate of 24,118 shares of Common Stock in
March 1994, and (ii) an aggregate of 24,118 shares of Common Stock in June
1995. Such Contingent Share Agreement was originally entered into at the time
of and in connection with the acquisition by the Registrant of Alpha in
November 1992. In connection with the issuances of Common Stock described
herein, the recipients (two of whom have remained in the continuous employ of
the Company since November 1992) were each provided access to all of the
Registrant's filings under the Exchange Act.
II-2
<PAGE>
H. In August 1995, pursuant to a Contingent Share Agreement entered into in
June 1994, the Registrant issued to the former shareholder of Medmark
Associates, Inc. ("Medmark") an aggregate of 23,810 shares of Common Stock.
Such Contingent Share Agreement was originally entered into at the time of and
in connection with the Company's acquisition of the business of Medmark in
June 1994. In connection with this transaction, the former shareholder of
Medmark (who has remained in the continuous employ of the Company since June
1994) was provided access to all of the Registrant's filings under the
Exchange Act.
I. In November 1995, pursuant to a Contingent Payment Agreement entered into
in August 1994, the Registrant issued to the former shareholder of Reliascan
Mobile Imaging, Inc. ("Reliascan") an aggregate of 12,903 shares of Common
Stock. Such issuance was made pursuant to a Contingent Payment Agreement
entered into at the time of and in connection with the Company's acquisition
of the business of Reliascan in August 1994. In connection with this
transaction, the former shareholder of Reliascan (who has remained in the
continuous employ of the Company since August 1994) was given access to all of
the Registrant's filings under the Exchange Act.
J. In April 1996, the Registrant issued $1,000,000 in principal amount of
subordinated promissory notes and 50,000 redeemable common stock purchase
warrants (the "Bridge Warrants") to a total of eighteen accredited investors
in a transaction exempt from registration requirements pursuant to Regulation
D promulgated under the Securities Act. Also in April 1996, the Company issued
50,000 Bridge Warrants to a commercial lending institution in connection with
a $1,000,000 loan from such lender to the Company.
K. From time to time from and after April 1, 1993, the Registrant has issued
to officers, directors, key employees and consultants, pursuant to the
Registrant's various stock option plans, stock options for an aggregate of
958,250 shares of Common Stock. Such issuances were exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. All recipients had adequate access, through their
relationships with the Registrant, to information regarding the Registrant.
ITEM 27. EXHIBITS
A. Exhibits.
NUMBER DESCRIPTION OF EXHIBIT
1.1 Revised form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 By-Laws of the Company. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, authorizing preferred stock of the Company. (6)
4.1 Form of Warrant Agreement. (1)
4.2 1992 Stock Option Plan, including forms of qualified incentive
stock option agreement and non-qualified stock option agreement.
(1)
4.3 Form of Underwriter's Warrant. (1)
4.4 [Reserved]
4.5 Specimen Form of Share Certificate. (1)
4.6 Specimen Form of Warrant Certificate. (1)
4.7 1995 Nonqualified Stock Option Plan. (6)
4.8 1995 Incentive Stock Option Plan. (6)
4.9 Form of Bridge Warrant and Bank Warrant. (7)
II-3
<PAGE>
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel as to
the legality of the securities being offered. (7)
10.1 Employment Agreement, dated November 1, 1991 (with amendment dated
February 17, 1992), between the Company and Max W. Batzer. (1)
10.2 Employment Agreement, dated November 1, 1991 (with amendment dated
February 17, 1992), between the Company and Brad A. Hummel. (1)
10.3 Contingent Share Agreement between the Company and the former
shareholders of SIS. (1)
10.4 Contingent Share Agreement between the Company and the former
shareholders of Alpha. (1)
10.5 Loan Agreement between the Company and NorthPark National Bank of
Dallas. (1)
10.6 Promissory Notes from HIT to Valley National Bank. (1)
10.7 Promissory Notes from SIS to Central National Bank of Mattoon. (1)
10.8 [Reserved]
10.9 Promissory Note from Alpha to NorthPark National Bank of Dallas.
(1)
10.10 Lease Agreement for Dallas headquarters. (1)
10.11 Agreement between the Company and Northeast Community Hospital
(Bedford, Texas). (1)
10.12 Agreement between the Company and Central Texas Medical Center
(San Marcos, Texas). (1)
10.13 Amendments, dated September 20, 1993 and November 9, 1993, to
Employment Agreement between the Company and Max W. Batzer. (2)
10.14 Amendments, dated September 20, 1993 and November 9, 1993, to
Employment Agreement between the Company and Brad A. Hummel. (2)
10.15 Renewal Revolving Line of Credit Promissory Note between the
Company and NorthPark National Bank of Dallas. (2)
10.16 Loan Extension Agreement between SIS and Central National Bank of
Mattoon. (2)
10.17 Stock Purchase Agreement, regarding the acquisition of HCI and
HCIM. (3)
10.18 Contingent Share Agreement between the Company and the former
owner of Medmark. (6)
10.19 Contingent Payment Agreement between the Company and the former
owner of Reliascan. (6)
10.20 Agreement and Plan of Merger, regarding the acquisition of MDI,
and form of Common Stock Purchase Warrant issued by the Company
to the former stockholders of MDI. (4)
10.21 Contingent Share Agreement between the Company and the former
stockholder of HDII. (6)
10.22 Amendments, dated December 5, 1994 and September 1, 1995, to
Employment Agreement between the Company and Max W. Batzer. (6)
10.23 Amendments, dated December 5, 1994 and September 1, 1995, to
Employment Agreement between the Company and Brad A. Hummel. (6)
10.24 Asset Purchase Agreement, regarding the MICA acquisition. (5)
10.25 Loan Agreement, dated as of July 31, 1995, among the Company, its
subsidiaries and Texas Commerce Bank. (5)
10.26 First Amendment to Loan Agreement, dated as of December 7, 1995,
among the Company, its subsidiaries and Texas Commerce Bank. (6)
10.27 Amendment, dated March 13, 1996, to Employment Agreement between
the Company and Max W. Batzer. (7)
10.28 Amendment, dated March 13, 1996, to Employment Agreement between
the Company and Brad A. Hummel. (7)
10.29 Second Amendment to Loan Agreement, dated as of April 16, 1996,
among the Company, its subsidiaries and Texas Commerce Bank. (7)
10.30 Form of Bridge Note. (7)
10.31 Commitment letter, dated May 2, 1996, from Texas Commerce Bank
regarding post-Offering credit facility.
II-4
<PAGE>
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Company.(7)
23.1 Consent of Moore Stephens Simonton, L.L.P.
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel
(included in Exhibit 5.1).(7)
- --------
(1) Incorporated by reference, filed as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2 filed on June 11, 1993, SEC
File No. 33-61392-FW.
(2) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on March 31, 1994.
(3) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on February 25, 1994.
(4) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on September 21, 1994.
(5) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on August 15, 1995.
(6) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on April 1, 1996.
(7) Filed as part of the original filing of this Registration Statement on
April 25, 1996.
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) To reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(3) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in
the registration statement;
(b) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering; and
(c) The Registrant will provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
3. If the Registrant relies on Rule 430A under the Act, the Registrant will:
(a) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4),
or 497(h) under the Act as part of this registration statement as of
the time the Commission declared it effective; and
(b) For determining any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement for the securities offered therein, and the offering of such
securities at that time as the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on May 2,
1996.
DIAGNOSTIC HEALTH SERVICES, INC.
/s/ Max W. Batzer
By: ________________________________
Max W. Batzer,
Chairman and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated. Each person whose
signature appears below hereby constitutes and appoints Max W. Batzer and Brad
A. Hummel and each of them acting individually with full power of substitution
to file one or more amendments, including post-effective amendments, to this
registration statement or to file a new registration statement pursuant to
Rule 462(b) of the Securities Act for the purpose of registering additional
Shares of Common Stock, which amendments may make such changes, or new
registration statement may contain such information, as Max W. Batzer and Brad
A. Hummel deem appropriate, and each person whose signature appears below,
individually and in each capacity stated below, hereby appoints Max W. Batzer
and Brad A. Hummel and each of them acting individually with full power of
substitution, as Attorney-in-Fact to execute his name and on his behalf to
file any such amendments to this registration statement or any such new
registration statement.
SIGNATURE TITLE DATE
/s/ Max W. Batzer Chief Executive Officer
- ------------------------- and Director May 2, 1996
Max W. Batzer
/s/ Brad A. Hummel President, Chief Operating Officer,
Principal Financial Officer,
Principal Accounting Officer
and Director
- ------------------------- May 2, 1996
Brad A. Hummel
/s/ Bo W. Lycke Director
- ------------------------- May 2, 1996
Bo W. Lycke
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ------ ---------------------- ----------
<S> <C> <C>
1.1 Revised form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 By-Laws of the Company. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, authorizing preferred stock of the Company. (6)
4.1 Form of Warrant Agreement. (1)
4.2 1992 Stock Option Plan, including forms of qualified incentive
stock option agreement and non-qualified stock option agreement. (1)
4.3 Form of Underwriter's Warrant. (1)
4.4 [Reserved]
4.5 Specimen Form of Share Certificate. (1)
4.6 Specimen Form of Warrant Certificate. (1)
4.7 1995 Nonqualified Stock Option Plan. (6)
4.8 1995 Incentive Stock Option Plan. (6)
4.9 Form of Bridge Warrant and Bank Warrant. (7)
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel as to
the legality of the securities being offered. (7)
10.1 Employment Agreement, dated November 1, 1991 (with amendment
dated February 17, 1992), between the Company and Max W. Batzer.(1)
10.2 Employment Agreement, dated November 1, 1991 (with amendment
dated February 17, 1992), between the Company and Brad A. Hummel.(1)
10.3 Contingent Share Agreement between the Company and the former
shareholders of SIS. (1)
10.4 Contingent Share Agreement between the Company and the former
shareholders of Alpha. (1)
10.5 Loan Agreement between the Company and NorthPark National Bank of
Dallas. (1)
10.6 Promissory Notes from HIT to Valley National Bank. (1)
10.7 Promissory Notes from SIS to Central National Bank of Mattoon.(1)
10.8 [Reserved]
10.9 Promissory Note from Alpha to NorthPark National Bank of Dallas.(1)
10.10 Lease Agreement for Dallas headquarters. (1)
10.11 Agreement between the Company and Northeast Community Hospital
(Bedford, Texas). (1)
10.12 Agreement between the Company and Central Texas Medical Center
(San Marcos, Texas). (1)
10.13 Amendments, dated September 20, 1993 and November 9, 1993, to
Employment Agreement between the Company and Max W. Batzer. (2)
10.14 Amendments, dated September 20, 1993 and November 9, 1993, to
Employment Agreement between the Company and Brad A. Hummel. (2)
10.15 Renewal Revolving Line of Credit Promissory Note between the
Company and NorthPark National Bank of Dallas. (2)
10.16 Loan Extension Agreement between SIS and Central National Bank of
Mattoon. (2)
10.17 Stock Purchase Agreement, regarding the acquisition of HCI and HCIM. (3)
10.18 Contingent Share Agreement between the Company and the former
owner of Medmark. (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
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<S> <C> <C>
10.19 Contingent Payment Agreement between the Company and the former
owner of Reliascan. (6)
10.20 Agreement and Plan of Merger, regarding the acquisition of MDI,
and form of Common Stock Purchase Warrant issued by the Company
to the former stockholders of MDI. (4)
10.21 Contingent Share Agreement between the Company and the former
stockholder of HDII. (6)
10.22 Amendments, dated December 5, 1994 and September 1, 1995, to
Employment Agreement between the Company and Max W. Batzer. (6)
10.23 Amendments, dated December 5, 1994 and September 1, 1995, to
Employment Agreement between the Company and Brad A. Hummel. (6)
10.24 Asset Purchase Agreement, regarding the MICA acquisition. (5)
10.25 Loan Agreement, dated as of July 31, 1995, among the Company, its
subsidiaries and Texas Commerce Bank. (5)
10.26 First Amendment to Loan Agreement, dated as of December 7, 1995,
among the Company, its subsidiaries and Texas Commerce Bank. (6)
10.27 Amendment, dated March 13, 1996, to Employment Agreement between
the Company and Max W. Batzer. (7)
10.28 Amendment, dated March 13, 1996, to Employment Agreement between
the Company and Brad A. Hummel. (7)
10.29 Second Amendment to Loan Agreement, dated as of April 16, 1996,
among the Company, its subsidiaries and Texas Commerce Bank. (7)
10.30 Form of Bridge Note. (7)
10.31 Commitment letter, dated May 2, 1996, from Texas Commerce Bank
regarding post-Offering credit facility.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Company. (7)
23.1 Consent of Moore Stephens Simonton, L.L.P.
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel
(included in Exhibit 5.1). (7)
</TABLE>
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(1) Incorporated by reference, filed as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2 filed on June 11, 1993, SEC
File No. 33-61392-FW.
(2) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on March 31, 1994.
(3) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on February 25, 1994.
(4) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on September 21, 1994.
(5) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on August 15, 1995.
(6) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on April 1, 1996.
(7) Filed as part of the original filing of this Registration Statement on
April 25, 1996.
<PAGE>
EXHIBIT 1.1
DRAFT
3,000,000 SHARES
DIAGNOSTIC HEALTH SERVICES, INC
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____________, 1996
Rodman & Renshaw, Inc.
c/o Rodman & Renshaw, Inc.
One Liberty Plaza
165 Broadway
New York, New York 10006
On behalf of the Several
Underwriters named in
Schedule I attached hereto.
Ladies and Gentlemen:
Diagnostic Health Services, Inc., a Delaware corporation (the "Company")
and certain shareholders of the Company set forth on Schedule II attached hereto
(the "Selling Shareholders"), proposes to sell to you and the other underwriters
named in Schedule I attached hereto (the "Underwriters"), for whom you are
acting as the Representative, an aggregate of 3,000,000 shares (the "Firm
Shares") of the Company's Common Stock, $.001 par value per share (the "Common
Stock") of which 2,500,000 shares (the "Company Shares") are to be issued and
sold by the Company and 500,000 shares (the "Selling Shareholder Shares") are to
be sold by the Selling Shareholders. In addition, the Company proposes to grant
to the Underwriters an option to purchase up to an additional 450,000 shares
(the "Option Shares"), of Common Stock for the purpose of covering over-
allotments in connection with the sale of the Firm Shares. The Firm Shares and
the Option Shares are together called the "Shares."
1. Sale and Purchase of the Shares. On the basis of the representations,
warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement:
(a) The Company agrees to issue and sell the Company Shares and the
Selling Shareholders agree to sell the Selling Shareholder Shares,
severally and not jointly, to the several Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase at the purchase
price per share of Common Stock of $_____ (the "Initial Price"), the
aggregate number of Firm Shares set forth opposite such Underwriter's name
in Schedule I attached hereto. The Underwriters agree to offer the Firm
Shares to the public as set forth in the Prospectus.
<PAGE>
(b) The Company grants to the several Underwriters an option to
purchase all or any part of the number of Option Shares at the Initial
Price. The number of Option Shares to be purchased by each Underwriter
shall be the same percentage (adjusted by the Representative to eliminate
fractions) of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares. Such
option may be exercised only to cover over-allotments in the sales of the
Firm Shares by the Underwriters and may be exercised in whole or in part at
any time on or before 12:00 noon, New York City time, on the business day
before the Firm Shares Closing Date (as defined below), and from time to
time thereafter within 30 days after the date of this Agreement, upon
written or telegraphic notice, or verbal or telephonic notice confirmed by
written or telegraphic notice, by the Representative to each of the Company
no later than 12:00 noon, New York City time, on the business day before
the Firm Shares Closing Date or at least two business days before any
Option Shares Closing Date (as defined below), as the case may be, setting
forth the number of Option Shares to be purchased and the time and date (if
other than the Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company and the Selling
Shareholders of the Firm Shares to the Representative for the respective
accounts of the Underwriters, and payment of the purchase price by certified or
official bank check or checks payable in New York Clearing House (next day)
funds to the Company and the Selling Shareholders, shall take place at the
offices of Rodman & Renshaw, Inc., at One Liberty Plaza, 165 Broadway, New York,
New York, 10006, at 10:00 a.m., New York City time, on the third business day
following the date on which the public offering of the Shares commences (unless
such date is postponed in accordance with the provisions of Section 10(b)), or
at such time and place on such other date, not later than 10 business days after
the date of this Agreement, as shall be agreed upon by the Company, the Selling
Shareholders and the Representative (such time and date of delivery and payment
are called the "Firm Shares Closing Date"). The public offering of the Shares
shall be deemed to have commenced at the time, which is the earlier of (a) the
time, after the Registration Statement (as defined in Section 4 below) becomes
effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or (b) the
time, after the Registration Statement becomes effective, when the Shares are
first released by you for offering by the Underwriters or dealers by letter or
telegram.
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representative for the
respective accounts of the Underwriters and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(next day) funds to the Company shall take place at the offices of Rodman &
Renshaw, Inc. specified above at the time and on the date (which may be the same
date as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section 1(b) (such time and date of
delivery and payment is called the "Option Shares Closing Date"). The Firm
Shares Closing Date and the Option Shares Closing Dates are called,
individually, a "Closing Date" and, together, the "Closing Dates."
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<PAGE>
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representative shall request at least two
full business days before the Firm Shares Closing Date or the Option Shares
Closing Date, as the case may be, and shall be made available to the
Representative for checking and packaging, at such place as is designated by the
Representative, on the full business day before the Firm Shares Closing Date or
the Option Shares Closing Date, as the case may be.
3. Public Offering. The Company and the Selling Shareholders understand
that the Underwriters propose to make a public offering of the Shares, as set
forth in and pursuant to the Prospectus (as defined in Section 4 below), as soon
after the effective date of the Registration Statement and the date of this
Agreement as the Representative deems advisable. The Company and the Selling
Shareholders hereby confirm that the Underwriters and dealers have been
authorized to distribute or cause to be distributed each preliminary prospectus
and are authorized to distribute the Prospectus (as from time to time amended or
supplemented if the Company furnishes amendments or supplements thereto to the
Underwriters).
4. Representations and Warranties of the Company and the Selling
Shareholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have
filed one or more amendments thereto, on Form SB-2 (Registration No.
333-_____), including in such registration statement and each such
amendment a related preliminary prospectus (a "Preliminary
Prospectus"), for the registration of the Shares and the Option
Shares, in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"). In addition, the Company has filed or
will promptly file a further amendment to such registration statement,
in the form heretofore delivered to you. As used in this Agreement,
the term "Registration Statement" means such registration statement,
as amended, on file with the Commission at the time such registration
statement becomes effective (including the prospectus, financial
statements, exhibits, and all other documents filed as a part thereof
or incorporated by reference directly or indirectly therein), provided
that such Registration Statement, at the time it becomes effective,
may omit such information as is permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A
of the General Rules and Regulations promulgated under the Act (the
"Regulations"), which information ("Rule 430 Information") shall be
deemed to be included in such Registration Statement when a final
prospectus is filed with the Commission in accordance with Rules 430A
and 424(b)(1) or (4) of the Regulations; the term "Preliminary
Prospectus" means each prospectus included in the Registration
Statement, or any amendments thereto, before it becomes effective
under the Act, the form of prospectus omitting Rule 430A Information
included in the Registration Statement when it becomes effective, if
applicable (the "Rule 430A Prospectus"),
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<PAGE>
and any prospectus filed by the Company with your consent pursuant to
Rule 424(a) of the Regulations; and the term "Prospectus" means the
final prospectus included as part of the Registration Statement,
except that if the prospectus relating to the securities covered by
the Registration Statement in the form first filed on behalf of the
Company with the Commission pursuant to Rule 424(b) of the Regulations
shall differ from such final prospectus, the term "Prospectus" shall
mean the prospectus as filed pursuant to Rule 424(b) from and after
the date on which it shall have first been used.
(ii) When the Registration Statement becomes effective, and at
all times subsequent thereto to and including the Closing Dates, and
during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer,
and during such longer period until any post-effective amendment
thereto shall become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the
Prospectus) will contain all statements which are required to be
stated therein in accordance with the Act and the Regulations, will
comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred which should
have been set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not then been set forth in such
an amendment or supplement; if a Rule 430A Prospectus is included in
the Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will
contain all Rule 430A Information; and each Preliminary Prospectus, as
of the date filed with the Commission, did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; except that no representation or warranty is
made in this Section 4(a)(ii) with respect to statement or omissions
made in reliance upon and in conformity with written information
furnished to the Company as stated in Section 7(b) with respect to any
Underwriter by or on behalf of such Underwriter through the
Representative expressly for inclusion in any Preliminary Prospectus,
the Registration Statement, or the Prospectus, or any amendment or
supplement thereto.
(iii) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction have issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement, or
suspending the registration or qualification of the Firm Shares or the
Option Shares nor has any
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<PAGE>
of such authorities instituted or threatened to institute any
proceedings with respect to a Stop Order.
(iv) Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
(v) The Company has no subsidiary or subsidiaries and does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization, except for those
listed on Schedule II hereto and for those permitted to be excluded
pursuant to Item 601, Exhibit 21 or Regulation S-K (each such
corporation singly a "Subsidiary" and collectively, the
"Subsidiaries"). Each of the Company and each of the Subsidiaries is
a corporation duly organized, validly existing, and in good standing
under the laws of the jurisdiction of incorporation, with full
corporate power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits
of and from, and declarations and filings with, all federal, state,
local, and other governmental authorities and all courts and other
tribunals, to own, lease, license, and use its properties and assets
and to carry on its business as now being conducted and in the manner
described in the Prospectus. Each of the Company and each of the
Subsidiaries is duly qualified to do business and is in good standing
in each jurisdiction in which its ownership, leasing, licensing, or
character, location or use of property and assets or the conduct of
its business makes such qualification necessary. Neither the Company
nor any of the Subsidiaries own, lease or license any property or
conduct any business outside the United States of America.
(vi) The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, of which 5,058,302 shares are
outstanding and 3,000,000 shares of preferred stock, of the Company
(the "Preferred Stock"), of which none are outstanding. Each
outstanding share of Common Stock and each outstanding share of
capital stock of each Subsidiary has been duly and validly authorized
and issued, fully paid, and non-assessable, without any personal
liability attaching to the ownership thereof and has not been issued
and is not owned or held in violation of any preemptive rights of
shareholders and, in the case of the Subsidiaries, is owned of record
and beneficially by the Company, free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders' agreements,
and voting trusts other than liens under the loan agreement among the
Company as borrower, the Subsidiaries as Guarantors and Texas Commerce
Bank National Association ("Texas Commerce Bank"), dated July 31, 1995
(the "Loan Agreement"). There is no commitment, plan, preemptive
right or arrangement to issue, and no outstanding option, warrant, or
other right calling for the issuance of, shares of capital stock of
the Company or of any
-5-
<PAGE>
Subsidiary or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for capital stock
of the Company or of any Subsidiary, except as may be properly
described in the Prospectus. There is outstanding no security or
other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company or of any Subsidiary,
except as may be properly described in the Prospectus.
(vii) The consolidated financial statements of the Company and
the Subsidiaries included in the Registration Statement and the
Prospectus fairly present, with respect to the Company and its
Subsidiaries the financial position, the consolidated results of
operations, and the other information purported to be shown therein at
the respective dates and for the respective periods to which they
apply. Such financial statements have been prepared in accordance
with generally accepted accounting principles (except to the extent
that certain footnote disclosures regarding any stub period may have
been omitted in accordance with the applicable rules of the Commission
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records
of the Company and the Subsidiaries. The accountants whose report on
the audited financial statements is filed with the Commission as a
part of the Registration Statement are, and during the periods covered
by their report(s) included in the Registration Statement and the
Prospectus were, independent certified public accountants with respect
to the Company and the Subsidiaries within the meaning of the Act and
the Regulations. No other financial statements are required by Form
SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. There has at no time been a material adverse change in
the financial condition, results of operations, business, properties,
assets, liabilities, or future prospects of the Company or any
Subsidiary from the latest information set forth in the Registration
Statement or the Prospectus, except as may be properly described in
the Prospectus.
(viii) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal), or investigation before any
court or before any public body or board pending, threatened, or in
prospect (or any basis therefor) with respect to the Company, any
Subsidiary, or any of their respective operations, business,
properties, or assets, except as may be properly described in the
Prospectus or such as individually or in the aggregate do not now have
and will not in the future have a material adverse effect upon the
operations, business, properties, assets or financial condition of the
Company. Neither the Company nor any of the Subsidiaries is involved
in any labor dispute, nor is such dispute threatened, which dispute
would have a material adverse effect upon the operations, business,
properties, assets or financial condition of the Company or the
Subsidiaries. Neither the Company nor the Subsidiaries is in
violation of, or in default with respect to, any law, rule,
regulation, order, judgment, or
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<PAGE>
decree; nor is the Company or the Subsidiaries required to take any
action in order to avoid any such violation or default.
(ix) The Company and each of the Subsidiaries has good and
marketable title in fee simple absolute to all real properties and
good title to all other properties and assets which the Prospectus
indicates are owned by it, and has valid and enforceable leasehold
interests in each of such items, free and clear of all liens, security
interests, pledges, charges, encumbrances, and mortgages (except as
may be properly described in the Prospectus). No real property owned,
leased, licensed or used by the Company or the Subsidiaries lies in an
area which is, or to the knowledge of the Company or the Subsidiaries
will be, subject to zoning, use or building code restrictions which
would prohibit, and no state of facts relating to the actions or
inaction of another person or entity or his or its ownership, leasing,
licensing or use of any real or personal property exists or will exist
which would prevent, the continued effective ownership, leasing,
licensing or use of such real property in the business of the Company
or the Subsidiaries as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be properly
described in the Prospectus).
(x) Neither the Company nor any of the Subsidiaries, nor to the
knowledge of the Company and the Subsidiaries, any other party, is now
or is expected by the Company to be in violation or breach of, or in
default with respect to, complying with any term, obligation or
provision of any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or understanding
which is material to the Company and the Subsidiaries or by which any
of its properties or business may be bound or affected, and no event
has occurred which with notice or lapse of time or both would
constitute such a default, and each such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding is in full force and is the legal, valid
and binding obligation of the parties thereto and is enforceable as to
them in accordance with its terms. The Company and each of the
Subsidiaries enjoys peaceful and undisturbed possession under all
leases and licenses under which it is operating. Neither the Company
nor any of the Subsidiaries is a party to or bound by any contract,
agreement, instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding, or subject to any charter
or other restriction, which has had or may in the future have a
material adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities or future
prospects of the Company or any of the Subsidiaries. Neither the
Company nor any of the Subsidiaries is in violation or breach of, or
in default with respect to, any term of its certificate of
incorporation (or other charter document) or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation.
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<PAGE>
(xi) The Company and each of the Subsidiaries has filed all
federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or have received extensions thereof,
and have paid all taxes shown on such returns and all assessments
received by it to the extent that the same are material and have
become due.
(xii) All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, franchises, and other intangible properties and assets
listed in the Registration Statement under "Business-Trademarks and
Service Marks" (all of the foregoing being collectively herein called
"Intangibles") that the Company and the Subsidiaries own, possesses or
have pending, or under which they are licensed, are in good standing
and uncontested. There is no right under any Intangible necessary to
the business of the Company or the Subsidiaries as presently conducted
or as the Prospectus indicates the Company or the Subsidiaries
contemplates conducting (except as may be so described in the
Prospectus). Neither the Company nor any of the Subsidiaries has
infringed, is infringing, or has received any notice of infringement
with respect to asserted Intangibles of others. To the knowledge of
the Company and each of the Subsidiaries, there is no infringement by
others of Intangibles of the Company or the Subsidiaries. To the
knowledge of the Company and the Subsidiaries, there is no Intangible
of others which has had or may in the future have a materially adverse
effect on the financial condition, results of operations, business,
properties, assets, liabilities or future prospects of the Company and
the Subsidiaries.
(xiii) Neither the Company nor any of the Subsidiaries nor any
director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of the Subsidiaries has,
directly or indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign
or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment. No transaction has occurred
between or among the Company or the Selling Shareholders and any of
its officers or directors or any affiliates or affiliates of any such
officer or director, except as described in the Prospectus.
(xiv) The Company has all requisite power and authority to
execute, deliver and perform this Agreement. All necessary corporate
proceedings of the Company have been duly taken to authorize the
execution, delivery and performance of this Agreement. This Agreement
has been duly authorized, executed, and delivered by the Company, is
the legal, valid and binding obligation of the Company, and is
enforceable as to the Company in accordance with its terms (subject to
applicable bankruptcy,
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<PAGE>
insolvency, and other laws affecting the enforceability of creditors'
rights generally). No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration or filing
with, any federal, state, local or other governmental authority or any
court or other tribunal is required by the Company for the execution,
delivery or performance by the Company of this Agreement (except
filings under the Act which have been or will be made before the
applicable Closing Date and such consents consisting only of consents
under "blue sky" or securities laws which have been obtained at or
prior to the date of this Agreement). No consent of any party to any
contract, agreement, instrument, lease, license, indenture, mortgage,
deed of trust, note, arrangement or understanding to which the Company
is a party, or to which any of its respective properties or assets are
subject, is required for the execution, delivery or performance of
this Agreement, and the execution, delivery and performance of this
Agreement, will not violate, result in a breach of, conflict with,
accelerate the due date of any payments under, or (with or without the
giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement, or understanding, or violate or result in a breach of any
term of the certificate of incorporation (or other charter document)
or by-laws of the Company, or violate, result in a breach of, or
conflict with any law, rule, regulation, order, judgment or decree
binding on the Company or to which any of its operations, business,
properties or assets are subject.
(xv) The Firm Shares and the Option Shares are validly
authorized. The Firm Shares, when issued and delivered in accordance
with this Agreement, and the Option Shares, when delivered in
accordance with this Agreement, will be duly and validly issued, fully
paid, and non-assessable, without any personal liability attaching to
the ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders, optionholders, warrantholders and
any other persons and the Underwriters will receive good title to the
Firm Shares and Option Shares purchased by them, respectively, free
and clear of all liens, security interests, pledges, charges,
encumbrances, shareholders' agreements and voting trusts.
(xvi) The Common Stock, the Preferred Stock, the Warrants issued
in connection with the Company's initial public offering in 1993 and
the Bridge Warrants and the Bridge Notes issued in connection with the
Company's April 1996 private placement, the Firm Shares and the Option
Shares conform to all statements relating thereto contained in the
Registration Statement or the Prospectus.
(xvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as may otherwise be properly described therein, there has
not been any material adverse change in the assets or properties,
business or results of operations or
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financial condition of the Company or any of the Subsidiaries, whether
or not arising from transactions in the ordinary course of business;
neither the Company nor any of the Subsidiaries has sustained any
material loss or interference with its business or properties from
fire, explosion, earthquake, flood or other calamity, whether or not
covered by insurance; since the date of the latest balance sheet
included in the Registration Statement and the Prospectus, except as
reflected therein, neither the Company nor any of the Subsidiaries has
undertaken any liability or obligation, direct or contingent, except
for liabilities or obligations undertaken in the ordinary course of
business; and the Company has not (A) issued any securities or
incurred any liability or obligation, primary or contingent, for
borrowed money, (B) entered into any transaction not in the ordinary
course of business, or (C) declared or paid any dividend or made any
distribution on any of its capital stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its capital stock.
(xviii) Neither the Company nor any of the Subsidiaries, nor any
of their officers, directors or affiliates (as defined in the
Regulations), has taken or will take, directly or indirectly, prior to
the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or
which might in the future reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of any of the Firm Shares or
the Option Shares.
(xix) The Company has obtained from each of its executive
officers and directors and each of the Selling Shareholders, their
enforceable written agreement, in form and substance satisfactory to
counsel for the Underwriters, that for a period of 180 days from the
date on which the public offering of the Shares commences they will
not, without the prior written consent of Rodman & Renshaw, Inc.
("Rodman"), on behalf of the Underwriters, offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or
other securities of the Company (or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the
Company, including, without limitation, any shares of Common Stock
issuable under any employee stock options), beneficially owned by
them, except with respect to Shares being sold in connection herewith
or their being a beneficial owner of any such Shares;
(xx) The Company is not, and does not intend to conduct its
business in a manner in which it would be, an "investment company" as
defined in Section 3(a) of the Investment Company Act of 1940 (the
"Investment Company Act").
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(xxi) No person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because
of the filing or effectiveness of the Registration Statement, except
such person or entities from whom written waivers of such rights have
been received prior to the date hereof.
(xxii) Except as may be set forth in the Prospectus, neither the
Company nor any of the Subsidiaries has incurred any liability for a
fee, commission or other compensation on account of the employment of
a broker or finder in connection with the transactions contemplated by
this Agreement.
(xxiii) No transaction has occurred between or among the Company
or any of the Subsidiaries and any of their respective officers or
directors or any affiliates of any such officer or director, that is
required to be described in and is not described in the Registration
Statement and the Prospectus.
(xxiv) All issuances and sales of securities by the Company and
the Subsidiaries were either (i) registered in a public offering or
(ii) exempt from registration under the Act and complied in all
respects with the provisions of all applicable federal and state
securities laws.
(xxv) The Company has, and at each Closing Date will have, made
all filings required to be made by it under the Exchange Act, and such
filings, at the time they were made, complied in all material respects
with the requirements of the Exchange Act, and the rules and
regulations thereunder, and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(xxvi) The Common Stock, including the Shares, are authorized
for quotation on the Nasdaq National Market.
(xxvii) Neither the Company nor any of the Subsidiaries nor any
of their affiliates is presently doing business with the government of
Cuba or with any person or affiliate located in Cuba. If, at any time
after the date that the Registration Statement is declared effective
with the Commission or with the Florida Department of Banking and
Finance (the "Florida Department"), whichever date is later, and prior
to the end of the period referred to in the first clause of Section
4(a)(ii) hereof, the Company commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba,
the Company will so inform the Florida Department within ninety days
after such commencement of business in Cuba, and during the period
referred to in Section 4(a)(ii) hereof will inform the Florida
Department within ninety days after any change occurs with respect to
previously reported information.
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(b) The Selling Shareholders, severally and not jointly, represent and
warrant to, and agree with, the several Underwriters that:
(i) There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation before any
court or beneficiary, public body or board pending, threatened, or in
prospect (or any basis therefor known to such Selling Shareholder)
with respect to such Selling Shareholder or any of such Selling
Shareholder's business, properties or assets. Such Selling
Shareholder is not in violation of, or in default with respect to, any
law, rule, regulation, order, judgment, or decree; nor is such Selling
Shareholder required to take any action in order to avoid such
violation or default.
(ii) Such Selling Shareholder has all requisite power and
authority to execute, deliver, and perform this Agreement. This
Agreement has been duly executed and delivered by or on behalf of such
Selling Shareholder, is the legal, valid and binding obligation of
such Selling Shareholder, and is enforceable as to such Selling
Shareholder in accordance with its terms. No consent, authorization,
approval, order, license, certificate, or permit of or from, or
declaration or filing with, any federal, state, local or other
governmental authority or any court or other tribunal is required by
such Selling Shareholder for the execution, delivery or performance of
this Agreement (except filings under the Act which have been made
before the applicable Closing Date and such consents consisting only
of consents under "blue sky" or securities laws which have been
obtained at or prior to the date of this Agreement) by such Selling
Shareholder. No consent of any party to any contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding to which such Selling Shareholder is a
party, or to which any of such Selling Shareholder's properties or
assets are subject, is required for the execution, delivery or
performance of this Agreement; and the execution, delivery and
performance of this Agreement will not violate, result in a breach of,
conflict with, or (with or without the giving of notice of the passage
of time or both) entitle any party to terminate or call a default
under any such contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note,arrangement or understanding,
or violate, result in a breach of, or conflict with, any law, rule,
regulation, order, judgment or decree binding on such Selling
Shareholder or to which any of such Selling Shareholder's operations,
business, properties, or assets are subject.
(iii) Such Selling Shareholder has good title to the Selling
Shareholder Shares to be sold by such Selling Shareholder pursuant to
this Agreement, free and clear of all liens, security interests,
pledges, charges, encumbrances, shareholders' agreements and voting
trusts and when delivered in accordance with this Agreement, the
Underwriters will receive good title to the Selling Shareholder Shares
purchased by them, respectively, from such Selling Shareholder, free
and clear of all liens, security interests,
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pledges, charges, encumbrances, shareholders' agreements and voting
trusts.
(iv) Neither such Selling Shareholder nor any of such Selling
Shareholder's affiliates (as defined in the Regulations) has taken or
will take, directly or indirectly, prior to the termination of the
underwriting syndicate contemplated by this Agreement, any action
designed to stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company, to
facilitate the sale or resale of any of the Selling Shareholder
Shares.
(v) All information furnished or to be furnished to the Company
by or on behalf of such Selling Shareholder for use in connection with
the preparation of the Registration Statement and the Prospectus is
true in all respects and does not and will not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(vi) Except as may be set forth in the Prospectus, such Selling
Shareholder has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder
in connection with the transactions contemplated by this Agreement.
(vii) Such Selling Shareholder has no knowledge that, and does
not believe that, any representation or warranty of the Company in
Section 4(a) is incorrect.
(viii) Such Selling Shareholder has not, directly or indirectly:
used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment.
(ix) No transaction has occurred between such person and the
Company that is required to be described in the Registration Statement
or the Prospectus.
5. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 6(a)(i) of this Agreement.
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(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and no
order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the Commission, and any requests for additional information
on the part of the Commission (to be included in the Registration Statement
or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Representative.
(c) The representations and warranties of the Company and the Selling
Shareholders contained in this Agreement and in the certificates delivered
pursuant to Section 5(d) shall be true and correct when made and on and as
of each Closing Date as if made on such date and the Company and the
Selling Shareholders shall have performed all covenants and agreements and
satisfied all the conditions contained in this Agreement required to be
performed or satisfied by it or them at or before such Closing Date.
(d) The Representative shall have received on each Closing Date (i) a
certificate, addressed to the Representative and dated such Closing Date,
of the chief executive or chief operating officer and the chief financial
officer of the Company to the effect that the persons executing such
certificate have carefully examined the Registration Statement, the
Prospectus and this Agreement and that the representations and warranties
of the Company in this Agreement are true and correct on and as of such
Closing Date with the same effect as if made on such Closing Date and the
Company has performed all covenants and agreements and satisfied all
conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date and (ii) certificates,
addressed to the Representative and dated such Closing Date, of each of the
Selling Shareholders to the effect that the representations and warranties
of each of such Selling Shareholders are true and correct on and as of such
Closing Date and such Selling Shareholders have performed all covenants and
agreements and satisfied all conditions contained in this Agreement
required to be performed or satisfied by such Selling Shareholders at or
prior to such Closing Date.
(e) The Representative shall have received at the time this Agreement
is executed and on each Closing Date, signed letters from Moore Stephens
Simonton, LLP addressed to the Representative and dated, respectively, the
date of this Agreement and each such Closing Date, in form and scope
reasonably satisfactory to the Representative, with reproduced copies or
signed counterparts thereof for each of the Underwriters confirming that
they are independent accountants within the meaning of the Act and the
Regulations, that the response to Item 10 of the Registration Statement is
correct in so far as it relates to them and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated by reference in
the Registration Statement and the Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Act, the Exchange Act and the related
published rules and regulations thereunder;
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<PAGE>
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the heading "Summary
Financial Data" which would not necessarily reveal matters of
significance with respect to the comments set forth in such letter, a
reading of the minutes of the meetings of the shareholders and
directors of the Company, and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
of the Company as to transactions and events subsequent to the date of
the latest audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(A) the amounts in "Summary Financial Data," and included or
incorporated by reference in the Registration Statement and the
Prospectus do not agree with the corresponding amounts in the
audited financial statements from which such amounts were
derived; or
(B) with respect to the Company, there were, at a specified
date not more than five business days prior to the date of the
letter, any decreases in net sales, income before income taxes
and net income or any increases in long-term debt of the Company
or any decreases in the capital stock, working capital or the
shareholders' equity in the Company, as compared with the amounts
shown on the Company's audited Balance Sheet for the fiscal year
ended December 31, 1994 included in the Registration Statement or
the audited Statement of Operations, for such year; and
(iii) they have performed certain other procedures as a result of
which they determined that information of an accounting, financial or
statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of
the Company) set forth in the Registration Statement and the
Prospectus and reasonably specified by the Representative agrees with
the accounting records of the Company.
References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the date
of such letter.
(f) The Representative shall have received on each Closing Date from
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., counsel for the
Company, an opinion, addressed to the Representative and dated such Closing
Date, and in form and scope satisfactory to counsel for the Underwriters,
with reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Delaware, with full corporate power and authority to own, lease,
license and use its properties and assets and to conduct its business
in the manner described in the Prospectus. To the
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<PAGE>
knowledge of such counsel, the Company has no subsidiary and does not
control, directly or indirectly any corporation, partnership, joint
venture, association or other business organization except for those
listed on Schedule II attached hereto and those permitted to be
excluded in a registration statement pursuant to Item 601, Exhibit 21
of Regulation S-K (each such corporation singly a "Subsidiary" and
collectively, the "Subsidiaries"). Each of the Subsidiaries has been
duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, with full corporation power and
authority to own, lease, license and use its properties and assets and
to conduct its business in the manner described in the Prospectus. To
the knowledge of such counsel, the Company and each of the
Subsidiaries has all necessary consents, authorizations, approvals,
orders, certificates and permits of and from, and declarations and
filings with, all federal, state, local and other governmental
authorities and all courts and other tribunals, to own, lease, license
and use its properties and assets and to conduct its business in the
manner described in the Prospectus. The Company and each of the
Subsidiaries is duly qualified to do business and is in good standing,
in each state where the failure to be so qualified could have a
material adverse effect on the operating condition (financial and
otherwise) or business of the Company and each of the Subsidiaries.
Neither the Company nor any of the Subsidiaries owns, leases or
licenses any property or conducts any business outside the United
States of America.
(ii) The Company has authorized, issued and outstanding capital
stock as set forth in the "actual" column of the capitalization table
under the caption "Capitalization" in the Prospectus. The
certificates evidencing the Shares are in due and proper legal form.
Each outstanding share of Common Stock has been duly and validly
authorized and issued, fully paid, and non-assessable, without any
personal liability attaching to the ownership thereof, and has not
been issued and is not owned or held in violation of any preemptive
right of shareholders. To the knowledge of such counsel, all of the
capital stock of the Subsidiaries is owned of record and beneficially
by the Company, free and clear of all liens, security interests,
pledges, changes, encumbrances, stockholders' agreements and voting
trusts other than liens under the Loan Agreement with Texas Commerce
Bank. To the knowledge of such counsel, there is no commitment, plan,
or arrangement to issue, and no outstanding option, warrant, or other
right calling for the issuance of, any share of capital stock of the
Company or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for capital stock
of the Company, except as may be properly described in the Prospectus.
To the knowledge of such counsel, there is outstanding no security or
other instrument which by its terms is convertible into, exercisable
for or exchangeable for capital stock of the Company, except as may be
properly described in the Prospectus.
(iii) To the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding
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<PAGE>
(formal or informal), or investigation before any court or before any
public body or board pending, threatened, or in prospect (or any basis
therefor) with respect to the Company, any of the Subsidiaries, any of
the Selling Shareholders or any of their respective operations,
businesses, properties, assets, or financial condition except as may
be properly described in the Prospectus or such as individually or in
the aggregate do not now have and will not in the future have a
material adverse effect upon the operations, business, properties,
assets, or financial condition of the Company or any of the
Subsidiaries. To the knowledge of such counsel, neither the Company,
any of the Subsidiaries nor any of the Selling Shareholders is
involved in any labor dispute, nor is such dispute threatened, which
dispute would have a material adverse effect upon the operations,
business, properties, assets or financial condition of the Company or
any of the Subsidiaries. Neither the Company, any of the Subsidiaries
nor any of the Selling Shareholders is in violation of, or in default
with respect to, any law, rule, regulation, order, judgment, or
decree, except as may be properly described in the Prospectus or such
as in the aggregate do not now have and will not in the future have a
material adverse effect upon the operations, business, properties,
assets, or financial condition of the Company or any of the
Subsidiaries; nor is the Company, any of the Subsidiaries or any of
the Selling Shareholders required to take any action in order to avoid
any such violation or default.
(iv) To the knowledge of such counsel, neither the Company, any
of the Subsidiaries, nor any other party is now or is expected by the
Company, any of the Subsidiaries, or any of the Selling Shareholders
to be in violation or breach of, or in default with respect to,
complying with any term, obligation or provision of any contract,
agreement, instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding which is material to the
Company or any of the Subsidiaries or by which any of its properties
or businesses may be bound or affected and no event has occurred which
with notice or lapse of time or both would constitute such a default.
(v) Neither the Company nor any of the Subsidiaries is in
violation or breach of, or in default with respect to, any term of its
certificate of incorporation (or other charter document) or by-laws.
(vi) Each of the Company and the Selling Shareholders has all
requisite power and authority to execute, deliver and perform this
Agreement and to issue and sell the Shares. All necessary corporate
proceedings of the Company have been taken to authorize the execution,
delivery and performance by the Company of this Agreement. This
Agreement has been duly authorized, executed and delivered by each of
the Company and the Selling Shareholders, is the legal, valid and
binding obligation of each of the Company and of the Selling
Shareholders and (subject to applicable bankruptcy, insolvency, and
other laws affecting the enforceability of creditors' rights
generally) is enforceable as to the Company in
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accordance with its terms. No consent, authorization, approval,
order, license, certificate or permit of or from, or declaration or
filing with, any federal state, local or other governmental authority
or any court or other tribunal is required by the Company or any of
the Selling Shareholders, for the execution, delivery or performance
by the Company or any of the Selling Shareholders of this Agreement
(except filings under the Act which have been made prior to the
Closing Date and consents consisting only of consents under "blue sky"
or securities laws). To the knowledge of such counsel, no consent of
any party to any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or understanding
to which the Company or any of the Selling Shareholders is a party, or
to which any of their respective properties or assets are subject, is
required for the execution, delivery or performance of this Agreement;
and the execution, delivery and performance of this Agreement will not
violate, result in a breach of, conflict with, or (with or without the
giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding, in each case known to such counsel, or
violate or result in a breach of any term of the certificate of
incorporation (or other charter document) or by-laws of the Company,
or violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or any
of the Selling Shareholders or to which any of their respective
operations, businesses, properties or assets are subject.
(vii) The Firm Shares and the Option Shares are duly and validly
authorized. Such opinion delivered at each of the Closing Dates shall
state that each Share, as the case may be, to be delivered on that
date is duly and validly issued, fully paid, and non-assessable, with
no personal liability attaching to the ownership thereof, and is not
issued in violation of any preemptive rights of shareholders, and the
Underwriters have received good title to the Shares purchased by them,
respectively, from the Company and the Selling Shareholders, as
applicable, for the consideration contemplated herein and in good
faith and without notice of any adverse claim within the meaning of
the Uniform Commercial Code, free and clear of any liens, security
interests, pledges, charges, encumbrances, shareholders' agreements,
voting trusts and other claims. The Common Stock, the Preferred
Stock, the Firm Shares and the Option Shares conform to all statements
relating thereto contained in the Registration Statement or the
Prospectus.
(viii) To the knowledge of such counsel, any contract, agreement,
instrument, lease or license required to be described in the
Registration Statement or the Prospectus has been properly described
therein. To the knowledge of such counsel, any contract, agreement,
instrument, lease or license required to be filed as an exhibit to the
Registration Statement has been filed with the
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Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
(ix) Insofar as statements in the Prospectus purport to summarize
the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases or licenses, such statements have been prepared or
reviewed by such counsel and to the knowledge of such counsel,
accurately reflect the status of such litigation and provisions
purported to be summarized and are correct in all material respects.
(x) The Company is not an "investment company" as defined in
Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Prospectus, will not become
an "investment company" and will not be required to be registered
under the Investment Company Act.
(xi) To the knowledge of such counsel, no person or entity has
the right to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness of
the Registration Statement except such persons or entities from whom
written waivers of such rights have been received prior to the Closing
Date.
(xii) The Registration Statement has become effective under the
Act. No Stop Order has been issued and no proceedings for that
purpose has been instituted or are threatened, pending, or to such
counsel's knowledge, contemplated.
(xiii) The Registration Statement, any Rule 430A Prospectus, and
the Prospectus, and any amendment or supplement thereto (other than
financial statements and other financial data and schedules which are
or should be contained in any thereof, as to which such counsel need
express no opinion), comply as to form in all material respects with
the requirements of the Act and the Regulations. To the knowledge of
such counsel, the conditions for the use of Form SB-2 have been
satisfied with respect to the Registration Statement.
(xiv) Such counsel has no reason to believe that any of the
Registration Statement, any Rule 430A Prospectus, or the Prospectus,
or any amendment or supplement thereto (other than financial
statements and other financial data and schedules which are or should
be contained in any thereof, as to which such counsel need express no
opinion), contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(xv) To the knowledge of such counsel, since the effective date
of the Registration Statement, no event has occurred which should have
been set forth in an amendment or supplement to the
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Registration Statement or the Prospectus which has not been set forth
in such an amendment or supplement.
(xvi) The agreement of each officer, director and Selling
Shareholder of the Company, stating that for a period of 180 days from
the date on which the public offering of the Shares commences, such
officer, director and principal Shareholder will not, without the
prior written consent of Rodman, on behalf of the Underwriters, offer,
pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of Common
Stock (or any other securities of the Company or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the
Company, including, without limitation, any shares of Common Stock
issuable under any employee stock options), beneficially owned by such
individual, except with respect to Shares being sold in connection
herewith by a Selling Shareholder, has been duly and validly
authorized, executed and delivered by such individual and constitutes
the legal, valid and binding obligation of such individual enforceable
against such individual in accordance with its terms.
In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and the Prospectus
and in conferences with officers and other representatives of the Company,
representatives of the Representative and representatives of the independent
accountants of the Company, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel has not independently verified and is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus (except as specified in the foregoing opinion), on the basis of the
foregoing and relying as to materiality upon the representations of executive
officers of the Company after conferring with such executive officers, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus, except for the financial statements and other financial
and statistical data included therein as to which counsel need express no
opinion, as amended or supplemented on the date thereof contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
the Company as to laws of any jurisdiction other than the Federal laws of the
United States, the General Corporate Law of the states of Delaware, New Jersey
and New York, provided that (1) each such local counsel is reasonably acceptable
to the Representative and (2) such reliance is expressly authorized by each
opinion so relied upon and a copy of each such opinion is addressed to the
Representative and is in form and substance reasonably satisfactory to them and
their counsel. In addition, such counsel may rely, as to matters of fact, to
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the extent such counsel deems proper, on certificates of responsible officers of
the Company, provided that executed copies of such certificates are provided to
the Representative.
[(g) The Representative shall have received on each Closing date from
__________________, counsel to the Selling Shareholders, an opinion, addressed
to the Representative, and dated such Closing Date, to the effect that:]
(i) Each of the such Selling Shareholders has all requisite power
and authority to execute, deliver and perform this Agreement and to
issue and sell the Shares. In the case of a Selling Shareholder that
is a trust, the trustee of such trusts has the power and authority to
execute, deliver and perform this Agreement and to issue and sell the
Shares on behalf of such trust. This Agreement has been duly
authorized, executed and delivered by each of such Selling
Shareholders, is the legal, valid and binding obligation of each of
such Selling Shareholders and (subject to applicable bankruptcy,
insolvency, and other laws affecting the enforceability of creditors'
rights generally) is enforceable as to the such Selling Shareholder in
accordance with its terms. No consent, authorization, approval,
order, license, certificate or permit of or from, or declaration or
filing with, any federal state, local or other governmental authority
or any court or other tribunal is required by any of such Selling
Shareholders, for the execution, delivery or performance by any of
such Selling Shareholders of this Agreement (except filings under the
Act which have been made prior to the Closing Date and consents
consisting only of consents under "blue sky" or securities laws). To
the knowledge of such counsel, no consent of any party to any
contract, agreement, instrument, lease, license, indenture, mortgage,
deed of trust, note, arrangement or understanding to which any of such
Selling Shareholders is a party, or to which any of their respective
properties or assets are subject, is required for the execution,
delivery or performance of this Agreement; and the execution, delivery
and performance of this Agreement will not violate, result in a breach
of, conflict with, or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a
default under any such contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement or
understanding, in each case known to such counsel, or violate or
result in a breach of any term of the certificate of incorporation (or
other charter or trust document) or by-laws of any of such Selling
Shareholders, or violate, result in a breach of, or conflict with any
law, rule, regulation, order, judgment, or decree binding on any of
such Selling Shareholders or to which any of their respective
operations, businesses, properties or assets are subject.
(ii) Such opinion delivered at each of the Closing Dates shall
state that each Share, as the case may be, to be delivered on that
date is duly and validly issued, fully paid, and non-assessable, with
no personal liability attaching to the ownership thereof, and is not
issued in violation of any preemptive rights of
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shareholders, and the Underwriters have received good title to the
Shares purchased by them, respectively, from the Selling Shareholders,
as applicable, for the consideration contemplated herein and in good
faith and without notice of any adverse claim within the meaning of
the Uniform Commercial Code, free and clear of any liens, security
interests, pledges, charges, encumbrances, shareholders' agreements,
voting trusts and other claims.
(h) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be satisfactory in
form and substance to the Representative and its counsel, and the Underwriters
shall have received from Squadron, Ellenoff, Plesent & Sheinfeld, LLP, a
favorable opinion, addressed to the Representative and dated such Closing Date,
with respect to the Shares, the Registration Statement and the Prospectus, and
such other related matters, as the Representative may reasonably request, and
the Company and the Selling Shareholders shall have furnished to Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
(i) On the Firm Shares Closing Date, the Company shall pay Rodman
$200,000, which is equal to 1.0% of the new credit facility obtained by the
Company from Texas Commerce Bank National Association, which was entered into
with the assistance of Rodman.
6. Covenants of the Company and the Selling Shareholders.
(a) The Company covenants and agrees as follows:
(i) The Company shall use its best efforts to cause the
Registration Statement to become effective as promptly as possible.
If the Registration Statement has become or becomes effective with a
form of prospectus omitting Rule 430A information, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
file the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company shall notify
you immediately, and confirm such notice in writing, (A) when the
Registration Statement and any post-effective amendment thereto become
effective, (B) of the receipt of any comments from the Commission or
the "blue sky" or securities authority of any jurisdiction regarding
the Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, and (C) of the
receipt of any notification with respect to a Stop Order. The Company
shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representative a copy for their review prior to filing and shall not
file any such proposed amendment or supplement to which the
Representative reasonably object. The Company shall use its best
efforts to prevent the issuance of any Stop Order and, if issued, to
obtain as soon as possible the withdrawal thereof.
(ii) During the time when a prospectus relating to the Shares is
required to be delivered hereunder or under the Act or
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the Regulations, comply so far as it is able with all requirements
imposed upon it by the Act, as now existing and as hereafter amended,
and by the Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the
Shares in accordance with the provisions hereof and the Prospectus.
If, at any time when a prospectus relating to the Shares is required
to be delivered under the Act and the Regulations, any event as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, or if it
shall be necessary to amend or supplement the Prospectus to comply
with the Act or the Regulations, the Company promptly shall prepare
and file with the Commission, subject to the third sentence of
paragraph (i) of this Section 6(a), an amendment or supplement which
shall correct such statement or omission or an amendment which shall
effect such compliance.
(iii) The Company shall make generally available to its security
holders and to the Representative as soon as practicable, but not
later than 45 days after the end of the 12-month period beginning at
the end of the fiscal quarter of the Company during which the
Effective Date (or 90 days if such 12-month period coincides with the
Company's fiscal year), an earnings statement (which need not be
audited) of the Company, covering such 12-month period, which shall
satisfy the provisions of Section 11(a) of the Act or Rule 158 of the
Regulations.
(iv) The Company shall furnish to the Representative and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including all exhibits and amendments thereto)
and to each other Underwriter a copy of the Registration Statement
(without exhibits thereto) and all amendments thereof and, so long as
delivery of a prospectus by an Underwriter or dealer may be required
by the Act or the Regulations, as many copies of any preliminary
prospectus and the Prospectus and any amendments thereof and
supplements thereto as the Representative may reasonably request.
(v) The Company shall cooperate with the Representative and its
counsel in endeavoring to qualify the Shares for offer and sale under
the laws of such jurisdictions as the Representative may designate and
shall maintain such qualifications in effect so long as required for
the distribution of the Shares; provided, however, that the Company
shall not be required in connection therewith, as a condition thereof,
to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction or subject itself to taxation
as doing business in any jurisdiction.
(vi) For a period of five years after the date of this Agreement,
the Company shall supply to the Representative, and to each other
Underwriter who may so request in writing, copies of
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such financial statements and other periodic and special reports as
the Company may from time to time distribute generally to the holders
of any class of its capital stock and to furnish to the Representative
a copy of each annual or other report it shall be required to file
with the Commission.
(vii) For a period of 180 days from the date on which a public
offering of the Shares commences, the Company will not redeem any
outstanding warrants issued by the Company unless the Common Stock is
trading on the Nasdaq National Market at a price equal to or greater
than $9.00 per share without the prior written consent of Rodman on
behalf of the Underwriters.
(viii) Without the prior written consent of Rodman, on behalf of
the Underwriters, for a period of 180 days from the date on which a
public offering of the Shares commences, the Company shall not issue,
sell or register with the Commission or otherwise dispose of, directly
or indirectly, any securities of the Company (or any securities
convertible into or exercisable or exchangeable for securities of the
Company), except for the issuance of the Shares pursuant to the
Registration Statement.
(ix) On or before completion of this offering, the Company shall
make all filings required under applicable securities laws and by the
Nasdaq National Market.
(x) Prior to each Closing Date and for a period of 25 days
thereafter, you shall be given reasonable written prior notice of any
press release or other direct or indirect communication and of any
press conference with respect to the Company, the financial
conditions, results of operations, business, properties, assets,
liabilities of the Company, or this offering.
(xi) The Company will make all filings required to be made under
the Exchange Act and such filings shall comply in all material
respects with the Requirements of the Exchange Act and the rules and
regulations thereunder.
(b) The Company agrees to pay, or reimburse if paid by the
Representative, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
relating to the registration and public offering of the Shares including
those relating to: (i) the preparation, printing, filing and distribution
of the Registration Statement including all exhibits thereto, each
preliminary prospectus, the Prospectus, all amendments and supplements to
the Registration Statement and the Prospectus, and any documents required
to be delivered with any Preliminary Prospectus or the Prospectus, and the
printing, filing and distribution of the Agreement Among Underwriters, this
Agreement and related documents; (ii) the preparation and delivery of
certificates for the Shares to the Underwriters; (iii) the registration or
qualification of the Shares for offer and sale under the securities or Blue
Sky laws of the various jurisdictions referred to in Section 6(a)(v),
including the fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification
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and the preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs of
shipping and mailing) to the Representative and to the Underwriters of
copies of each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by
this Section to be so furnished, as may be reasonably requested for use in
connection with the offering and sale of the Shares by the Underwriters or
by dealers to whom Shares may be sold; (v) the filing fees of the National
Association of Securities Dealers, Inc. in connection with its review of
the terms of the public offering; (vi) the furnishing (including costs of
shipping and mailing) to the Representative and to the Underwriters of
copies of all reports and information required by Section 6(a)(vi); (vii)
inclusion of the Shares for quotation on the NASDAQ National Market System;
and (viii) all transfer taxes, if any, with respect to the sale and
delivery of the Shares by the Company and the Selling Shareholders to the
Underwriters. Except as otherwise contemplated by Section 9 hereof, the
Underwriters will pay their own counsel fees and expenses to the extent not
otherwise covered by clause (iii) above, and their own travel and travel-
related expenses in connection with the distribution of the Shares.
Without limiting the Company's obligations set forth above, each of the
Selling Shareholders agrees to pay all of its other costs and expenses
incident to the performance of its obligations under this Agreement and the
sale of the Shares by it hereunder.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act against any and all
losses, claims, damages and liabilities, joint or several (including any
reasonable investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding
or any claim asserted), to which they, or any of them, may become subject
under the Act, the Exchange Act or other Federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any
omission or alleged omission to state therein such fact required to be
stated therein or necessary to make such statements therein not misleading.
The Selling Shareholders agree, jointly and severally, to indemnify each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other Federal
or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact with
respect to
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<PAGE>
such Selling Shareholders contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment thereof or
supplement thereto (which amendments or supplements are furnished to such
Selling Shareholders), or which arise out of or are based upon any omission
or alleged omission to state therein such fact required to be stated
therein or necessary to make such statements therein not misleading, but
only with reference to information relating to such Selling Shareholders
furnished in writing to the Company by or on behalf of such Selling
Shareholders expressly for use in connection with the preparation of the
Registration Statement and Prospectus or any amendment thereof or
supplement thereto. Such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account of any
losses, claims, damages or liabilities arising from the sale of the Shares
to any person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such amendment
or supplement, in reliance upon and in conformity with information
furnished in writing to the Company by the Representative on behalf of any
Underwriter specifically for use therein. The obligations of each of the
Selling Shareholders, pursuant to this Section 7(a) and Section 8, shall be
limited to an amount not exceeding the product of the Per Share Price to
Public of the Shares as set forth on the cover page of the Prospectus and
the number of Shares being sold by each of them. In no event shall the
indemnification agreement contained in this Section 7(a) inure to the
benefit of any Underwriter on account of any losses, claims, damages,
liabilities or actions arising from the sale of the Shares upon the public
offering to any person by such Underwriter if such losses, claims, damages,
liabilities or actions arise out of, or are based upon, a statement or
omission or alleged omission in a preliminary prospectus and if, in respect
to such statement, omission or alleged omission, the Prospectus differs in
a material respect from such preliminary prospectus and a copy of the
Prospectus has not been sent or given to such person at or prior to the
confirmation of such sale to such person. This indemnity agreement will be
in addition to any liability which the Company and Selling Shareholders may
otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company
who signs the Registration Statement and each Selling Shareholder, to the
same extent as the foregoing indemnity from the Company and the Selling
Shareholders to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement
or omission or alleged untrue statement or omission which was made in any
Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement
thereto, which were made in reliance upon and in conformity with
information furnished in writing to the Company by the Representative on
behalf of any Underwriter for specific use therein; provided, however, that
the obligation of each Underwriter to indemnify the Company (including any
controlling person, director or officer thereof) and the Selling
Shareholders shall be limited to the net
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proceeds received by the Company and the Selling Shareholders,
respectively, from such Underwriter. For all purposes of this Agreement,
the amounts of the selling concession and reallowance set forth in the
Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for inclusion in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a
claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7(a) or 7(b) shall be available to
any party who shall fail to give notice as provided in this Section 7(c) if
the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure to
give such notice but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
that it may have to any indemnified party for contribution or otherwise
than under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval by
the indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except as
provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party), or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the indemnifying parties.
An indemnifying party shall not be liable for any settlement of any action,
suit, proceeding or claim effected without its written consent.
8. Contribution. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Sections 7(a) and
(b) is due in accordance with its terms but for any reason is
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<PAGE>
held to be unavailable from the Company, the Selling Shareholders or the
Underwriters, the Company, the Selling Shareholders and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, such as the Selling
Shareholders, persons who control the Company within the meaning of the Act,
officers of the Company who signed the Registration Statement and directors of
the Company, who may also be liable for contribution) to which the Company and
the Selling Shareholders and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Shareholders on the one hand and the Underwriters on
the other from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the Offering (net of underwriting
discounts but before deducting expenses) received by the Company or the Selling
Shareholders from the sale of the Shares, as set forth in the table on the cover
page of the Prospectus (but not taking into account the use of the proceeds of
such sale of Shares by the Company), bear to (y) the underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, the Selling Shareholders and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to information
supplied by the Company, the Selling Shareholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter (except as may be provided
in the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, (ii) in no case shall any of the Selling Shareholders be
liable or responsible for any amount in excess of the product of the Per Share
Price to Public of the Shares as set forth on the cover page of the Prospectus
and the number of Shares being sold by each of them subject to the limitation
expressed in Section 7(a), and (iii) the Company shall be liable and responsible
for any amount in excess of the underwriting discount and the amount referred to
in clause (ii); provided, however (i) that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
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20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i), (ii) and (iii) in the immediately
preceding sentence of this Section 8. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section, notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties from whom contribution may be sought shall not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have hereunder or otherwise than under this Section. No party
shall be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent. The Underwriters' obligations to
contribute pursuant to this Section 8 are several in proportion to their
respective underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with respect to the
Shares to be purchased on any Closing Date by the Representative by notifying
the Company at any time prior to the purchase of the Shares:
(a) in the absolute discretion of the Representative at or before any
Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the opinion of the Representative will in the future materially disrupt,
the securities markets; (ii) if there has occurred any new outbreak or
material escalation of hostilities or other calamity or crisis the effect
of which on the financial markets of the United States is such as to make
it, in the judgment of the Representative, inadvisable to proceed with the
Offering; (iii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States such as to make
it, in the judgment of the Representative, inadvisable or impracticable to
market the Shares; (iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. or the Nasdaq National Market System has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or any
other governmental or regulatory authority; or (v) if a banking moratorium
has been declared by any state or federal authority, or
(b) at or before any Closing Date, if any of the conditions specified
in Section 5 shall not have been fulfilled when and as required by this
Agreement.
If this Agreement is terminated pursuant to any of its provisions, neither
the Company nor the Selling Shareholders shall be under any liability to any
Underwriter, and no Underwriter shall be under any liability to the Company or
the Selling Shareholders, except that (y) if this Agreement is terminated by the
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Representative or the Underwriters because of any failure, refusal or inability
on the part of the Company or the Selling Shareholders or all of them to comply
with the terms or to fulfill any of the conditions of this Agreement, the
Company and the Selling Shareholders will reimburse the Underwriters for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
incurred by them in connection with the proposed purchase and sale of the Shares
or in contemplation of performing their obligations hereunder and (z) no
Underwriter who shall have failed or refused to purchase the Shares agreed to be
purchased by it under this Agreement, without some reason sufficient hereunder
to justify cancellation or termination of its obligations under this Agreement,
shall be relieved of liability to the Company and the Selling Shareholders or to
the other Underwriters for damages occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representative may find one or more substitute underwriters to
purchase such Shares or make such other arrangements as the Representative may
deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representative, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date:
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum number
of Shares that any Underwriter has agreed to purchase pursuant to Section 1
be increased pursuant to this Section 10 by more than one-ninth of such
number of Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representative to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representative or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representative and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and none of the nondefaulting
Underwriters or the Company shall make arrangements pursuant to this Section
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within the period stated for the purchase of the Shares that the defaulting
Underwriters agreed to purchase, this Agreement shall terminate with respect to
the Shares to be purchased on such Closing Date without liability on the part of
any nondefaulting Underwriter to the Company and the Selling Shareholders and
without liability on the part of the Company and the Selling Shareholders,
except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions
of this Section shall not in any way affect the liability of any defaulting
Underwriter to the Company or the Selling Shareholders or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers, of
the Selling Shareholders and of the Underwriters set forth in or made pursuant
to this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or the
Selling Shareholders or any of the officers, directors or controlling persons
referred to in Sections 7 and 8 hereof, and shall survive delivery of and
payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters,
the Company and the Selling Shareholders and their respective successors and
assigns and, to the extent expressed herein, for the benefit of persons
controlling any of the Underwriters, or the Company, and directors and officers
of the Company, and their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of Shares from any
Underwriter merely because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered, or by telefax or telegraph if subsequently confirmed by letter, (a)
if to the Representative, to Rodman & Renshaw, Inc., One Liberty Plaza, 165
Broadway, New York, New York 10006, Attention: John J. Borer, III, Managing
Director, telecopy: (212) 346-5099, (b) if to the Company, to the Company's
agent for service as such agent's address appears on the cover page of the
Registration Statement, and (c) if to the Selling Shareholders, to such Selling
Shareholder at each of their respective addresses appearing in Schedule II.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, or neuter, singular or plural, as the identity of the
person or persons or entity or entities require.
All section headings herein are for convenience of reference only and are
not part of this Agreement, and no construction or inference shall be derived
therefrom.
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Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
DIAGNOSTIC HEALTH SERVICES, INC.
By _________________________________
_______________________________
________________________________
________________________________
________________________________
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Confirmed on behalf of itself
and as the Representative of the several Underwriters
named in Schedule I annexed hereto:
RODMAN & RENSHAW, INC.
By:______________________________
Name: John J. Borer, III
Title: Managing Director
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SCHEDULE I
Number of Firm
Shares to be
NAME OF UNDERWRITER Purchased
- ------------------- ---------------
Rodman & Renshaw, Inc.
Total 3,000,000
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SCHEDULE II
FIRM SHARES
Number of Shares
Name of Selling Shareholder To Be Sold
--------------------------- ----------------
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<PAGE>
EXHIBIT 10.31
[LETTERHEAD OF TEXAS COMMERCE BANK]
May 2, 1996
Mr. Max W. Batzer
Chairman & Chief Executive Officer
Mr. Brad A. Hummel
President & Chief Operating Officer
Diagnostic Health Services, Inc.
2777 Stemmons, Suite 1525
Dallas, Texas 75207
RE: $20,000,000 Credit Facility
Gentlemen:
This letter (the "Financing Letter") is to confirm the understanding of
Diagnostic Health Services, Inc. (the "Company") and Texas Commerce Bank
National Association ("TCB") regarding financing in an aggregate amount of up
to $20,000,000 (the "Credit Facility") as outlined in Exhibit "A" hereto (the
"Term Sheet"). The Company's acceptance hereof will constitute the Company's
agreement to engage TCB to arrange the Credit Facility, subject to the terms
and conditions set forth herein, in the Term Sheet attached hereto, and in the
letter of even date herewith addressed by TCB to the Company providing, among
other things, for the payment of certain fees relating to the Credit Facility
(the "Fee Letter").
The Term Sheet is intended as a summary outline of the terms of the Facility
and the terms and conditions of the Credit Facility are not limited to those
set forth in the Term Sheet and those matters which are not covered by the
provisions of the Term Sheet are subject to TCB's and the Company's approval.
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
Diagnostic Health Services, Inc.
May 2, 1996
Page 2
Texas Commerce Bank National Association ("TCB") is pleased to commit
$20,000,000 of the Credit Facility. Until the date of execution of the final
documentation relating to the Credit Facility (the "Closing Date"), TCB's
willingness to participate in the transaction contemplated herein, in the Fee
Letter and in the Term Sheet is subject to TCB's continuing satisfaction with
the financial condition, operations and assets of the Company. If, on or
before the Closing Date, TCB's continuing review of the Company discloses
information, or TCB otherwise discovers information not previously disclosed
to it, which TCB believes has a materially negative impact on the Company's
financial condition, operations and/or assets, TCB may, in its sole
discretion, withdraw its commitment and decline to provide the Credit
Facility.
Among other things, the agreement of TCB hereunder is subject to: (i) TCB's
continued satisfaction with the business and financial condition of the
Company, and its subsidiaries, (ii) the Company's receipt of no less than
$10,000,000 from its contemplated secondary public offering, net of usually
and customary expenses, (iii) repayment of all term indebtedness outstanding
to TCB as of the commitment date, and (v) the negotiation, execution and
delivery of definitive documentation with respect to the Credit Facility
("Financing Documents") satisfactory to TCB and its counsel.
The Company hereby represents and covenants that to the best of its knowledge
all information and data concerning the Company and its subsidiaries (the
"Information") which is made available to TCB by or on behalf of the Company
will be to the best knowledge of the Company complete and correct in all
material respects and will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein not materially misleading in light of the circumstances
under which such statements are made. In arranging the Credit Facility, TCB
will be using and relying primarily on the Information without independent
verification thereof.
The Company hereby acknowledges and consents that TCB may share the offering
memorandum, the Information and any other information of matters relating to
the Company or the transactions contemplated hereby with affiliates including
Chemical Bank, The Chase Manhattan Bank, N.A., and TCB, and that such
affiliates may likewise share information relating to the Company or such
transactions with TCB.
The Company agrees to reimburse TCB for all reasonable out-of-pocket fees,
expenses and charges incurred in connection with respective activities
conducted pursuant to this Financing Letter, the Fee Letter, the Term Sheet
and the preparation of the Financing Documents, regardless of whether the
Credit Facility or the transactions contemplated by this Financing Letter, the
Fee Letter or the Term Sheet are consummated.
In the event that the Closing Date for the Credit Facility does not occur on
or before July 31, 1996 then the agreement of TCB hereunder will terminate
unless the parties hereto agree to an extension.
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
Diagnostic Health Services, Inc.
May 2, 1996
Page 3
THIS FINANCING LETTER, THE FEE LETTER AND THE TERM SHEET (INCLUDING ALL
EXHIBITS HERETO OR THERETO) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO ITS PRINCIPLES
OF CONFLICTS OF LAWS.
The terms of this Financing Letter, the Fee Letter and the Term Sheet shall
not be disclosed by the Company to any other person except persons in a
confidential relationship with the Company in connection with the transactions
contemplated by this Financing Letter, Fee Letter and the Term Sheet and
except as required by law or regulation or to comply with any pre-existing
duty of disclosure. In no event may the terms or existence of this Financing
Letter, the Fee Letter and the Term Sheet be disclosed to any financial
institution without the prior written consent of TCB.
THIS FINANCING LETTER, THE FEE LETTER AND THE TERM SHEET (INCLUDING ALL
EXHIBITS HERETO AND THERETO) CONSTITUTE A "LOAN AGREEMENT" FOR PURPOSES OF
(S)26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing correctly sets forth our agreement, please indicate the
Company's acceptance of the terms hereof and of the Term Sheet by signing in
the appropriate space below and returning to TCB the enclosed duplicate
original of this Financing Letter no later than 5:00 p.m., Dallas, Texas time
on Friday, May 3, 1996. In the event that TCB does not receive your acceptance
in accordance with the immediately preceding sentence, the agreement of TCB
hereunder shall terminate.
Very truly yours,
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By:
Name:
Title: Vice President
Accepted and Agreed to
this 2nd day of May 1996
Diagnostic Health Services, Inc.
By: Brad H. Hummel
Name: Brad A. Hummel
Title: President
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
SUMMARY OF TERMS AND CONDITIONS
- -------------------------------------------------------------------------------
EXHIBIT A
BORROWER: Diagnostic Health Services, Inc. (the "Company").
LENDER: Texas Commerce Bank National Association ("TCB").
GUARANTORS: All exisiting and future Subsidiaries of the Borrower.
FACILITIES: $20,000,000 credit facility (the "Credit Facility")
consisting of two branches:
A. $17,500,000 Advance Team Facility (the "Advance
Facility").
B. $2,500,000 Revolving Loan Facility (the "Revolving
Facility").
PURPOSE: A. To provide capacity for future acquisitions, including
fixed assets associated with such acquisitions.
Advances under the Advance Facility will be governed
by the ratio of Funded Debt to EBITDA as defined in
Financial Covenants. In addition, for single
acquisitions involving consideration of $2,000,000 or
greater, Borrower will obtain TCB approval prior to
closing. For individual acquisitions which do not meet
the above referenced $2,000,000 transaction threshold,
but whose cumulative consideration within any six
month period is $5,000,000 or greater ("Cumulative
Threshold"), Borrower will obtain TCB approval prior
to closing the transaction which meets or exceeds the
Cumulative Threshold. In all instances, Borrower will
forward to TCB within three days of execution, a copy
of letters of intent, purchase agreements, etc.
B. To fund ongoing working capital requirements.
INTEREST RATES
AND FEES:
See Schedule A attached.
MATURITY: A. June 30, 2001
B. June 30, 1998
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
SCHEDULED AMORTIZATION: A. Advances under the Advance Facility may be
made through December 31, 1997 with such
advances to be amortized (will include a
final balloon payment at maturity) as
follows:
(i) Quarterly interest only payments on
advances made through December 31, 1996.
The outstanding principal balance of
advances made through that date will be
repaid based on a five year, straight-
line amortization beginning February 1,
1997.
(ii) Quarterly interest only payments on
advances made after December 31, 1996
through December 31, 1997. The
outstanding principal balance of advances
made through that date will be repaid
based on a five year, straight-line
amortization beginning February 1, 1998.
B. N/A.
OPTIONAL PREPAYMENT: The Borrower may prepay amounts under the
Advance Facility in integral multiples of
$1,000,000 at any time upon certain required
notification periods, without premium or
penalty; however, prepayments of borrowings
based on the LIBOR Rate on any day other than
the last day of an interest period must be
accompanied by payments of all breakage costs
and funding losses, if any. All optional
prepayments of the Advance Facility shall be
applied to principal installments in inverse
order of maturity.
MANDATORY PREPAYMENT:
A. 50% of Excess Cash Flow ("ECF") shall be
applied annually to the remaining principal
installments of the Term Loan in inverse
order of maturity.
B. None.
ECF shall be defined as net income plus
depreciation, amortization, non-cash taxes and
other non-cash charges, minus other non-cash
gains, scheduled principal installments,
optional prepayments on the Advance Facility
(during the calculation period), cash interest
expense, nonfinanced capital expenditures
permitted under the Loan Agreement (limited to
$1,250,000 for purposes of determining ECF) and
scheduled capital lease payments.
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
SECURITY: The Credit Facility will be secured by a first lien or
first priority security interest and/or pledge of all of
the Borrower's and all of the present and future
Subsidiaries of the Borrower's assets, including: (i)
accounts receivable, (ii) inventory, (iii) furniture and
equipment, (iv) intangibles, and (v) outstanding capital
stock of the Subsidiaries.
CONDITIONS
PRECEDENT: Usual and customary for transactions of this type for
similar borrowers including, but not limited to, the
following:
(i) acceptable corporate and subsidiary structure;
(ii) execution and delivery of loan agreement, promissory
notes, mortgages, security agreements, guarantees
and other loan documents;
(iii) evidence of existence, good standing, authority and
authorization;
(iv) evidence of insurance certificates and loss payee
endorsements;
(v) absence of defaults or material adverse litigation
or material adverse change in the assets, business,
financial condition or prospects of the Borrower;
(vi) accuracy of representations and warranties;
(vii) opinions of counsel to the Borrower; and
(viii) payment of all fees and expenses.
REPRESENTATIONS AND
WARRANTIES:
Usual and customary for transactions of this type,
including, but not limited to, the following;
(i) due corporate organization, power and authorization
for contemplated transaction;
(ii) absence of material adverse litigation or
arbitration or change in financial condition;
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
(iii) no violations of any provisions in any existing
documents, laws or regulations, judgement decree or
order of any court or regulatory authority shall be
violated by the documents contemplated in this
transaction;
(iv) compliance with applicable laws, rules, regulations
licenses and permits (including but not limited to
those relating to the environment and ERISA);
(v) no liens created by execution of loan documents
except as are in favor of Agent;
(vi) possession of all material permits, licenses,
trademarks and other intangibles necessary to
conduct business;
(vii) fair presentation of financial statements of the
Borrower and its Subsidiaries; and
(viii) absence of defaults.
COVENANTS: Usual and customary for transactions for this type,
including, but not limited to, the following:
(i) delivery of financial statements (including, without
limitation, annual audited statements, monthly
unaudited statements, a monthly aging of accounts
receivable and a monthly officer's certificate
demonstrating compliance with the financial
covenants and a certificate of no default);
(ii) maintenance of financial covenants;
(iii) payment of taxes;
(iv) maintenance of corporate existence, compliance with
all applicable laws (including without limitation,
those related to ERISA);
(v) maintenance of books and records in accordance with
generally accepted accounting principles,
consistently applied;
(vi) prohibition on transactions with affiliates other
than on an arm's length basis on terms no less
favorable to the Borrower than those available from
third parties;
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
(vii) maintenance of insurance as is customary for the
industry; in addition, a continued assignment of
life insurance on Max Batzer and Brad Hummel in an
amount of not less than $1,000,000 each;
(viii) limitation on the creation of additional
indebtedness, liens, and contingent liabilities;
(ix) limitation on asset dispositions;
(x) limitation on mergers and consolidations; and
(xi) limitation on capital expenditures, investments,
dividends and other restricted payments;
(xii) limitation of Borrower's investment (advances or
loans) to subsidiary in Mexico;
(xiii) limitation on Messrs. Batzer and Hummel sale or
transfer of respective portion of Borrower stock.
FINANCIAL
COVENANTS:
MINIMUM FIXED CHARGE COVERAGE RATIO. The Borrower will
not permit the Fixed Charge Coverage Ratio at the end of
any fiscal quarter to be less than [1.20] to 1.00.
"Fixed Charge Coverage Ratio" means the ratio, at the end
of each fiscal quarter, of (a) EBITDA less cash taxes to
(b) the sum of interest expense plus scheduled
amortization (including capital lease obligations) plus
nonfinanced capital expenditures plus one-fifth of the
funded, non-amortizing portion of the Advance Facility.
MAXIMUM FUNDED DEBT TO EBITDA. The Borrower will not
permit the ratio of funded indebtedness to EBITDA to
exceed [2.50] times.
Funded Debt includes all amounts owed for borrowed money
such as those related to the Credit Facility, capital
lease obligations, guaranties and contingent liabilities
and other permitted debt.
EBITDA includes the sum of the Borrower's consolidated
net income before taxes, interest expense, depreciation
and amortization, less any EBITDA resulting from
equipment placement transactions which exceeds $500,000
in the aggregate plus "Acquired EBITDA".
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
Acquired EBITDA includes the sum of historical,
unadjusted net income before taxes of acquired companies
plus related interest expense, depreciation and
amortization (one time calculation computed at the time
of such acquisition and approved by TCB); multiplied by
the appropriate EBITDA Factor referenced in the chart
below:
<TABLE>
<CAPTION>
MONTHS SINCE EBITDA
ACQUISITION FACTOR
------------ ------
<S> <C>
Month Acquired 1.000
1 .9167
2 .8333
3 .7500
4 .6667
5 .5833
6 .5000
7 .4167
8 .3333
9 .2500
10 .1667
11 .0833
12 & thereafter .0000
</TABLE>
MINIMUM CURRENT RATIO. The Borrower will not permit the
Current Ratio to be less than [1.20] to 1.00
EVENTS OF DEFAULT: Usual and customary for facilities of this type,
including but not limited to, the following:
(i) failure to make any required mandatory principal
payment, payment of interest, or payments of fees;
(ii) commencement of voluntary or involuntary bankruptcy
or similar proceeding, insolvency, or dissolution;
(iii) breach of any Representation, Warranty or Covenant;
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(iv) default occurring under any indenture or
other agreement under which any
indebtedness for borrowed money may be
issued and such default shall continue for
a period of time sufficient to permit the
acceleration of the maturity of any
indebtedness;
- -------------------------------------------------------------------------------
(v) any final judgement in an amount in excess
of a negotiated maximum that remains
undischarged and unstayed for a period
longer than the appeal time provided by
applicable law, or any uninsured or
indemnified loss in excess of a negotiated
maximum;
(vi) change of control; and
(vii) unenforceability of any loan document.
CAPITAL ADEQUACY
YIELD PROTECTION:
The loan documents will contain yield
protection provisions appropriate for
transactions of this type, including provisions
relating to increased reserve requirement,
changes in law and circumstances, possible
future illegality of interest options, taxes
(other than on gross receipts or income),
possible inability to determine market rate,
capital adequacy, redeployment costs, and
consequential loss.
INDEMNIFICATION:
THE BORROWER WILL INDEMNIFY, DEFEND, AND HOLD
THE AGENT, THE ARRANGER AND THE LENDERS AND
THEIR RESPECTIVE SHAREHOLDERS, DIRECTORS,
OFFICERS, EMPLOYEES, AND AGENTS HARMLESS FROM
AND AGAINST ALL COSTS, LIABILITY AND EXPENSE
(INCLUDING INTEREST, PENALTIES, ATTORNEYS' FEES
AND AMOUNTS PAID IN SETTLEMENT) TO WHICH ANY OF
THEM MAY BECOME SUBJECT ARISING OUT OF OR
RELATING TO THE CREDIT FACILITY, INCLUDING
CONSEQUENCES OF THEIR OWN NEGLIGENCE, WHETHER
BY ALLEGED OR ACTUAL NEGLIGENCE OF THE PARTY TO
BE INDEMNIFIED OR OTHERWISE, EXCEPT AND TO THE
EXTENT CAUSED BY THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDIVIDUAL OR ENTITY
OTHERWISE SO INDEMNIFIED.
GOVERNING LAW: State of Texas.
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
CONFIDENTIAL DIAGNOSTIC HEALTH SERVICES, INC.
- -------------------------------------------------------------------------------
SCHEDULE A
INTEREST RATE
AND COMMITMENT FEE:
INTEREST RATE
At Borrower's option: (i) the Base Rate (greater
of (a) TCB's "prime rate" or (b) the federal
funds rate plus 1/2%) plus the Base Rate Margin
Percentage, or (ii) the LIBOR Rate (the reserve
adjusted rate quoted for the offering to the
Agent by prime banks selected by the Agent, of
deposits in U.S. dollars for delivery on the
first day of the applicable interest period and
having a maturity of one, two, three or six
months, as specified by the Borrower) plus the
LIBOR Margin Percentage. The Base Rate Margin
Percentage and the LIBOR Margin Percentage will
be determined by the ratio of Funded Debt to
EBITDA as shown in the matrix below and defined
in the Financial Covenants:
<TABLE>
<CAPTION>
BASE RATE LIBOR
MARGIN MARGIN UNUSED
FUNDED DEBT TO EBITDA RATIO PERCENTAGE PERCENTAGE FEE
--------------------------- ---------- ---------- ------
<S> <C> <C> <C>
Greater than 2.00............... 1.00% 2.50% .375%
Greater than or equal to 1.00
but less than 2.00............. .50% 2.00% .250%
Less than 1.00.................. .25% 1.75% .250%
</TABLE>
- --------------------------------------------------------------------------------
Texas
LOGO Commerce Texas Commerce LOGO CHASE
Bank
<PAGE>
EXHIBIT 11.1
Statement re: computation of per share earnings.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
EARNINGS PER SHARE
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL ISSUED PRIMARY FULLY DILUTED
DATE # SHARES WTD. AVG. WTD. AVG.
-------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Shares issued January 1, 1995 1/1/95 4,793,453 4,793,453
Treasury Shares 1/1/95 (233,259) (233,259)
ADI Acquisition 1/1/95 240,000 240,000
SIS Contingent Bonus 1/3/95 7,017 6,959
Options Exercised 1/12/95 500 484
HDI Acquisition 1/1/95 84,211 84,211
Alpha Contingent Bonus 6/14/95 24,118 13,215
Medmark Contingent Bonus 7/1/95 23,810 11,938
HomeCare Minority Interest 10/19/95 9,622 1,924
SIS Contingent Bonus 10/27/95 10,727 1,910
Reliascan Contingent Bonus 11/14/95 12,903 1,661
- -------------------------------------------------------------------------------
Shares Outstanding 12/31/95 4,973,102 4,922,497 4,922,497
Common Stock Equivalents (See 486,146 762,814
Schedule) ---------- ----------
Primary weighted average 5,408,643 5,685,311
shares ========== ==========
Fully diluted:
Alpha contingent 24,118
Cardio/HDI contingent 33,333
Reliascan contingent
($1.9375/share) 25,806
Medmark contingent 47,620
($1.75/share) --------
130,877 130,877
-------- ----------
Fully diluted weighted average 5,816,188
shares ==========
December 31, 1995 Net Income $1,227,713 $1,227,713
========== ==========
Earnings Per Share $0.2270 $0.2111
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF COMMON STOCK EQUIVALENTS
------------------------------------
<S> <C> <C> <C> <C>
Closing price at end of
period 5.2500
Average share price
during period 3.2248
</TABLE>
<TABLE>
<CAPTION>
FULLY
PRIMARY D.
PRIMARY FULLY D. NET NET
STOCK OPTIONS & EXERCISE ASSUMED TREAS. SHS. TREAS. SHS. ADD'L ADD'L
WARRANTS: NUMBER PRICE PROCEEDS ACQUIRED ACQUIRED SHARES SHARES
- --------------- --------- -------- -------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Public warrants 1,375,000 5.2500 0 0 0 0 0
Shares included in Un-
derwriter's Warrants 137,500 6.3000 0 0 0 0 0
Warrants included in Un-
derwriter's Warrants 137,500 6.3000 0 0 0 0 0
Private Warrant #1 49,693 2.2100 109,822 34,055 20,918 15,638 28,775
Private Warrant #2 49,693 2.2100 109,822 34,055 20,918 15,638 28,775
ISO's Round #1 80,299 2.2100 177,461 55,030 33,802 25,269 46,497
Non-Qual. Round #1 304,935 2.2100 673,906 208,975 128,363 95,960 176,572
Employee Non-Qual. #1 3,000 2.6250 7,875 2,442 1,500 558 1,500
Employee Non-Qual. #2 2,000 2.6250 5,250 1,628 1,000 372 1,000
Homecare #1 Non-Qual. 12,000 1.8400 22,080 6,847 4,206 5,153 7,794
ISO's Round #2 33,000 0.9375 30,938 9,594 5,893 23,406 27,107
Non-Qual. Round #2 173,000 0.9375 162,188 50,293 30,893 122,707 142,107
Warrants (MDI Purchase) 75,000 3.0000 225,000 69,771 42,857 5,229 32,143
Warrants (Post-MDI) 22,000 3.0000 66,000 20,466 12,571 1,534 9,429
Non-Qual. Round #3 200,000 1.6875 337,500 104,657 64,286 95,343 135,714
ISO's Round #3 65,750 1.9375 127,391 39,503 24,265 26,247 41,485
Non-Qual. Round #4 133,000 1.9375 257,688 79,908 49,083 53,092 83,917
Non-Qual. Round #5 36,000 4.2500 0 0 0 0 0
Non-Qual. Round #6 130,000 4.2500 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total Common Stock
Equivalents 3,019,370 486,146 762,814
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. SUBSIDIARIES
EARNINGS PER SHARE
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL ISSUED PRIMARY FULLY DILUTED
DATE # SHARES WTD. AVG. WTD. AVG.
------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Shares issued January 1, 1996 1/1/96 5,206,361 5,206,361
Treasury Shares 1/1/96 (233,259) (233,259)
NPE/PEDI Acquisition 1/1/96 85,200 85,200
Shares Outstanding 3/31/96 5,058,302 5,058,302 5,058,302
Common Stock Equivalents (See
Schedule) 885,840 885,840
--------- ---------
Primary weighted average shares 5,944,142 5,994,142
=========
Fully diluted:
Alpha contingent 24,118
Cardio/HDI contingent 33,333
Reliascan contingent
($1.9375/share) 25,806
Medmark contingent ($1.75/share) 47,620
-------
130,877 130,877
------- ---------
Fully diluted weighted average
shares 6,075,019
=========
March 31, 1996 Net Income $ 458,835 $ 458,835
========= =========
Earnings Per Share $ 0.0772 $ 0.0755
========= =========
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF COMMON STOCK EQUIVALENTS
------------------------------------
<S> <C>
Closing price at end of
period 5.6250
Average share price
during period 5.9685
</TABLE>
<TABLE>
<CAPTION>
PRIMARY FULLY D.
PRIMARY FULLY D. NET NET
EXERCISE ASSUMED TREAS. SHS. TREAS. SHS ADD'L ADD'L
STOCK OPTIONS & WARRANTS NUMBER PRICE PROCEEDS ACQUIRED ACQUIRED SHARES SHARES
- ------------------------ --------- -------- -------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Public warrants 1,375,000 6.2500 0 0 0 0 0
Shares included in Un-
derwriter's Warrants 156,646 5.5300 866,252 145,137 145,137 11,509 11,509
Warrants included in Un-
derwriter's Warrants 156,646 7.5000 0 0 0 0 0
Private Warrant #1 49,693 2.2100 109,822 18,400 18,400 31,293 31,293
Private Warrant #2 49,693 2.2100 109,822 18,400 18,400 31,293 31,293
ISO's Round #1 80,299 2.2100 177,461 29,733 29,733 50,566 50,566
Non-Qual. Round #1 304,935 2.2100 673,906 112,910 112,910 192,025 192,025
Kirker Non-Qual. #1 3,000 2.6250 7,875 1,319 1,319 1,681 1,681
Pena Non-Qual. #2 2,000 2.6250 5,250 880 880 1,120 1,120
Nosnik #1 Non-Qual. 16,000 1,8400 29,440 4,933 4,933 11,067 11,067
ISO's Round #2 33,000 0.9375 30,938 5,183 5,183 27,817 27,817
Non-Qual. Round #2 173,000 0.9375 162,188 27,174 27,174 145,826 145,826
Warrants (MDI Purchase) 75,000 3.0000 225,000 37,698 37,698 37,302 37,302
Warrants (Post-MDI) 22,000 3.0000 66,000 11,058 11,058 10,942 10,942
Non-Qual. Round #3 200,000 1.6875 337,500 56,547 56,547 143,453 143,453
ISO's Round #3 65,750 1.9375 127,391 21,344 21,344 44,406 44,406
Non-Qual. Round #4 133,000 1.9375 257,688 43,175 43,175 89,825 89,825
Non-Qual. Round #5 36,000 4.2500 153,000 25,635 25,635 10,365 10,365
Non-Qual. Round #6 130,000 4.2500 552,500 92,569 92,569 37,431 37,431
Nosnik #2 Non-Qual. 60,000 5.2500 315,000 52,777 52,777 7,223 7,223
Non-Qual Round #7 7,000 5.3750 37,625 6,304 6,304 696 696
Non-Qual Round #8 52,500 6.2500 0 0 0 0 0
--------- ------ ------- ------- ------- ------- -------
Total Common Stock
Equivalents 3,181,162 885,840 885,840
========= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our
report dated March 1, 1996 relating to the consolidated financial statements
of Diagnostic Health Services, Inc. and Subsidiaries for the years ended
December 31, 1994 and 1995, and the reference of our firm under the captions
"SELECTED FINANCIAL DATA" and "EXPERTS" in the Prospectus.
[Signature]
Moore Stephens Simonton, L.L.P.
Houston, Texas
May 2, 1996
