<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943 [No Fee Required]
For the transition period from.........to........
Commission file number 0-21758
DIAGNOSTIC HEALTH SERVICES, INC.
(Name of small business issuer in its charter)
Delaware 22-2960048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207
(Address of principal executive offices)
Issuer's telephone number: (214)634-0403
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 par value NASDAQ National Market
Warrants to purchase Common Stock NASDAQ National Market
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Warrants to purchase Common Stock
Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90
days. Yes...X... No.......
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B not contained in this
form and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to the Form 10-KSB. [ ]
<PAGE>
The issuer's revenues for its most recent fiscal year
were $24,171,000.
The aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which
the stock was sold, or the average bid and asked prices of
such stock, as of March 21, 1997, was $69,223,818.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of
the Exchange Act after the distribution of securities under
a plan confirmed by a court. Yes...... No......
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the issuer's Common
Stock, $.001 par value, as of March 21, 1997 was 8,925,102.
Documents Incorporated By Reference: None
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Diagnostic Health Services, Inc. ("DHS" or the "Company") is a
leading outsource provider of medical services to hospitals,
physicians' offices and other healthcare facilities in the
Midwest, West and South Central United States. DHS primarily
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,
including radiology technologists, physical and occupational
therapists and other healthcare professionals, on a temporary
basis to perform a variety of functions in hospitals, long-term
care facilities, physicians' offices, clinics and home healthcare
settings.
The Company was incorporated in Texas in 1983 and was
reincorporated in Delaware in 1992. The Company is headquartered
in Dallas, Texas, and provides services in Texas, Oklahoma,
Illinois, Indiana, Louisiana, Mississippi, Missouri, Iowa, Ohio,
Michigan, Arkansas, Georgia, Alabama, Virginia, Tennessee,
Kansas, New Mexico, Arizona, Nevada, California and in the
greater Mexico City area.
In addition to significant internal growth, the Company has
expanded its business through numerous acquisitions. Information
regarding acquisitions in the past three fiscal years is included
in the footnotes to the audited financial statements appearing at
Item 7 below.
The following chart sets forth the corporate structure of the
Company and its subsidiaries at March 21, 1997:
[CHART APPEARS HERE]
In addition, DHSMS has an inactive wholly-owned subsidiary, HomeCare
International, Inc.
3
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Business Operations
Shared Services
- ---------------
The Company operates a fleet of specially equipped vehicles
(vans and trucks) to transport its imaging equipment to
hospitals, clinics, long- term care facilities and other
healthcare settings. The services provided via the shared
services mechanism are predominantly diagnostic ultrasound, for
which the equipment is portable and service is rendered on an
"as needed" basis. This includes a large number of regular and
routed schedules as well as "on call" services to customers in
response to emergent demand.
At year- end 1996, the Company provided shared services to
approximately 311 hospitals and approximately 566 additional
clients across the healthcare spectrum, including physicians'
offices, sub acute and long-term care facilities, managed care
systems, and government facilities.
In-House Services (also referred to as Fixed Site Services)
- -------------------------------------------------------------
In addition to the shared services, the Company provides
diagnostic services within hospitals and clinical radiology
or cardiology departments. These services include the provision
of the allied healthcare professional (technologist) who staff
the equipment and is responsible for image acquisition; the
provision and management of diagnostic equipment or other
related instrumentation; the management and processing of data
for the procedures conducted within the respective department;
and in some instances the provision, via subcontracting, of
the professional component (interpretation) of the data by a
physician.
These in-house services may include any or all of the
aforementioned responsibilities. The imaging modalities under
management include, but are not limited to, diagnostic
ultrasound, computerized tomography, MRI, nuclear medicine, and
cardiac catherization services.
Generally, the Company is responsible for various quality
assurance programs related to the services it provides and
assumes documentation responsibility and management oversight of
departmental compliance issues, licenses, accreditation and
certification requirements.
At December 31, 1996, the Company provided in-house services at
96 hospitals throughout its operational markets.
Ancillary Services
- ------------------
During 1996, the Company reorganized its former "TempTech"
division into an operating unit that included (i) the provision
of contract occupational and physical therapists on a long or
short term basis to healthcare facilities throughout the United
States; (ii) the provision of therapists and nurses in a home
healthcare setting in Mexico City and surrounding areas, and (iii)
the provision of cardiac monitoring services, such as Holter
monitoring, pacemaker monitoring and event recording to patients
in several of the Company's markets.
4
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Customers
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 1995 and 1996, 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 1995 and
approximately 6% of the Company's revenues in 1996. In most
cases, the hospital or healthcare facility (which is the
Company's customer) is the responsible payment party. Third
party payors accounted for approximately 7% and 15% of the
Company's revenue in 1995 and 1996, 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 1996, the Company's customer base increased from 323
(including seven in-house agreements) to approximately 1,200
(including 96 in-house agreements). Customers in 1996 included
409 hospitals and 711 physicians' offices, clinics and healthcare
facilities in 12 states.
In 1996, the Company's revenues were attributable to shared
services, in-house services and ancillary services, in the
following approximate proportions:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Shared 32%
In-House/Fixed Base 64%
Ancillary 2%
</TABLE>
Operating Structure
Through the implementation of a deliberate and prudent
acquisition strategy, the Company has established a network of
operational facilities throughout the country. These division
offices, located in Arlington, San Antonio and Houston, TX,
Los Angeles and San Diego, CA, Albuquerque, NM, Phoenix, AZ, Las
Vegas and Reno, NV, Tulsa and Oklahoma City OK, St. Louis MO,
Chicago IL, Atlanta, GA and Monroe LA, serve as an operations
base for both clinical staff, local management and sales. By
keeping these functions local, the Company remains responsive
to its customer base as well as to opportunities for expansion
and development within the Company's markets.
The Company provides local personnel with a comprehensive range
of support services, including financial and administrative
services, and employs a system which carefully monitors local
operations through an extensive system of controls, including
regular financial reporting, accounts receivable analysis and
customer tracking. The Company provides administrative
functions at the corporate level, including receivables
management, purchasing, human resources and accounting
thereby eliminating the need for these services locally.
5
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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 divisional 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 with information specific to
existing customers. The Company believes that its information
technology system can support substantial growth without
requiring significant capital expenditures.
Sales and Marketing
The Company directs its sales and marketing activities from its
Dallas headquarters, and out of each of its operating divisions.
Each operating division has at least one, and in some instances
more than one, sales representative devoted full time to
promotion of the Company's business and maintenance and expansion
of existing relationships. Additionally, each division manager
as well as the regional vice presidents devote portions of their
time to customer relations and marketing functions.
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.
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 Ancillary Services Division have
generally increased in holiday periods, due to increased demand
for temporary personnel when regular staff is away.
6
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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 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.
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 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 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. Further,
7
<PAGE>
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 designed 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 the law. For example, if the
opportunity for a physician to provide interpretations pursuant
to a personal services agreement with the Company was conditioned
upon 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 (resource-based relative value scale) 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 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.
8
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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. 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
9
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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.
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 21, 1997, the Company had 367 full-time employees,
41 part-time employees, and 81 contract employees for a total of
489 employees (including operations in Mexico). 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.
10
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ITEM 2. DESCRIPTION OF PROPERTY
Property
The Company maintains its headquarters in approximately 8,781
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
divisional offices at 15 leased locations, ranging in size from
approximately 1,200 square feet to approximately 11,300 square
feet, at rentals generally ranging from $4 to $15 per square
foot per year (although rental at the Company's newly acquired
Los Angeles office is approximately $32 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.
Investment Policies
The Company generally acquires its assets for the purpose of
producing income from the use of such assets in the Company's
operations. The Company invests excess cash on hand primarily in
short-term certificates of deposit and United States Treasury
instruments.
The Company does not have any real estate-related investments and
does not intend to make or acquire any such investments in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation arising in the normal course
of its business. No pending litigation involving the Company
(taken singly or in the aggregate) is expected to have a material
adverse effect on the Company or its consolidated financial
position. The Company is not aware of any contemplated legal
proceedings that may be brought against the Company in the future
and which would, if adversely determined, have a material adverse
effect on the Company or its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the
fourth quarter of 1996.
In prior years, the Company held its annual meeting of
stockholders in late November. However, in 1996, the Board of
Directors determined to amend the Company's by-laws so as to
provide for the annual meeting of stockholders to be held during
the last week of May in each year, to coincide with the
publication of the Company's annual financial statements and
annual report. As a result, the term of each existing
directorship of the Company was extended by approximately six
months, to coincide with such rescheduled annual meeting.
11
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Since January 22, 1996, the Company's Common Stock has been
listed on the NASDAQ National Market. From June 23, 1993 to
January 19, 1996, the Common Stock was listed on the SmallCap
Market of the National Association of Securities Dealers
Automated Quotation System. The range of reported high bid and
low bid quotations for the Common Stock on a quarterly basis from
January 1, 1995 through January 19, 1996, and the last sale price
from January 22, 1996 through March 21, 1997, 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 Bid Low Bid
-------- -------
<S> <C> <C>
1995
1st Quarter $2.63 $1.88
2nd Quarter $3.38 $1.94
3rd Quarter $4.75 $2.94
4th Quarter $5.25 $3.81
1996
1st Quarter $7.50 $4.875
2nd Quarter $8.375 $5.00
3rd Quarter $8.375 $5.875
4th Quarter $8.50 $6.625
1997
1st Quarter to March 21, 1997 $10.125 $7.44
</TABLE>
On March 21, 1997, the last reported sale price for the Common
Stock was $8.625, and the Company had 163 stockholders of record
as of that date. The Company believes that there are more than
1,200 beneficial owners of Common Stock.
Recent Sales of Unregistered Securities
In the past three years, in addition to options granted under the
Company's various stock option plans (see Item 10 below) and
securities issued in connection with the Company's business
acquisitions (see the notes to the audited financial statements
included in Item 7 below), the Company consummated a private
placement in April 1996 of unregistered promissory notes in an
aggregate amount of $1,000,000 (the "Bridge Notes"), and in
connection therewith, issued , to the purchasers of such Bridge
Notes, warrants (the "Bridge Warrants") entitling the holders
thereof to purchase, at any time through April 15, 2001, up to an
aggregate of 50,000 shares of common stock of the Company at an
exercise price of $6.25 per share, subject to adjustment
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upon the occurrence of any stock dividends, stock splits,
combinations of shares or reclassifications of the Common Stock,
or upon any consolidation or merger of the Company with or into
another corporation. Commencing October 15, 1997, the Company has
the right to call the Bridge Warrants for redemption at $.01 per
Bridge Warrant on 30 days' written notice if the average market
price of the Common Stock equals or exceed $9.00 per share
(subject to adjustments 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. As of the date of this report, an aggregate
of 35,000 Bridge Warrants have been exercised, although
certificates for only 2,500 of such shares have been issued. The
issuance of the Bridge Notes and the Bridge Warrants was exempt
from registration under Regulation D promulgated under the
Securities Act of 1933, as amended (the "Act"), based upon
representations and warranties made by the eighteen purchasers
thereof as to their status as "accredited investors."
Simultaneously with the issuance of the Bridge Notes and the
Bridge Warrants, the Company borrowed an additional $1,000,000
from Texas Commerce Bank National Association (TCB"), in
conjunction with which the Company issued to TCB warrants ("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. The issuance of The Bank Warrants was exempt
from registration pursuant to Regulation D promulgated under the
Act based upon TCB's representations and warranties as to its
status as an "accredited investor."
In connection with the Company's acquisition of Advanced Clinical
Technology, Inc. and Horizon MDS Corporation (collectively,
"ACT") in November 1996 (see Note 11 to the audited financial
statements included in Item 7 below), the Company issued to ACT
642,857 shares of Series A Convertible Redeemable Preferred Stock
of the Company ("Series A Preferred Stock"), having an aggregate
liquidation preference of $4,500,000. The shares of Series A
Preferred Stock bear dividends at the rate of 7.25% per annum
(payable in kind in additional shares of Series A Preferred
Stock), and all outstanding shares of Series A Preferred Stock
(including accrued dividends) are convertible, at the option of
the holder thereof, into Common Stock of the Company at the rate
of one share of Series A Preferred Stock for each share of Common
Stock. In addition, in the event that, commencing with the
Company's fiscal quarter ending December 31, 1997, the mean
average daily last reported sale price of the Common Stock (the
"Average Closing Price") in any fiscal quarter of the Company
shall be less than $7.00 per share, then, at any time and from
time to time during the next succeeding fiscal quarter of the
Company, each outstanding share of Series A Preferred Stock will
be convertible into a number of shares of Common Stock equal to
$7.00 divided by the Average Closing Price during the preceding
fiscal quarter. The Company has reserved the right to limit
ACT's holdings of conversion shares to 4.9% of the total
outstanding common stock (or 9.9% in the event of and after
giving effect to any conversion at the reduced price under the
immediately preceding sentence). The issuance of the Series A
Preferred Stock was exempt from registration pursuant to
Regulation D and promulgated under the Act, and based on ACT's
warranty as to the acquisition of such shares for investment and
not for resale or distribution.
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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 ("TCB")
prohibits the payment of dividends without TCB'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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The following discussion and analysis should be read in
conjunction with the information set forth in the financial
statements and notes thereto included in this report. All 1994
and 1995 information has been restated to reflect the pooling-of-
interests with ADI.
Results of Operations
The following table sets forth operating data of the Company as a
percentage of net sales for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- -----
<S> <C> <C>
Net Sales 100.0% 100.0%
Operating expenses 83.9 89.8
----- -----
Operating Income 16.2 10.2
Interest Expense (3.6) (2.5)
Other Income 2.0 .05
----- -----
Income Before Income Taxes 14.6 8.2
Income Tax Expense (4.4) 1.0
----- -----
Net Income 10.2% 7.2%
===== =====
</TABLE>
NOTE: Numbers may not add due to rounding.
Year Ended December 31, 1996 Compared With Year Ended December
31, 1995
Gross revenues increased by 41.5% to approximately $24,171,000 in
1996 from approximately $17,083,00 in 1995. Excluding revenues
attributable to acquired businesses, gross revenues increased by
25.5% to approximately $18,791,000 for 1996 from approximately
$14,966,000 for 1995.
The Company's operating expenses increased from approximately
$15,336,000 in 1995 to approximately $20,268,000 in 1996. As a
percentage of net sales, operating expenses decreased from 89.9%
to 83.9%. 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.
Income from operations increased by 123.4% to approximately
$3,903,540 in 1996 from approximately $ 1,747,035 in 1995. As a
percentage of gross revenues, income from operations increased
from 10.2% in 1995 to 16.2% in 1996.
Interest expense increased by 96.8% from approximately $442,000
in 1995 to approximately $870,000 in 1996, primarily as a result
of new obligations acquired in connection with the ACT
15
<PAGE>
acquisition. As a percentage of net sales, interest expense
increased from 2.5% in 1995 to 3.6% in 1996.
"Other income" is primarily interest earned on liquid
investments.
Net income approximately doubled from $1,227,000 in 1995 to
$2,459,000 in 1996. This increase is primarily due to continued
consolidation of the Company's administrative functions, and
increased sales. As a percentage of sales, all expense
categories were down in 1996, except for depreciation and
amortization.
Liquidity and Capital Resources
In July 1996, the Company and its subsidiaries entered in to an
amended and restated revolving credit and term loan facility
with TCB, providing for up to $2,500,000 in available revolving
credit (or, if less, 75% of the Company's and its subsidiaries'
eligible accounts receivable from time to time), and an
acquisition term loan facility of up to $17,500,000 in original
principal amount. At December 31, 1996, the Company's
outstanding borrowings under the loan agreement were $1,572,000
under the revolving credit facility, and $8,569,573 under the
term loan facility. These loans bear interest at varying rates,
depending on the Company's relative leverage from time to time.
The Company and its subsidiaries have also entered into various
financing arrangements with commercial leasing companies and
equipment suppliers, bearing interest ranging from 6% to 11% per
annum.
In July 1996, the Company also completed a public offering of
Common Stock, pursuant to which the Company realized net proceeds
of approximately $17,504,500. The proceeds of this offering have
been and continue to be utilized to retire debt (including the
Bridge Notes) and lease financing liabilities, to consummate
acquisitions, and for working capital.
At December 31, 1996, the Company had approximately $5,220,000 in
cash, cash equivalents and short-term investments and additional
unused availability of $928,000 under its revolving credit
facility. From February 1 to March 20, 1997, the Company
received approximately $4,379,000 from the exercise of its
publicly traded warrants and certain of the Bridge Warrants.
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 through
the close of the Company's fiscal year ending December 31, 1997.
The Company has retained Prudential Securities, Inc. to effect a
private placement of $20,000,000 of senior subordinated
promissory notes, in connection with (a) the Company's proposed
acquisition of four magnetic resonance imaging centers in
California from Diagnostic Imaging Services, Inc. ("DIS"), and
(b) to retire a $5,500,000 advance made to the Company by TCB in
connection with the Company's acquisition of the ultrasound
division of DIS consummated in March 1997.
16
<PAGE>
Trends and Uncertainties
The Company's future revenues and results of operations may be
substantially affected by proposed reforms of the nation's
healthcare system and by potential reductions in reimbursement
rates and policies imposed by Medicare and other third-party
reimbursement programs (from which the Company derives a material
portion of its receipts). Continuing pressures on pricing
structures applicable to the Company's services could have the
effect of reducing the Company's revenues and operating profit
margins. The Company is unable to predict the nature or extent
of any such policy changes and/or the effects thereof on the
Company.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Page
Number
Consolidated Financial Statements:
Independent Auditors Report F - 2
Consolidated Balance Sheet as
of December 31, 1996 and 1995 F - 3
Consolidated Statement of Operations
for the years ended
December 31, 1996 and 1995 F - 5
Consolidated Statement of
Stockholders' Equity for the
years ended December 31, 1996 and 1995 F - 6
Consolidated Statement of Cash Flows
for the years ended December 31, 1996 and 1995 F - 7
Notes to the Consolidated Financial Statements F - 8
18
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996 and 1995
and
Independent Auditors' Report
F-1
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Independent Auditors' 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, 1996 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 audits.
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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Diagnostic Health Services, Inc. and Subsidiaries at
December 31, 1996 and 1995, and the results of their operations
and cash flows for the years then ended in conformity with
generally accepted accounting principles.
/S/ Simonton, Kutac & Barnidge, L.L.P.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
March 21, 1997
F-2
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 229,547 $ 705,179
Short-term investments 5,000,000 --
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $1,413,168 and $114,817, respectively 10,530,807 2,810,912
Accrued interest and other 701,438 177,054
Stockholders 40,453 34,243
Employees 185,892 56,795
Contracts receivable - current 1,317,146 434,008
Prepaid expenses 1,359,596 397,807
Deferred tax asset 57,876 55,023
----------- -----------
Total Current Assets 19,422,755 4,671,021
----------- -----------
Property & Equipment:
Office furniture & equipment 1,139,535 654,970
Machinery & service equipment 20,089,559 9,527,210
Leasehold improvements 45,526 19,009
Less: Accumulated depreciation and amortization (5,425,437) (3,705,988)
----------- -----------
Total Property & Equipment 15,849,183 6,495,201
----------- -----------
Other Assets:
Deposits and other 958,391 362,320
Deferred acquisition costs 164,199 57,523
Contracts receivable - long-term 1,739,587 1,458,481
Goodwill 15,022,858 5,584,306
Noncompete agreements 1,586,818 1,335,892
Less: Accumulated amortization (1,423,418) (673,215)
----------- -----------
Total Other Assets 18,048,435 8,125,307
----------- -----------
Total Assets $53,320,373 $19,291,529
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current Liabilities:
Accounts payable 1,957,758 $1,070,915
Accrued liabilities 1,534,551 207,133
Current lease obligations 2,154,035 759,079
Current portion of long-term debt 1,991,824 1,403,463
Notes payable 1,572,000 700,000
Current income taxes 195,000 23,965
------------ -----------
Total Current Liabilities 9,405,168 4,164,555
Long-term lease obligations 4,865,190 1,243,231
Long-term debt 7,081,745 4,418,396
Deferred rent 155,426 --
Other liabilities 778,446 353,192
Deferred income taxes 1,057,779 205,961
------------ -----------
Total Liabilities 23,343,754 10,385,335
------------ -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value; authorized 15,000,000
shares; issued 8,400,762 shares in 1996 and 5,206,361
shares in 1995; outstanding 8,167,503 shares in 1996
and 4,973,102 shares in 1995 8,401 5,206
Preferred stock, $.001 par value; authorized 3,000,000
shares; issued and outstanding 648,986
shares in 1996 and zero shares in 1995 649 --
Additional paid-in capital 27,617,425 9,018,442
Retained earnings 2,567,195 108,118
Foreign currency translation (5,900) (6,171)
Stock subscription receivable -- (8,250)
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
----------- -----------
Total Stockholders' Equity 29,976,619 8,906,194
----------- -----------
Total Liabilities & Stockholders' Equity $53,320,373 $19,291,529
=========== ===========
</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
December 31,
----------------------
1996 1995
----------- -----------
<S> <C> <C>
Gross revenues $24,171,286 $17,083,447
----------- -----------
Expenses:
General & administrative 1,385,305 1,112,212
Salaries & employee benefits 11,898,905 9,449,639
Legal & professional 177,756 231,063
Rent & utilities 389,533 290,464
Taxes & insurance 420,375 400,213
Technical operating expenses 3,158,037 2,380,849
Provision for doubtful accounts 40,970 37,529
Depreciation and amortization 2,796,865 1,434,443
----------- -----------
Total operating expenses 20,267,746 15,336,412
----------- -----------
Income from operations 3,903,540 1,747,035
----------- -----------
Other income (expense):
Other income 486,704 97,509
Interest expense (869,601) (441,928)
----------- -----------
Total other income (expense) (382,897) (344,419)
----------- -----------
Income before taxes 3,520,643 1,402,616
Provision for income taxes 1,061,560 174,903
---------- ----------
Net income $2,459,083 $1,227,713
========== ==========
Net income per share:
Primary $ 0.32 $ 0.23
========== ==========
Fully Diluted $ 0.30 $ 0.21
========== ==========
Weighted average common shares outstanding
Primary 7,738,414 5,408,643
========== ==========
Fully Diluted 8,133,401 5,816,188
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional Retained Foreign Stock
Common Preferred Paid In Earnings Currency Subscription Stockholder Treasury
Stock Stock Capital (Deficit) Translation Receivable Receivable Stock Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 exercised 1 468 469
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
Shares issued in
connection with
secondary offering 2,955 17,494,019 17,496,974
Shares issued in
connection with the
following acquisitions:
Alpha 24 (24) --
Medmark 24 41,644 41,668
Reliascan 13 24,987 25,000
NPE/PEDI 85 425,915 426,000
CCI 23 149,977 150,000
ACT 643 643
DDI 40 274,960 275,000
Options exercised 1 1,468 1,469
MDI warrants exercised 3 9,231 9,234
Foreign currency
translations 271 271
Stock subscription
collection 8,250 8,250
Shares issued in payment
of debt 27 176,806 176,833
Preferred stock dividend 6 (6) --
Net income 2,459,083 2,459,083
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 $8,401 $649 $27,617,425 $2,567,195 $(5,900) $ -- $(103,500) $(107,651) $29,976,619
=========================================================================================================
</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>
December 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 2,459,083 $ 1,227,713
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 2,796,865 1,434,443
Deferred federal income taxes 848,965 150,938
Deferred rent expense 155,426 (6,747)
Foreign currency translation 271 (2,609)
Increase in trade receivable (4,331,129) (591,401)
Increase in contracts receivable (1,164,244) (1,892,489)
Increase in prepaid expenses (701,492) (47,566)
(Increase) decrease in other assets (590,986) 77,242
Increase in accounts payable 14,404 432,385
Increase (decrease) in accrued liabilities 655,716 (201,426)
Increase in income taxes payable 171,035 23,965
Increase in other liabilities 279,411 152,830
------------ -----------
Net Cash Provided by Operations 593,325 757,278
------------ -----------
Cash Flows Used in Investing Activities:
(Increase) decrease in cash investments (5,000,000) 1,750,100
Cash payments for the purchase of property (1,487,178) (211,669)
Acquisition of businesses net of cash acquired (13,003,736) (278,222)
Additional subsidiary acquisition costs (449,829) (382,400)
Increase in other receivables (524,384) (72,605)
Increase in employee receivables (87,587) (6,763)
Increase in stockholder receivable (6,210) (6,210)
Decrease in minority interest -- (6,235)
------------ -----------
Net Cash (Used in) Provided by Investing Activities (20,558,924) 785,996
------------ -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 17,751,177 469
Net borrowings on line of credit 872,000 736,798
Proceeds from issuance of bridge loans 2,000,000 --
Proceeds from banks loans 6,569,573 --
Proceeds from stock subscription receivable 8,250 --
Principal payments on long-term debt (6,315,642) (562,681)
Principal payments on capital lease obligations (1,395,391) (941,000)
Distributions -- (350,000)
------------ -----------
Net Cash (Used in) Provided by Financing Activities 19,489,967 (1,116,414)
------------ -----------
Net increase (decrease) in cash (475,632) 426,860
Cash balance, beginning of year 705,179 278,319
------------ -----------
Cash balance, end of year $ 229,547 $ 705,179
============ ===========
</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, 1996 and 1995
--------------------------
NOTE 1 - ORGANIZATION
- ---------------------
Organization -- Diagnostic Health Services, Inc. ("DHS") and its
subsidiaries (collectively, with DHS, the "Company") is an
outsource provider of medical services to hospitals, physicians
offices and other healthcare facilities in the Midwest, South
Central and Western United States. Headquartered in Dallas,
Texas, DHS primarily provides radiology and cardiology
diagnostics services and equipment, and related management
services to a broad range of healthcare providers. The company
also provides temporary placement with allied healthcare
professionals throughout the U.S. and in the Federal District of
Mexico.
Acquisitions are discussed in Note 11 of these Notes to Financial
Statements.
The following chart sets forth the corporate structure of the
Company and its subsidiaries at December 31, 1996:
[CHART APPEARS HERE]
In addition to the above, DHSMS has one inactive wholly-owned
subsidiary, HomeCare International, Inc.
F-8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
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 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.
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.
F-9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Long-Lived Assets -- In accordance with SFAS 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
loses 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.
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 share equivalents at
December 31, 1996 and 1995 were 7,740,622 and 5,408,643,
respectively.
Use of Estimates and Assumptions -- Management uses estimates and
assumptions in preparing its financial statements. Those estimates
and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses. Actual results
may vary from the estimates that were used.
New Accounting Standards -- In October 1995, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"), was issued. This statement requires the
fair value of stock options and other stock-based compensation
issued to employees, to either be included as compensation expense
in the income statement or the pro forma effect on net income and
earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements, commencing
with the Company's 1996 fiscal year. DHS adopted SFAS 123 on
January 1, 1996. The Company will continue to measure compensation
costs using the "intrinsic value based method" of accounting for
stock issued to employees.
NOTE 3 - PREPAID EXPENSES
- -------------------------
At December 31, 1996 and 1995, prepaid expenses consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Prepaid insurance $ 171,907 $ 32,903
Prepaid supplies 509,471 191,411
Other 678,218 173,493
--------- ---------
$1,359,596 $ 397,807
========== =========
</TABLE>
F-10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 4 - NOTES PAYABLE
- ----------------------
Notes payable consists of the following obligations at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
$1,000,000 line of credit with bank, with
interest at varying rates, due July 31, 1996.
Secured by substantially all of the assets of
the Company. $ -- $700,000
$2,500,000 line of credit with bank, with
interest at varying rates (9.25% at
December 31, 1996), due June 30, 1998.
Secured by substantially all of the assets of
the Company. 1,572,000 --
---------- --------
$1,572,000 $700,000
========== ========
</TABLE>
In July 1995, the Company entered in a one-year loan agreement with
a bank whereby the Company was permitted to 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 provided for three separate term notes totaling
$5,350,000 in original principal amount, whose terms are discussed
in Note 5.
In July 1996, the Company entered in a two-year loan agreement with
a bank whereby the Company is permitted to borrow up to $2,500,000
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 a separate term loan facility
totaling $17,500,000 in original principal amount, whose terms are
discussed in Note 5.
F-11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 4 - NOTES PAYABLE (Continued)
- ----------------------------------
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 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,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable to bank in connection with
the ACT acquisition, maturing June 1998,
due in monthly installments of $142,826, plus
interest at varying rates (7.5, 7.51, and 8.75% at
December 31, 1996); secured by substantially
all of the assets of the Company. $ 8,569,573 $ --
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
</TABLE>
F-12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 5 - LONG-TERM DEBT (Continued)
- -----------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
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
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. -- 31,221
Notes payable to financial institutions, with
interest from 7.0% to 10.0%, maturing through
2000, requiring monthly payments of
$2,440, including principal and
interest. Secured by vehicles. 51,917 --
Noncompete agreements, with monthly
payments of $27,628 and $22,303, receptively,
including principal and interest of 6% to 9%,
maturing through 1998. 452,079 548,923
</TABLE>
F-13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 5 - LONG-TERM DEBT (Continued)
- -----------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable to individual in connection
with HCI acquisition; interest at
6%; matured February 1996. -- 2,815
---------- ----------
9,073,569 5,821,859
Less current maturities (1,991,824) (1,403,463)
---------- ----------
$7,081,745 $4,418,396
========== ==========
</TABLE>
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
- ----------------------------
<S> <C>
1997 $1,991,824
1998 1,923,743
1999 1,726,262
2000 1,717,826
2001 1,713,914
----------
$9,073,569
==========
</TABLE>
F-14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
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,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Office furniture & equipment $ 56,783 $ 325,399
Machinery & service equipment 7,045,440 3,402,505
---------- ----------
7,102,223 3,727,904
Less: accumulated amortization (695,199) (864,669)
---------- ----------
$6,407,024 $2,863,235
========== ==========
</TABLE>
The Company leases its office space under operating lease agree-
ments 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.
Future minimum lease payments under non-cancelable leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
For the Years Ending Capital Operating
December 31, Leases Leases
-------------------- ----------- ----------
<S> <C> <C>
1997 $ 2,718,094 $ 597,615
1998 2,439,875 496,552
1999 1,404,416 278,369
2000 1,084,011 205,871
2001 713,345 119,045
Thereafter -- 20,440
----------- ----------
Total minimum lease payments 8,359,741 $1,717,892
----------- ----------
Less: amount representing interest (1,340,516)
-----------
Present value of minimum lease payments 7,019,225
-----------
Less: current portion 2,154,035
-----------
Long-term capital lease obligation $ 4,865,190
===========
</TABLE>
F-15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 6 - LEASES (Continued)
- ---------------------------
Rent expense during the years ended December 31, 1996 and 1995 for
all operating leases was $758,351 and $727,371, respectively, and
is included in operating expenses.
NOTE 7 - EMPLOYMENT AGREEMENTS
- ------------------------------
The Company has entered into employment agreements, excluding
corporate executives, with certain employees from contracts
established at the time a corporation is acquired through purchase
by the Company. Future minimum payments under theses employment
agreements are as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
--------------------
<S> <C>
1997 $ 653,332
1998 383,750
1999 75,000
----------
Total $1,112,082
==========
</TABLE>
NOTE 8 - INCOME TAXES
- ---------------------
The consolidated provision for income taxes included in the
statement of operations for the year ended December 31, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Current taxes payable $ 195,000 $ 23,965
Deferred taxes payable:
Long term 869,413 205,961
Current (benefit) (2,853) (55,023)
---------- ---------
Provision for income taxes $1,061,560 $ 174,903
========== =========
</TABLE>
F-16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 8 - INCOME TAXES (Continued)
- ---------------------------------
Net deferred tax assets and liabilities at December 31, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 977,060 $ 215,161
Goodwill 152,501 14,619
---------- ---------
Total deferred tax liabilities 1,129,561 229,780
---------- ---------
Deferred tax assets:
Receivable allowance -- 39,038
Accrued vacation 57,876 15,985
Noncompete agreements 71,782 23,819
---------- ---------
Total deferred tax assets 129,658 78,842
---------- ---------
Net deferred tax liability $ 999,903 $ 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, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal Statutory Rate 35% 35%
Premerger earnings of ADI -- (11)
Property and equipment -- 11
Intangible assets 2 --
Utilization of tax loss carryforwards (12) (16)
Other, net 5 (7)
---- ----
Effective tax rate 30% 12%
==== ====
</TABLE>
NOTE 9 - SECONDARY OFFERING
- ---------------------------
On June 12, 1996, the Company completed a public offering (the
"Secondary Offering") of 3,000,000 shares of common stock at an
offering price to the public of $6.75 per share. Of the shares
sold, 2,555,000 were sold by the Company, and 445,000 shares were
sold by selling stockholders. Net proceeds to the Company, after
incurred expenses, were approximately $14,972,500.
F-17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 9 - SECONDARY OFFERING (Continued)
- ---------------------------------------
On July 5, 1996, the investment banking firm of Rodman & Renshaw,
Inc., as representative of the several underwriters in the
Secondary Offering, exercised their over-allotment option to
purchase from DHS an additional 400,000 shares of common stock.
The additional net proceeds to DHS were $2,524,500.
DHS realized total net proceeds from the Secondary Offering of
approximately $17,497,000. The proceeds have been and will be used
for acquisitions, capital expenditures, working capital and
retirement of outstanding debt.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid for the year ended December 31, 1996 and 1995 for
interest was approximately $921,512 and $442,000, respectively.
Cash paid for Federal income taxes for the year ended December 31,
1996 and 1995 amounted to zero.
The Company acquired assets in exchange for the issuance of common
stock and the assumption of various liabilities in connection with
certain acquisitions. Cash and noncash investing and financing
activities related to acquisitions consisted of the following for
the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Assets acquired $19,904,468 $ 932,482
Liabilities assumed (6,032,525) (273,676)
Common stock issued (851,643) (200,001)
----------- ---------
Total cash paid 13,020,300 458,805
Fees and expenses -- (106,805)
Less cash acquired (16,564) (73,778)
----------- ---------
Net cash paid $13,003,736 $ 278,222
=========== =========
</TABLE>
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, 1996 and 1995, amounted to $5,285,069 and
$1,134,878, respectively.
F-18
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
- --------------------------------------------------------
The Company issued 60,831 and 88,197 shares of common stock valued
at $66,668 and $82,668, in 1996 and 1995, respectively, pursuant
to contingent stock bonus plans relating to various acquisitions.
NOTE 11 - 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 is 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.
F-19
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (Continued)
- ----------------------------------
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 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.
F-20
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (Continued)
- ----------------------------------
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 merged the acquired businesses
into another wholly-owned subsidiary of DHSMS in 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.
Simultaneous with the closing of the acquisition, 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 (see Note 12 below), the Company obtained an additional
$600,000 term loan under the loan agreement. All of the loans
under this loan agreement were refinanced with the same lender in
June 1996, as described in Note 4 above.
F-21
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (Continued)
- ----------------------------------
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 acquired net assets of approximately $426,000 including
goodwill of approximately $248,000 in connection with the
acquisitions. In December 1996, NPE was merged into MDS.
On June 28, 1996, MDS acquired all of the outstanding capital
stock of Cardiac Concepts, Inc. ("CCI"). The purchase price
consisted of 22,785 shares of the Company's common stock, in
consideration of which the Company received net assets valued
at approximately $150,000 including goodwill of approximately
$657,000. On the date of the acquisition, the Company also
issued 26,861 shares of common stock in payment of approximately
$177,000 of the debt and liabilities of CCI. The acquisition of
CCI 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.
Effective October 31, 1996, MDS acquired by merger all of the
outstanding capital stock of Dysrythmic Data, Inc. ("DDI), a Texas-
based provider of ambulatory electrocardiographic monitoring
services. The consideration paid for DDI consisted of 39,521
shares of common stock of the Company.
On November 13, 1996, DHSMS purchased substantially all of the
operating assets (exclusive of cash and mobile x-ray assets) of
Advanced Clinical Technology, Inc. and Horizon/MDS Corporation
(collectively "ACT"). The consideration paid for ACT consisted of
approximately $12,620,000 in cash and $4,500,000 in the form of
642,857 shares of Series A Convertible Redeemable Preferred Stock
of the Company, with an aggregate liquidation preference of
$4,500,000. The Company also assumed approximately $4,727,000 of
liabilities.
F-22
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 12 - 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 is 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 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.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
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 1996 and 1995 were $63,740 and $51,432, respectively.
The accounts receivable from stockholders consist of $13,543 of
other advances made to three of the Company's stockholders as of
December 31, 1996 and 1995, and $26,910 and $20,700, respectively,
of accrued interest on the stockholder receivables.
F-23
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 14 - STOCK OPTION PLANS
- ----------------------------
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, and
659,935 of such awarded options contain optional price reduction
provisions in connection with any change in control of the Company.
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 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, (a) stock
options for an aggregate of 133,000 shares, all of which provide
for an exercise price of $1.9375 per share, are currently
exercisable and expire on April 4, 2003 (subject to prior
termination in accordance with the application stock option
agreements), and (b) additional stock options for an aggregate of
36,000 shares, all of which provide for an exercise price of $4.25
per share, are currently exercisable and expire on August 20, 2003
(subject to prior termination in accordance with applicable stock
option agreements). 98,000 of such awarded options contain
optional price reduction provisions in connection with any change
in control of the Company.
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.
F-24
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 14 - STOCK OPTION PLANS (Continued)
- ----------------------------------------
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 1,215,401 $2.55 869,930 $1.91
Granted 234,500 $6.30 364,750 $3.00
Exercised (1,125) $3.65 (500) $0.94
Forfeited/expired (73,316) $2.96 (18,779) $2.17
---------- ----------
Outstanding, end of period 1,375,460 $3.81 1,215,401 $2.55
========== ==========
Options exercisable, end of period 1,358,960 $3.75 1,207,401 $2.53
========== ==========
Weighted average fair value of
options granted during the year $ 6.30 $ 3.00
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
Range of Exercise Options Weighted Weighted Options Weighted
Prices Outstanding at Average Average Exercise Exercisable Average Exercise
12/31/98 Remaining Price at 12/31/96 Price
Contractual Life
- --------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.9375 TO $3.00 987,085 4.12 $ 1.91 987,085 $ 1.91
$3.01 TO $5.50 225,875 6.91 $ 4.60 224,875 $ 4.60
$5.51 TO $7.50 162,500 6.50 $ 6.30 147,000 $ 6.30
---------- ----------
1,375,460 5.15 $ 3.81 1,358,960 $ 3.75
========== ==========
</TABLE>
Vesting varies by agreement ranging from zero th three years.
Compensation costs will be recognized as an expense over the
periods of employment attributable to the options at an amount
equal to the excess of the fair market value of the stock at the
date of measurement over the amount the employee must pay. The
measurement date is generally the grant date. As of December 31,
1996 and 1995, no compensation cost was recognized as expense. Had
compensation cost for the Company's stock-based compensation been
determined on the fair value at the grant dates for awards with the
method of FASB Statement 123, the Company's net income would have
been $2,410,489 for the year ended December 31, 1996. Accordingly,
primary and fully-diluted earnings per share would have amounted to
$0.31 per share and $0.30 per share respectively, as of December 31,
1996
F-25
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 15 - SUBSEQUENT EVENTS
- ---------------------------
In January 1997, the Company, through its Heart Institute of Tulsa,
Inc. subsidiary, acquired Ultrasound Diagnostic Services, Ltd.
("UDS"), an Arizona-based provider of non-invasive diagnostic
ultrasound testing services. The consideration paid for UDS
consisted of 86,520 shares of DHS's common stock and a $400,000
cash payment to the former stockholders of UDS.
Effective March 1, 1997, the Company, through its SoCal Diagnostic
Services, Inc. subsidiary, purchased substantially all of the
operating assets of the ultrasound division of Diagnostic Imaging
Services, Inc. ("DISI"). The acquired business includes a
mobile/fixed ultrasound business serving clients in San Diego,
Orange and Los Angeles counties. The acquisition of DISI will
provide DHS with a firm foundation in the southern California
market, which is contiguous with the Company's existing operations
in Arizona and Nevada, as well as departmental access to leading
hospitals in this market. Pursuant to long-term contracts, DISI
provides ultrasound services to 26 facilities and numerous shared
service accounts. Simultaneous with such acquisition, DHSMS
received an option to purchase four hospital-based MRI centers from
the same seller.
On February 14, 1997, the SEC declared effective the Company's Form
S-3 Registration Statement relating to an offering of 1,791,150
Warrant Shares, which are issuable upon exercise of (i) 1,375,000
Redeemable Common Stock Purchase Warrants (the "Public Warrants")
issued in connection with the company's 1993 initial public
offering (the "IPO"), (ii) 316,150 underwriter warrants issued in
connection with the IPO (the "Underwriters' Warrants"), and (iii)
100,000 warrants issued in connection with DHS's equity private
placement in April 1996 (the "Bridge Warrants") of which 2,500 had
been exercised prior to the effectiveness of the registration. On
February 18, 1997, the Company called all of the Public Warrants
for redemption.
The Warrants are exercisable at prices ranging from $7.50 per share
to $5.48 per share. On February 25, 1997, the last sale price
quoted on NASDAQ for a share of DHS's common stock was $9.375. The
Company will not receive any proceeds from the sale of the Warrant
Shares, although it has received, and will continue to receive,
proceeds from the exercise of the Warrants, if and to the extent
exercised. In the event that all of the unexercised Warrants are
exercised, the maximum aggregate net proceeds to the Company would
be approximately $11.2 million. To the extent received, such
proceeds may be utilized to repay a portion of existing
indebtedness for working capital, for general corporate purposes
and for possible acquisitions (none of which have been identified)
at the discretion of the Company's management.
F-26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
19
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS
Executive Officers, Directors and Key Employees
The executive officers, directors, and key employees of the Company
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Max W. Batzer (1)(2) 53 Chairman of the Board of Directors and
Chief Executive Officer
Brad A. Hummel 40 Director, President, Chief Operating
Officer and Chief Financial Officer
Thomas M. Sestak (1)(2) 54 Director
Bo W. Lycke (1)(2) 51 Director
James R. Angelica 49 Director and Senior Vice President
Bonnie G. Lankford 41 Sr. Vice President - Operations
Don W. Caughron 41 Sr. Vice President - Finance
Carol J. Gannon 37 Sr. Vice President - Clinical Services
</TABLE>
(1) Member of the compensation committee
(2) Member of the audit committee
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 May 31,
1997, Mr. Batzer's and Mr. Angelica's seats next come up for
election on or about May 31, 1998, and Mr. Sestak's and Mr. Lycke's
seats next come up for election on or about May 31, 1999.
The following is a summary of the business experience of each
executive officer, director and key employee.
Max W. Batzer has been Chairman of the Board and Chief Executive
Officer of the Company since 1987, and a stockholder and 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
20
<PAGE>
commodity trading organization headquartered in New York
City. In addition, Mr. Batzer has also, at various times during
the past 20 years, worked as an analyst for Pan American World
Airways, served as Vice President for Marketing for World Courier
Inc., and served as 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.
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. (a general construction
contractor operating in the greater San Francisco area). Mr. Sestak
holds a B.S.E. degree from The Wharton School at the University of
Pennsylvania.
Bo W. Lycke has been a Director of the Company since 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.
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 echocardiology and obstetrics/gynecology.
21
<PAGE>
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 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. degree
from Texas Tech University.
Carol J. Gannon was appointed Senior Vice President of Clinical
Services in January 1996, upon 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
September 1990 to December 1995. She is a registered nurse with
additional ultrasound registries in vascular technology and cardiac
stenography. 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.
The Company is not aware of any person who, at any time during the
fiscal year ended December 31, 1996, was a director, officer, or
beneficial owner of more than 10% of the Company's common stock
that failed to timely file any reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, or prior
years, except that, following the consummation of the Company's
initial public offering in June 1993, each of the directors and
officers of the Company was late in filing his or her Form 3 (all
of which filings have since been made).
22
<PAGE>
ITEM 10. 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>
Other Restricted
Annual Stock Options/ LTIP All Other
Name & Principal Position Year Salary Bonus Compensation(1) Awards SAR's (#) Payouts Compensation(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max W. Batzer 1996 305,900 20,000 0 0 0 0 0
Chairman and CEO 1995 231,000 7,500 0 0 75,000 0 0
1994 173,666 0 0 0 128,500 0 0
Brad A. Hummel 1996 225,570 15,000
President and COO 1995 173,133 7,500 0 0 30,000 0 0
1994 127,750 0 0 0 103,500 0 0
James R. Angelica(2) 1996 89,824 0 25,000 0
Director and 1995 89,824 0 27,500 0 25,000 0 0
Senior Vice President 1994 21,644 0 0 0 0 0 0
Carol J. Gannon 1996 85,102 0 65,000 0 0 0 0
Senior Vice President
</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 Named Officers and
directors is included under the heading "Stock Option Plans" below.
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,
2001. The employment agreement provides for a minimum base salary
of $360,000 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.
23
<PAGE>
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, 2001. 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 provides for a minimum base salary
of $270,000 per annum, and benefits comparable to those provided to
other Company employees. The agreement further provides for Mr.
Hummel to devote substantially all of his business time to the
performance of his duties and responsibilities to the Company.
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 40% 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
December 5, 1994.
The Company also has employment agreements with James R. Angelica,
Bonnie G. Lankford and Carol J. Gannon. Mr. Angelica's employment
agreement (as amended) 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, 1999, at a minimum base salary
of $110,000 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 the
Company's Common Stock (of which no more 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 859,085 shares of common stock at exercise
prices ranging from $.93 to $7.50 per share, and expiring at
various times from January 1998 through April 2003. The weighted
average exercise price under such options is approximately $1.80
per share. The
24
<PAGE>
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 most
recently quoted in the over-the-counter "pink sheets" or on the
National Association of Securities Dealers, Inc. Automated
Quotation System ("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 39,000 of the
690,935 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.
25
<PAGE>
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 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. There are currently outstanding, under the 1995 Non-
Qualified Plan, stock options for an aggregate of 454,625 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 2005. The weighted average exercise price under such
options is $4.14 per share. Of the outstanding options under the
1995 Non-Qualified Plan, 60,000 (exercisable at $5.25 per share)
are subject to certain contingencies relating to the Company's
earnings, and 225,000 other options contain price reduction
provisions 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 of the Company. 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). On the date of this
report, 61,750 options are outstanding under the 1995 Incentive
Plan at an exercise price of $6.25 per share and expiring on July
17, 2001.
In January 1997, the Board of Directors of the Company adopted the
Company's 1997 Non-Qualified Stock Option Plan (the "1997 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 1,000,000
shares of the Company's Common Stock. The exercise price,
expiration date and other terms of any options granted under the
1997 Non-Qualified Plan are substantially similar to the
requirements applicable to non-qualified options under the 1992
Plan. Options for an aggregate of 345,000 shares of Common Stock
have been issued and are outstanding under the 1997 Non-Qualified
Plan at an exercise price of $7.44 per share and expiring on
January 2, 2005. 235,000 of such options contain price reduction
provisions similar to those described above.
26
<PAGE>
The table set forth below lists information on stock options
granted to each of the Company's Named Officers and directors
through December 31, 1996.
<TABLE>
<CAPTION>
Percent of
Total Options
Granted to Exercise
Type of Number Employees In Price Expiration
Name Option of Shares Fiscal Year Per Share Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Max W. Batzer Qualified 5,082 1.6% $2.21 January 13, 1998
Non-qualified 101,645 32.5% $2.21 January 13, 2001
Qualified 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
Qualified 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 Qualified 5,082 1.6% $2.21 January 13, 1998
Non-qualified 101,645 32.5% $2.21 January 13, 2001
Qualified 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 M. 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 Qualified 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>
Through December 31, 1996, a total of 2,625 incentive stock options
granted under the 1992 Plan had been exercised (none by executive
officers or directors), and no non-qualified stock options granted
under any of the Plans have been exercised.
27
<PAGE>
The following table sets forth all stock option exercises by
executive officers and directors of the Company during the fiscal
year ended December 31, 1996, 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, 1996 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>
Shares Number of Value of Unexercised
Acquired Value Unexercised Options In-The-Money Options
Name on Exercise Realized at Fiscal Year at Fiscal Year End
- ---- ----------- -------- ------------------- --------------------
<S> <C> <C> <C> <C>
Max W. Batzer 0 0 310,227 $1,895,960
Brad A. Hummel 0 0 240,227 $1,423,660
Thomas M. Sestak 0 0 221,645 $1,056,175
Bo W. Lycke 0 0 77,000 $446,470
James R. Angelica 0 0 27,000 $128,970
Carol J. Gannon 0 0 0 0
</TABLE>
Prior to April 16, 1993, the 1992 Plan was administered by the
Company's Board of Directors. Beginning on April 16, 1993,
administration of the 1992 Plan was delegated to the Compensation
Committee of the Company's Board of Directors, which has wide
discretion in determining the recipients of options, the amounts of
options awarded, and various other terms and conditions applicable
to options granted under the 1992 Plan. The 1995 Non-Qualified
Plan, the 1995 Incentive Plan and the 1997 Non-Qualified Plan has
at all times been administered by the Compensation Committee, which
has similar wide discretion in the administration thereof. In
determining whether and to what extent specific employees or
consultants will be awarded options, the Compensation Committee
takes into account the value of the specific individual's services
to the Company, the individual's time in service, the long-term
prospects for the individual to handle additional responsibilities
within the Company, and such other factors as the Compensation
Committee may deem relevant in order to reward and motivate the
Company's employees and consultants.
28
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 21, 1997, the number of
shares of the Company's Common Stock owned by each person
(including any "group" as used in Section 13(d)(3) of the Exchange
Act) known to the Company to be the beneficial owner of more than
five percent of the Company's common stock, each director of the
Company and all directors and executive officers of the Company as
a group.
<TABLE>
<CAPTION>
Beneficially
Name and Address of Beneficial Owner Owned Percentage
- ------------------------------------ ------------ ----------
<S> <C> <C>
Max W. Batzer 591,395 (1) 6.4%
2777 Stemmons
Dallas, Texas 75207
Thomas M. Sestak 338,066 (2) 3.7%
1226 Ninth Avenue
San Francisco, California 94122
Brad A. Hummel 317,538 (3) 3.5%
2777 Stemmons
Dallas, Texas 75207
Bo W. Lycke 83,000 (4) 0.9%
2777 Stemmons
Dallas, Texas 75207
James R. Angelica 466,552 (5) 4.7%
9717 Landmark Parkway Drive
St. Louis, Missouri 63127
All directors and executive
officers as a group
(eight persons) 2,159,962 (1)(2)(3)(4)(5) 21.4%
</TABLE>
- ----------
(1) Includes 410,227 shares which are subject to currently
exercisable stock options.
(2) Includes 452 shares held by Mr. Sestak as custodian for his
minor children, and 191,645 shares which are subject to currently
exercisable stock options and warrants.
(3) Includes 315,227 shares which are subject to currently
exercisable stock options.
(4) Includes 82,000 shares which are subject to currently
exercisable stock options.
(5) 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, and 39,500 shares which are subject to
currently exercisable stock options and 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.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 of the Company 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 its common stock without TCB's prior consent.
In April 1996, in connection with the Company's private placement
of the Bridge Notes and Bridge Warrants, 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 purchased by Carol J. Gannon.
30
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibits Description of Exhibit
- -------- ----------------------
<S> <C>
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)
3.4 Certificate of Stock Designation, creating Series
A Preferred Stock. (8)
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)
4.10 1997 Non-Qualified Stock Option Plan.
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)
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
10.4 Contingent Share Agreement between the Company and
the former shareholders of Alpha. (1)
10.5 Loan Agreement between the Company and North Park
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 North Park 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 North Park 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
former owner of Medmark. (6)
</TABLE>
32
<PAGE>
<TABLE>
<S> <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 TCB. (5)
10.26 First Amendment to Loan Agreement, dated as of
December 7, 1995, among the Company, its subsidiaries
and TCB. (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 Amended and Restated Loan Agreement, dated as of
July 24, 1996, among the Company, its subsidiaries
and Texas Commerce Bank.
10.32 Asset Purchase Agreement, dated September 27,
1996, by and among the Company, DHS Management Services,
Inc., Advanced Clinical Technology, Inc., Horizon MDS
Corporation, and Horizon/CMS Healthcare Corporation. (8)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
10.33 Amendment, dated January 3, 1997, to Employment Agreement
between the Company and Max W. Batzer.
10.34 Amendment, dated January 3, 1997, to Employment Agreement
between the Company and Brad A. Hummel.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Company.
</TABLE>
- -------------------
(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 10-KSB 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) Incorporated by reference, filed as an exhibit to the
Company's Registration Statement on Form SB-2 filed on April 25,
1996, SEC File No. 333-4034.
(8) Incorporated by reference, filed as an exhibit to the
Company's report on Form 8-K filed on November 26, 1996.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 25, 1997
DIAGNOSTIC HEALTH SERVICES, INC.
By: /S/ Max W. Batzer
-------------------------------
Max W. Batzer, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Max W. Batzer
- ------------------
Max W. Batzer Chairman, Chief Executive Officer March 25, 1997
and Director
/s/ Brad A. Hummel
- -------------------
Brad A. Hummel President, Chief Operating Officer, March 25, 1997
Principal Financial Officer, Principal
Accounting Officer and Director
/s/ Bo W. Lycke
- -------------------
Bo W. Lycke Director March 25, 1997
35
<PAGE>
EXHIBIT 4.10
1997 Non-Qualified Stock Option Plan.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
--------------------------------
1997 NONQUALIFIED STOCK OPTION PLAN
-----------------------------------
1. Purposes.
--------
The purposes of the Diagnostic Health Services, Inc. 1997 Nonqualified
Stock Option Plan (this "Plan") are to aid Diagnostic Health Services, Inc. (the
"Company") and its subsidiaries in attracting and retaining capable management
and employees and to enable officers, directors, employees and/or consultants of
the Company and its subsidiaries to acquire or increase ownership interest in
the Company on a basis that will encourage them to perform at increasing levels
of effectiveness and use their best efforts to promote the growth and
profitability of the Company and its subsidiaries. Consistent with these
objectives, this Plan authorizes the granting to officers, directors, employees
and/or consultants of options (collectively, "Options") to acquire shares of the
Company's common stock, $.001 par value per share ("Common Stock"), pursuant to
the terms and conditions hereinafter set forth. As used herein, the term
"subsidiary" has the same meaning as is ascribed to the term "subsidiary
corporation" under Section 425 of the Internal Revenue Code of 1986, as amended
(the "Code").
Options granted hereunder are not intended to be and shall not be
treated as "incentive stock options" within the meaning of Section 422 of the
Code.
<PAGE>
2. Effective Date.
--------------
This Plan shall become effective upon the adoption and approval hereof
by the Board of Directors of the Company (the "Board").
3. Administration.
--------------
(a) This Plan shall be administered by the Compensation Committee
of the Board, or, if no Compensation Committee shall then be constituted, a
committee consisting of three members of the Board who are selected by the Board
(in either case, the "Committee"); provided, however, that in the event that,
-------- -------
and for so long as, the entire Board shall consist of only three members, then
the Board shall constitute the Committee hereunder. If, at any time, there are
less than three members of the Committee eligible to serve in such capacity, the
Board shall appoint one or more other eligible members of the Board to serve on
the Committee. All Committee members shall serve, and may be removed, at the
pleasure of the Board.
(b) A majority of the members of the Committee (but not less than two)
shall constitute a quorum, and any action taken by a majority of such members
present at any meeting at which a quorum is present, or acts approved in writing
by all such members, shall be the acts of the Committee.
(c) Subject to the other provisions of this Plan, the Committee shall
have full authority to decide the date or dates on which Options will be granted
under this Plan (in each instance, the "Date of Grant"), to select the officers,
directors, employees and/or consultants to whom Options will be granted, to
determine the number of shares of Common Stock to be covered by each Option, the
price at which such shares may be purchased upon the exercise of such Option
(the "Exercise Price") and other terms and conditions of such purchase. In
making such determinations, the Committee shall solicit the recommendations of
the Chairman and President of the Company and may take into account each
proposed optionee's present and potential contributions to the Company's
business and any other factors which the Committee may deem relevant. Subject
to the other provisions of this Plan, the Committee shall also have full
authority to (i) interpret this Plan and any stock option agreements evidencing
Options granted
-2-
<PAGE>
hereunder ("Option Agreements"), (ii) issue rules for administering this Plan,
(ii) change, alter, amend or rescind such rules, and (iv) make all other
determinations necessary or appropriate for the administration of this Plan. All
determinations, interpretations and constructions made by the Committee pursuant
to this Section 3 shall be final and conclusive. No member of the Board or the
Committee shall be liable for any action, determination or omission taken or
made in good faith with respect to this Plan or any Option granted hereunder.
4. Eligibility.
-----------
(a) All officers, directors, employees and/or consultants of the
Company (as determined by the Committee) shall be eligible to receive Options
under this Plan.
(b) Anything elsewhere contained in this Plan to the contrary
notwithstanding, in no event and under no circumstances shall any Options be
granted under this Plan providing for an Exercise Price less than 100% of the
fair market value per share on the Date of Grant if the net pre-tax income of
the Company in the full fiscal year immediately preceding the Date of Grant of
such Option (the "Prior Year") did not exceed 125% of the mean average annual
net pre-tax income of the Company for the three fiscal years immediately
preceding the Prior Year; and in no event and under no circumstances (other than
by reason of any adjustment authorized herein to take place following the Date
of Grant) shall the Exercise Price under any Option on the Date of Grant of such
Option be less than 85% of the fair market value per share on such Date of
Grant. For purposes hereof, the Company's net pre-tax income for any fiscal
year shall be the consolidated net pre-tax income of the Company and its
subsidiaries as reflected in the Company's consolidated audited financial
statements for such fiscal year, which shall be prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout all periods in question.
-3-
<PAGE>
5. Option Shares.
-------------
(a) The shares subject to Options granted under this Plan shall be
shares of Common Stock and, except as otherwise required or permitted by Section
5(b) below, the aggregate number of shares with respect to which Incentive
Options may be granted hereunder shall not exceed 1,000,000 shares. If an Option
expires, terminates or is otherwise surrendered, in whole or in part, the shares
allocable to the unexercised portion of such Option shall again become available
for grants of Options hereunder. As determined from time to time by the Board,
the shares available under this Plan for grants of Options may consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock which have been reacquired by the Company or a subsidiary following
original issuance.
(b) The aggregate number of shares of Common Stock as to which
Options may be granted hereunder (as provided in Section 5(a) above), the number
of shares covered by each outstanding Option, and the Exercise Price applicable
to each outstanding Option shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, recapitalization or other subdivision or consolidation of shares or other
adjustment, or the payment of a stock dividend in respect of the Common Stock;
provided, however, that any fractional shares resulting from any such adjustment
- -------- -------
shall be eliminated.
6. Terms and Conditions of Options.
-------------------------------
Each Option granted pursuant to this Plan shall be evidenced by an
Option Agreement between the Company and the officer, director, employee and/or
consultant to whom the Option is granted (the "Optionee") in such form or forms
as the Committee, from time to time, shall prescribe, which agreements may but
need not be identical to each other, but shall comply with and be subject to the
following terms and conditions:
-4-
<PAGE>
(a) Exercise Price. The Exercise Price at which each share of Common
--------------
Stock may be purchased pursuant to an Option shall be determined by the
Committee in accordancw with the requirements of this Plan, but shall in no
event be less than 85% of the fair market value for each such share on the Date
of Grant of such Option, determined by the Committee as aforesaid; provided,
--------
however, that the Option Agreement in respect of any or all Options may (but
- -------
need not) provide 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 Optionee (or other person entitled to exercise such Option)
affirmatively elects, during a limited period of time after receiving notice of
such event, to permanently revoke and terminate the subject Option (in whole or
in part) and/or to reaffirm all or any portion of such Option without giving
effect to the reduction in Exercise Price hereinafter 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 Optionee (or other person entitled to exercise such Option)
thereafter exercises such Option (or the non-revoked and non-reaffirmed portion
thereof, as the case may be). Anything contained in this Section 6(a) to the
contrary notwithstanding, in the event that the number of shares of Common Stock
subject to any Option is adjusted pursuant to Section 5(b) above, a
corresponding adjustment shall be made in the Exercise Price per share.
(b) Duration of Options. The duration of each Option granted
-------------------
hereunder shall be determined by the Committee, but shall in no event be later
than that date which is the day before the eighth anniversary of the Date of
Grant of such Option, subject to extension by mutual written agreement of the
Company and the subject Optionee (in each instance, the "Expiration Date").
(c) Vesting of Options. The vesting of each Option granted hereunder
------------------
shall be determined by the Committee, provided that, if no vesting requirements
are specified at the time of the granting of any Option hereunder, then the
subject Option shall be deemed to be fully vested and exercisable on the Date of
Grant. Only the vested portion(s) of any Option may be exercised.
-5-
<PAGE>
(d) Merger, Consolidation, etc. In the event that the Company shall,
---------------------------
pursuant to action by the Board, at any time propose to merge into, consolidate
with, or sell or otherwise transfer all or substantially all of its assets to,
another corporation and provision is not made pursuant to the terms of such
transaction for (i) the assumption by the surviving, resulting or acquiring
corporation of all outstanding Options granted pursuant to this Plan, (ii) the
substitution of new options therefor, or (iii) the payment of cash or other
consideration in respect thereof, then the Committee shall cause written notice
of the proposed transaction to be given to each Optionee not less than thirty
(30) days prior to the anticipated effective date of the proposed transaction.
On a date which the Committee shall specify in such notice, which date shall be
not less than ten (10) days prior to the anticipated effective date of the
proposed transaction, each Optionee's Options shall become fully (100%) vested
and each Optionee shall have the right to exercise his or her Options to
purchase any or all shares then subject to such Options; and if the proposed
transaction is consummated, each Option, to the extent not previously exercised
prior to the effective date of the transaction, shall terminate on such
effective date. If the proposed transaction is abandoned or otherwise not
consummated, then to the extent that any Option not exercised prior to such
abandonment shall have vested solely by operation of this Section 6(d), such
vesting shall be annulled and be of no further force or effect and the vesting
period otherwise established for or applicable to such Option pursuant to
Section 6(c) above shall be reinstituted as of the date of such abandonment;
provided, however, that nothing herein contained shall be deemed to
- -------- -------
retroactively affect or impair any exercise of any such vested Option prior to
the date of such abandonment.
(e) Exercise of Options. A person entitled to exercise an Option,
-------------------
or any portion thereof, may exercise it (or such vested portion thereof) in
whole at any time, or in part from time to time, by delivering to the Company at
its principal office, directed to the attention of the President of the Company
or such other duly elected officer as shall be designated in writing by the
Committee to the Optionee, written notice specifying the number of shares of
Common Stock with respect to which the Option is being exercised, together with
payment in full of the aggregate Exercise Price for such shares. Such payment
-6-
<PAGE>
shall be made in cash or by certified check or bank draft to the order of the
Company; provided, however, that the Committee may, in its sole discretion,
-------- -------
authorize such payment, in whole or in part, in any other form, including
payment by personal check or by the exchange of shares of Common Stock owned of
record by the person entitled to exercise the Option and having a fair market
value on the date of exercise equal to the price for which the shares of Common
Stock may be purchased pursuant to the Option.
(f) Non-Transferability. Any Option granted hereunder may, if so
-------------------
provided in the subject Option Agreement, be transferable to members of the
Optionee's immediate family or by will or by the laws of decent and
distribution, and may, if so provided in the subject Option Agreement, be
pledged as collateral security in favor of another permitted holder of an Option
hereunder, solely as collateral for a loan made by such other holder to the
person making such pledge.
(g) Termination of Employment; Competition. The following provisions
--------------------------------------
shall apply in the event of an Optionee's engaging in competition with the
Company, or in the event of the termination of an Optionee's employment with the
Company or any of its subsidiaries:
(i) In the event that an Optionee shall engage or participate in,
or become involved with, in any manner or capacity (whether as employee,
agent, consultant, advisor, officer, director, manager, partner, joint
venturer, investor, shareholder (other than passive investments in less
than 5% of the outstanding securities of any company) or otherwise), any
business enterprise which is engaged in the rendering of diagnostic
ultrasound services, nuclear imaging, cardiac lab management, paramedical
personnel placement, or any other business conducted or operated by the
Company on the date on which such Optionee first became involved with such
other business enterprise, or in the event that an Optionee's employment
with the Company or any of its subsidiaries shall be terminated either (A)
by the Company or any of its subsidiaries for "Cause" (as defined in any
applicable employment agreement to which such Optionee is a party), or (in
the absence of a definition contained in any applicable employment
agreement) for fraud, dishonesty,
-7-
<PAGE>
habitual drunkenness or drug use, for willful disregard of assigned duties
or instructions by such Optionee, or for concrete actions causing
substantial harm to the Company, or for other material breach by the
Optionee of any applicable employment agreement to which the Optionee is a
party, or (B) by the Optionee voluntarily and without the written consent
of the Company, then all outstanding Options granted hereunder to such
----
Optionee shall automatically and immediately terminate at the time that
notice of termination of employment is given, and shall not then or
thereafter be exercisable in whole or in part; provided, however, that
-------- -------
nothing herein contained shall be deemed to modify or amend the terms and
conditions of any applicable employment agreement, including but not
limited to the grounds upon which any Optionee's employment may be
terminated.
(ii) In the event that an Optionee's employment with the Company
or any of its subsidiaries shall terminate (A) by reason of retirement, or
(B) under circumstances other than those specified in Section 6(g)(i) above
and for other than death or disability, then all outstanding Options
----
granted hereunder to such Optionee shall terminate three (3) months after
the date of such termination of employment or on the Expiration Date,
whichever shall first occur; provided, however, that if such Optionee
-------- -------
dies within such three (3) month period, then all outstanding Options
granted hereunder to such Optionee shall terminate on the first anniversary
of such Optionee's death or on the Expiration Date, whichever shall first
occur.
(iii) In the event of the death or disability of an Optionee
while such Optionee is employed by the Company or any of its subsidiaries,
all outstanding Options granted hereunder to such Optionee shall terminate
on the first anniversary of such death or disability, as the case may be,
or on the Expiration Date, whichever shall first occur.
-8-
<PAGE>
(iv) Anything contained in this Section 6 to the contrary
notwithstanding, an Option granted pursuant to this Plan may only be
exercised following the subject Optionee's termination of employment with
the Company or any of its subsidiaries for reasons other than death,
disability or retirement if, and to the extent that, such Option was
exercisable immediately prior to such termination of employment.
(v) An Optionee's transfer of employment between the Company and
any of its subsidiaries or between subsidiaries shall not constitute a
termination of employment, and the Committee shall determine in each case
whether an authorized leave of absence for professional education, military
service or otherwise shall constitute a termination of employment.
(vi) Nothing contained in this Section 6(g) shall be deemed to
modify or affect any vesting schedule provided in any Option Agreement,
which vesting schedule shall continue in effect and be applied and enforced
notwithstanding any modification of the exercise period arising by reason
of the application of this Section 6(g).
(h) No Rights as a Stockholder or to Continued Employment. No
-----------------------------------------------------
Optionee shall have any rights as a stockholder of the Company with respect to
any shares covered by an Option prior to the date of issuance to such Optionee
of the certificate or certificates for such shares. Neither this Plan nor any
Option granted hereunder shall confer upon an Optionee any right to continued
employment by the Company or any of its subsidiaries or interfere in any way
with the right of the Company or its subsidiaries to terminate the employment of
such Optionee (subject to the terms and conditions of any applicable employment
agreement between the Company or any of its subsidiaries and the subject
Optionee).
(i) Designation. Each Option Agreement entered into pursuant to this
-----------
Plan shall specify therein that the subject Option has been granted under this
Plan.
-9-
<PAGE>
(j) Other Terms and Conditions. Any Option Agreement entered into
--------------------------
pursuant to this Plan may contain such further terms and conditions (including a
right of first refusal in favor of the Company in the event that the Optionee
shall seek to transfer any shares acquired upon exercise of the subject Option)
as the Committee may determine, provided that such other terms and conditions
are not in violation of, in conflict with or otherwise inconsistent with the
requirements of this Plan.
7. Issuance of Shares; Restrictions.
--------------------------------
(a) Subject to the conditions, restrictions and other qualifications
provided in this Section 7, the Company shall, within thirty (30) business days
after an Option has been duly exercised in whole or in part, deliver to the
person who exercised the Option one or more certificates, registered in the name
of such person, for the number of shares of Common Stock with respect to which
the Option has been exercised. The Company may legend any stock certificate
issued hereunder to reflect any restrictions provided for in this Section 7,
including but not limited to a "stop transfer" legend pursuant to Section 7(b)
below.
(b) Unless the shares subject to Options granted under the Plan have
been registered under the Securities Act of 1933, as amended (the "Act") (and,
if the person exercising the Option may be deemed an "affiliate" of the Company
as such term is defined in Rule 405 under the Act, such shares have been
registered under the Act for resale by such person), or the Company has
determined that an exemption from registration under the Act is available, the
Company may require, prior to and as a condition of the issuance of any shares
of Common Stock upon exercise of any Option, that the person exercising such
Option hereunder furnish the Company with a written representation in a form
prescribed by the Committee to the effect that such person is acquiring such
shares solely with a view to investment for his or her own account and not with
a view to the resale or distribution of all or any part thereof, and that such
person will not dispose of any of such shares otherwise than in accordance with
the provisions of Rule 144 under the Act unless and until either the sale or
distribution of such shares is registered under the Act or the Company is
satisfied that an exemption from such registration is available.
-10-
<PAGE>
(c) Anything herein contained to the contrary notwithstanding, the
Company shall not be obligated to sell or issue any shares of Common Stock
pursuant to the exercise of an Option granted hereunder unless and until the
Company is satisfied that such sale or issuance complies with all applicable
provisions of the Act and all other laws and/or regulations by which the Company
is bound or to which the Company or such shares may be subject; and the Company
reserves the right to delay the issuance and/or delivery of shares of Common
Stock for such period of time as may be required in order to effect compliance
with the applicable provisions of the Act and all other applicable laws and/or
regulations as aforesaid.
8. Substitute Options.
------------------
Anything herein contained to the contrary notwithstanding, Options
may, at the discretion of the Board, be granted under this Plan in substitution
for options to purchase shares of capital stock of another corporation which is
merged into, consolidated with or all or a substantial portion of the property
or stock of which is acquired by, the Company or a subsidiary. The terms,
provisions and benefits to each Optionee under such substitute Options shall in
all respects be identical to the terms, provisions and benefits to such Optionee
of his or her options of the other corporation on the date of substitution,
except that such substitute Options shall provide for the purchase of shares of
Common Stock of the Company instead of shares of such other corporation.
9. Term of this Plan.
-----------------
Unless this Plan has been sooner terminated pursuant to Section 10
below, this Plan shall terminate on, and no Options hereunder shall be granted
after, the tenth (10th) anniversary of the date of the adoption and approval of
this Plan by the Board. Notwithstanding any such Plan termination, the
provisions of this Plan shall nonetheless continue thereafter to govern all
Options theretofore granted (including but not limited to any Options the
Expiration Date of which is extended to any date subsequent to the termination
of this Plan) until the exercise, expiration or cancellation of such Options.
-11-
<PAGE>
10. Amendment and Termination of Plan.
---------------------------------
The Board may at any time terminate this Plan, or amend this Plan from
time to time in such respects as the Board deems desirable; provided, however,
-------- -------
that, subject to the provisions of Sections 6 and 7 above, no termination hereof
or amendment hereto shall adversely affect the rights of an Optionee or other
person holding an Option theretofore granted hereunder without the consent of
such Optionee or other person, as the case may be.
-12-
<PAGE>
EXHIBIT 10.31
Amended and restated Loan Agreement, dated as of July 24, 1996, among the
Company, its subsidiaries and Texas Commerce Bank.
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT (hereinafter referred to as this
"Agreement") is executed as of July 24, 1996, among DIAGNOSTIC HEALTH SERVICES,
INC., a Delaware corporation (hereinafter referred to as "Borrower"), DHS
MANAGEMENT SERVICES, INC., a Texas corporation, MOBILE DIAGNOSTIC SYSTEMS, INC.,
a Texas corporation, ALPHA SCANNING SERVICE, INC., a Louisiana corporation,
HEART INSTITUTE OF TULSA, INC., an Oklahoma corporation, SPECIALIZED IMAGING
SERVICES INC., an Illinois corporation, MOBILE DIAGNOSTIC IMAGING, INC., a
Delaware corporation, ST. LOUIS MOBILE ULTRASOUND, INC., a Delaware corporation,
HDI ACQUISITION CORP., a Texas corporation, CARDIO-GRAPHIC CONSULTANTS, INC., a
Texas corporation, HEART DIAGNOSTIC INSTITUTES, INC., a Texas corporation,
HOMECARE INTERNATIONAL, INC., a Texas corporation, DIAGNOSTIC HEALTH SERVICES DE
MEXICO, S.A. de C.V., a corporation incorporated under the laws of the Republic
of Mexico, HOMECARE INTERNATIONAL DE MEXICO, S.A. de C.V., a corporation
incorporated under the laws of the Republic of Mexico, ADVANCED DIAGNOSTIC
IMAGING, INC., a Texas corporation, NEONATAL PEDIATRIC ECHOCARDIOGRAPHY, INC., a
Texas corporation, PEDIATRIC ECHOCARDIOGRAPHIC DIAGNOSTIC IMAGING, INC., a Texas
corporation, and CARDIAC CONCEPTS, INC., a Texas corporation (hereinafter
collectively referred to, together with any other corporations or other entities
that pursuant to Section11(q) shall become a "Guarantor" hereunder, as
"Guarantors," and singularly as a "Guarantor"), and TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, a national banking association (hereinafter sometimes referred to
as "Bank").
W I T N E S S E T H:
WHEREAS, Borrower, Guarantors and Bank entered into that certain Loan
Agreement dated July 31, 1995, as amended by that certain First Amendment to
Loan Agreement dated December 7, 1995, and that certain Second Amendment to Loan
Agreement dated April 19, 1996 (the "Prior Agreement");
WHEREAS, Borrower, Guarantors and Bank desire to extinguish the commitment of
Bank under the Prior Agreement; and
WHEREAS, Borrower has requested that Bank provide Borrower with a multiple
draw term loan facility in the principal amount of up to $17,500,000 and a
revolving credit facility in the principal amount of up to $2,500,000, and Bank
is willing to make such facilities available to Borrower on the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
<PAGE>
1. Definitions. When used herein the terms "Agreement," "Borrower,"
"Bank" and "Guarantors" shall have the meanings indicated above. When used
herein the following terms shall have the following meanings:
Accounts - All present and future accounts, accounts
--------
receivable and other rights of Borrower and Guarantors to payment for the
sale or lease of goods or the rendition of services (except those evidenced
by instruments or chattel paper), whether now existing or hereafter arising
and wherever arising.
Acquired Company - As of any date of calculation of EBITDA, a
----------------
Subsidiary acquired by Borrower or another Subsidiary, or a Person all or
substantially all of the assets of which have been acquired by Borrower or
another Subsidiary, in either case after the date hereof, and in each case
having an Initial Report Date on or after the last day of the twelfth (12)
calendar month prior to such date of calculation of EBITDA.
Acquired EBITDA - For each Acquired Company, either of the
---------------
following as approved in writing by Bank in its sole discretion: (a) (i)
GAAP EBITDA for such Acquired Company for the twelve (12) month period
ended on the date of calculation, or (ii) GAAP EBITDA for such Acquired
Company for some other twelve (12) month period as may be acceptable to
Bank in its sole discretion; in each case calculated as of the Initial
Report Date for such Acquired Company, multiplied by (b) the EBITDA Factor
-------------
for such Acquired Company.
Acquisition - The acquisition by Borrower or any Guarantor of the
-----------
stock of, any other equity security or other interest in, or, in a
transaction outside the ordinary course of business, the assets of, any
other Person.
Advance or Advances - A loan or loans under the Advance Term Loan
-------------------
or the Revolving Loan.
Advance Maturity Date - June 30, 2001.
---------------------
Advance Term Loan - The multiple advance term loan made under the
-----------------
Advance Term Loan Commitment pursuant to Section 2(a).
Advance Term Loan Commitment - The commitment contained in
----------------------------
Section 2(a) of this Agreement.
Advance Term Note - That certain $17,500,000 multiple advance
-----------------
term note described in Section 3(a).
AMENDED AND RESTATED LOAN AGREEMENT - Page 2
<PAGE>
Borrowing Base - The aggregate value of seventy-five percent
--------------
(75%) of Eligible Accounts.
Borrowing Base Certificate - A certificate the form of which is
--------------------------
set forth as Exhibit "F" hereto to be delivered to Bank by Borrower at the
times and on the dates specified herein, showing the Borrowing Base
applicable and in effect as of the date of such Borrowing Base Certificate.
Borrowing Date - The date, which shall be a Business Day, elected
--------------
by Borrower pursuant to Section 2(c) for an Advance on the Advance Term
Loan or the Revolving Loan.
Business Day - The normal banking hours during any day (other
------------
than Saturdays or Sundays) that banks are legally open for business in
Dallas, Texas.
Change of Control - If either of Max W. Batzer or Brad A. Hummel
-----------------
(and any trust controlled by such individual as sole trustee and for his
benefit and/or the benefit of his immediate family members) (i) owns
outstanding capital stock of Borrower in an aggregate amount equal to or
less than fifty percent (50%) of the shares of Borrower's capital stock
owned by him on June 13, 1996, or (ii) transfers any stock options
exercisable for shares of Borrower's capital stock (except any deemed
transfer resulting from the exercise, expiration or surrender thereof),
unless in either case the transaction giving rise to such sale or transfer
results in the payment in full of the Advance Term Loan.
Change of Management - If (i) Max Batzer ever ceases to be the
--------------------
Chairman or Chief Executive Officer of Borrower, or (ii) Brad Hummel ever
ceases to be the President and Chief Operating Officer of Borrower.
Current Assets - The total amount of Borrower's consolidated
--------------
current assets, determined in accordance with GAAP.
Current Liabilities - The total amount of Borrower's consolidated
-------------------
current liabilities, determined in accordance with GAAP.
Current Ratio - The ratio of Current Assets to Current
-------------
Liabilities, determined in accordance with GAAP.
EBITDA - The sum of Borrower's consolidated GAAP EBITDA plus
------ ----
(without duplication) Acquired EBITDA for all Acquired Companies.
AMENDED AND RESTATED LOAN AGREEMENT - Page 3
<PAGE>
EBITDA Factor - For each Acquired Company as of any date of
-------------
calculation of EBITDA, the percentage set forth below corresponding to the
Initial Report Date for such Acquired Company, relative to such date of
calculation of EBITDA:
AMENDED AND RESTATED LOAN AGREEMENT - Page 4
<PAGE>
<TABLE>
<CAPTION>
EBITDA
Initial Report Date Factor
<S> <C>
Same as date of
calculation of EBITDA 1.00
Last day of first calendar
-----
month prior to date of
calculation of EBITDA .9167
Last day of second calendar
------
month prior to date of
calculation of EBITDA .8333
Last day of third calendar
-----
month prior to date of
calculation of EBITDA .7500
Last day of fourth calendar
------
month prior to date of
calculation of EBITDA .6667
Last day of fifth calendar
-----
month prior to date of
calculation of EBITDA .5833
Last day of sixth calendar
-----
month prior to date of
calculation of EBITDA .5000
Last day of seventh calendar
-------
month prior to date of
calculation of EBITDA .4167
Last day of eighth calendar
------
month prior to date of
calculation of EBITDA .3333
Last day of ninth calendar
-----
month prior to date of
calculation of EBITDA .2500
Last day of tenth calendar
-----
month prior to date of
calculation of EBITDA .1667
Last day of eleventh calendar
--------
month prior to date of
</TABLE>
AMENDED AND RESTATED LOAN AGREEMENT - Page 5
<PAGE>
<TABLE>
<CAPTION>
EBITDA
Initial Report Date Factor
<S> <C>
calculation of EBITDA .0833
Last day of twelfth calendar
-------
month prior to date of
calculation of EBITDA .0000
</TABLE>
Eligible Accounts - All Accounts that (i) are not due from a
-----------------
Person related to or affiliated with Borrower or any Guarantor; (ii) are
not subject to pending disputes or counterclaims, or offset; (iii) are not
outstanding for more than ninety (90) days from the date of invoice for
such Account; (iv) are not due from an account debtor that is failing,
generally, to pay its debts as they become due or that has suffered the
termination of its existence or as to which a dissolution or insolvency
proceeding is pending or an assignment for the benefit of creditors has
been made, or for which a trustee, receiver or conservator has been
appointed, for all or any part of the property belonging to said account
debtor; (v) are not due from an account debtor that does not reside in or
is not subject to process in the United States of America, except to the
extent payment of the subject Account(s) is secured by a letter of credit
issued by a domestic bank, which letter of credit and bank are acceptable
to Bank in all respects; (vi) are subject to a valid, perfected Lien in
favor of Bank; and (vii) are not Accounts commonly known as consignment or
"bill and hold." In addition, the total balance of any Account that has
-- --------
in excess of twenty percent (20%) of its balance outstanding over ninety
(90) days from the date of invoice for such account shall not be deemed an
Eligible Account; and provided, further, that if any Accounts due from any
-------- -------
single account debtor would exceed ten percent (10%) of Borrower's total
aggregate Accounts, then the amount of such Accounts owed by such account
debtor constituting such excess shall not be deemed Eligible Accounts.
Environmental Laws - The Comprehensive Environmental Response,
------------------
Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S) 9601, et seq.,
-- ---
the Resource Conservation and Recovery Act, as amended by the Hazardous
Solid Waste Amendment of 1984, 42 U.S.C.A. (S) 6901, et seq., the Clean Air
-- ---
Act, 42 U.S.C.A. (S) 1251, et seq., the Toxic Substances Control Act, 15
-- ---
U.S.C.A. (S) 2601, et seq., The Oil Pollution Act of 1990, 33 U.S.C. (S)
-- ---
2701, et seq., and all other laws, statutes, codes, acts, ordinances,
-- ---
orders, judgments, decrees, injunctions, rules, regulations, order and
restrictions of any federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign, relating to air
pollution, water pollution, noise control and/or the handling, discharge,
disposal or recovery of on-site or off-site asbestos or "hazardous
substances" as defined by 42 U.S.C. (S) 9601, et seq., as amended, as each
-- ---
of the foregoing may be amended from time to time.
AMENDED AND RESTATED LOAN AGREEMENT - Page 6
<PAGE>
Environmental Liability - Any claim, demand, obligation, cause of
-----------------------
action, accusation, allegation, order, violation, damage, injury, judgment,
penalty or fine, cost of enforcement, cost of remedial action or any other
costs or expense whatsoever, including reasonable attorneys' fees and
disbursements, resulting from the violation or alleged violation of any
Environmental Law or the imposition of any Environmental Lien.
Environmental Lien - A Lien in favor of any court, governmental
------------------
agency or instrumentality or any other Person (i) for any Environmental
Liability or (ii) for damages arising from or cost incurred by such court
or governmental agency or instrumentality or other person in response to a
release or threatened release of hazardous or toxic waste, substance or
constituent into the environment.
Equipment - All of Borrower's and Guarantors' present and future
---------
(i) equipment and fixtures, including, without limitation, wherever
located, machinery, manufacturing, distribution, selling, data processing
and office equipment, furniture, furnishings, assembly systems, tools,
tooling, molds, dies, appliances and vehicles and any accessories thereto,
(ii) other tangible personal property (exclusive of Inventory), and (iii)
any and all accessories, parts and appurtenances attached to any of the
foregoing or used in connection therewith, and any substitutions therefor
and replacements, products and proceeds thereof.
ERISA - The Employee Retirement Income Security Act of 1974, as
-----
amended.
Eurodollar Business Day - A Business Day on which dealings in
-----------------------
U.S. Dollar deposits are carried on in the London interbank market.
Eurodollar Interest Period - With respect to any Eurodollar Loan
--------------------------
(i) initially, the period commencing on the date such Eurodollar Loan is
made and ending ninety days thereafter, as specified by Borrower in its
applicable Advance Request and (ii) thereafter, each period commencing on
the day following the last day of the next preceding Eurodollar Interest
Period applicable to such Eurodollar Loan and ending ninety days
thereafter, as specified by Borrower in its applicable Advance Request
thereafter; provided, however, that (i) if any Eurodollar Interest Period
-------- -------
would otherwise expire on a day which is not a Eurodollar Business Day,
then such Eurodollar Interest Period shall expire on the next succeeding
Eurodollar Business Day unless the result of such extension would be to
extend such Eurodollar Interest Period into the next calendar month, in
which case such Eurodollar Interest Period shall end on the immediately
preceding Eurodollar Business Day, (ii) if any Eurodollar Interest Period
begins on the last Eurodollar Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the calendar month
at the end of such Eurodollar Interest Period), then such Eurodollar
Interest Period shall end on the last Eurodollar
AMENDED AND RESTATED LOAN AGREEMENT - Page 7
<PAGE>
Business Day of a calendar month, (iii) any Eurodollar Interest Period
under the Advance Term Loan which would otherwise expire after the Advance
Maturity Date shall end on the Advance Maturity Date, and (iv) any
Eurodollar Interest Period under the Revolving Loan which would otherwise
expire after the Revolving Maturity Date shall end on the Revolving
Maturity Date.
Eurodollar Loan - Any Loan, or a portion thereof, during any
---------------
period that bears interest at the Eurodollar Rate plus the Eurodollar
----
Margin, or which would bear interest at such rate if the Maximum Rate
ceiling was not in effect at a particular time.
Eurodollar Margin - One and three-quarters percent (1.75%)
-----------------
whenever the Funded Debt Ratio is less than 1.0:1.0; two percent (2.0%)
whenever the Funded Debt Ratio is equal to or greater than 1.0:1.0, but
less than 2.0:1.0; and two and one-half percent (2.5%) whenever the Funded
Debt Ratio is 2.0:1.0 or greater.
Eurodollar Rate - With respect to each Eurodollar Loan a rate per
---------------
annum equal to the following:
Interbank Offered Rate
-------------------------------------------
1.0 - Eurodollar Reserve Requirement
Eurodollar Reserve Requirement - On any day, that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as provided by the
Board of Governors of the Federal Reserve System (or any successor
governmental body) applied for determining the maximum reserve requirements
for Bank (including without limitation, basic, supplemental, marginal and
emergency reserves) under Regulation D with respect to "Eurocurrency
liabilities" as currently defined in Regulation D, or under any similar or
successor regulation with respect to Eurocurrency liabilities or
Eurocurrency funding. Each determination by Bank of the Eurodollar Reserve
Requirement shall, in the absence of manifest error, be conclusive and
binding.
Event of Default - An event constituting an Event of Default as
----------------
defined by and pursuant to Section 13.
Excess Cash Flow - An amount, for Borrower's immediately
----------------
preceding fiscal year, equal to Borrower's consolidated net income plus:
----
depreciation, amortization, non-cash taxes and other non-cash charges,
minus: non-cash gains, scheduled principal payments on Funded Debt
-----
(including, without limitation, the principal component of any payments in
respect of capital lease obligations), any voluntary prepayments of the
Advance Term Loan, interest expense paid in cash and Unleveraged Capital
Expenditures (the latter being limited to $1,250,000 for purposes of this
definition), with all
AMENDED AND RESTATED LOAN AGREEMENT - Page 8
<PAGE>
such amounts being determined on a consolidated basis for Borrower's
immediately preceding fiscal year.
Federal Funds Effective Rate - Federal Funds Effective Rate
----------------------------
means, for any period, a fluctuating interest rate per annum equal for each
day during such period to the weighted average of the rates on overnight
Federal fund transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published for such day (or, if such
day is not a Business Day, of the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for
any day that is a Business Day, the average of the quotations for such day
on such transactions received by Bank from three Federal funds brokers of
recognized standing selected by Bank.
Fixed Charges - An amount, for the most recently completed twelve
-------------
calendar months, determined on a consolidated basis in accordance with
GAAP, equal to Borrower's (i) current maturities of long-term indebtedness
and current maturities of capitalized lease obligations, in both cases
determined as of end of such period plus (ii) (x) if the end of such period
----
is on or before December 31, 1996, one-fifth of the outstanding principal
balance of the Advance Term Loan as of the end of such period or (y) if the
end of such period is after December 31, 1996 but on or before December 31,
1997, one-fifth of the total principal amount of the Advances under the
Advance Term Loan made during calendar 1997, and not then repaid, plus
----
(iii) interest expense (including, without limitation, the interest
component of any payments in respect of capital lease obligations) paid or
payable in such period, plus (iv) Unleveraged Capital Expenditures paid or
----
payable in such period, each as determined in accordance with GAAP.
Fixed Charge Coverage Ratio - As at any date, a ratio equal to
---------------------------
(i) the sum of EBITDA for the period of the twelve calendar months ending
on, or most recently ended prior to, such date, less cash taxes paid in
----
such period, divided by (ii) Fixed Charges for such period.
----------
Funded Debt - For Borrower and Guarantors, the sum (determined on
-----------
a consolidated basis without duplication in accordance with GAAP), of the
following: (i) obligations created, issued or incurred for borrowed money
(whether by loan, the issuance and sale of debt securities or the sale of
property to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such property from such Person);
(ii) obligations to pay the deferred purchase or acquisition price of
property or services, other than trade accounts payable (other than for
borrowed money) arising, and accrued expenses incurred, in the ordinary
course of business so long as such trade accounts payable are payable
within 90 days of the date the respective goods are
AMENDED AND RESTATED LOAN AGREEMENT - Page 9
<PAGE>
delivered or the respective services are rendered; (iii) Funded Debt of
others secured by a Lien on property of Borrower or any Guarantor, whether
or not the respective indebtedness so secured has been assumed;
(iv) obligations in respect of letters of credit or similar instruments
issued or accepted by banks and other financial institutions for account of
Borrower or a Guarantor; (v) capital lease obligations; and (vi) Funded
Debt of others guaranteed by Borrower or a Guarantor.
Funded Debt Ratio - As of any date, the ratio of (i) Funded Debt
-----------------
as of such date to (ii) EBITDA for the period of the twelve calendar months
ending on, or most recently ended prior to, such date; provided that solely
--------
for purposes of Section 2(a) hereof the Funded Debt Ratio shall be
calculated as if the proposed Acquisition then under consideration has been
consummated on the date of calculation on the terms proposed by Borrower or
the subject Guarantor.
For purposes of determining the commitment fees earned and
payable in accordance with Section 7 and the Eurodollar Margin and the
Prime Rate Margin (each a "Margin," and, collectively, the "Margins"), the
Funded Debt Ratio is subject to adjustment quarterly (by increase or
decrease, as appropriate), effective only as of the first day of the
calendar month next following the month in which Borrower delivers a
Compliance Certificate (in the form of ExhibitD) contemporaneously with the
quarterly financial information delivered to Bank pursuant to Section
11(a)(ii) (each such day, an "Adjustment Date"). (For example, the
commitment fee and the Margins shall adjust effective September 1, 1997
based on financial information for the fiscal quarter ending June 30, 1997
delivered to Bank on or about August 14, 1997.) After each adjustment of
the commitment fee or the Margins resulting from an adjustment in the
Funded Debt Ratio, in accordance herewith, each such commitment fee shall
thereafter apply, or each such Margin shall thereafter apply to all Loans
then outstanding or made (i.e., with no retroactivity), until the next
Adjustment Date that a Compliance Certificate delivered contemporaneously
with quarterly financial information required pursuant to Section 11(a)(ii)
demonstrates a change in the Funded Debt Ratio such that other commitment
fees or Margins apply. Upon request of Bank, Borrower shall demonstrate to
the reasonable satisfaction of Bank the numerically required applicable
ratio in order to obtain an adjustment to a lower applicable commitment fee
or Margin. If Borrower fails to furnish to Bank any Compliance Certificate
by the date required by this Agreement, then the maximum commitment fees
shall thereafter apply, or the maximum Margins shall thereafter apply to
all Loans then outstanding or made (i.e., with no retroactivity), until
Borrower furnishes the required Compliance Certificate to Bank.
For purposes of this Agreement, as of the date hereof, the Prime
Rate Margin is one-half of one percent (0.50%) and the Eurodollar Rate
Margin is two percent (2.00%) and each will remain such until an adjustment
to the Margins is made in accordance with
AMENDED AND RESTATED LOAN AGREEMENT - Page 10
<PAGE>
the terms of this Agreement on September 1, 1996, being the first
Adjustment Date following execution of this Agreement.
GAAP - Generally accepted accounting principles, applied on a
----
consistent basis, as set forth in Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants and/or in
statements of the Financial Accounting Standards Board and/or their
respective successors and that are applicable in the circumstances as of
the date in question. Accounting principles are applied on a "consistent
basis" when the accounting principles applied in a current period are
comparable in all material respects to those accounting principles applied
in a preceding period.
GAAP EBITDA - Borrower's consolidated net income, determined in
-----------
accordance with GAAP, before provision for income taxes, interest expense,
depreciation and amortization and other non-cash charges to the extent
actually deducted in arriving at net income, minus extraordinary income,
-----
plus extraordinary losses, minus amounts that would otherwise constitute
---- -----
GAAP EBITDA in the subject twelve month period which are derived from
"equipment placement transactions" and which exceed $500,000 in the
aggregate, with all of the foregoing being determined in accordance with
GAAP.
General Intangibles - All of Borrower's and Guarantors' present and future
-------------------
choses in action, causes of action and all other intangible personal property of
every kind and nature, including, without limitation, corporate, partnership and
other business books and records, inventions, designs, patents, patent
applications, trademarks, trademark applications, trade names, trade secrets,
service marks, goodwill, registrations, copyrights, licenses, franchises,
customer lists, computer programs, software and other computer materials, tax
refunds, tax refund claims, rights and claims against charters, carriers,
shippers, franchisees, lessors, and lessees, and rights to indemnification,
intercompany receivables and any security documents executed in connection
therewith, deposit accounts, proceeds of any letters of credit, indemnity,
warranty or guaranty payable to Borrower or any Guarantor from time to time with
respect to the foregoing or proceeds of any insurance policies on which Borrower
or any Guarantor is named as beneficiary, claims against third parties for
advances and other financial accommodations and any other obligations whatsoever
owing to Borrower or any Guarantor, contract rights, customer and supplier
contracts, rights in and to all security agreements, security interests or other
security held by Borrower or any Guarantor to secure payment of Borrower's or
any Guarantors' accounts, all right, title and interest under leases, subleases,
and concessions and other agreements relating to real or personal property
(including, without limitation, all rents, issues and profits related thereto),
rights in and under guarantees, instruments, securities, documents of title and
other contracts securing, evidencing, supporting or otherwise relating to any of
the foregoing, together with all rights in any goods, merchandise or Inventory
which any of the foregoing may represent.
AMENDED AND RESTATED LOAN AGREEMENT - Page 11
<PAGE>
Guaranties - The unlimited guaranties heretofore executed and/or joined in
----------
by each of Guarantors for the benefit of Bank.
Interbank Offered Rate - With respect to each Eurodollar Interest Period,
----------------------
the rate of interest per annum at which deposits in immediately available and
freely transferable funds in U.S. Dollars are offered to Bank (at approximately
10:00 a.m., Dallas, Texas time (or as soon thereafter as practical) two
Eurodollar Business Days prior to the first day of each Eurodollar Interest
Period) in whatever Eurodollar interbank market may be selected by Bank in its
sole discretion, acting in good faith, at the time of determination and in
accordance with the usual practice in such market for delivery on the first day
of such Eurodollar Interest Period in an amount equal to or comparable to the
principal amount of the Eurodollar Loan to which such Eurodollar Interest Period
relates. Each determination of the Interbank Offered Rate by Bank shall, in the
absence of manifest error, be conclusive and binding.
Interest Payment Date - With respect to any Prime Rate Loan, the last day
---------------------
of each Prime Rate Interest Period. With respect to any Eurodollar Loan, the
last day of the applicable Eurodollar Interest Period.
Initial Report Date - With respect to an Acquired Company, either (a) the
-------------------
last day of the calendar month in which the stock or assets of such Acquired
Company are acquired, or (b) the last day of the calendar month immediately
preceding the calendar month in which the stock or assets of such Acquired
Company are acquired, or (c) if the requisite financial information cannot be
determined for the dates or periods set forth in clause (a) or (b) above, then
the last day of another preceding calendar month approved in writing by Bank.
(i) inventory, (ii) goods, merchandise and other personal property furnished
or to be furnished under any contract or service or intended for sale or lease,
and all goods consigned by Borrower or any Guarantor and all other items which
have previously constituted Equipment but are then currently being held for sale
or lease in the ordinary course of Borrower's or any Guarantor's business, (iii)
raw materials, work-in-process and finished goods, (iv) materials, components
and supplies of any kind, nature or description used or consumed in Borrower's
or any Guarantor's business or in connection with the manufacture, production,
packing, shipping, advertising, finishing or sale of any of the Property
described in clauses (i) through (iii) above, (v) goods in which Borrower or
----------- -----
any Guarantor has a joint or other interest to the extent of Borrower's or any
Guarantor's interest therein or right of any kind (including, without
limitation, goods in which Borrower or any Guarantor has an interest or right as
consignee), and (vi) goods that are returned to or repossessed by Borrower; in
each case whether in the possession
AMENDED AND RESTATED LOAN AGREEMENT - Page 12
<PAGE>
of Borrower or any Guarantor, a bailee, a consignee, or any other Person for
sale, storage, transit, processing, use or otherwise, and any and all documents
relating to any of the foregoing.
"Key Man" Policies - A life insurance policy issued on the life of Max W.
------------------
Batzer in the amount of not less than $1,000,000, and a life insurance policy
issued on the life of Brad A. Hummel in the amount of not less than $1,000,000.
Lien - Any mortgage, deed of trust, pledge, security interest, assignment,
----
encumbrance or lien (statutory or otherwise) of every kind and character.
Loan Documents - This Agreement, the Notes, the Security Instruments and
--------------
all other documents executed in connection with the lending, credit and security
transactions described in this Agreement.
Loans - Collectively, the Advance Term Loan and the Revolving Loan.
-----
Material Adverse Effect - Any set of circumstances or events that has a
-----------------------
material adverse effect on (i) the assets or properties, liabilities, financial
condition, business, operations, affairs or circumstances of Borrower and
Guarantors, taken as a whole, (ii) the ability of Borrower and Guarantors to
carry out their consolidated business as it exists on the date of this Agreement
or as proposed at the date of this Agreement to be conducted, (iii) the ability
of Borrower to meet its obligations under the Notes, this Agreement or any of
the other Loan Documents, in each case on a timely basis, or (iv) the ability of
Borrower and Guarantors, taken as a whole, to meet their obligations under this
Agreement or any of the other Loan Documents.
Maximum Rate - At any particular time in question, the maximum rate of
------------
interest that under applicable law may then be charged on the Notes. If such
maximum rate changes after the date of this Agreement, then the Maximum Rate
shall be automatically increased or decreased, as the case may be, without
notice to Borrower, from time to time as of the effective date of each change in
such maximum rate.
Notes - Collectively, the Advance Term Note and the Revolving Note,
-----
together with all renewals, modifications, amendments and extensions thereof or
any part thereof.
Obligations - Any and all obligations of Borrower or any of Guarantors for
-----------
(i) the payment of money, whether principal, interest, fees, costs or otherwise,
and (ii) the performance of agreements, promises, covenants and acts, in both
cases arising under or in connection with this Agreement, the Notes, any of the
Security Instruments or any of the other Loan Documents.
AMENDED AND RESTATED LOAN AGREEMENT - Page 13
<PAGE>
Permitted Liens - The term Permitted Lien shall mean (i) easements, rights
---------------
of way, servitudes, permits, conditions, covenants and other restrictions, and
easements of streets, alleys, highways, pipelines, telephone lines, power lines,
railways and other easements and rights of way on, over or in respect of any of
Borrower's or Guarantors' assets or properties and that do not, individually or
in the aggregate, cause a Material Adverse Effect; (ii) materialmen's,
mechanic's, repairman's, employee's, warehousemen's, landlord's, carrier's,
contractor's, sub-contractor's, and other Liens (including any financing
statements filed in respect thereof) incidental to the construction,
maintenance, development, transportation, storage or operation of Borrower's or
Guarantors' assets or properties to the extent not delinquent (or which, if
delinquent, are being contested in good faith by appropriate proceedings and for
which Borrower or any Guarantor has set aside on its books adequate reserves in
accordance with GAAP); (iii) all contracts, agreements and instruments (but not
any contract, agreement or instrument that affirmatively or expressly creates a
security interest, except as described in clause (vii) below), and all defects
and irregularities and other matters affecting Borrower's or Guarantors' assets
and properties which were in existence at the time Borrower's or Guarantors'
assets and properties were originally acquired by Borrower or such Guarantor and
all routine operational agreements entered into in the ordinary course of
business, which contracts, agreements, instruments, defects, irregularities and
other matters and routine operational agreements are not such as to,
individually or in the aggregate, interfere materially with the operation, value
or use of Borrower's and Guarantors' assets and properties, considered in the
aggregate; (iv) liens in connection with worker's compensation, unemployment
insurance or other social security, old age pension or public liability
obligations; (v) legal or equitable encumbrances deemed to exist by reason of
the existence of any litigation or other legal proceeding or arising out of a
judgment or award with respect to which an appeal is being prosecuted in good
faith and levy and execution thereon have been stayed and continue to be stayed;
(vi) rights reserved to or vested in any municipality, governmental, statutory
or other public authority to control or regulate any of Borrower's or
Guarantors' assets and properties in any manner, and all applicable laws, rules,
regulations and orders from any governmental authority; (vii) purchase money
security interests incurred in the ordinary course of Borrower's or any
Guarantor's business in connection with the acquisition of Equipment (provided
that the related indebtedness shall be subject to Section 12(f)(iv)) or
Inventory; (viii) Liens created by or pursuant to this Agreement or the other
Security Instruments; (ix) Liens existing at the date of this Agreement and
disclosed to Bank in Borrower's annual audited consolidated financial statements
dated December 31, 1995, or otherwise on Schedule 9(j) attached hereto; and (x)
any and all renewals and extensions of all or any of the foregoing.
AMENDED AND RESTATED LOAN AGREEMENT - Page 14
<PAGE>
Person - An individual, a corporation, a partnership, an association, a
------
trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
Plan - Any plan subject to Title IV of ERISA and maintained by Borrower or
----
a Guarantor, or any such plan to which Borrower or a Guarantor is required to
contribute on behalf of its employees.
Prime Rate - The "Prime Rate" as announced by Bank at its principal banking
----------
office in Dallas, Texas from time to time, but, for any day, never less than the
Federal Funds Effective Rate in effect for such day plus one-half of one percent
( 1/2%) per annum. Without notice to Borrower, Guarantors or any other Person,
the Prime Rate shall change automatically from time to time as and in the amount
by which said Prime Rate shall fluctuate, with each such change to be effective
as of the date of each change in the Prime Rate. The Prime Rate is a reference
rate and does not necessarily represent the lowest or best rate charged to any
customer by Bank.
Prime Rate Interest Period - With respect to any Prime Rate Loan, the
--------------------------
quarterly period ending on the first (1st) day of each February, May, August and
November, provided, however, that (i) if any Prime Rate Interest Period would
-------- -------
end on a day that is not a Business Day, such Prime Rate Interest Period shall
be extended to the next succeeding Business Day, and (ii) if any Prime Rate
Interest Period would otherwise end after the Advance Term Maturity Date or
Revolving Maturity Date, as applicable, then such Prime Rate Interest Period
shall end on the Advance Maturity Date or Revolving Maturity Date, respectively.
Prime Rate Loan - Any Loan, or a portion thereof, during any period that
---------------
bears interest at the Prime Rate plus the Prime Rate Margin, or which would bear
----
interest at such rate if the Maximum Rate ceiling was not in effect at a
particular time.
Prime Rate Margin - One-fourth of one percent (0.25%) whenever the Funded
-----------------
Debt Ratio is less than 1.0:1.0; one-half of one percent (0.50%) whenever the
Funded Debt Ratio is equal to or greater than 1.0:1.0, but less than 2.0:1.0;
and one percent (1.00%) whenever the Funded Debt Ratio is 2.0:1.0 or greater.
Revolving Loan - The Loan or loans made under the Revolving Loan Commitment
--------------
pursuant to Section 2(b).
Revolving Loan Commitment - The commitment contained in Section 2(b) of
-------------------------
this Agreement.
AMENDED AND RESTATED LOAN AGREEMENT - Page 15
<PAGE>
Revolving Maturity Date - June 30, 1998.
-----------------------
Revolving Note - That certain $2,500,000 revolving note described in
--------------
Section 3(a).
Security Instruments - The term Security Instruments is used collectively
--------------------
herein to mean this Agreement, all security agreements, pledge agreements and
financing statements, the Guaranties and other collateral documents covering
certain of Borrower's and Guarantors' assets and properties, all such documents
in form and substance reasonably satisfactory to Bank.
Subsidiary - Any corporation or other Person of which securities or other
----------
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are at the time
directly or indirectly owned by Borrower or any Guarantor.
Unleveraged Capital Expenditures - For any period, the total cost of
--------------------------------
capital expenditures in such period by Borrower on a consolidated basis for the
purpose of acquiring, or acquiring the use of, Equipment or other tangible
capital assets, less the total amount of Funded Debt incurred in connection with
such expenditures.
AMENDED AND RESTATED LOAN AGREEMENT - Page 16
<PAGE>
1. Commitments of Bank.
(a) Advance Term Loan. On the terms and conditions hereinafter set forth, Bank
-----------------
agrees to make a multiple draw term loan to Borrower in one or more
Advances during the period beginning on the date of this Agreement and
ending on December 31, 1997 in such amounts as Borrower may request,
subject to the limitation of Section 12(c) hereof, up to the aggregate
principal amount of $17,500,000 (provided, however, that Advances shall not
-------- -------
be available to Borrower under this Section 2(a) until it has expended,
after the date hereof, $1,430,427 in cash for Acquisitions (calculated by
subtracting from the $2,000,000 outstanding hereunder on the date hereof
$569,573 in cash expended in connection with the acquisition of Cardiac
Concepts, Inc.)). Notwithstanding any other provision of this Agreement,
no Advance shall be required to be made hereunder if any Event of Default
has occurred and is continuing or if any event or condition has occurred
that may, with notice, be an Event of Default.
(b) Revolving Loan. On the terms and conditions hereinafter set forth, Bank
--------------
agrees to make a revolving loan consisting of one or more Advances to
Borrower from time to time during the period beginning on the date of this
Agreement and ending on (but not including) the Revolving Maturity Date in
such amounts as Borrower may request up to an amount not to exceed, in the
aggregate principal amount outstanding at any time the lesser of (i) the
Borrowing Base (as determined by the most recently received Borrowing Base
Certificate) or (ii) $2,500,000. Within the limit of this Section 2(b),
Borrower may borrow, repay without premium or penalty, and reborrow.
Notwithstanding any other provision of this Agreement, no Advance shall be
required to be made hereunder if any Event of Default has occurred and is
continuing or if any event or condition has occurred that may, with notice,
be an Event of Default.
(c) Procedure for Borrowing Under Advance Term Loan and Revolving Loan
------------------------------------------------------------------
Commitments. Whenever Borrower desires an Advance under the Advance Term
-----------
Loan or the Revolving Loan, it shall give Bank telegraphic, facsimile,
telex or telephonic notice (an "Advance Request") of such requested
Advance, which in the case of telephonic notice, shall be promptly
confirmed in writing. Each Advance Request for an Advance under the
Advance Term Loan shall be in the form of Exhibit "A1" attached hereto, and
each Advance Request for an Advance under the Revolving Loan shall be in
the form of Exhibit "A2" attached hereto. Each Advance Request shall be
executed by the President, Chief Executive Officer or Chief Financial
Officer of Borrower and shall be received by Bank not later than 11:00 a.m.
Dallas, Texas time, on the Borrowing Date, in the case of an Advance under
the Revolving Loan, or three (3) days prior to the Borrowing Date, in the
case of an Advance under the Advance Term Loan; provided, however, that any
-------- -------
Advance Request for a Eurodollar Loan shall be received by Bank not later
than three (3) Eurodollar Business Days prior to the Borrowing Date.
(Notwithstanding, in the case of an Advance under the Advance Term Loan,
prior to obtaining the Advance, Borrower must have otherwise complied, if
and to the extent required thereunder, with the requirements of Section
12(o) of this Agreement, and
AMENDED AND RESTATED LOAN AGREEMENT - Page 17
<PAGE>
obtained any other consents or approvals required hereunder.) Each Advance
Request shall specify the Borrowing Date, and the principal amount to be
borrowed (which shall not be less than $100,000).
(b) Voluntary Reduction of Revolving Loan Commitment. Borrower may at any
------------------------------------------------
time, or from time to time, upon not less than three (3) Business Days
prior written notice to Bank, reduce or terminate the Revolving Loan
Commitment; provided, however, that each reduction in the Revolving Loan
-------- -------
Commitment must (i) be in a minimum amount of at least $100,000, and (ii)
be accompanied by a prepayment of the Revolving Note in at least the amount
by which the then-outstanding principal balance of the Revolving Note
exceeds the Revolving Loan Commitment as reduced in accordance with this
Section 2(d).
(c) Voluntary Reduction of Advance Term Loan Commitment. Borrower may at any
---------------------------------------------------
time, or from time to time, upon not less than three (3) Business Days
prior written notice to Bank, reduce or terminate the Advance Term Loan
Commitment; provided, however, that each reduction in the Advance Term Loan
-------- -------
Commitment must (i) be in a minimum amount of at least $100,000, and (ii)
be accompanied by a prepayment of the Advance Term Note in at least the
amount by which the then-outstanding principal balance of the Advance Term
Note exceeds the Advance Term Loan Commitment as reduced in accordance with
this Section 2(e). Any and all such prepayments shall be applied in
inverse order of maturity.
(d) Deemed Advance under Advance Term Loan. Borrower and Bank agree that the
--------------------------------------
existing outstanding indebtedness of Borrower to Bank under the Prior
Agreement in the principal amount of $2,000,000 shall, for purposes of this
Agreement, be deemed an Advance under the Advance Term Loan subject to the
terms and conditions hereof, and shall continue as a Prime Rate Loan.
3. Notes Evidencing Loans.
(a) The facilities described above in Section 2 shall be evidenced by two
promissory notes of Borrower as follows:
(i) Form of Advance Term Note - The Advance Term Loan shall be evidenced by a
-------------------------
note in the face amount of $17,500,000, and shall be in the form of Exhibit
"B" hereto with appropriate insertion. Notwithstanding the principal
amount of the Advance Term Note, as stated on the face thereof, the actual
principal amount due from Borrower to Bank on account of the Advance Term
Note, as of any date of computation, shall be the sum of Advance Term Loan
Advances then and theretofore made on account thereof, less all principal
payments actually received by Bank in collected funds with respect thereto.
Although the Advance Term Note shall be dated as of the date of this
Agreement,
AMENDED AND RESTATED LOAN AGREEMENT - Page 18
<PAGE>
interest in respect thereof shall be payable only for the period during
which the Advance Term Loan Advances evidenced thereby are outstanding and,
although the face amount of the Advance Term Note may be higher, the
Advance Term Note shall be enforceable, with respect to Borrower's
obligation to pay the principal amount thereof, only to the extent of the
unpaid principal amount of such Advance Term Loan Advances.
(ii) Form of Revolving Note - The Revolving Loan shall be evidenced by a note in
----------------------
the face amount of $2,500,000, and shall be in the form of Exhibit "C"
hereto with appropriate insertion. Notwithstanding the principal amount of
the Revolving Note, as stated on the face thereof, the actual principal
amount due from Borrower to Bank on account of the Revolving Note, as of
any date of computation, shall be the sum of Revolving Loan Advances then
and theretofore made on account thereof, less all principal payments
actually received by Bank in collected funds with respect thereto.
Although the Revolving Note shall be dated as of the date of this
Agreement, interest in respect thereof shall be payable only for the period
during which the Revolving Loan Advances evidenced thereby are outstanding
and, although the face amount of the Revolving Note may be higher, the
Revolving Note shall be enforceable, with respect to Borrower's obligation
to pay the principal amount thereof, only to the extent of the unpaid
principal amount of such Revolving Loan Advances.
(b) Interest Rates - The unpaid principal balances of the Notes shall bear
--------------
interest from time to time as set forth in Section 4.
(c) Payment of Interest on Advance Term Note - Interest on the Advance Term
----------------------------------------
Note shall be payable quarterly, in arrears, on the Interest Payment Date
and the Advance Term Maturity Date.
(d) Payment of Principal of Advance Term Loan - The principal of the Advance
-----------------------------------------
Term Loan shall be payable as follows:
(i) With respect to Advances made during the period beginning as of the date of
this Agreement through and including December 31, 1996 and the deemed
Advance referred to in Section 2(f), Borrower shall make quarterly
principal payments based on a five (5) year, "straight line" amortization
(i.e., as if consisting of twenty (20) equal payments of principal), the
first such payment being payable on the first (1st) day of February 1997,
and continuing on the first (1st) day of each May, August, November and
February thereafter;
(ii) With respect to Advances made during calendar 1997, Borrower shall make
quarterly principal payments based on a five (5)
AMENDED AND RESTATED LOAN AGREEMENT - Page 19
<PAGE>
year, "straight line" amortization (i.e., as if consisting of twenty (20)
equal payments of principal), the first such payment to be due and payable
on the first (1st) day of February, 1998, and continuing on the first (1st)
day of each May, August, November and February thereafter; and
(iii) Borrower shall make one (1) final payment equal to the entire outstanding
principal balance of the Advance Term Loan, which final payment shall be
due and payable on the Advance Maturity Date.
(e) Payment of Interest on Revolving Note - Interest on the Revolving Note
-------------------------------------
shall be payable quarterly, in arrears, on the applicable Interest Payment
Date and the Revolving Maturity Date.
(f) Payment of Principal of Revolving Loan - Principal of the Revolving Note
--------------------------------------
shall be due and payable on the Revolving Maturity Date.
4. Interest Rates.
(a) Interest Rate Options for Loans. The following interest rate options are
-------------------------------
available for amounts outstanding from time to time under the Loans:
(i) Prime Rate Loans. With respect to the unpaid principal amount of a Prime
----------------
Rate Loan, Borrower agrees to pay interest on the Advance Term Note or the
Revolving Note, as the case may be, calculated on the basis of the actual
days elapsed (including the first day but excluding the last day) in a year
consisting of 360 days (unless such calculation would result in a usurious
rate, in which case interest shall be calculated on the basis of a year or
365 or 366 days, as the case may be) from the date the proceeds thereof are
made available to Borrower until maturity (whether by acceleration or
otherwise), at a varying rate per annum equal to the lesser of (i) the
Maximum Rate, or (ii) the Prime Rate plus the Prime Rate Margin. Past due
----
principal and, to the extent permitted by law, past due interest in respect
to a Prime Rate Loan, shall bear interest, payable on demand, at a rate per
annum equal to the Prime Rate plus four percent (4%).
----
(ii) Eurodollar Loans. With respect to the unpaid principal amount of a
----------------
Eurodollar Loan, Borrower agrees to pay interest calculated on the basis of
the actual days elapsed (including the first day but excluding the last
day) in a year consisting of 360 days (unless such calculation would result
in a usurious rate, in which case interest shall be calculated on the basis
of a year or 365 or 366 days, as the case may be) from the date the
proceeds thereof are made available to Borrower until
AMENDED AND RESTATED LOAN AGREEMENT - Page 20
<PAGE>
maturity (whether by acceleration or otherwise), at a varying rate per
annum equal to the lesser of (i) the Maximum Rate, or (ii) the
Eurodollar Rate plus the Eurodollar Margin. Past due principal and, to
----
the extent permitted by law, past due interest shall bear interest, payable
on demand, at a rate per annum equal to the Prime Rate plus four percent
----
(4%).
(iii) Exercise of Option. No more than a total of three (3) Eurodollar Loans
------------------
shall be outstanding at any one time in respect of the Advance Term Loan and the
Revolving Loan. In addition, the principal amount of each Eurodollar Loan shall
be at least $1,000,000. Without Bank's prior written consent, no continuation
or conversion, as applicable, shall be made of a Eurodollar Loan if in
connection with required regular principal payments on the Advance Term Note,
such continuation or conversion would cause Borrower to be required to make
payments pursuant to Section 5(g).
(b) Interest Rate Determination. Bank shall determine each interest rate
---------------------------
applicable to the Notes hereunder in accordance with this Section 4. Bank
shall give prompt notice to Borrower of each Eurodollar Rate so determined
and its determination thereof shall be conclusive absent manifest error.
(c) Initial Option/Conversion/Continuation Option. With respect to each new
---------------------------------------------
Advance, Borrower shall in writing request that the same be a Eurodollar
Loan, or a Prime Rate Loan, at the time Borrower submits an Advance Request
therefor. Thereafter, subject to Section 5 and Borrower's and Guarantors'
compliance with their other obligations under this Agreement, Borrower may
elect from time to time:
(i) to convert a Eurodollar Loan to a Prime Rate Loan by giving Bank
irrevocable notice of such election (in writing in the form of an Interest
Option Request in the form of Exhibit E) prior to 10:00 a.m. (Dallas, Texas
time) on the conversion date and such conversion shall be made on the requested
conversion date, provided that any such conversion of a Eurodollar Loan shall
only be made on the last day of the Eurodollar Interest Period with respect
thereto; or
(ii) to convert a Prime Rate Loan to a Eurodollar Loan, or continue a
Eurodollar Loan as a Eurodollar Loan, by giving Bank irrevocable notice of such
election (in writing in the form of an Interest Option Request in the form of
ExhibitE) three (3) Eurodollar Business Days prior to the proposed conversion
and, subject to Section5 and Borrower's and Guarantors' compliance with their
other obligations under this Agreement, such conversion shall be made on the
requested conversion date, or if such requested conversion date is not a
Eurodollar Business Day, on the next succeeding Eurodollar Business Day.
AMENDED AND RESTATED LOAN AGREEMENT - Page 21
<PAGE>
Any such conversion shall not be deemed to be a prepayment of any of the
Loans for purposes of this Agreement. If Bank shall not have received timely
notice as herein provided with respect to the continuation or conversion of an
expiring Eurodollar Interest Period, then Borrower shall be deemed to have
elected to convert any maturing Eurodollar Loan to a Prime Rate Loan.
(d) Recoupment. If at any time the applicable rate of interest selected
----------
pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum
Rate, thereby causing the interest on one or more of the Notes to be
limited to the Maximum Rate, then any subsequent reduction in the interest
rate so selected or subsequently selected shall not reduce the rate of
interest on such Notes below the Maximum Rate until the total amount of
interest accrued on such Notes equals the amount of interest that would
have accrued on the Note if the rate or rates selected pursuant to Sections
4(a)(i) or 4(a)(ii), as the case may be, had at all times been in effect.
5. Special Provisions Relating to Eurodollar Loans.
(a) Unavailability of Funds or Inadequacy of Pricing. If, in connection with
------------------------------------------------
any proposed Eurodollar Loan, Bank (i) shall have determined that U.S.
Dollar deposits of the relevant amount and for the relevant Eurodollar
Interest Period for any Eurodollar Loan are not available to Bank in the
London interbank market; or (ii) in good faith determines that the
Eurodollar Interest Rate will not adequately reflect the cost to Bank of
maintaining or funding a Eurodollar Loan for such Interest Period, then in
either case the obligations of Bank to make a Eurodollar Loan shall be
suspended until such time as Bank in its sole discretion reasonably
exercised determines that the event resulting in such suspension has ceased
to exist. If Bank shall make such determination it shall promptly notify
Borrower in writing and Borrower shall either repay any outstanding
Eurodollar Loan owed to Bank, without penalty, on the last day of the
current Eurodollar Interest Period, or convert the same to a Prime Rate
Loan on the last day of the then current Eurodollar Interest Period for
such Eurodollar Loan.
(b) Reserve Requirements. Upon any change in any applicable law, treaty or
--------------------
regulation or in the interpretation or administration thereof, or if any
central bank or other fiscal monetary or other authority having
jurisdiction over Bank or the loans contemplated by this Agreement shall
impose, modify or deem applicable any reserve requirement of the Board of
Governors of the Federal Reserve System on any Eurodollar Loan, or any
other reserve, special deposit, or similar requirements against assets or
deposits with or for the account of, or credit extended by, Bank or shall
impose on Bank, Eurodollar interbank markets in general or the London
interbank market specifically, as the case may be, any other condition
affecting this Agreement or any Eurodollar Loan and the result of any of
the foregoing is to increase the cost to Bank in making or maintaining a
Eurodollar Loan or to reduce any amount (or the effective return on any
amount) received by Bank hereunder, then Borrower shall either (i) pay to
Bank upon
AMENDED AND RESTATED LOAN AGREEMENT - Page 22
<PAGE>
demand of Bank as additional interest on the Advance Term Note or the
Revolving Note, as the case may be, evidencing a Eurodollar Loan such
additional amount or amounts as will reimburse Bank for such additional
cost or such reduction or (ii) convert such Eurodollar Loan to a Prime Rate
Loan. Bank shall give notice to Borrower upon becoming aware of any such
change or imposition which may result in any such increase or reduction. A
certificate of Bank setting forth the basis for the determination of such
amount necessary to compensate Bank as aforesaid shall be delivered to
Borrower and shall be conclusive as to such determination and such amount,
absent manifest error.
(c) Taxes. Both principal and interest on the Advance Term Note or the
-----
Revolving Note, as the case may be, evidencing any Eurodollar Loan are
payable without withholding or deduction for or on account of any taxes.
If any taxes (other than taxes based on the overall net income of Bank) are
levied or imposed on or with respect to the Advance Term Note or the
Revolving Note, as the case may be, evidencing a Eurodollar Loan or on any
payment on the Advance Term Note or the Revolving Note, as the case may be,
evidencing a Eurodollar Loan made to Bank, then, and in any such event,
Borrower shall pay to Bank upon demand of Bank such additional amounts as
may be necessary so that every net payment of principal and interest on the
Advance Term Note or the Revolving Note, as the case may be, evidencing a
Eurodollar Loan, after withholding or deduction for or on account of any
such taxes, will not be less than any amount provided for herein. In
addition, if at any time when any Eurodollar Loan is outstanding any laws
enacted or promulgated, or any court of law or governmental agency
interprets or administers any law, that, in any such case, materially
changes the basis of taxation of payments to Bank of principal of or
interest on the Advance Term Note or the Revolving Note, as the case may
be, evidencing a Eurodollar Loan by reason of subjecting such payments to
double taxation or otherwise (except through an increase in the rate of tax
on the overall net income of Bank) then Borrower will pay upon demand by
Bank the amount of loss to the extent that such loss is caused by such a
change. Bank shall give notice to Borrower upon becoming aware of the
amount of any loss incurred by Bank through enactment or promulgation of
any such law that materially changes the basis of taxation of payments to
Bank. Bank shall also give notice on becoming aware of any such enactment
or promulgation that may result in such payments becoming subject to double
taxation or otherwise. A certificate of Bank setting forth the basis for
the determination of such loss and the computation of such amounts shall be
delivered to Borrower and shall be conclusive of such determination and
such amount, absent manifest error.
(d) Change in Laws. If at any time any new law or any change in existing laws
--------------
or in the interpretation of any new or existing laws shall make it unlawful
for Bank to maintain or fund a Eurodollar Loan hereunder, then Bank shall
promptly notify Borrower in writing and Borrower shall either (i) repay any
outstanding Eurodollar Loan owed to Bank, without penalty, on the last day
of the current Eurodollar Interest Period (or, if Bank may not lawfully
continue to maintain and fund such Eurodollar Loan,
AMENDED AND RESTATED LOAN AGREEMENT - Page 23
<PAGE>
immediately), or (ii) Borrower may convert such Eurodollar Loan at such
appropriate time to a Prime Rate Loan.
(e) Option to Fund. Bank shall have the option if Borrower elects a Eurodollar
--------------
Loan, to purchase one or more deposits in order to fund or maintain its
funding of the principal balance of a Note to which such Eurodollar Loan is
applicable during the Eurodollar Interest Period in question; it being
understood that the provisions of this Agreement relating to such funding
are included only for the purpose of determining the rate of interest to be
paid under such Eurodollar Loan and any amounts owing hereunder. Bank
shall be entitled to fund and maintain its funding of all or any part of
that portion of the principal balance of either Note in any manner it sees
fit, but all such determinations hereunder shall be made as if Bank have
actually funded and maintained that portion of the principal balance of
either Note to which a Eurodollar Loan is applicable during the applicable
Eurodollar Interest Period through the purchase of deposits in an amount
equal to the principal balance of the Note to which such Eurodollar Loan is
applicable and having a maturity corresponding to such Eurodollar Interest
Period. Bank may fund the outstanding principal balance of either Note
which is to be subject to any Eurodollar Loan from any branch or office of
Bank as Bank may designate from time to time.
(f) Indemnity. Borrower shall indemnify and hold harmless Bank against all
---------
reasonable and necessary out-of-pocket costs and expenses (which costs and
expenses are not intended to include, without limitation, any loss
sustained by Bank in connection with the borrowing or reemployment of funds
with respect to any Eurodollar Loan) which Bank may sustain (i) if (other
than as a result of a default by Bank hereunder) the making of any loan or
loans as a Eurodollar Loan does not occur on the date, if any, specified
therefor in the notice given by Borrower pursuant to Section 4(c), (ii) as
a consequence of any default by Borrower under this Section 5, or (iii) any
other loss suffered by Bank as a result of the making of any Loan as a
Eurodollar Loan.
(g) Payments Not at End of Eurodollar Interest Period. If Borrower makes any
-------------------------------------------------
payment of principal with respect to any Eurodollar Loan on any day other
than the last day of the Eurodollar Interest Period applicable to such
Eurodollar Loan, then, except in connection with a mandatory prepayment in
accordance with Section 8(b), Borrower shall reimburse Bank on demand for
any loss, cost or expense incurred by Bank as a result of the timing of
such payment or in redepositing such principal amount, including the sum of
(i) the cost of funds to Bank in respect of such principal amount so paid,
for the remainder of the Eurodollar Interest Period applicable to such sum,
reduced, if Bank is able to redeposit such principal amount so paid for the
balance of the Eurodollar Interest Period, by the interest earned by Bank
as a result of so redepositing such principal amount, plus (ii) any expense
or penalty incurred by Bank in redepositing such principal amount. A
certificate of Bank setting forth the basis for the determination
AMENDED AND RESTATED LOAN AGREEMENT - Page 24
<PAGE>
of the amount owed by Borrower pursuant to this Section 5(g) shall be
delivered to Borrower and shall be conclusive in the absence of manifest
error.
6. Collateral Security and Guaranties. Borrower and each Guarantor hereby
confirm and acknowledge that the Liens previously granted to Bank in connection
with the Prior Agreement, to secure the performance of their obligations
thereunder, also secure the Obligations, whether now or hereafter incurred,
matured or unmatured, direct or contingent, joint or several, or joint and
several, including extensions, modifications and renewals thereof, and
substitutions therefor, and as such remain in force and full effect.
Additionally, Borrower acknowledges that in the Prior Agreement Borrower pledged
and delivered to Bank one hundred percent (100%) of the issued and outstanding
shares of the capital stock of DHS Management Services, Inc. ("DHSMS") and
ninety-nine percent (99%) of the issued and outstanding capital stock of
Diagnostic Health Services De Mexico, S.A. de C.V., and DHSMS pledged and
delivered, or caused its appropriate Subsidiary to pledge and deliver, to Bank
one hundred percent (100%) of the issued and outstanding shares of the capital
stock of each of its Subsidiaries (other than (i) Homecare International De
Mexico, S.A. de C.V., as to which DHSMS pledged and delivered its shares thereof
constituting one percent (1%) of the issued and outstanding shares thereof, and
caused Diagnostic Health Services de Mexico, S.A. de C.V., to pledge and deliver
shares thereof constituting ninety-nine percent (99%) (including after-acquired
shares) of the issued and outstanding shares thereof, and (ii) Diagnostic Health
Services De Mexico, S.A. de C.V., as to which DHSMS pledged and delivered its
shares thereof constituting one percent (1%) of the issued and outstanding
shares thereof). Borrower and each Guarantor hereby confirm that each such
pledge secures the Obligations, whether now or hereafter incurred, matured or
unmatured, direct or contingent, joint or several, or joint and several,
including extensions, modifications and renewals thereof, and substitutions
therefor, and as such remain in force and full effect. All collateral in which
Borrower or any Guarantor has herewith granted or hereafter grants to Bank a
Lien (to the satisfaction of Bank) in accordance with this Section 6, as such
properties and interests are from time to time constituted, are hereinafter
collectively called the "Collateral." Bank's Lien on the Collateral shall be a
first and prior Lien, subject only to such priority as may be afforded a
Permitted Lien under applicable law.
In addition to the grant of Liens against the Collateral in favor of Bank,
Guarantors acknowledge the execution and delivery of the Guaranties to Bank in
connection with the Prior Agreement and confirm that the Guaranties apply to the
Obligations to the same extent as they applied to the "Obligations" under and as
defined in the Prior Agreement. Without limiting the foregoing, each Guarantor
hereby acknowledges and consents to this Loan Agreement and (a) acknowledges
that its obligations under that certain Guaranty dated on or before the date of
this Agreement in favor of Bank includes a guaranty of all of the obligations,
indebtedness and liabilities of Borrower under (i) this Agreement and (ii) the
Notes, (b) represents to Bank that such Guaranty remains in full force and
effect, and (c) agrees that this Agreement and all documents executed in
connection herewith do not operate to reduce or discharge its obligations under
such Guaranty.
AMENDED AND RESTATED LOAN AGREEMENT - Page 25
<PAGE>
7. Fees. In addition to the fees payable to Bank as set forth in that certain
fee letter agreement dated May 2, 1996 between Borrower and Bank, Borrower shall
pay to Bank the following commitment fees:
(i) a commitment fee on the daily average unused amount of Bank's
Advance Term Loan Commitment for the period from and including the date hereof
to and including December 31, 1997, at a rate per annum of one quarter of one
percent (0.25%) whenever the Funded Debt Ratio is less than 2.0:1.0 and three-
eighths of one percent (0.375%) whenever the Funded Debt Ratio is equal to or
greater than 2.0:1.0 (the "Advance Commitment Fee"); and
(ii) a commitment fee on the daily average unused amount of Bank's
Revolving Loan Commitment for the period from and including the date hereof to
but not including the Revolving Maturity Date, at a rate per annum of one
quarter of one percent (0.25%) whenever the Funded Debt Ratio is less than
2.0:1.0 and three-eighths of one percent (0.375%) whenever the Funded Debt Ratio
is equal to or greater than 2.0:1.0 (the "Revolving Commitment Fee").
Accrued Advance Commitment Fees shall be payable quarterly in arrears on the
first day of each February, May, August and November with respect to the
preceding quarter and on the Advance Maturity Date. Accrued Revolving
Commitment Fees shall be payable quarterly in arrears on the first day of each
February, May, August and November with respect to the preceding quarter and on
the Revolving Maturity Date.
8. Prepayments.
(a) Voluntary Prepayments. Borrower may at any time and from time to time,
---------------------
without penalty or premium, prepay any of the Notes, in whole or in part;
provided, however, that any prepayment of any Eurodollar Loan on any day
other than an Interest Payment Date must include a payment for all breakage
costs and funding losses, if any. Each prepayment of the Advance Term Note
shall be made on at least one (1) Business Day's notice to Bank and shall
be in a minimum amount of $100,000 or the unpaid balance of the Advance
Term Note, whichever is less, and shall be applied to amounts of
outstanding principal, in reverse order of maturity.
(b) Mandatory Prepayment of Advance Term Loan. On or before April 15 of each
-----------------------------------------
year, beginning April 15, 1997, Borrower shall make a mandatory prepayment
of the Advance Term Loan in an amount equal to fifty percent (50%) of
Excess Cash Flow attributable to Borrower's immediately preceding fiscal
year, calculated on the basis of the annual audited consolidated financial
statements for such fiscal year delivered pursuant to Section 11(a)(i).
All such prepayments of the Advance Term Loan shall be accompanied with
accrued interest to the date of prepayment on the amount so prepaid and
shall be applied to the installments due thereunder in the inverse order of
maturity.
AMENDED AND RESTATED LOAN AGREEMENT - Page 26
<PAGE>
Concurrently with the making of any such payment, Borrower shall deliver to
Bank a certificate in the form of Exhibit D attached hereto demonstrating
its calculation of the amount required to be paid.
(c) Mandatory Prepayment of Revolving Loan. If at any time the then-
--------------------------------------
outstanding principal balance of the Revolving Loan exceeds the Borrowing
Base, then Borrower shall immediately pay Bank the amount of such excess as
a prepayment of principal of the Revolving Loan.
9. Representations and Warranties. In order to induce Bank to enter into this
Agreement, Borrower and, to the extent applicable, each Guarantor hereby
represents and warrants to Bank (which representations and warranties will
survive the execution and delivery of this Agreement and the Notes) that:
(a) Existence. Each of Borrower and the Guarantors is a corporation duly
---------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and is duly qualified to conduct business
in all jurisdictions wherein the failure to qualify could result in a
Material Adverse Effect.
(b) Power and Authorization. Borrower is duly authorized and empowered to
-----------------------
create and issue the Notes; and Borrower and Guarantors are duly authorized
and empowered to execute, deliver and perform this Agreement and the other
Loan Documents to which each is a party; and all action on Borrower's and
Guarantors' part requisite for the due creation and issuance of the Notes
and for the due execution, delivery and performance of the other Loan
Documents, including this Agreement, has been duly and effectively taken.
(c) Binding Obligations. This Agreement does, and the Notes and other Loan
-------------------
Documents upon their creation, issuance, execution and delivery will,
constitute valid and binding obligations of Borrower and Guarantors, as the
case may be, enforceable in accordance with their terms (except that
enforcement may be subject to any applicable bankruptcy, insolvency, or
similar debtor relief laws now or hereafter in effect and relating to or
affecting the enforcement of creditors rights generally, and to general
principles of equity).
(d) No Legal Bar or Resultant Lien. The Notes and the other Loan Documents,
------------------------------
including this Agreement, do not and will not violate any provisions of any
contract, agreement, law, regulation, order, injunction, judgment, decree
or writ to which Borrower or any Guarantor is subject, or result in the
creation or imposition of any Lien upon any assets or properties of
Borrower or any Guarantor, other than those contemplated by this Agreement.
AMENDED AND RESTATED LOAN AGREEMENT - Page 27
<PAGE>
(e) No Consent. The execution, delivery and performance by Borrower and
----------
Guarantors of the Notes and the other Loan Documents, including this
Agreement, does not require the consent or approval of any other Person,
including without limitation any regulatory authority or governmental body
of the United States or any state thereof or any political subdivision of
the United States or any state thereof (except for consents which have been
obtained by Borrower or such Guarantor as to which such consent may be
applicable).
(f) Financial Condition. The consolidated balance sheets of Borrower and its
-------------------
consolidated Subsidiaries as at December 31, 1995 and the related
consolidated statements of income and of cash flows for the fiscal year
ended on such date, reported on by Moore Stephens Simonton, L.L.P., copies
of which have heretofore been furnished to Bank, present fairly the
consolidated financial condition of Borrower and its consolidated
Subsidiaries as at such dates, and the consolidated results of their
operations and cash flows for the fiscal year then ended. The two
unaudited consolidated balance sheets of Borrower and its consolidated
Subsidiaries as at March 31, 1996 and as at May 31, 1996, and the related
unaudited consolidated statements of income and of cash flows for the
three-month and five-month periods ended on such respective dates, copies
of which have heretofore been filed with the Securities and Exchange
Commission (in the case of such statements as at March 31, 1996 and for the
three-month period then ended) and furnished to Bank (in the case of all
such statements), present fairly the consolidated financial condition of
Borrower and its consolidated Subsidiaries as at such respective dates, and
the consolidated results of their operations and changes in cash flows for
the three-month and five-month periods, respectively, then ended (subject
to normal year-end audit adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by such accountants, and as disclosed therein and
except that the quarterly statements and the statements as at May 31, 1996
and for the five-month period then ended are unaudited and do not include
footnotes as would be required for audited financial statements). Neither
Borrower nor any of its Subsidiaries had, at the date of the most recent
balance sheet referred to above, any guarantee obligation, contingent
liability or liability for taxes, or any long-term lease or any interest
rate or foreign currency swap of exchange transaction, that is not
reflected in the foregoing statements or in the notes thereto and which, in
the aggregate, would be material to Borrower and Guarantors, taken as a
whole, except as set forth on Schedule 9(f). Since December 31, 1995, no
change has occurred in the condition, financial or otherwise, of Borrower
or a Subsidiary thereof that could have a Material Adverse Effect, except
as set forth in Schedule 9(f).
(g) Liabilities. As of the date of this Agreement, neither Borrower nor any
-----------
Guarantor has any material (individually or in the aggregate) liability,
direct or contingent, except as disclosed in the financial statements
referenced in Section 9(f) or on Schedule 9(g) attached hereto. No unusual
or unduly burdensome restrictions, restraint,
AMENDED AND RESTATED LOAN AGREEMENT - Page 28
<PAGE>
or hazard exists by contract, law or governmental regulation or otherwise
relative to the business, assets or properties of Borrower or any Guarantor
that could have a Material Adverse Effect.
(h) Litigation. Except as described in Borrower's annual audited consolidated
----------
financial statements, or as otherwise disclosed to Bank in Schedule 9(h)
attached hereto, there is no litigation, legal or administrative
proceeding, investigation or other action of any nature pending or, to the
knowledge of Borrower, threatened against or affecting Borrower or any
Guarantor that could have a Material Adverse Effect.
(i) Taxes; Governmental Charges. Borrower and each Guarantor have filed all
---------------------------
tax returns and reports required to be filed and have paid all taxes,
assessments, fees and other governmental charges levied upon them or their
assets, properties or income which are due and payable, including interest
and penalties, the failure of which to pay could have a Material Adverse
Effect, except such as are being contested in good faith by appropriate
proceedings and for which adequate reserves for the payment thereof as
required by GAAP have been provided and with respect to which levy and
execution thereon have been stayed and continue to be stayed.
(j) Titles, Liens. Borrower and each Guarantor have good and marketable title
-------------
to all of their assets and properties, free and clear of all Liens or other
encumbrances except Permitted Liens, including, without limitation, those
Permitted Liens identified on Schedule 9(j).
(k) Defaults. Neither Borrower nor any Guarantor is in default and no event or
--------
circumstance has occurred that, but for the passage of time or the giving
of notice, or both, would constitute a default under any loan or credit
agreement, indenture, mortgage, deed of trust, security agreement or other
agreement or instrument to which Borrower or any Guarantor is a party that
could in any respect have a Material Adverse Effect. No Event of Default
hereunder has occurred and is continuing.
(l) Casualties; Taking of Properties. After the date of the most recent
--------------------------------
consolidated financial statements of Borrower delivered to Bank, neither
the business nor the assets or properties of Borrower or any Guarantor have
been affected (to the extent the same could cause a Material Adverse
Effect) as a result of any fire, explosion, earthquake, flood, drought,
windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of property or cancellation of contracts, permits or
concessions by any domestic or foreign government or any agency thereof,
riot, activities of armed forces or acts of God or of any public enemy.
(m) Use of Proceeds; Margin Stock. Subject to the terms and conditions hereof
-----------------------------
(specifically including Section 12(o)), Borrower will use the proceeds of
the Advance Term Loan to finance future Acquisitions (including, without
limitation, the
AMENDED AND RESTATED LOAN AGREEMENT - Page 29
<PAGE>
payment of purchase price, the refinancing of debt of the acquired
business(es), and the payment of transaction expenses in connection with
such Acquisitions). Borrower will use the proceeds of the Revolving Loan
for working capital and general corporate purposes. Neither Borrower nor
any Guarantor is engaged principally or as one of its important activities
in the business of extending credit for the purpose of purchasing or
carrying any "margin stock" as defined in Regulation U of the Board of
Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the
purpose of reducing or retiring any indebtedness that was originally
incurred to purchase or carry a margin stock or for any other purpose which
might constitute this transaction a "purpose credit" within the meaning of
said Regulation U.
(n) Location of Business and Offices. The principal place of business of
--------------------------------
Borrower is located at 2777 Stemmons Freeway, Suite 1525, Dallas, Texas
75207. All names (including prior corporate names and past and present
trade names) used by any of Borrower and Guarantors during the past five
years (expressly including any such names used by a predecessor to Borrower
or a Guarantor, or used by a Guarantor prior to its becoming a Subsidiary)
are set forth on Schedule 9(n). The locations of business at which any
such names were used during such five years is also set forth on Schedule
9(n).
(o) Compliance with Law. Neither Borrower nor any Guarantor:
-------------------
(i) is in violation of any law, judgment, decree, order, ordinance, or
governmental rule or regulation to which Borrower, any Guarantor, or any of
its or their assets or properties is subject; and
(ii) has failed to obtain any license, permit, franchise or other governmental
authorization necessary to the ownership of any of its assets or properties
or the conduct of business;
which violation or failure could have a Material Adverse Effect.
(p) No Material Misstatements. No information, exhibit or report furnished by
-------------------------
Borrower to Bank or its counsel in connection with this Agreement contains
any material misstatement of fact or omits to state a material fact or any
fact necessary to make the statement contained therein not materially
misleading.
(q) ERISA. Borrower and each Guarantor are in compliance in all material
-----
respects with the applicable provisions of ERISA, and no "reportable
event," as such term is defined in Section 4043 of ERISA, has occurred with
respect to any Plan of Borrower or any Guarantor that could cause a
Material Adverse Effect.
AMENDED AND RESTATED LOAN AGREEMENT - Page 30
<PAGE>
(r) Subsidiaries. Borrower has no Subsidiaries other than Guarantors. The
------------
corporate name, federal tax identification number, state of incorporation
and states of qualification to do business as a foreign corporation, number
of authorized and issued and outstanding shares of capital stock (and their
record and beneficial holder or holders) of each Guarantor are disclosed on
Schedule 9(r).
(s) Environmental Matters. Except as disclosed on Schedule 9(s), neither
---------------------
Borrower nor any Guarantor has received notice or otherwise has knowledge
of (i) any Environmental Liability that could individually or in the
aggregate have a Material Adverse Effect arising in connection with (A) any
non-compliance with or violation of the requirements of any Environmental
Law or (B) the release or threatened release of any toxic or hazardous
waste into the environment, (ii) any threatened or actual liability in
connection with the release or threatened release of any toxic or hazardous
waste into the environment which could individually or in the aggregate
have a Material Adverse Effect or (iii) any federal or state investigation
evaluating whether any remedial action is needed to respond to a release or
threatened release of any toxic or hazardous waste into the environment for
which Borrower or any Guarantor is or may be liable.
(t) Ownership. Both as of June 13, 1996 and as of the date of this Agreement,
---------
each of Max W. Batzer and Brad A. Hummel owned and owns the number of
shares, and options exercisable for shares, of capital stock of Borrower
set forth opposite his name on Schedule 9(t). As of June 13, 1996, the
authorized capital stock of Borrower consisted of 15,000,000 shares of
common stock and 3,000,000 shares of preferred stock, of which 7,613,302
shares of common stock, and no shares of preferred stock, were issued and
outstanding. As of June 13, 1996, 3,362,346 shares of common stock were
reserved for issuance upon the exercise of previously granted stock options
or warrants.
(u) Investments and Guaranties. Neither Borrower nor any Guarantor has made
--------------------------
any investment in, advances to or guaranties of the obligations of any
Person (other than Borrower or a Guarantor that is a wholly-owned
Subsidiary of Borrower), except as reflected in its financial statements
previously delivered to Bank or as otherwise disclosed in writing to Bank.
(v) Closing of Public Offering. Borrower has completed a public offering
--------------------------
including 2,955,000 shares of its common stock sold for Borrower's account
through underwriters represented by Rodman and Renshaw, Inc. and in
accordance with the terms of the offering described in that certain
Prospectus dated June6, 1996, and Borrower has received gross proceeds
(prior to offering expenses) of not less than $18,600,000 therefrom.
AMENDED AND RESTATED LOAN AGREEMENT - Page 31
<PAGE>
10. Conditions of Lending.
(a) The obligation of Bank to make the initial Advance under the Revolving
Loan and the Advance Term Loan shall be subject to the following
conditions precedent:
(i) Execution and Delivery. Borrower shall have executed and delivered to
----------------------
Bank the Notes and the other Loan Documents required to be executed by
Borrower and other required documents, all in form and substance
satisfactory to Bank;
(ii) Landlord's Subordinations. Bank shall have received from each landlord of
-------------------------
Borrower and each Guarantor on and after the date of this Agreement an
executed landlord's subordination or waiver agreement in form and content
satisfactory to Bank provided, however, that such agreements may be
-------- -------
received from landlords of Cardiac Concepts, Inc. and Specialized Imaging
Services Inc., Guarantors, up to forty-five days after the date hereof;
(iii) Legal Opinion. Bank shall have received from Greenberg Traurig et al.,
-------------
Borrower's legal counsel, a favorable legal opinion in form and substance
satisfactory to Bank (i) as to the matters set forth in Subsections 9(a),
(b), (c), (d), (e) and (h) and (ii) as to such other matters as Bank or
its counsel shall reasonably request;
(iv) Secretary's Certificate. Bank shall have received a Secretary's
-----------------------
Certificate from the secretary or assistant secretary of Borrower and each
Guarantor certifying and attaching appropriate corporate resolutions
regarding the transactions contemplated hereby and statements of
incumbency;
(v) Good Standing and Existence. Bank shall have received evidence
---------------------------
satisfactory to it of the existence and good standing of Borrower and each
Guarantor (including, without limitation, in jurisdictions other than
their respective jurisdictions of incorporation);
(vi) Articles and Bylaws. Bank shall have received from Borrower and each
-------------------
Guarantor certified copies of their Articles or Certificate of
Incorporation and Bylaws;
(vii) Title. Bank shall have received evidence satisfactory to it as to the
-----
title of Borrower and Guarantors, as applicable, to the Collateral;
AMENDED AND RESTATED LOAN AGREEMENT - Page 32
<PAGE>
(viii) Priority of Liens. Bank shall have received satisfactory evidence that
-----------------
the Liens granted to Bank in the Security Instruments covering the
Collateral constitute perfected, first priority Liens, subject only to
Permitted Liens;
(ix) UCC Searches. Bank shall have received Uniform Commercial Code searches
------------
covering Borrower, Guarantors and the Collateral, the results of which
searches shall be satisfactory to Bank;
(x) Fees. Borrower shall have paid Bank the fees due and payable to Bank
----
pursuant to that certain fee letter agreement dated May 2, 1996 between
Borrower and Bank;
(xi) Insurance. Borrower shall have provided evidence of its insurance of
---------
such types and in such amounts as is satisfactory to Bank; and
(xii) Legal Matters Satisfactory. All legal matters incident to the
--------------------------
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for Bank retained at the expense of
Borrower.
(b) The obligation of Bank to make any subsequent Advance on the Revolving
Loan shall be subject to the following additional conditions precedent
that, at the date of making each such Advance and after giving effect
thereto:
(i) Representations and Warranties. With respect to any Advance, the
------------------------------
representations and warranties of Borrower and Guarantors under this
Agreement are true and correct in all material respects as of such date,
as if then made (except to the extent that such representations and
warranties related solely to an earlier date); and
(ii) No Event of Default. No Event of Default shall have occurred and be
-------------------
continuing nor shall any event have occurred or failed to occur which,
with the passage of time or service of notice, or both, would constitute
an Event of Default.
(c) The obligation of Bank to make any subsequent Advance on the Advance Term
Loan shall be subject to the following additional conditions precedent
that, at the date of making each such Advance and after giving effect
thereto:
(i) Representations and Warranties. With respect to any Advance, the
------------------------------
representations and warranties of Borrower and Guarantors under this
Agreement
AMENDED AND RESTATED LOAN AGREEMENT - Page 33
<PAGE>
are true and correct in all material respects as of such date, as if then
made (except to the extent that such representations and warranties related
solely to an earlier date);
(ii) No Event of Default. No Event of Default shall have occurred and be
-------------------
continuing nor shall any event have occurred or failed to occur which, with
the passage of time or service of notice, or both, would constitute an
Event of Default.
(iii) Compliance with Funded Debt Ratio Restrictions. Borrower shall be in
----------------------------------------------
compliance with the Funded Debt Ratio restrictions set forth in Section
12(c) of this Agreement.
(iv) Certification of Funded Debt Ratio. Borrower shall have provided to Bank
----------------------------------
certification, in form and substance reasonably satisfactory to Bank, that
Borrower is in compliance with the Funded Debt Ratio restrictions set
forth in Section 12(c) of this Agreement.
11. Affirmative Covenants. Borrower and, to the extent applicable, each
Guarantor will at all times comply with the covenants contained in this Section
11 from the date of this Agreement and for so long as any part of the Loans are
in existence.
(a) Financial Statements and Reports. Borrower shall promptly furnish to Bank
--------------------------------
from time to time upon request such information regarding the business and
affairs and financial condition of any of Borrower and Guarantors, as Bank
may reasonably request, and will furnish to Bank:
(i) Annual Financial Statements - as soon as available, and in any event within
---------------------------
ninety (90) days after the end of each fiscal year of Borrower, beginning
with the fiscal year ending December 31, 1996, a copy of the annual audit
report of Borrower and its consolidated Subsidiaries for such fiscal year
containing, on a consolidated and consolidating basis, balance sheets and
statements of income, retained earnings, and cash flows as at the end of
such fiscal year and for the 12-month period then ended, in each case
setting forth in comparative form the figures for the preceding fiscal
year, all in reasonable detail and audited by, and accompanied by the
unqualified opinion of, Moore Stephens Simonton, L.L.P. (or other
independent certified public accountants of recognized standing acceptable
to Bank), to the effect that such report has been prepared in accordance
with GAAP and presents fairly the financial condition and results of
operations of Borrower and its consolidated Subsidiaries as of the dates
and for the periods presented;
AMENDED AND RESTATED LOAN AGREEMENT - Page 34
<PAGE>
(ii) Quarterly Financial Statements - as soon as available, and in any event
------------------------------
within forty-five (45) days after the end of each fiscal quarter, a copy
of an unaudited financial report of Borrower and its consolidated
Subsidiaries as of the end of such fiscal quarter and for the portion of
the fiscal year then ended, containing, on a consolidated and
consolidating basis, balance sheets and statements of income, and cash
flows, in each case setting forth in comparative form the figures for the
corresponding period of the preceding fiscal year, all in reasonable
detail and prepared in accordance with GAAP to fairly and accurately
present (subject to year-end audit adjustments and disclosures) the
financial condition and results of operations of Borrower and its
consolidated Subsidiaries, on a consolidated and consolidating basis, at
the date and for the periods indicated therein;
(iii) Monthly Financial Statements - as soon as available, and in any event
----------------------------
within thirty (30) days after the end of each calendar month (other than
the last calendar month in a fiscal quarter), a copy of an unaudited
financial report of Borrower and its consolidated Subsidiaries as of the
end of such month and for the portion of the fiscal year then ended,
containing, on a consolidated basis for each of Borrower and such
Subsidiaries, balance sheets and statements of income, and cash flows, in
each case setting forth in comparative form the figures for the
corresponding period of the preceding fiscal year, all in reasonable
detail and prepared in accordance with GAAP to fairly and accurately
present (subject to year-end audit adjustments and disclosures) the
financial condition and results of operations of Borrower and its
consolidated Subsidiaries, on a consolidated and, commencing with the
report due May 30, 1997 in respect of the month of April 1997,
consolidating basis, at the date and for the periods indicated therein;
(iv) SEC/Exchange Filings - as soon as available, copies of all registration
--------------------
statements and regular periodic reports, if any, that Borrower shall have
filed with the Securities and Exchange Commission (or any successor
agency), any securities exchange or any automated trading system
maintained by the National Association of Securities Dealers, Inc.;
(v) Borrowing Base Certificate - as soon as available, and in any event within
--------------------------
thirty (30) days of the end of each month (other than the end of a month
that is also the end of a fiscal quarter), and forty-five (45) days of the
end of each fiscal quarter, an accurately completed Borrowing Base
Certificate and an Accounts aging report, each as of the end of such month
or fiscal quarter, as applicable;
AMENDED AND RESTATED LOAN AGREEMENT - Page 35
<PAGE>
(vi) Stockholder Information - promptly upon the mailing thereof to the
-----------------------
stockholders of Borrower generally, copies of all financial statements,
reports, notices, correspondence and proxy and information statements so
mailed;
(vii) Management Letters - promptly following delivery thereof to Borrower, or
------------------
the board of directors or management of Borrower, a copy of any
management letter or report by independent public accountants with
respect to the financial condition, operations, business or prospects of
Borrower and its Subsidiaries; and
(viii) Additional Information - promptly upon request of Bank from time to time
----------------------
any additional financial information or other information that Bank may
reasonably request.
All such information, reports, balance sheets and financial statements
referred to in Subsection 11(a) above shall be in such detail as Bank may
reasonably request.
(b) Certificates of Compliance. Contemporaneously with the delivery of the
--------------------------
information required by Sections11(a)(i), (ii) and (iii), Borrower will
furnish or cause to be furnished to Bank a certificate in the form of
Exhibit D attached hereto, signed by any of the President, Chief Executive
Officer or Chief Financial Officer of Borrower on behalf of Borrower (i)
stating that Borrower and Guarantors have fulfilled in all material
respects their obligations under this Agreement, the Notes, the Security
Instruments and all other Loan Documents and that all representations and
warranties made herein and therein continue (except to the extent they
relate solely to an earlier date) to be true and correct in all material
respects (or specifying the nature of any change), or if an Event of
Default has occurred, specifying the Event of Default and the nature and
status thereof; (ii) to the extent requested from time to time by Bank,
specifically affirming compliance of Borrower and Guarantors, as
applicable, in all material respects with any of their representations
(except to the extent they relate solely to an earlier date) or obligations
under said instruments; (iii) for certificates delivered in respect of a
quarterly period, setting forth the computation, in reasonable detail as of
the end of such quarterly period, of compliance with Sections 12(c), (d)
and (e); and (iv) containing or accompanied by such financial or other
details, information and material as Bank may reasonably request to
evidence such compliance.
(c) Accountants' Certificate. Concurrently with the furnishing of the annual
------------------------
audited financial statements pursuant to Section 11(a)(i), Borrower will
furnish a statement from the firm of independent public accountants which
prepared such statements to the effect that nothing has come to their
attention to cause them to believe that there existed on the date of such
statements any Event of Default.
AMENDED AND RESTATED LOAN AGREEMENT - Page 36
<PAGE>
(d) Taxes and Other Liens. Borrower and each Guarantor will pay and discharge
---------------------
promptly when due all taxes, assessments and governmental charges or levies
imposed upon Borrower or any Guarantor or upon the income or any assets or
property of Borrower or any Guarantor as well as all claims of any kind
(including claims for labor, materials, supplies and rent) that, if unpaid,
might become a Lien or other encumbrance upon any or all of the assets or
property of Borrower or any Guarantor and which could result in a Material
Adverse Effect; provided, however, that neither Borrower nor any Guarantor
shall be required to pay any such tax, assessment, charge, levy or claim if
the amount, applicability or validity thereof shall currently be contested
in good faith by appropriate proceedings diligently conducted, levy and
execution thereon have been stayed and continue to be stayed, and Borrower
or such Guarantor shall have set up adequate reserves therefor, if
required, under GAAP.
(e) Compliance with Laws. Borrower and each Guarantor will observe and comply,
--------------------
in all material respects, with all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
orders and restrictions relating to environmental standards or controls or
to energy regulations of all federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign.
(f) Further Assurances. Borrower will cure promptly any defects in the
------------------
creation and issuance of the Notes and the execution and delivery of the
Notes and Borrower and Guarantor will cure promptly any defects in the
execution and delivery of the Loan Documents, including this Agreement.
Borrower and Guarantors at their sole expense will promptly execute and
deliver to Bank upon its reasonable request all such other and further
documents, agreements and instruments in compliance with or accomplishment
of the covenants and agreements in this Agreement, or to correct any
omissions in the Notes or more fully to state the obligations set out
herein.
(g) Performance of Obligations. Borrower will pay the Notes and other
--------------------------
obligations incurred by it hereunder according to the reading, tenor and
effect thereof and hereof; and Borrower and Guarantors will do and perform
every act and discharge all of the obligations provided to be performed and
discharged by Borrower and Guarantors under the Loan Documents, including
this Agreement, at the time or times and in the manner specified.
(h) Insurance. Borrower will maintain, and will cause each of its Subsidiaries
---------
to maintain, insurance (including, without limitation, property and
casualty insurance in amounts reasonably acceptable to Bank) with
financially sound and reputable insurance companies in such amounts and
covering such risks as are usually carried by business entities engaged in
similar businesses and owning similar properties in the same general areas
in which Borrower and its Subsidiaries operate, provided that in any event
AMENDED AND RESTATED LOAN AGREEMENT - Page 37
<PAGE>
Borrower and its Subsidiaries will maintain medical professional liability
insurance coverage for each Subsidiary of at least $1,000,000 per incident
and $3,000,000 maximum coverage. Each insurance policy covering Collateral
or general liability shall name Bank as loss payee or as an additional
insured and shall provide that such policy shall not be canceled or reduced
without thirty (30) days prior written notice to Bank.
(i) Accounts and Records. Borrower and Guarantors will keep books, records and
--------------------
accounts in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and activities,
prepared in a manner consistent with prior years, subject to changes
required by GAAP or suggested by Borrower's auditors.
(j) Right of Inspection. Borrower and Guarantors will permit any officer,
-------------------
employee or agent of Bank to examine Borrower's and Guarantors' books,
records and accounts, and make and retain copies and extracts therefrom,
all at such reasonable times and as often as Bank may reasonably request.
(k) Notice of Certain Events. Borrower and Guarantors shall promptly notify
------------------------
Bank if Borrower or any such Guarantor learns of the occurrence of (i) any
event which constitutes, or which with the giving of notice or the passage
of time would constitute, an Event of Default (including, but not limited
to, a Change of Control or a Change of Management) together with a detailed
statement by Borrower or such Guarantor of the steps being taken to cure
the Event of Default or prospective Event of Default; or (ii) any legal,
judicial or regulatory proceedings affecting Borrower or any such
Guarantor, or any of the assets or properties of Borrower or any such
Guarantor, which, if adversely determined, could have a Material Adverse
Effect (determined for purposes of this Section 11(k) with respect to
Borrower or any Guarantor individually and not taken as a whole); or (iii)
any dispute between Borrower or any such Guarantor and any governmental or
regulatory body or any other Person which, if adversely determined, could
cause a Material Adverse Effect; or (iv) any other matter that is
reasonably likely to have a Material Adverse Effect.
(l) ERISA Information and Compliance. Borrower and Guarantors will promptly
--------------------------------
furnish to Bank, immediately upon becoming aware of the occurrence of any
"reportable event," as such term is defined in Section 4043 of ERISA, or of
any "prohibited transaction," as such term is defined in Section406 of
ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended, in
connection with any Plan or any trust created thereunder, a written notice
signed by the President, Chief Executive Officer or the Chief Financial
Officer of Borrower or such Guarantor, on behalf of Borrower or such
Guarantor, as applicable, specifying the nature thereof, what action
Borrower or such Guarantor is taking or proposes to take with respect
thereto, and, when known, any action taken by the Internal Revenue Service
with respect thereto.
AMENDED AND RESTATED LOAN AGREEMENT - Page 38
<PAGE>
(m) Environmental Reports and Notices. Borrower and Guarantors will deliver to
---------------------------------
Bank (i) promptly upon its becoming available, one copy of each report sent
by Borrower or any Guarantor to any court, governmental agency or
instrumentality pursuant to any Environmental Law, (ii) notice, in writing,
promptly upon Borrower's or any Guarantor's learning that it has received
notice or otherwise learned of any claim, demand, action, event, condition,
report or investigation indicating any potential or actual liability
arising in connection with (x) the non-compliance with or violation of the
requirements of any Environmental Law which could have a Material Adverse
Effect (determined for purposes of this Section 11(m) with respect to
Borrower or any Guarantor individually and not taken as a whole); (y) the
release or threatened release of any toxic or hazardous waste into the
environment which could have a Material Adverse Effect or which release
Borrower or any such Guarantor would have a duty to report to any court or
government agency or instrumentality, or (iii) the existence of any
Environmental Lien on any properties or assets of Borrower or any such
Guarantor, and Borrower or any such Guarantor shall immediately deliver a
copy of any such notice to Bank.
(n) Sale of Certain Assets/Prepayment of Proceeds. Without limiting Section
---------------------------------------------
12(m), except for Inventory sold in the ordinary course of business,
Borrower will immediately pay Bank an amount equal to one hundred percent
(100%) of the proceeds (net of federal income taxes and direct costs of
sale) in excess of $50,000 per sale (or series of related sales), and in
any event in excess of $100,000 in any fiscal year of Borrower, received by
Borrower and/or Guarantors from the sale of any of the Collateral, to be
applied against the Advance Term Loan. In addition, Borrower shall notify
Bank in writing of each such sale as soon as practical and in no event
later than three (3) Business Days after the earlier of (y) the execution
and delivery by Borrower or a Guarantor, as applicable, of a letter of
intent or similar instrument or document relating to such sale, (z) the
execution and delivery by Borrower or a Guarantor, as applicable, of
definitive agreements relating to such sale. Borrower shall also,
contemporaneously with such notice, provide Bank with copies of such letter
of intent, similar document or definitive agreements, as applicable.
(o) "Key Man" Policies. Borrower will pay all premiums due on, and in all
------------------
other respects maintain in full force and effect, the "Key Man" Policies.
(p) Vehicles Subject to Certificates. To the extent Borrower has not
--------------------------------
previously done so, Borrower will, within thirty (30) days of the date of
this Agreement, deliver to Bank a certificate of title, or similar
document, covering any vehicle owned by Borrower or any Guarantor that is
subject to any certificate of title or similar statute by the jurisdiction
in which any such vehicle is registered or located, which certificate of
title, or similar document, shall name Bank as secured party or lienholder.
AMENDED AND RESTATED LOAN AGREEMENT - Page 39
<PAGE>
(q) Additional Subsidiary Guarantors. Borrower will take such action, and will
--------------------------------
cause each of its Subsidiaries to take such action, from time to time as
shall be necessary to ensure that all Subsidiaries of Borrower are
"Guarantors" hereunder. Without limiting the generality of the foregoing,
if Borrower or any of its Subsidiaries shall form or acquire any new
Subsidiary that shall constitute a Subsidiary hereunder (including, without
limitation, any Subsidiary of Borrower that shall become a Subsidiary of
Borrower in connection with any acquisition not prohibited by this
Agreement or with respect to which Bank has consented in writing), then
Borrower and its Subsidiaries will cause such new Subsidiary to
(i) become a "Guarantor" hereunder, and execute and deliver to Bank a
Guaranty in form and substance equivalent to the Guaranty executed and delivered
by each Guarantor on or prior to the date of this Agreement;
(ii) execute and deliver to Bank a Security Agreement in form and
substance equivalent to the Security Agreement executed and delivered by each
Guarantor on or prior to the date of this Agreement;
(iii) cause such Subsidiary to take such action (including,
without limitation, delivering such shares of stock, executing and delivering
such Uniform Commercial Code financing statements and executing and delivering
mortgages covering any real property and fixtures owned or leased by such
Subsidiary) as shall be necessary to create and perfect valid and enforceable
first priority Liens (subject only to Permitted Liens) on substantially all of
the property of such new Subsidiary as collateral security for the obligations
of such new Subsidiary hereunder and under its Guaranty; and
(iv) deliver such proof of corporate action, incumbency of officers,
opinions of counsel and other documents as are consistent with those delivered
by each of Borrower and Guarantors pursuant to Section 10 upon the date of this
Agreement or the date of the Prior Agreement, as applicable, or as Bank shall
have reasonably requested.
(r) Additional Collateral. With respect to any personal property assets of
---------------------
Borrower or any Guarantor currently subject to a Permitted Lien or capital
lease obligation, including vehicles, upon satisfaction of such Permitted
Lien or capital lease obligation, Borrower or any such Guarantor shall
execute and deliver such documents or instruments as may be necessary to
create and perfect in favor of Bank a first priority lien thereon (subject
to any other Permitted Lien).
(s) Maintenance of Existence; Conduct of Business. Borrower will preserve and
---------------------------------------------
maintain, and will cause each Subsidiary to preserve and maintain, its
corporate existence and all of its leases, privileges, licenses, permits,
franchises, qualifications, and
AMENDED AND RESTATED LOAN AGREEMENT - Page 40
<PAGE>
rights that are necessary or desirable in the ordinary conduct of its
business, except where the failure to do so does not and will not have a
Material Adverse Effect. Without limiting the foregoing, Borrower will
preserve and maintain, and will cause each Subsidiary to preserve and
maintain, to the extent necessary or desirable in the ordinary conduct of
its business, its status as an approved provider with all governmental
authorities (including, without limitation, all agencies administering or
enforcing health care laws and regulations). Borrower will conduct, and
will cause each Subsidiary to conduct, its business in an orderly and
efficient manner in accordance with good business practices.
12. Negative Covenants. A deviation from the provisions of this Section 12
shall not constitute an Event of Default under this Agreement if such deviation
is consented to in writing by Bank. Without the prior written consent of Bank,
Borrower, and to the extent applicable, each Guarantor, will at all times comply
with the covenants contained in this Section 12 from the date of this Agreement
and for so long as any part of the Loans are in existence.
(a) Liens. Neither Borrower nor any Guarantor will create, incur, assume or
-----
permit to exist any Lien on any of its assets or properties except
Permitted Liens.
(b) Consolidations, Mergers. Neither Borrower nor any Guarantor will
-----------------------
consolidate or merge with or into any other Person, except that (i) any
Guarantor or Guarantors may merge with any other Guarantor or Guarantors at
any time and from time to time, and (ii) Borrower or any such Guarantor may
at any time and from time to time merge with another Person if Borrower or
such Guarantor is the corporation surviving such merger and if, after
giving effect thereto, no Event of Default (or event that, with the passage
of time or the giving of notice, or both, would constitute an Event of
Default) shall result or have occurred and be continuing.
(c) Funded Debt Ratio. Borrower will not permit the Funded Debt Ratio to ever
-----------------
be greater than 2.50:1.0.
(d) Fixed Charge Coverage Ratio. Borrower will not permit the Fixed Charge
---------------------------
Coverage Ratio to ever be less than 1.2:1.0.
(e) Current Ratio. Borrower will not permit the Current Ratio to ever be less
-------------
than 1.2:1.0.
(f) Debts, Guaranties and Other Obligations. Neither Borrower nor any
---------------------------------------
Guarantor will incur, create, assume or in any manner become or be liable
in respect of any indebtedness, nor will Borrower or any Guarantor
guarantee or otherwise in any manner become or be liable in respect of any
indebtedness, liabilities or other obligations of any other Person, whether
by agreement to purchase the indebtedness of any other Person or agreement
for the furnishing of funds to any other Person through the purchase
AMENDED AND RESTATED LOAN AGREEMENT - Page 41
<PAGE>
or lease of goods, supplies or services (or by way of stock purchase,
capital contribution, advance or loan) for the purpose of paying or
discharging the indebtedness of any other Person, or otherwise, except
that the foregoing restrictions shall not apply to:
(i) the Notes, or other indebtedness of Borrower or Guarantors heretofore
disclosed to Bank in Borrower's financial statements or on Schedule 12(f)
hereto;
(ii) taxes, assessments or other government charges that are not yet due or are
being contested in good faith by appropriate action promptly initiated and
diligently conducted, if such reserves as shall be required by GAAP shall
have been made therefor and levy and execution thereon have been stayed
and continue to be stayed;
(iii) indebtedness incurred in the ordinary course of business as conducted on
the date of this Agreement;
(iv) indebtedness, not to exceed $750,000 in the aggregate, incurred in any
fiscal year of Borrower in respect of the purchase money financing of, or
capitalized leasing of, Equipment;
(v) unsecured indebtedness (but not payments made, or payment obligations
established, in consideration of a covenant not to compete) owed to
sellers or their affiliates in Acquisitions permitted pursuant to Section
12(o), so long as such indebtedness is subordinated to the Obligations
pursuant to subordination provisions in form and substance satisfactory to
Bank; or
(vi) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any indebtedness described
in clauses (i), (ii), (iii), (iv) and (v) above, including any successive
refinancings, so long as the aggregate principal amount of indebtedness
represented thereby is not increased by such refinancing plus the amount
of direct expenses of Borrower or a Guarantor, as applicable, incurred in
connection with such refinancing.
(g) Dividends. Neither Borrower nor any Guarantor will declare or pay any cash
---------
dividend, purchase, redeem or otherwise acquire for value any of its stock
now or hereafter outstanding, return any capital to stockholders, or make
any distribution of its assets to its stockholders as such; provided,
--------
however, that the foregoing shall not prohibit any direct or indirect
-------
wholly-owned Subsidiary of Borrower from paying dividends to, or making
distributions or paying management fees to, at any time and from time to
time, Borrower or any wholly-owned Subsidiary of Borrower.
AMENDED AND RESTATED LOAN AGREEMENT - Page 42
<PAGE>
(h) Loans and Advances. Neither Borrower nor any Guarantor shall make or
------------------
permit to remain outstanding any loans or advances to any Person, except
that the foregoing restriction shall not apply to (i) loans or advances
(and renewals and extensions thereof that do not increase the amount
thereof) the material details of which have been set forth in the
financial statements of Borrower heretofore furnished to Bank or have
otherwise heretofore been disclosed in writing to Bank on Schedule 12(h)
and (ii) temporary advances to employees of Borrower and its Subsidiaries
for business or personal needs, not to exceed $100,000 in the aggregate at
any time outstanding.
(i) Investments. Neither Borrower nor any Guarantor shall make investments in
-----------
(including for purposes of this clause (i), without limitation, loan and
advances to) any Person, except the foregoing restriction shall not apply
to:
(i) investments in direct or guaranteed obligations of the United States of
America or any agency thereof maturing within one year from the date of
acquisition;
(ii) expense accounts for directors, officers, and employees of Borrower and
Guarantors in the ordinary course of business not to exceed $10,000 in the
aggregate outstanding at any time for any one director, officer, or
employee;
(iii) certificates of deposit issued by commercial banks organized under the
laws of the United States of America or any state thereof and having (A)
combined capital, surplus, and undivided profits of not less than
$100,000,000 and (B) a commercial paper rating from Moody's Investors
Service, Inc. or Standard & Poor's Corporation of at least P-1 and A-1,
respectively;
(iv) Eurodollar investments with financial institutions having (A) combined
capital, surplus, and undivided profits of not less than U.S.
$100,000,000, and (B) a commercial paper rated at least P-1 or A-1 by
Moody's Investors Service, Inc., or Standard & Poor's Corporation,
respectively, or, if any institution does not have a commercial paper
rating, a comparable bond rating of a least A or BAA-1 by Standard &
Poor's Corporation or Moody's Investors Service, Inc., respectively;
(v) investments in Borrower or, subject to compliance with Section11(q),
Guarantors (other than Homecare International De Mexico, S.A. de C.V.);
AMENDED AND RESTATED LOAN AGREEMENT - Page 43
<PAGE>
(vi) investments in Homecare International DeMexico, S.A. de C.V., or any
other Subsidiary conducting more than an incidental portion of its
business in Mexico, in any case in an amount that does not exceed, in the
aggregate subsequent to the date of this Agreement for all such
Subsidiaries, $200,000;
(vii) extensions of credit in connection with trade receivables and
overpayments of trade payables, in each case resulting from transactions
in the ordinary course of business;
(viii) other investments in a Person or Persons; provided, however, that (A)
-------- -------
with respect to any transaction (or series of related transactions) of
more than $100,000 or that would cause the cumulative investments made in
--
reliance on this clause (viii) to exceed $500,000 from and after the
date of the Prior Agreement (less returns of capital), each such Person,
whether or not it is or then becomes a Subsidiary of Borrower, executes
--
and delivers to Bank the documents contemplated by Section11(q) (i.e.,
as if such Person were to become a "Guarantor" hereunder and, among
-- --
other things, executes and delivers to Bank a security agreement) and (B)
Borrower notifies Bank of each such investment as soon as practical and
in no event later than three (3) Business Days after the earlier of (y)
the execution and delivery by Borrower or a Guarantor, as applicable, of
a letter of intent or similar instrument or document relating to such
investment and (z) the execution and delivery by Borrower or a Guarantor,
as applicable, of definitive agreements relating to such investment (and
in the case of either (y) or (z) contemporaneously with such notice
provides Bank with copies thereof); and
(ix) loans or advances permitted by Section 12(h) and investments disclosed on
Schedule 12(i).
(j) Sale or Discount of Receivables. Neither Borrower nor any Guarantor will
-------------------------------
discount or sell with recourse, or sell for less than the greater of the
face or market value thereof, any of their notes receivable or Accounts.
(k) Nature of Business. Neither Borrower nor any Guarantor will permit any
------------------
material change to be made in the character of their businesses as
carried on at the date of this Agreement.
(l) Amendment of Articles or Bylaws. Except for a change of name upon not
-------------------------------
less than thirty (30) days' prior written notice to Bank, neither
Borrower nor any Guarantor will permit any amendment to, or alteration
of, its Articles or Certificate of Incorporation (or equivalent charter
document) or bylaws, other than amendments to
AMENDED AND RESTATED LOAN AGREEMENT - Page 44
<PAGE>
Borrower's Certificate of Incorporation (i) to increase its authorized
capital stock or (ii) to create one or more series of preferred stock.
(m) Sale of Assets. Neither Borrower nor any Guarantor shall sell, transfer or
--------------
otherwise dispose of any of its assets except for Inventory and obsolete
Equipment in both cases sold in the ordinary course of business in either
case.
(n) Transactions with Affiliates. Neither Borrower nor any Guarantor will
----------------------------
enter into any transaction with any affiliate, except transactions
previously disclosed in Borrower's most recent reports on Form 10-KSB and
Form 10-QSB and otherwise upon terms no less favorable to it than would be
obtained in a transaction negotiated at arm's length with an unrelated
third party.
(o) Acquisitions. Borrower shall not consummate any Acquisition except in
------------
accordance with the following conditions: (i) with respect to any single
Acquisition (or series of related Acquisitions) for which the consideration
to be paid or given by Borrower and Guarantors exceeds $2,000,000, Borrower
shall have obtained Bank's written consent to such Acquisition (which may
be given or withheld by Bank in its discretion); (ii) with respect to any
single Acquisition (or series of related Acquisitions) for which the
consideration paid or given by Borrower and Guarantors is less than
$2,000,000 but for which cumulative consideration paid and to be paid and
given or to be given is $5,000,000 or more, within the six (6) month period
then ending, Borrower shall have obtained Bank's prior written consent to
such Acquisition (which may be given or withheld by Bank in its
discretion); (iii) Borrower shall notify Bank in writing and with
reasonable specificity of each such proposed or contemplated Acquisition as
soon as practical and in any event no later than three (3) Business Days
after the earlier of (y) the execution and delivery by Borrower or a
Guarantor, as applicable, of a letter of intent or similar instrument or
document relating to such Acquisition and (z) the execution and delivery by
Borrower or a Guarantor, as applicable, of definitive agreements relating
to such Acquisition (and in the case of either (y) or (z) contemporaneously
provide Bank with copies thereof); and (iv) if the consideration allocated
to a covenant or covenants not to compete in connection with any such
Acquisition is in excess of forty percent (40%) of the dollar amount sum of
(w) salaries and (x) payments in consideration of a covenant or covenants
not to compete in both cases agreed to be paid by Borrower or a Guarantor
(or an affiliate thereof) in connection with such acquisition, then such
excess shall be subordinated to the Obligations pursuant to subordination
provisions in form and substance satisfactory to Bank. For purposes of the
foregoing sentence, (A) if common stock of Borrower paid or issued (or to
be paid or issued) to the seller of such stock, security, interest or
assets, or otherwise issued as part of an Acquisition transaction, is the
only consideration in such Acquisition transaction, then consideration
shall not include the value of such common stock, (B) consideration shall
include obligations incurred or assumed in such acquisition that are
liabilities on a balance sheet, prepared in accordance with GAAP, of the
acquiring entity after giving effect to such incurrence or
AMENDED AND RESTATED LOAN AGREEMENT - Page 45
<PAGE>
assumption (but excluding any accounts payable so assumed), (C) without
limiting the effect of clause (B) above, debt secured by Liens on assets
acquired in such acquisition, and the principal component of obligations
under capital leases of assets, which leases are assigned in such
acquisition (whether or not such assignment requires prior notice or
consent, or both), in all cases shall be viewed as consideration paid as of
the closing of such acquisition, (D) payments made or payment obligations
established in consideration of a covenant not to compete shall be
considered consideration paid as of the closing of such acquisition, and
(E) the value of any consideration not expressly denominated in dollars
shall be the fair market value thereof; provided, however, that nothing in
-------- -------
this sentence shall be construed to limit the prohibitions established by
Section 12(f).
(p) Regulation U. Neither Borrower, any Guarantor, nor any Person acting on
------------
behalf of Borrower or any of Guarantors has taken or will take any action
which might cause the loans hereunder or any of the Loan Documents,
including this Agreement, to violate Regulation U or any other regulation
of the Board of Governors of the Federal Reserve System or to violate the
Securities Exchange Act of 1934, as amended, or any rule or regulation
thereunder, in each case as now in effect or as the same may hereafter be
in effect.
(q) Subsidiary Stock. Except for a sale of all of the capital stock of a
----------------
Subsidiary, which sale complies with Section 11(n), Borrower shall not
permit any of its Subsidiaries to, at any time, issue, sell, assign or
otherwise dispose of (a) any of its capital stock, (b) any securities
exchangeable for or convertible into or carrying any rights to acquire any
of its capital stock, or (c) any option, warrant, or other right to acquire
any of its capital stock, except, in each case, to Borrower or a wholly-
owned Subsidiary of Borrower.
(r) Fiscal Year. Neither Borrower nor any Guarantor shall change its fiscal
-----------
year.
13. Events of Default. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) Borrower or, to the extent applicable, any Guarantor shall fail to pay when
due or declared due the principal of, and the interest on any of, the
Obligations, including the Notes or any fee or any other indebtedness of
Borrower or any Guarantor incurred pursuant to this Agreement, any of the
other Security Instruments or any of the other Loan Documents; or
(b) Any representation or warranty made under this Agreement, or in any
certificate or statement furnished or made to Bank pursuant hereto, or in
connection herewith, or in connection with any document furnished
hereunder, shall prove to be untrue in any material respect as of the date
on which such representation or warranty is
AMENDED AND RESTATED LOAN AGREEMENT - Page 46
<PAGE>
made (or deemed made), or any representation, statement (including
financial statements), certificate, report or other data furnished or to be
furnished or made by Borrower or any Guarantor under any of the Loan
Documents, including this Agreement, proves to have been untrue in any
material respect, as of the date as of which the facts therein set forth
were stated or certified; or
(c) Borrower or a Guarantor (i) shall fail to perform or to observe any
covenant contained in Sections 11(a), (b), (c), (h), (n), (o), (p), (q), or
(s) or any provision of Section 12; or (ii) shall fail to perform or to
observe any covenant or agreement contained herein or in any of the other
Loan Documents, other than covenants referred to in Sections 13(a), (b) and
(c) (i) above, and, if such failure is subject to being remedied, such
failure shall remain unremedied for twenty (20) days after the earlier of
an officer of such corporation becoming aware thereof or notice thereof
being given by Bank to Borrower; or
(d) Default shall be made in respect of (i)(A) any payment obligation
(regardless of amount) for borrowed money, other than the Notes, for which
Borrower or any Guarantor is liable (directly, by assumption, as guarantor
or otherwise) in an aggregate principal amount in excess of $100,000, (B)
any payment obligation (regardless of amount) secured by any Lien on any
asset or property of Borrower or any Guarantor having an aggregate book
value or fair market value, whichever is greater, in excess of $100,000, or
(C) any lease payment (regardless of amount) relating to a capital lease
obligation of Borrower or a Guarantor in an aggregate principal amount in
excess of $100,000, or (ii) any performance obligation (other than a
payment obligation) with respect to an agreement involving $100,000 or
more; provided, however, that such default, (i) if a payment default, shall
-------- -------
continue beyond the greater of (A) ten days and (B) the lesser of (x)
thirty days and (y) the applicable grace period, if any, and (ii) if a non-
payment default, shall continue beyond the greater of (C) ten days and (D)
the applicable grace period, if any; provided, further, however, that the
-------- ------- -------
foregoing proviso shall apply only if Borrower promptly gives Bank notice
of such default; or
(e) Borrower or any Guarantor shall commence a voluntary case or other
proceedings seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking an appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action
authorizing the foregoing; or
(f) An involuntary case or other proceeding shall be commenced against Borrower
or any Guarantor seeking liquidation, reorganization or other relief with
AMENDED AND RESTATED LOAN AGREEMENT - Page 47
<PAGE>
respect to it or its debts under any bankruptcy, insolvency or similar law
now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of sixty (60)
days; or an order for relief shall be entered against Borrower or any
Guarantor under the federal bankruptcy laws as now or hereinafter in
effect; or
(g) A final judgment or order for the payment of money in excess of $100,000
(or judgments or orders for the payment of money aggregating in excess of
$100,000), exclusive of amounts covered by insurance (as the applicability
of insurance coverage is determined by Borrower in good faith, but in any
event excluding from coverage matters as to which the applicable insurance
company has stated specific grounds for denying, or for reserving its right
to deny, coverage (excluding any such reservation of rights that is
customary for such insurance company)) shall be rendered against Borrower
or any Guarantor and such judgments or orders shall continue unsatisfied or
unstayed for a period of thirty (30) days; or
(h) Borrower shall fail to comply in any respect with the mandatory prepayment
provisions set forth in Section 8;
(i) A Change of Control shall occur;
(j) A Change of Management shall occur; or
(k) Any Loan Document or any provision thereof shall be alleged by Borrower or
confirmed by any court of competent jurisdiction to be unenforceable in any
respect.
Upon occurrence of any Event of Default specified in Subsections 13(e) and
(f), the Revolving Loan Commitment shall terminate and the entire principal
amount due under the Notes and all interest then accrued thereon, and any other
liabilities of Borrower and any Guarantor hereunder and under the other Loan
Documents, shall become immediately due and payable, all without notice and
without presentment, demand, protest, notice of protest or dishonor, notice of
intent to accelerate, notice of acceleration, or any other notice of any kind,
all of which are hereby expressly waived by Borrower and each Guarantor. Upon
any other Event of Default that has occurred and is continuing, Bank may by
notice to Borrower terminate the Revolving Loan Commitment and declare the
principal of, and all interest then accrued on, the Notes and any other
liabilities of Borrower and any Guarantor and under the other Loan Documents
hereunder to be forthwith due and payable, whereupon the same shall forthwith
become due and payable without presentment, demand, protest, notice of protest
or dishonor, notice of intent to accelerate, notice of acceleration or any other
notice of any kind, all of which Borrower and each Guarantor hereby expressly
waive, anything contained herein or in the Notes
AMENDED AND RESTATED LOAN AGREEMENT - Page 48
<PAGE>
to the contrary notwithstanding. Nothing contained in this Section 13 shall be
construed to limit or amend in any way events of default enumerated in any other
Loan Documents.
Upon the occurrence and during the continuance of any Event of Default,
Bank is hereby authorized at any time and from time to time, without notice to
Borrower and Guarantors (any such notice being expressly waived by Borrower and
each Guarantor), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final, or otherwise) at any time held and other
indebtedness at any time owing by Bank to or for the credit or the account of
Borrower and Guarantors (other than amounts specifically held in trust for
others) against any and all of the indebtedness of Borrower and Guarantors under
the Notes and the other Loan Documents, including this Agreement, irrespective
of whether or not Bank shall have made any demand under the Loan Documents,
including this Agreement or the Notes and although such indebtedness may be
unmatured. Any amount set-off by Bank shall be applied against the indebtedness
owed Bank by Borrower or Guarantors pursuant to this Agreement and the Notes.
Bank agrees promptly to notify Borrower and Guarantors after any such set-off
and application, provided that the failure to give such notice shall not affect
the validity of such set-off and application. The rights of Bank under this
Section 13 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) that Bank may have, including at common
law.
14. Exercise of Rights. No failure to exercise, and no delay in exercising,
on the part of Bank, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Bank
hereunder shall be in addition to all other rights provided by law. No
modification or waiver of any provision of the Loan Documents, including this
Agreement, or the Notes, nor consent to departure therefrom, shall be effective
unless in writing, and no such consent or waiver shall extend beyond the
particular case and purpose involved. No notice or demand given in any case
shall constitute a waiver of the right to take other action in the same, similar
or other circumstances without such notice or demand.
15. Notices. Any notices or other communications required or permitted to be
given by this Agreement or any other Loan Documents must be given in writing
(which may be by facsimile transmission) and must be personally delivered,
telecopied or mailed by prepaid certified or registered mail to the party to
whom such notice or communication is directed at the address of such party as
follows: (a) BORROWER and GUARANTORS: DIAGNOSTIC HEALTH SERVICES, INC., 2777
Stemmons Freeway, Suite 1525, Dallas, Texas 75207, Facsimile No. 214-689-6459,
Attention: Mr. Brad A. Hummel, President; (b) BANK: TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, 2200 Ross Avenue, Dallas, Texas 75201 Facsimile No. 214-
965-2384, Attention: Steven T. Prichett, Vice President. Any such notice or
other communication shall be deemed to have been given (whether actually
received or not) on the day it is personally delivered or telecopied as
aforesaid or, if mailed as aforesaid, on the fifth day after it is mailed. Any
party may change its address for purposes of this Agreement by giving notice of
such change to the other party pursuant to this Section 15.
AMENDED AND RESTATED LOAN AGREEMENT - Page 49
<PAGE>
16. Expenses. Borrower and Guarantors, jointly and severally, shall pay (i)
all reasonable and necessary out-of-pocket expenses of Bank, including
reasonable fees and disbursements of special counsel for Bank, in connection
with (A) the negotiation, preparation, execution, filing, recording, re-filing,
recording, re-filing, re-recording, modification, amendment, supplementation and
waiver of any one or more of the Loan Documents, and (B) any default or Event of
Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of
Bank, including reasonable fees and disbursements of special counsel for Bank,
in connection with the preparation of any participation agreement for a
participant or participants requested by Borrower or any amendment thereof and
(iii) if a default or an Event of Default occurs, all reasonable and necessary
out-of-pocket expenses incurred by Bank, including fees and disbursements of
counsel, in connection with such default or Event of Default, as applicable, and
collection and other enforcement proceedings resulting therefrom. Borrower
shall indemnify Bank against any transfer taxes, document taxes, and other like
assessments and charges, made by any governmental authority by reason of the
execution and delivery of this Agreement or the Notes. The obligation of
Borrower and Guarantors set forth in this Section 16 shall survive any
termination of this Agreement, the expiration of the Loans and the payment of
all indebtedness of Borrower to Bank hereunder and under the Notes and the other
Loan Documents.
AMENDED AND RESTATED LOAN AGREEMENT - Page 50
<PAGE>
17. Indemnity; Capital Adequacy.
(a) Borrower and each Guarantor agree to indemnify and hold harmless Bank and
its officers, employees, agents, attorneys and representatives (singularly,
an "Indemnified Party", and collectively, the "Indemnified Parties") from
and against any loss, cost, liability, damage or expense (including the
reasonable fees and out-of-pocket expenses of counsel to Bank, including
all local counsel hired by such counsel) ("Claim") incurred by Bank in
investigating or preparing for, defending against, or providing evidence,
producing documents or taking any other action in respect of any commenced
or threatened litigation, administrative proceeding or investigation under
any federal securities law, federal or state environmental law, or any
other statute of any jurisdiction, or any regulation, or at common law or
otherwise, which is alleged to arise out of or is based upon any acts,
practices or omissions or alleged acts, practices or omissions of Borrower,
any of Guarantors or their agents or arises in connection with the duties,
obligations or performance of the Indemnified Parties in negotiating,
preparing, executing, accepting, keeping, completing, countersigning,
issuing, selling, delivering, releasing, assigning, handling, certifying,
processing or receiving or taking any other action with respect to the Loan
Documents and all documents, items and materials contemplated thereby, even
if any of the foregoing arises out of an Indemnified Party's ordinary
negligence. The indemnity set forth herein shall be in addition to any
other obligations or liabilities of Borrower and Guarantors to Bank
hereunder or at common law or otherwise, and shall survive any termination
of this Agreement, the expiration of the Loans and the payment of all
indebtedness of Borrower to Bank hereunder and under the Notes, provided
that neither Borrower nor any Guarantor shall have any obligation under
this Section 17 to Bank with respect to any of the foregoing arising out of
the gross negligence or willful misconduct of Bank or any other Indemnified
Party. If any Claim is asserted against any Indemnified Party, the
Indemnified Party shall endeavor to notify Borrower of such Claim (but
failure to do so shall not affect the indemnification herein made except to
the extent of the actual harm caused by such failure). The Indemnified
Party shall have the right to employ, at Borrower's expense, counsel of the
Indemnified Parties' choosing and to control the defense of the Claim.
Borrower may at its own expense also participate in the defense of any
Claim. Each Indemnified Party may at Borrower's expense employ separate
counsel in connection with any Claim to the extent such Indemnified Party
believes it reasonably prudent to protect such Indemnified Party.
The parties intend for the provisions of this Section 17(a) to apply to and
protect each Indemnified Party from the consequences of its own negligence,
whether or not that negligence is the sole, contributing, or concurring cause of
any Claim.
(b) (i) In addition to, and without limiting Section5, if after the date of
this Agreement, Bank shall have determined that the adoption of any applicable
law, rule or regulation regarding capital adequacy, or any change therein, or
any change in the interpretation or administration thereof, or compliance by
Bank with
AMENDED AND RESTATED LOAN AGREEMENT - Page 51
<PAGE>
any request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on Bank's capital as a
consequence of its obligations hereunder to a level below that which Bank could
have achieved but for such adoption, change or compliance (taking into
consideration Bank's policies with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, Borrower shall pay to
Bank such additional amount or amounts as will compensate Bank for such
reduction.
(i) A certificate of Bank setting forth such amount or amounts as shall be
necessary to compensate Bank as specified in paragraph(i) above shall be
delivered as soon as practicable to Borrower and shall be conclusive and
binding, absent manifest error. Borrower shall pay Bank the amount shown
as due on any such certificate within 15 days after Bank delivers such
certificate. In preparing such certificate, Bank may employ such
assumptions and allocations of costs and expenses as it shall in good faith
deem reasonable and may use any reasonable averaging and attribution
method.
18. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA AND THE SUBSTANTIVE LAWS OF TEXAS SHALL
GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
AGREEMENT AND ALL OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED THEREIN.
19. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, then such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
20. Maximum Interest Rate. Regardless of any provisions contained in this
Agreement or in any other Loan Documents, Bank shall never be deemed to have
contracted for or be entitled to receive, collect or apply as interest on the
Notes or otherwise any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and if Bank ever receives, collects
or applies as interest any such excess, or if acceleration of the maturity of
the Notes or if any prepayment by Borrower results in Borrower having paid any
interest in excess of the maximum rate, such amount which would be excessive
interest shall be applied to the reduction of the unpaid principal balance of
the Notes for which such excess was received,
AMENDED AND RESTATED LOAN AGREEMENT - Page 52
<PAGE>
collected or applied, and, if the principal balances of Notes are paid in full,
any remaining excess shall forthwith be paid to Borrower. All sums paid or
agreed to be paid to Bank for the use, forbearance or detention of the
indebtedness evidenced by the Notes and/or this Agreement shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
maximum lawful rate permitted under applicable law. In determining whether or
not the interest paid or payable under any specific contingency exceeds the
maximum rate of interest permitted by law, Borrower and Bank shall, to the
maximum extent permitted under applicable law, (i) characterize any non-
principal payment as an expense, fee or premium, rather than as interest; and
(ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the
total amount of interest contracted for, charged or received with the total
amount of interest which could be contracted for, charged or received throughout
the entire contemplated term of the Notes at the maximum lawful rate under
applicable law.
21. Amendments. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
22. Multiple Counterparts, Etc. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto. References herein to
Sections are references to Sections of this Agreement unless the context
indicates to the contrary.
23. Conflict. If any term or provision of this Agreement is inconsistent with
or conflicts with any provision of the other Loan Documents, then the terms or
provisions contained in this Agreement shall be controlling.
24. Survival. All covenants, agreements, undertakings, representations and
warranties made in the Loan Documents, including this Agreement and the Notes,
shall survive all closings hereunder and shall not be affected by any
investigation made by any party.
25. Parties Bound. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates; provided, however, that neither Borrower nor
-------- -------
any Guarantor may, without the prior written consent of Bank, assign any rights,
powers, duties or obligations hereunder.
26. Participations. Bank shall have the right at any time and from time to
time to sell one or more participations in the Notes or any Advance or other
portion thereof; provided, however, that Bank will not at any time retain less
-------- -------
than a fifty percent (50%) interest in the indebtedness represented by the
Notes. To the extent of any such participation the provisions of
AMENDED AND RESTATED LOAN AGREEMENT - Page 53
<PAGE>
this Agreement shall inure to the benefit of, and be binding on, each
participant, including, but not limited to, any indemnity from Borrower to Bank.
Borrower shall have no obligation or liability to and no obligation to negotiate
or confer with, any participant, and Borrower shall be entitled to treat Bank as
the sole owner of the Notes without regard to notice or actual knowledge of any
such participation. Upon the occurrence of a default or an Event of Default,
each participant will have and is hereby granted the right to setoff against and
to appropriate and apply from time to time, without prior notice to Borrower or
any other party, any such notice being hereby expressly waived, any and all
deposits (general or special or other indebtedness or claims, direct or
indirect, contingent or otherwise), at any time held or owing by the participant
to or for the credit or account of Borrower against the payment of the Notes and
any other obligations of Borrower hereunder or under the other Loan Documents;
provided, however, that none of the rights granted in this Section 26 shall
- ------- -------
apply to any deposits held by any participant constituting trust funds and so
identified to such participant at the time the applicable deposit account is
created. Immediately after such setoff or appropriation by a participant, that
participant shall give Borrower and Bank written notice thereof. However, a
failure to give such notice will not affect the validity of such setoff or
appropriation.
27. WAIVER OF TRIAL BY JURY. EACH OF BORROWER AND GUARANTORS WAIVES ANY AND
ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR
OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS
AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH OF BORROWER
AND GUARANTORS ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL
INDUCEMENT TO BANK'S ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
AND THAT BANK IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH
CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO BANK THAT SUCH
CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL
AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING
JURY TRIAL WAIVER MY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
28. DTPA WAIVER. EACH OF BORROWER AND GUARANTORS HEREBY WAIVES ALL PROVISIONS
OF THE TEXAS DECEPTIVE TRADE PRACTICES CONSUMER PROTECTION ACT (TEX. BUS. & COM.
CODE (S) 17.01 ET SEQ.), OTHER THAN (S) 17.555 THEREOF, AND REPRESENTS AND
WARRANTS TO BANK THAT SUCH CORPORATION (A) HAS ASSETS OF $5,000,000 OR MORE
(EXCEPT THAT ONLY BORROWER AND DHS MANAGEMENT SERVICES, INC. MAKE THE
REPRESENTATION IN THIS CLAUSE (A)), (B) HAS KNOWLEDGE AND EXPERIENCE IN
FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO EVALUATE THE
MERITS AND RISKS OF THE
AMENDED AND RESTATED LOAN AGREEMENT - Page 54
<PAGE>
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (C) IS NOT
IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO BANK, AND (D) HAS
BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH SUCH TRANSACTIONS.
29. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT AMONG 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 AMONG THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BORROWER:
DIAGNOSTIC HEALTH SERVICES, INC.
a Delaware corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
GUARANTORS:
DHS MANAGEMENT SERVICES, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
AMENDED AND RESTATED LOAN AGREEMENT - Page 55
<PAGE>
MOBILE DIAGNOSTIC SYSTEMS, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
ALPHA SCANNING SERVICE, INC.,
a Louisiana corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: Chief Operating Officer
HEART INSTITUTE OF TULSA, INC.,
an Oklahoma corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
SPECIALIZED IMAGING SERVICES INC.,
an Illinois corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
AMENDED AND RESTATED LOAN AGREEMENT - Page 56
<PAGE>
MOBILE DIAGNOSTIC IMAGING, INC.,
a Delaware corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
ST. LOUIS MOBILE ULTRASOUND, INC.,
a Delaware corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
HDI ACQUISITION CORP.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
CARDIO-GRAPHIC CONSULTANTS, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
HEART DIAGNOSTIC INSTITUTES, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
AMENDED AND RESTATED LOAN AGREEMENT - Page 57
<PAGE>
HOMECARE INTERNATIONAL, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
DIAGNOSTIC HEALTH SERVICES DE
MEXICO, S.A. de C.V. a corporation
incorporated under the laws of the
Republic of Mexico
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: Director
HOMECARE INTERNATIONAL DE MEXICO, S.A. de C.V., a
corporation incorporated under the laws
of the Republic of Mexico
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: Director
ADVANCED DIAGNOSTIC IMAGING, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel
Title: President
AMENDED AND RESTATED LOAN AGREEMENT - Page 58
<PAGE>
NEONATAL PEDIATRIC
ECHOCARDIOGRAPHY, INC.,
a Texas corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel,
Title: President
PEDIATRIC ECHOCARDIOGRAPHIC
DIAGNOSTIC IMAGING, INC., a Texas
corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel,
Title: President
CARDIAC CONCEPTS, INC., a Texas
corporation
By: /S/ BRAD A. HUMMEL
------------------
Name: Brad A. Hummel,
Title: President
BANK:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, a national banking association
By: /S/ STEVEN T. PRICHETT
----------------------
Steven T. Prichett,
Vice President
AMENDED AND RESTATED LOAN AGREEMENT - Page 59
<PAGE>
EXHIBIT 10.33
Amendment, dated January 3, 1997, to Employment Agreement between the Company
and Max W. Batzer
<PAGE>
Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, Texas 75207
January 3, 1997
Mr. Max W. Batzer
10709 St. Lazare Drive
Dallas, TX 75229
Re: Seventh Amendment to Employment Agreement
-----------------------------------------
Dear Max:
This will confirm that, on the date hereof, the Board of Directors of
Diagnostic Health Services, Inc. (the "Company") has authorized and approved
certain amendments to your outstanding employment agreement with the Company
dated November 1, 1991 (as amended to date, the "Employment Agreement").
The amendments that have been authorized and approved consist of the
following:
1. Paragraph 2 of the Employment Agreement is hereby amended so as to
provide for a new scheduled expiration date of December 31, 2001, subject to
year-to-year renewal thereafter in accordance with such paragraph 2.
2. Paragraph 3(a) of the Employment Agreement is hereby amended so
as to provide for a minimum annual base salary of $360,000 per annum, effective
retroactively to January 1, 1997.
Except as specifically set forth herein, all terms and conditions of
the Employment Agreement shall remain unmodified and in full force and effect.
If you are in agreement with the foregoing, kindly confirm same by
countersigning and returning to the Company a duplicate copy of this letter.
Very truly yours,
DIAGNOSTIC HEALTH SERVICES, INC.
By: /S/ BRAD A. HUMMEL
------------------
Brad A. Hummel, President
Acknowledged, Confirmed and
Agreed To:
/S/ MAX W,. BATZER
------------------
Max W. Batzer
<PAGE>
EXHIBIT 10.34
Amendment, dated January 3, 1997, to Employment Agreement between the Company
and Brad A. Hummel.
<PAGE>
Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, Texas 75207
January 3, 1997
Mr. Brad A. Hummel
4434 Gloster
Dallas, TX 75220
Re: Seventh Amendment to Employment Agreement
-----------------------------------------
Dear Brad:
This will confirm that, on the date hereof, the Board of Directors of
Diagnostic Health Services, Inc. (the "Company") has authorized and approved
certain amendments to your outstanding employment agreement with the Company
dated November 1, 1991 (as amended to date, the "Employment Agreement").
The amendments that have been authorized and approved consist of the
following:
1. Paragraph 2 of the Employment Agreement is hereby amended so as
to provide for a new scheduled expiration date of December 31, 2001, subject to
year-to-year renewal thereafter in accordance with such paragraph 2.
2. Paragraph 3(a) of the Employment Agreement is hereby amended so
as to provide for a minimum annual base salary of $270,000 per annum, effective
retroactively to January 1, 1997.
Except as specifically set forth herein, all terms and conditions of
the Employment Agreement shall remain unmodified and in full force and effect.
If you are in agreement with the foregoing, kindly confirm same by
countersigning and returning to the Company a duplicate copy of this letter.
Very truly yours,
DIAGNOSTIC HEALTH SERVICES, INC.
By: /S/ MAX W. BATZER
-----------------
Max W. Batzer, Chairman
Acknowledged, Confirmed and
Agreed To:
/S/ BRAD A. HUMMEL
- ------------------
Brad A. Hummel
<PAGE>
EXHIBIT 11.1
Statement re: computation of per share earnings.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
December 31, 1996
<TABLE>
<CAPTION>
Total Issue 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
Secondary Offering 6/12/96 2,555,000 1,410,137
Options Exercised 6/27/96 125 64
Options Exercised 6/27/96 1,000 511
CCI Acquisition 6/28/96 22,785 11,579
CCI Debt Conversion 6/28/96 26,861 13,651
Secondary Offering Over Allotment 7/5/96 400,000 195,628
Alpha Contingent 10/10/96 24,118 5,403
Medmark Contingent 10/10/96 23,810 5,334
MDI Warrants Exercised 10/18/96 2,554 516
Reliascan Contingent 10/31/96 12,903 2,151
DDI Acquisition 11/1/96 39,521 6,479
MDI Warrants Exercised 12/3/96 524 40
-----------------------------------------------------------------------------
Shares Outstanding 12/31/96 8,167,503 6,709,795 6,709,795
Common Stock Equivalents (See Schedule) 1,028,619 1,364,671
---------- -----------
Primary weighted average shares 7,738,414 8,074,466
==========
Fully diluted:
- --------------
Cardio/HDI contingent 22,222
Reliascan contingent ($1.9375/share) 12,903
Medmark contingent ($1.75/share) 23,810
------
58,935 58,935
------ ----------
Fully diluted weighted average shares 8,133,401
==========
December 31, 1996 Net Income $2,459,083 $2,459,083
Less preferred stock dividend (6) (6)
---------- ----------
Common stock earnings $2,459,077 $2,459,077
========== ==========
Earnings Per Share $0.3178 $0.3023
========== ==========
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Closing price at end of period 8.0000 Primary Fully D.
Average share price during period 6.7310 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 8,593,750 1,276,742 1,074,219 98,258 300,781
Shares included in Underwriter's Warrants 158,075 5.5300 874,155 129,870 109,269 28,205 48,806
Warrants included in Underwriter's Warrants 158,075 7.5000 0 0 0 0 0
Private Option (Grossman) 49,693 2.2100 109,822 16,316 13,728 33,377 35,965
ISO's Round #1 71,150 2.2100 157,242 23,361 19,655 47,789 51,495
Non-Qual. Round #1 304,935 2.2100 673,906 100,120 84,238 204,815 220,697
Kirker Non-Qual. #1 3,000 2.6250 7,875 1,170 984 1,830 2,016
Pena Non-Qual. #2 2,000 2.6250 5,250 780 656 1,220 1,344
Nosnik #1 Non-Qual. 8,000 1.8400 14,720 2,187 1,840 5,813 6,160
ISO's Round #2 31,500 0.9375 29,531 4,387 3,691 27,113 27,809
Non-Qual. Round #2 173,000 0.9375 162,188 24,096 20,273 148,904 152,727
Warrants (MDI Purchase) 71,922 3.0000 215,766 32,056 26,971 39,866 44,951
Warrants (Post-MDI) 22,000 3.0000 66,000 9,805 8,250 12,195 13,750
Non-Qual. Round #3 200,000 1.6875 337,500 50,141 42,188 149,859 157,813
ISO's Round #3 60,500 1.9375 117,219 17,415 14,652 43,085 45,848
Non-Qual. Round #4 133,000 1.9375 257,688 38,284 32,211 94,716 100,789
Non-Qual Round #5 28,875 4.2500 122,719 18,232 15,340 10,643 13,535
Non-Qual Round #6 130,000 4.2500 552,500 82,083 69,063 47,917 60,938
Nosnik #2 Non-Qual. 60,000 5.2500 315,000 46,798 39,375 13,202 20,625
Non-Qual Round #7 7,000 5.3750 37,625 5,590 4,703 1,410 2,297
Non-Qual Round #8 48,000 6.2500 300,000 44,570 37,500 3,430 10,500
Bridge Warrants 100,000 6.2500 625,000 92,854 78,125 7,146 21,875
ISO's Round #4 61,750 6.2500 385,938 57,337 48,242 4,413 13,508
Non-Qual Round #9 47,750 6.2500 298,438 44,338 37,305 3,412 10,445
Bondurant & Dennis ISOs 5,000 7.5000 0 0 0 0 0
==============================================================================================================================
Total Common Stock Equivalents 3,310,225 1,028,619 1,364,671
==============================================================================================================================
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company.
<PAGE>
Exhibit 21.1
------------
Subsidiaries
------------
Subsidiary's Jurisdiction of
Corporate Name Incorporation
- -------------- ---------------
DHS Management Services, Inc. Texas
Mobile Diagnostic Systems, Inc. Texas
Heart Institute of Tulsa, Inc. Oklahoma
Specialized Imaging Services Inc. Illinois
Alpha Scanning Service, Inc. Louisiana
Diagnostic Health Services
de Mexico, S.A. de C.V. Mexico
HomeCare International
de Mexico, S.A. de C.V. Mexico
HomeCare International, Inc. Texas
Mobile Diagnostic Imaging, Inc. Delaware
St. Louis Mobile Ultrasound, Inc. Delaware
HDI Acquisition Corp. Texas
Advanced Diagnostic Imaging, Inc. Texas
Pediatric Echocardiographic
Diagnostic Imaging, Inc. Texas
Ultrasound Diagnostic Services, Ltd. Arizona
SoCal Diagnostic Services, Inc. California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
PERIOD ENDING 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895659
<NAME> DIAGNOSTIC HEALTH SERVICES, INC.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> OCT-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 0 229,547
<SECURITIES> 0 5,000,000
<RECEIVABLES> 0 11,943,975
<ALLOWANCES> 0 (1,413,168)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 19,422,755
<PP&E> 0 21,274,620
<DEPRECIATION> 0 (5,425,437)
<TOTAL-ASSETS> 0 53,320,373
<CURRENT-LIABILITIES> 0 9,405,168
<BONDS> 0 11,946,935
0 8,401
0 0
<COMMON> 0 649
<OTHER-SE> 0 29,967,569
<TOTAL-LIABILITY-AND-EQUITY> 0 53,320,373
<SALES> 7,424,128 24,171,286
<TOTAL-REVENUES> 7,424,128 24,171,286
<CGS> 0 0
<TOTAL-COSTS> 6,425,804 20,226,776
<OTHER-EXPENSES> (240,593) (486,704)
<LOSS-PROVISION> 42,428 40,970
<INTEREST-EXPENSE> 205,816 869,601
<INCOME-PRETAX> 990,673 3,520,643
<INCOME-TAX> 251,970 1,061,560
<INCOME-CONTINUING> 738,703 2,459,083
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 738,703 2,459,083
<EPS-PRIMARY> .08 .32
<EPS-DILUTED> .08 .30
</TABLE>
