SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
---------------
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from____________________to_____________________
Commission File No. 1-13392
U.S. DIAGNOSTIC LABS INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3164389
(State or Other Jurisdiction of (IRS Employer Identification number)
Incorporation or Organization)
777 S. Flagler Drive, Suite 1006
Phillips Point West
West Palm Beach, Florida 33401
(Address of Principal Executive Offices)
(407) 832-0006
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the issuer (I) filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
-------- --------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at July 29, 1996:
----- -----------------------------
Common Stock, $.01 par value 15,760,287 shares
Traditional Small Business Disclosure Format
Yes X No
-------- --------
<PAGE>
U.S. DIAGNOSTIC LABS INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1996
and December 31, 1995..........................................................3
Consolidated Condensed Statements of Operations for the Three and Six
Months ended June 30, 1996 and 1995............................................5
Consolidated Condensed Statements of Shareholders' Equity
as of June 30, 1996 and December 31, 1995......................................6
Consolidated Condensed Statements of Cash Flows for the Six Months
ended June 30, 1996 and 1995...................................................8
Notes to Consolidated Condensed Financial Statements...........................9
Pro Forma Condensed Balance Sheet as of June 30, 1996.........................12
Pro Forma Condensed Statement of Operations for the
Three and Six Months ended June 30, 1996......................................13
Notes to Pro Forma Consolidated Condensed Financial Statements................15
Item 2. Managements Discussion and Analysis
of Financial Condition and Results
of Operations.......................................................16
Part II. OTHER INFORMATION
Item 5. Other Information ....................................................21
Item 6. Exhibits and Reports on Form 8-K......................................22
SIGNATURES....................................................................25
-2-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1996 1995
---- ----
ASSETS:
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 58,532,625 $ 3,889,934
Restricted Cash and Cash Equivalents -- 483,942
Accounts Receivable[Net of Estimated Uncollectibles
of $10,957,864 and $5,871,683, respectively] 24,703,518 10,818,919
Prepaid Expenses 2,815,926 900,619
Other Current Assets 708,901 270,796
------------------ ---------------
TOTAL CURRENT ASSETS 86,760,970 16,364,210
------------------ ---------------
PROPERTY, PLANT AND EQUIPMENT - NET 38,876,601 22,550,884
------------------ ---------------
OTHER ASSETS:
Other Assets 1,715,764 371,196
Deferred Charges - Net 3,396,818 --
Goodwill - Net 44,093,269 12,941,462
Other Intangibles - Net 5,802,768 5,051,472
------------------ ---------------
TOTAL OTHER ASSETS 55,008,619 18,364,130
------------------ ---------------
TOTAL ASSETS $ 180,646,190 $ 57,279,224
================== ===============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1996 1995
---- ----
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES:
<S> <C> <C>
Trade Accounts Payable $ 1,167,426 $ 1,509,958
Accrued Expenses and Other Current Liabilities 3,244,919 1,889,200
Income Taxes Payable 2,370,146 --
Short-Term Borrowings -- 667,286
Current Portion of Long-Term Debt 8,236,072 3,831,975
Obligations Under Capital Leases - Current Portion 1,826,006 2,519,982
------------------ ---------------
TOTAL CURRENT LIABILITIES 16,844,569 10,418,401
------------------ ---------------
LONG-TERM LIABILITIES:
Long-Term Debt - Net of Current Portion 22,476,390 15,992,617
Obligations Under Capital Leases - Net of Current Portion 3,447,764 5,072,018
Convertible Debentures 59,483,000 --
Deferred Revenue 374,899 423,500
Deferred Income Taxes 164,452 164,452
------------------ ---------------
TOTAL LONG-TERM LIABILITIES 85,946,505 21,652,587
------------------ ---------------
TOTAL LIABILITIES 102,791,074 32,070,988
------------------ ---------------
MINORITY INTERESTS 2,029,226 715,543
------------------ ---------------
COMMITMENTS -- --
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value; Authorized
5,000,000 Shares, None Issued -- --
Common Stock, $.01 Par Value; 50,000,000 Shares Authorized
and 14,955,652 and 7,032,622 Shares Issued and
Outstanding at June 30, 1996 and December 31, 1995, respectively. 149,556 70,326
Additional Paid in Capital 69,356,066 22,953,590
Retained Earnings 7,096,549 2,495,678
------------------ ---------------
76,602,171 25,519,594
Less: Deferred Charges (776,281) (1,026,901)
------------------ ---------------
TOTAL SHAREHOLDERS' EQUITY 75,825,890 24,492,693
------------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 180,646,190 $ 57,279,224
================== ===============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE [NET OF ALLOWANCES] $ 20,436,871 $ 5,937,223 $ 36,362,446 $ 10,735,376
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, General and Administrative 12,356,618 4,089,533 22,446,126 7,651,424
Expense
Depreciation and Amortization Expense 2,372,139 593,607 4,097,348 989,713
------------ ------------ ------------ ------------
Total Operating Expenses 14,728,757 4,683,140 26,543,474 8,641,137
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,708,114 1,254,083 9,818,972 2,094,239
------------ ------------ ------------ ------------
OTHER INCOME [EXPENSE]:
Interest Expense (2,049,372) (201,298) (2,854,361) (395,205)
Interest and Other Income 506,367 18,657 605,865 44.855
------------ ------------ ------------ ------------
TOTAL OTHER [EXPENSE] (1,543,005) (182,641) (2,248,496) (350,350)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY 4,165,109 1,071,442 7,570,476 1,743,889
INTEREST
MINORITY INTEREST IN CONSOLIDATED PARTNERSHIPS (360,438) (42,705) (544,604) (105,072)
INCOME TAX EXPENSE (1,293,588) (423,087) (2,425,001) (435,393)
------------ ------------ ------------ ------------
NET INCOME $ 2,511,083 $ 605,650 $ 4,600,871 $ 1,203,424
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Primary $ .21 .14 .54 .29
=== === === ===
Fully Diluted $ .17 .14 .35 .29
=== === === ===
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON STOCK EQUIVALENTS OUTSTANDING:
Primary 16,058,343 4,229,761 10,492,494 4,130,861
============ ============ ============ ============
Fully Diluted 23,053,587 4,229,761 19,270,013 4,130,861
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-5-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------ ---------- -----
NUMBER PAID-IN DEFERRED RETAINED SHAREHOLDERS'
------ ------- -------- -------- -------------
OF SHARES AMOUNT CAPITAL CHARGES EARNINGS EQUITY
--------- ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 4,078,560 $ 40,786 $ 9,431,484 $ (599,275) $ (834,953) $ 8,038,042
50,000 Warrants at $2.00 50,000 500 99,500 --- -- 100,000
Issuance of 200,000 Shares -
LDC Acquisition 200,000 2,000 998,000 -- -- 1,000,000
Issuance of 87,313 Shares -
CROV Acquisition 87,313 873 399,127 -- -- 400,000
Issuance of 50,000 Shares -
Arrow Acquisition 50,000 500 249,500 -- -- 250,000
Issuance of 197,750 Shares -
SIL Acquisition 197,750 1,977 536,023 -- -- 538,000
Issuance of 27,600 Shares to
Unrelated Individuals 27,600 276 137,724 (138,000) -- --
70,000 Warrants at $2.00 70,000 700 139,300 -- -- 140,000
Common Stock Issued in
Connection with
Secondary Offering 1,857,250 18,573 9,077,494 -- -- 9,096,067
Issuance of 80,000 Shares -
OPDC Acquisition 80,000 800 399,200 -- -- 400,000
Issuance of 68,817 Shares -
Future Care Acquisition 68,817 688 399,312 -- -- 400,000
Issuance of 150,000 Shares to
Individual for Future Services 150,000 1,500 523,500 (525,000) -- --
Warrants Exercised at Various 115,332 1,153 563,426 -- -- 564,579
Prices
Deferred Charges Amortization -- -- -- 235,374 -- 235,374
Net Income -- -- -- -- 3,330,631 3,330,631
--------- --------- ----------- ------------ ----------- ------------
BALANCE - DECEMBER 31, 1995 7,032,622 $ 70,326 $22,953,590 $(1,026,901) $ 2,495,678 $ 24,492,693
FORWARD ========= ========= =========== ============ =========== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-6-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
------ ---------- -----
NUMBER OF PAID-IN DEFERRED RETAINED SHAREHOLDERS'
--------- ------- -------- -------- ------------
SHARES AMOUNT CAPITAL CHARGES EARNINGS EQUITY
------ ------ ------- ------- -------- ------
BALANCE - DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C> <C>
FORWARDED 7,032,622 $ 70,326 $ 22,953,590 $ (1,026,901) $2 ,495,678 $ 24,492,693
Warrants Exercised at Various
Prices 5,134,960 51,349 28,979,679 -- -- 29,031,028
Shares Issued in Connection
with MIC Acquisition 68,070 681 424,757 -- -- 425,438
Shares Issued in Connection
with Prepayment of CMI
Consulting Agreement 93,000 930 580,320 -- -- 581,250
Shares Issued in Connection
with SCR Acquisition 206,000 2,060 822,970 -- -- 825,030
Shares Issued in Connection
with U.S. Imaging Acquisition 1,671,000 16,710 6,990,000 -- -- 7,006,710
Shares Issued in Connection
with Pittsburgh Acquisition 750,000 7,500 8,604,750 -- -- 8,612,250
Amortization of Deferred Charges -- -- -- 250,620 -- 250,620
Net Income -- -- -- -- 4,600,871 3,058,433
---------- ---------- ------------ ------------- ----------- ------------
BALANCE - JUNE 30, 1996 14,955,652 $ 149,556 $ 69,356,066 $ (776,281) $ 7,096,549 $ 75,825,890
========== ========== ============ ============= =========== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-7-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
---- ----
<S> <C> <C>
NET CASH - OPERATING ACTIVITIES $ 5,154,044 $ 210,793
------------ ------------
INVESTING ACTIVITIES:
Purchase of Property and Equipment (3,792,180) (505,853)
Purchase of Intangible Assets (6,069,761) --
Investment in Pending Acquisition (1,238,975) --
Acquisition [Net of Cash Acquired] (28,486,919) (1,330,000)
NET CASH - INVESTING ACTIVITIES (39,587,835) (1,835,853)
------------ ------------
FINANCING ACTIVITIES:
Proceeds From Convertible Debentures 59,483,000 --
Repayments of Debt and Capital Lease Obligations (4,026,547) (2,714,067)
Proceeds from Borrowings 3,098,371 2,130,211
Common Stock Issued 30,037,716 100,000
Bridge Loans Proceeds -- 850,000
------------ ------------
NET CASH - FINANCING ACTIVITIES $ 88,592,540 366,144
------------ ------------
NET INCREASE [DECREASE] IN CASH AND CASH EQUIVALENTS 54,158,749 (1,258,916)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,373,876 (258,916)
------------ ------------
CASH AND CASH EQUIVALENTS - AT END OF PERIOD $ 58,532,625 $ 1,565,524
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 1,419,305 $ 393,643
Income Taxes $ -- $ --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company issued $17,450,678 of common stock related to various acquisitions
consummated in the six months ended June 30, 1996.
See Notes to Consolidated Condensed Financial Statements.
-8-
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] In the opinion of U.S. Diagnostic Labs Inc. [the "Company"], the
accompanying unaudited financial statements contain all adjustments
[consisting of only normal accruals] necessary to present fairly the financial
position of the Company as of June 30, 1996 and the results of its operations
for the three and six months ended June 30, 1996 and 1995 and changes in cash
flows for the six months then ended.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the December 31, 1995 U.S. Diagnostic Labs
Inc. Annual Report on Form 10-KSB which is incorporated by reference.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
[2] The results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results to be expected for the full
year.
[3] Earnings per common share is computed under the "Modified Treasury Stock
Method" whereby the adjusted net income for the periods is divided by the
weighted average number of common shares and common stock equivalents
outstanding. All dilutive stock options and warrants have been included as
common stock equivalents in the computation of primary earnings per share. All
dilutive stock options, warrants and convertible debt conversions have been
included as common stock equivalents in the computation of earnings per common
shared on a fully diluted basis.
[4] In April and May 1996, the Company consummated a $57.5 million offering of
9% Subordinated Convertible Debentures Due 2003. The investment banking firm
who acted as the agent in connection with the offering was issued 319,445
five-year warrants at $9.00. The Company used a portion of the proceeds during
the quarter ended June 30, 1996 and the acquisitions in note 6 below. The
Company plans to use the balance of the net proceeds of this issuance to fund
pending and future acquisitions.
[5] The Company called for redemption on June 28, 1996, all of its outstanding
redeemable Class A warrants. There were 2,120,034 warrants at an exercise
price of $6.25, totaling $13,250,212 which proceeds were not received until
July 11, 1996. The Company plans to use the proceeds from the redemption of
the warrants to continue to pursue acquisitions.
[6] During the quarter ended June 30, 1996, the Company completed the
acquisitions of the following outpatient diagnostic facilities:
<TABLE>
<CAPTION>
Name Effective Date Location Business Purchased Ownership %
- ---- -------------- -------- -------- ---------------------
<S> <C> <C> <C> <C>
South Coast Radiologists 1/1/96 Coos Bay, OR Multi-Modality Imaging 100%
Allegheny MRI (four centers) 4/1/96 Pittsburgh, PA MRI 100%
Heights Imaging Center 6/1/96 Haddon Height, NJ Multi-Modality Imaging 100%
Radiation Oncology Centers 4/1/96 Modesto, CA Radiation Therapy 50.1%
(three centers)
U.S. Imaging (six centers) 1/1/96 Houston, TX Multi-Modality Imaging 100%
</TABLE>
The Company financed these acquisitions with cash, notes, convertibles
notes and common stock of the Company. These acquisitions were accounted for
as asset or stock purchases with the excess purchase price over the value of
the assets attributed to goodwill totaling approximately $32,000,000. The
results of operations are included with that of the Company from the
acquisition date onward.
The South Coast Radiologists and U.S. Imaging acquisitions were
retroactive to January 1, 1996 and therefore their operations are included in
the entire six months ended June 30, 1996 and their operations from April 1,
1996 to June 30, 1996 are included in the three months ended June 30, 1996.
The pro forma information presented below reflects the effect of their
operations from January 1, 1996 to March 31, 1996 which were not included in
the 10-QSB
-9-
<PAGE>
for the quarter ended March 31, 1996 since the conditions surrounding the
retroactive adjustment were not known and did not exist at the time the March
31, 1996 10-QSB were filed.
As of June 30, 1996 the Company had singed "Letters of Intent" to acquire
the following five (5) businesses. Two (2) of these probable acquisitions have
closed as of August 14, 1996.
<TABLE>
<CAPTION>
Name Location Business Purchased Ownership %
- ---- -------- -------- ---------------------
<S> <C> <C> <C>
MediTek (15 centers) South Florida Multi-Modality Imaging 100%
LINC (3 centers) Southern California MRI 100%
Medical Marketing Development
(4 centers) New York Area Multi-Modality Imaging 100%
Medical Imaging Centers of
America, Inc. (18 centers) Southern California MultiModality Imaging and
Fee for Service Contracts 100%
Quantum (8 centers) Houston, TX Multi-Modality Imaging 85%
</TABLE>
The Company intends to finance these acquisitions with cash, notes,
convertible notes and common stock. These acquisitions will be accounted for as
asset or stock purchases with the excess purchase price over the fair value of
assets attributed to goodwill totaling approximately $47,000,000.
The following pro forma (unaudited) combined results of operations are
adjusted for the exercise of the outstanding "A" and "B" warrants,
amortization of goodwill, non-compete convenants, and depreciation on assets
acquired as though the acquisitions referred to herein occurred at the
beginning of the periods presented.
Six Months Ended Three Months Ended
June 30, 1996 June 30, 1996
------------- -------------
Net Revenue $ 82,852,000 $42,384,000
============ ===========
Net Income $ 7,744,000 $ 4,338,000
============= ===========
Primary Earnings per Share $.70 $.29
===== =====
Fully Diluted Earnings per Share $.43 $.23
===== =====
-10-
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- ------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following unaudited pro forma combined condensed balance sheet as
of June 30, 1996 and the unaudited pro forma combined condensed statements of
operations for the six months and three months ended June 30, 1996 have been
prepared to reflect the probable acquisitions to be consummated during the
third quarter of 1996 giving effect to the transaction under the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the pro forma financial statements. The unaudited pro forma combined
condensed statements of operations for the six and three months ended June 30,
1996 were prepared as if all transactions had occurred on January 1, 1996 (for
the six months ended June 30, 1996) and April 1, 1996 (for three months ended
June 30, 1996). The unaudited pro forma combined condensed balance sheet as of
June 30, 1996 has been prepared as if the probable acquisitions had occurred
as of that date.
The unaudited pro forma combined condensed financial statements have
been prepared by the Company's management based upon the historical financial
statements of the Company and the aforementioned to be acquired companies.
These pro forma financial statements are not necessarily indicative of the
results that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future.
-11-
<PAGE>
U.S. DIAGNOSTIC LABS INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF JUNE 30, 1996 [IN THOUSANDS]
[UNAUDITED]
<TABLE>
<CAPTION>
USDL MediTek LINC
------------- ------------ -----------
<S> <C> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 58,533 $ 713 $ 162
Accounts Receivable - Net 24,704 2,758 1,664
Other Current Assets 3,525 1,006 22
------------- ------------ -----------
Total Current Assets 86,762 4,477 1,848
------------- ------------ -----------
Property and Equipment - Net 38,877 4,669 144
------------- ------------ -----------
Other Assets:
Other Assets 5,112 2,344 23
Goodwill - Net 44,093 11,144 244
Covenant Not-to-compete - Net 2,667 - -
Other Intangibles - Net 3,136 - -
------------- ------------ -----------
Total Other Assets 55,008 13,488 267
------------- ------------ -----------
Total Assets 180,647 22,634 2,259
============= ============ ===========
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable 1,168 919 108
Accrued Expenses 5,615 951 1,201
Notes Payable 8,236 780 327
Obligations under Capital Leases 1,826 - 141
------------- ------------ -----------
Total Current Liabilities: 16,845 2,650 1,777
------------- ------------ -----------
Long-Term Liabilities:
Notes Payable 22,476 3,359 -
Obligations under Capital Leases 3,448 - -
Convertible Debentures 59,483 - -
Deferred Revenue 375 - 38
Deferred Income Taxes 164 565 -
------------- ------------ -----------
Total Long-Term Liabilities 85,946 3,924 38
------------- ------------ -----------
Minority Interests 2,029 119 -
------------- ------------ -----------
Shareholders' Equity:
Common Stock 150 - 3
Additional Paid-in Capital 69,356 17,398 -
Retained Earnings (Deficit) 7,097 (1,457) 441
------------- ------------ -----------
Totals 76,603 15,941 444
Less: Deferred Charges (776) - -
------------- ------------ -----------
Total Shareholders' Equity 75,827 15,941 444
------------- ------------ -----------
Total Liabilities and Shareholders'
Equity $ 180,647 $ 22,634 $ 2,259
============= ============ ===========
</TABLE>
(THE FOLLOWING TABLE WAS RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
Medical
Marketing Quantum MICA
------------ -------------- ------------
<S> <C> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 202 $ 215 $ 4,696
Accounts Receivable - Net 3,043 6,820 7,930
Other Current Assets 172 - 638
------------ ------------- ------------
Total Current Assets 3,417 7,035 13,264
------------ ------------- ------------
Property and Equipment - Net 6,541 2,138 13,739
------------ ------------- ------------
Other Assets:
Other Assets 218 64 2,264
Goodwill - Net - - -
Covenant Not-to-compete - Net - - -
Other Intangibles - Net 189 - 830
------------ ------------- ------------
Total Other Assets 407 64 3,094
------------ ------------- ------------
Total Assets 10,365 9,237 30,097
============ ============= ============
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable 903 330 1,268
Accrued Expenses 6 - 2,805
Notes Payable 128 1,282 5,427
Obligations under Capital Leases 1,926 - -
------------ ------------- ------------
Total Current Liabilities: 2,963 1,612 9,500
------------ ------------- ------------
Long-Term Liabilities:
Notes Payable 368 1,503 8,361
Obligations under Capital Leases 2,250 - -
Convertible Debentures - - 5,400
Deferred Revenue - - -
Deferred Income Taxes 37 - -
------------ ------------- ------------
Total Long-Term Liabilities 2,655 1,503 13,761
------------ ------------- ------------
Minority Interests - - 1,053
------------ ------------- ------------
Shareholders' Equity:
Common Stock - 55,995
Additional Paid-in Capital 4,747 - -
Retained Earnings (Deficit) - 6,122 (50,212)
------------ ------------- ------------
Totals 4,747 6,122 5,783
Less: Deferred Charges - - -
------------ ------------- ------------
Total Shareholders' Equity 4,747 6,122 5,783
------------ ------------- ------------
Total Liabilities and Shareholders'
Equity $ 10,365 $ 9,237 $ 30,097
============ ============= ============
</TABLE>
(THE FOLLOWING TABLE WAS RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma As Adjusted
Adjustments June 30,1996
---------------------- --------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 8,443 [A],[B],[C] $ 72,964
Accounts Receivable - Net (1,664)[B] 45,255
Other Current Assets (22)[B] 5,341
------------ -------------
Total Current Assets 6,757 123,560
------------ -------------
Property and Equipment - Net 6,656 [C] 72,764
------------ -------------
Other Assets:
Other Assets (23)[B] 10,002
Goodwill - Net 46,527 [C] 102,008
Covenant Not-to-compete - Net 2,667
Other Intangibles - Net 4,155
------------ -------------
Total Other Assets 46,504 118,832
------------ -------------
Total Assets 59,917 315,156
============ =============
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable (108)[B] 4,588
Accrued Expenses (1,201)[B] 9,377
Notes Payable (327)[B] 15,853
Obligations under Capital Leases (141)[B] 3,752
------------ -------------
Total Current Liabilities: (1,777) 33,570
------------ -------------
Long-Term Liabilities:
Notes Payable 2,500 [D] 38,567
Obligations under Capital Leases 5,698
Convertible Debentures 10,000 [D] 74,883
Deferred Revenue (38)[B] 375
Deferred Income Taxes 766
------------ -------------
Total Long-Term Liabilities 12,462 120,289
------------ -------------
Minority Interests 918 [I] 4,119
------------ -------------
Shareholders' Equity:
Common Stock (55,892)[A],[C],[E] 256
Additional Paid-in Capital 59,100 [A],[C],[E] 150,601
Retained Earnings (Deficit) 45,106 [E] 7,097
------------ -------------
Totals 48,314 157,954
Less: Deferred Charges - (776)
------------ -------------
Total Shareholders' Equity 48,314 157,178
------------ -------------
Total Liabilities and Shareholders'
Equity $ 59,917 $ 315,156
============ =============
</TABLE>
-12-
<PAGE>
US DIAGNOSTIC LABS INC.
- ------------------------------------------------------------
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1996 [IN THOUSANDS, EXCEPT PER SHARE DATA]
[UNAUDITED]
- ------------------------------------------------------------
<TABLE>
<CAPTION>
ALLEGHENY HEIGHTS
GROUP R.O.C. IMAGING CENTER
USDA APRIL 1, 1996 APRIL 1, 1996 JUNE 1, 1996
---- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $36,362 $2,477 $1,194 $1,498
GENERAL AND ADMINISTRATIVE
EXPENSES 22,446 1,424 994 909
INTEREST EXPENSE 2,854 10 20 97
DEPRECIATION AND AMORTIZATION 4,097 116 42 113
PROVISION FOR BAD DEBTS - - - -
OTHER [INCOME] EXPENSE (551) (3) (12) (4)
MINORITY INTERESTS 545 - 73 -
------------ ------------- ------------ ------------
INCOME BEFORE INCOME TAXES 6,971 930 77 383
INCOME TAXES PRO FORMA 2,370 372 31 153
------------ ------------- ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 4,601 558 46 230
------------ ------------- ------------ ------------
EXTRAORDINARY ITEM - [NET OF TAX EFFECT] - - - -
------------ ------------- ------------ ------------
NET INCOME $4,601 $558 $46 $230
============ ============= ============ ============
EARNINGS PER COMMON SHARE:
Primary $0.54
============
Fully Diluted $0.35
============
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 10,492,494
============
Fully Diluted 19,270,013
============
</TABLE>
(THE FOLLOWING TABLE WAS RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
MEDICAL PRO FORMA AS ADJUSTED
MEDITEK LINC MARKETING QUANTUM MICA ADJUSTMENTS JUNE 30, 1996
------- ---- --------- ------- ---- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES $9,946 $2,019 $4,553 $6,354 $18,449 $82,852
GENERAL AND ADMINISTRATIVE
EXPENSES 8,895 1,764 3,589 3,540 12,638 (1,550)[F] 54,649
INTEREST EXPENSE 83 4 - 206 1,018 1,866 [G] 6,158
DEPRECIATION AND AMORTIZATION - 63 - 451 3,433 1,444 [H] 9,759
PROVISION FOR BAD DEBTS - - - - 272 272
OTHER [INCOME] EXPENSE (14) (7) 48 - (210) (753)
MINORITY INTERESTS 236 - - - 36 323 [I] 1,213
------- -------- ---------- --------- --------- ---------- -----------
INCOME BEFORE INCOME TAXES 746 195 916 2,157 1,262 (2,083) 11,554
INCOME TAXES PRO FORMA 298 59 366 863 45 (365) 4,192
------- -------- ---------- --------- --------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 448 136 550 1,294 1,217 (1,718) 7,362
------- -------- ---------- --------- --------- ---------- -----------
EXTRAORDINARY ITEM - [NET OF TAX EFFECT] - - - - 382 382
------- -------- ---------- --------- --------- ---------- -----------
NET INCOME $448 $136 $550 $1,294 $1,599 ($1,718) $7,744
======= ======== ========== ========= ========= ========== ===========
EARNINGS PER COMMON SHARE:
Primary $0.70
===========
Fully Diluted $0.43
===========
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 12,539,924
===========
Fully Diluted 25,728,969
===========
</TABLE>
USDL's operations include the operations of Allegheny, ROC, and Heights Imaging
from the acquisition dates (April 1, 1996, April 1, 1996, and June 1, 1996,
respectively) onward
-13-
<PAGE>
US DIAGNOSTIC LABS INC.
- ------------------------------------------
PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1996 [IN THOUSANDS, EXCEPT PER SHARE DATA]
[UNAUDITED]
- ------------------------------------------
<TABLE>
<CAPTION>
HEIGHTS
IMAGING CENTER MEDICAL
USDL JUNE 1, 1996 MEDITEK LINC MARKETING
---- ------------ ------- ---- ---------
<S> <C> <C> <C> <C> <C>
NET REVENUES $20,436 $613 $5,851 $1,034 $2,277
GENERAL AND ADMINISTRATIVE
EXPENSES 12,356 393 5,236 890 1,795
INTEREST EXPENSE 2,049 38 54 2 -
DEPRECIATION AND AMORTIZATION 2,372 45 - 31 -
PROVISION FOR BAD DEBTS - - - - -
OTHER [INCOME] EXPENSE (507) (1) 3 (4) 24
MINORITY INTERESTS 361 - 152 - -
--------- --------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 3,805 138 406 115 458
INCOME TAXES PRO FORMA 1,294 55 162 35 183
--------- --------- --------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 2,511 83 244 80 275
--------- --------- --------- ---------- ----------
EXTRAORDINARY ITEM - [NET OF TAX EFFECT] - - - - -
--------- --------- --------- ---------- ----------
NET INCOME $2,511 $83 $244 $80 $275
========= ========= ========= ========== ==========
EARNINGS PER COMMON SHARE:
Primary $0.21
=========
Fully Diluted $0.17
=========
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 16,058,343
===========
Fully Diluted 23,053,587
===========
</TABLE>
USDL's operations include the operations of Heights Imaging from the
acquisition date (June 1, 1996) onward
(THE FOLLOWING TABLE WAS RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA AS
PRO FORMA ADJUSTED
QUANTUM MICA ADJUSTMENTS JUNE 30, 1996
------- ---- ----------- -------------
<S> <C> <C> <C> <C>
NET REVENUES $3,177 $8,996 $42,384
GENERAL AND ADMINISTRATIVE
EXPENSES 1,770 5,528 (525) [F] 27,443
INTEREST EXPENSE 103 458 223 [G] 2,927
DEPRECIATION AND AMORTIZATION 226 1,656 602 [H] 4,932
PROVISION FOR BAD DEBTS - 149 149
OTHER [INCOME] EXPENSE - (82) (567)
MINORITY INTERESTS - (45) 162 630
---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,078 1,332 (462) 6,870
INCOME TAXES PRO FORMA 431 45 327 2,532
---------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 647 1,287 (789) 4,338
---------- ----------- ----------- -----------
EXTRAORDINARY ITEM - (NET OF TAX EFFECT) - - 0
---------- ----------- ----------- -----------
NET INCOME $647 $1,287 ($789) $4,338
========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Primary $0.29
===========
Fully Diluted $0.23
===========
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 17,935,400
===========
Fully Diluted 26,013,725
===========
</TABLE>
USDL's operations include the operations of Heights Imaging from the
acquisition date (June 1, 1996) onward
-14-
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- ------------------------------------------------------------------------------
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[A] Assumes conversion of remaining B warrants resulting in approximately
$63 million of additional cash available to consummate the pending
acquisitions which will require approximately $55 million.
[B] To eliminate assets and liabilities not being acquired or assumed.
[C] Assumes the allocation of purchased cost to acquired assets at fair value
and the resulting goodwill from the probable acquisitions.
[D] Assumes the issuance of $2.5 million in notes and $10 million in
convertible notes for the probable acquisitions.
[E] Adjusts for the elimination of common stock, additional paid-in capital
and retained earnings of the probable acquisitions.
[F] Adjusts for the effects of the new employment contracts, radiologists'
agreements, and management fee agreements pursuant to the acquisitions plus
other identifiable elimination of certain expenses.
[G] Adjusts interest expense due to the issuance of the notes in connection
with the acquisitions.
[H] Adjusts amortization expense to properly reflect the allocation of the
purchase price as required per purchase accounting for each of the
acquisitions.
[I] Adjusts for the minority interest on one of the acquisitions.
-15-
<PAGE>
Item 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
OVERVIEW
The Company did not commence operations until the completion of its
first acquisition in October 1993. The acquisitions completed by the Company
to date are as follows: (i) Havertown Medical Lab in October 1993, (ii)
Computerized Medical Imaging in June 1994, (iii) Columbus Diagnostic Center in
August 1994, (iv) Alpha Laboratory in November 1994, (v) Morton Clinical
Laboratory in December 1994, (vi) Santa Fe Imaging Center in January, 1995,
(vii) Laborde Diagnostic Center in February 1995, effective January 2, 1995
(80% owned), (viii) Community Radiology of Virginia in February 1995, (ix)
Arrow Clinical Laboratories in March 1995, (x) Salisbury Imaging Center
effective April 1995 (80% owned), (xi) Orange Park Diagnostic Center effective
June 1995, (xii) San Francisco Magnetic Resonance Center in September 5, 1995,
(xiii) Advanced Medical Imaging Center in October 1995, (xiv) Modesto Imaging
Center effective September 1995, (xv) FutureCare Affiliates, Inc. in November
1995, (xvi) Radiation Oncology Centers, Inc. effective April 1, 1996, (xvii)
Heights Imaging Center effective June 1, 1996, (xviii) South Coast
Radiologists effective January 1, 1996, (xix) U.S. Imaging effective January
1, 1996, (xx) Allegheny Imaging effective April 1, 1996, (xxi) MediTek Health
Corporation effective July 1, 1996, (xxii) OwnerDiagnostics effective June 30,
1996, (xxiii) Ft. Lauderdale Regional MR Center effective July 1, 1996 and
(xxiv) LINC Medical Imaging effective August 1, 1996. In addition, the Company
entered into an agreement to divest its clinical laboratory operations in
August 1996. The Company's ability to meet its objective to become the leading
network provider of imaging services is dependent to a large extent upon its
continuing ability to consummate acquisitions of imaging centers and therapy
centers and to increase revenues after completion of each acquisition.
As a result of the acquisitions, the Company will have recorded
approximately $108.8 million of goodwill and other intangibles on its pro
forma balance sheet which will be amortized over varying periods of up to 20
years and will result in annual charges to income of approximately $10.9
million for the next two years and lesser amounts in future years. The Company
recognized approximately $834,000 on a historical basis and approximately
$2,000,000 on a pro forma basis of goodwill and other intangibles amortization
in 1995 and $1,494,000 and $3,318,000 for the six months ended June 30, 1996.
Future acquisitions will likely result in additional amortization charges.
The Company's financial performance is substantially dependent upon its
ability to integrate the operations of acquired imaging centers and therapy
centers into the Company's infrastructure and reduce operating expenses of
acquired entities, its ability to deliver equivalent service to clients
immediately after an acquisition without significant interruption or
inconvenience and various other risks associated with the acquisition of
businesses, including expenses associated with the integration of the acquired
businesses. In order to manage its planned continuing rapid growth, the
Company has recently hired additional management and is in the process of
implementing new information and billing systems. Although to date the
acquired entities have been operated by the Company on a profitable basis and
successfully integrated into the Company, there can be no assurance that the
Company will be able to successfully operate these and other operations that
may be acquired in the future. Several potential acquisitions being considered
by the Company are substantially larger than those acquired in the past, which
will substantially increase revenues but may also pose additional operational
issues. If the Company is unable to manage growth effectively, the Company's
operating results could be materially adversely affected.
Approximately 95% all of the Company's revenues are derived from third
party payors. For the six months ended June 30, 1996, the Company derived
approximately 69% of its revenues from non-government payors and approximately
26% from government sponsored healthcare programs (principally, Medicare and
Medicaid). The
-16-
<PAGE>
Company's revenues and profitability may be materially adversely affected by
the current trend in the healthcare industry toward cost containment as
government and private third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with services
providers. Continuing budgetary constraints at both the federal and state
level and the rapidly escalating costs of healthcare and reimbursement
programs have led, and may continue to lead, to significant reductions in
government and other third party reimbursements for certain medical charges
and to the negotiation of reduced contract rates or capitated or other
financial risk-shifting payment systems by third party payors with service
providers. In addition, rates paid by private third party payors, including
those that provide Medicare supplemental insurance, are generally higher than
Medicare payment rates. Changes in the mix of the Company's patients among the
non-government payors and government sponsored healthcare programs, and among
different types of non-government payors and government sponsored healthcare
programs, and among different types of non-government payor sources, could
have a material adverse effect on the Company. Further reductions in payments
to physicians or other changes in reimbursement for healthcare services could
have a material adverse effect on the Company, unless the Company is otherwise
able to offset such payment reductions through cost reductions, increased
volume, introduction of new procedures or otherwise.
The Company reports revenue at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated prospectively determined adjustments under reimbursement agreements
with third-party payors. These adjustments are accrued on an estimated basis
in the period the related services are rendered and adjusted in future period
as final settlements are determined. As a result, the Company does not have
any significant bad debt expense.
Statements in this Form 10-QSB that are not descriptions of historical
factare forward-looking statements that are subject to risks and
uncertainties.Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth in the
Company's SEC filings under "Risk Factors."
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
COMPARED WITH THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
Net patient revenue for the three months ended June 30, 1996 increased
$14,499,648 from $5,937,223 to $20,436,871 as compared to the comparable 1995
period. Net income for the three months ended June 30, 1996 increased
$1,905,433 from $605,650 to $2,511,083 as compared to the 1995 period. The
revenue increase reflects (i) primarily the acquisition of nine imaging
centers, which accounted for approximately $7.2 million of the increase, (ii)
enhanced marketing efforts by the Company and (iii) recapture of certain
Medicare business which former physician-owners were previously prohibited
from referring to imaging centers until the sale of such imaging centers to
the Company. The net income increase reflects the direct relationship of such
acquisitions, the implementation of internal controls over administrative
functions and the consolidation of administrative and accounting functions.
Net patient revenue for the six months ended June 30, 1996 increased
$25,627,070 from $10,735,376 to $36,362,446 as compared to the comparable 1995
period. Net income for the six months ended June 30, 1996 increased $3,397,447
from $1,203,424 to $4,600,871. The revenue increase reflects the acquisition
of 15 imaging centers, which accounted for $11.2 million of the increase.
Revenues for centers owned as of January 1, 1995 increased by an average of 7%
on a same center basis for the six months ended June 30, 1996 compared to the
1995 period.
Upon acquisition of an imaging center, the Company initiates a process
to improve operating performance through the implementation of marketing
programs and the consolidation of accounting and administrative functions. It
generally requires three to six months for the benefits from such programs to
be reflected in operating results. As a result, actual and pro forma results
of operations for the three and six months ended June 30, 1996 do not fully
reflect such benefits with respect to the integration of the recent
acquisitions.
The Company's clinical laboratory operations continued to experience
intense competitive and pricing pressures
-17-
<PAGE>
in 1996 as a result of managed care and independent physician practice
competition. Clinical laboratory revenues accounted for approximately $593,000
or 2.9% of the Company's revenues for the three months ended June 30, 1996
(1.4% on a pro forma basis) and $1,162,000 or 3.2% for the six months ended
June 30, 1996 (1.4% on a pro forma basis). In August 1996, the Company entered
into an agreement to sell its clinical laboratory operations for preferred
stock of the buyer having a value approximately equal to the Company's book
value. Accordingly the Company does not expect to recognize gain or loss at this
time.
Selling, general and administrative expenses for the three months ended
June 30, 1996 increased $8,267,085 from $4,089,533 in the 1995 period to
$12,356,618 in the 1996 period, but declined as a percentage of net revenues
from approximately 68.9% to 60.5%. Selling, general and administrative
expenses for the six months ended June 30, 1996 increased $14,794,702 from
$7,651,424 in the 1996 period to $22,446,126 in the 1995 period, but declined
as a percentage of net revenues from approximately 71.3% to 61.7%. The
increases relate to (i) the increase in operating expenses of the Company as
a result of the acquisitions described above, and (ii) the increase in
corporate overhead as the Company consolidated or commenced consolidation of
most administrative operations at its headquarters.
Amortization resulting from the goodwill and other intangibles for the
three months ended June 30, 1996 increased approximately $944,000 from
$158,000 to $1,102,000 as compared to 1995. Amortization resulting from the
goodwill and other intangibles for the six months ended June 30, 1996 increased
approximately $1,220,000 from $274,000 to $1,494,000 as compared to 1995. The
increases were due to the acquisitions.
Income tax expense for the three months ended June 30, 1996 increased
$870,501 from $423,087 to $1,293,588 as compared to 1995 end for the six
months ended June 30, 1996 increased $1,989,608 from $435,393 to $2,425,001 as
compared to 1995. The increases relate to the increase in net income at
applicable tax rates and the use of the Company's remaining net operating loss
carryforwards in 1995.
Primary earnings per share for the three months ended June 30, 1996 as
compared to June 30,1995 increased from $0.14 to $.21 on an additional
11,828,582 weighted average number of shares outstanding. Fully diluted
earnings per share were $.17 on 23,053,587 weighted average number of shares
outstanding.
Primary earnings per share for the six months ended June 30, 1996 as
compared to June 30, 1995 increased from $.29 to $.54 on an additional
6,361,633 weighted average number of shares outstanding. Fully diluted
earnings per share were $.35 on 19,270,013 weighted average number of shares
outstanding.
PRO FORMA RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1996.
Pro forma results for the three and six months ended June 30, 1996
reflect operations as if all acquisitions had occurred on January 1, 1996. The
pro forma net patient revenues and expenses reflect operations of Allegheny
Imaging from January 1, 1996 to March 31, 1996, Heights Imaging from January 1,
1996 to May 31, 1996. Radiation Oncology from January 1, 1996 to March 31,
1996 and MediTek Health Corporation, LINC, Medical Marketing, Quantum and MICA
from January 1, 1996 to June 30,1996.
Pro forma net patient revenues for the three months ended June 30, 1996
were approximately $42,384,000. Pro forma general and administrative expenses
for the three months ended June 30, 1996 were approximately $27,443,000, pro
forma interest expense was approximately $2,927,000 and pro forma depreciation
and amortization was approximately $4,932,000. Pro forma net income for the
three months ended June 30, 1996 was approximately $4,338,000 or $ .29 per
primary share and $.23 per fully diluted share. The pro forma revenue increase
reflects enhanced marketing efforts, the addition of new equipment and
modalities and the recapture of certain Medicare business which former
physician-owners were previously prohibited from referring to imaging centers
until the sale of such facility to the Company. The Company believes that had
all the acquisitions included in the 1996 pro forma results actually been
consummated prior to January 1, 1996,
-18-
<PAGE>
and the Company had implemented its marketing programs for the full year,
revenue would have been higher than that set forth in the pro forma statement
of operations. The pro forma net income does not reflect any cost savings from
(i) consolidating administrative and accounting controls, (ii) large purchase
discounts, and (iii) other significant savings from finance, radiology and
maintenance contract renegotiations.
Pro forma net patient revenues for the six months ended June 30, 1996
were approximately $82,852,000. Pro forma general and administrative expenses
for the six months ended June 30, 1996 were approximately $54,649,000, pro
forma interest expense was approximately $6,158,000 and pro forma depreciation
and amortization was approximately $9,759,000. Pro forma net revenue for the
six months ended June 30, 1996 was approximately $7,744,000 or $.70 per
primary share and $.43 per fully diluted.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1995, the Company raised an aggregate of
approximately $21.9 million through private placements, its initial public
offering in October 1994 and a secondary offering in August 1995,
substantially all of which was used for acquisitions and working capital.
As of June 30, 1996, the Company had approximately $58,533,000 in cash
and cash equivalents and working capital of $69,916,401, primarily as a result
of the offering of $57.5 million principal amount of 9% Subordinated
Convertible Debentures Due 2003 (the "Debentures") through a Rule 144A
offering in April and May 1996, which generated net proceeds of $53 million,
as well as the exercise of all of the Class A Warrants and other outstanding
warrants, which generated net proceeds of $26 million. In addition, effective
July 31, 1996, substantially all of the Company's Class B Warrants were
exercised as a result of a warrant redemption, generating additional net
proceeds of approximately $63 million subsequent to June 30, 1996. As a
result, at July 31, 1996, the Company had cash of approximately $100 million,
of which approximately $56 million was expected to be used for the MICA, MMD
and Quantum transactions. The Company will use the remaining proceeds for
future acquisitions and for working capital and general corporate purposes.
There can be no assurance that the Company will be able to effectively utilize
all of such cash.
For the six months ended June 30, 1996, the Company generated
approximately $54.2 million in cash. The Company generated $5,154,044 from
operations primarily due to net income and non-cash amortization and generated
$88,592,540 from financing activities, primarily from the Debentures, offset by
the repayment of notes and capital leases and exercise of the warrants, and
used $39,587,835 in investing activities, which were primarily acquisitions
and equipment purchases. The Company generally collects its receivables within
60 days, although, in accordance with industry practice, it keeps a large
allowance for contractual adjustments and doubtful accounts (approximately
one-third of gross receivables) as many third party payors do not reimburse
for the full amount of bills.
The Company expects to realize additional savings and revenue at the
imaging centers it acquired in 1996 as a result of (i) further consolidation
of billing and collections in 1996, and (ii) implementing a regional
"Open-MRI" marketing program targeted towards print and television advertising
in an effort to enhance patient referrals.
The Company's facilities are generally cash flow positive from the date
of acquisition, and as such the Company's capital needs primarily relate to
the acquisition of additional facilities. Acquisitions will be funded through
cash, notes, equity securities issued by the Company, or any combinations of
the foregoing.
The Company has an unused line of credit of $15 million at the prime
interest rate with a bank.
As of June 30, 1996, the Company had an aggregate of approximately
$30.7 million of notes payable, of which approximately $8.2 million are
classified as current. Substantially all of these amounts relate to notes
issued in connection with acquisitions and equipment purchases. At that date,
the Company also had approximately $5.3
-19-
<PAGE>
million of capital lease obligations, of which approximately $1.8 million are
due in 1996. Substantially all of these obligations are related to equipment
for the Company's imaging centers acquired pursuant to completed acquisitions.
The Company's monthly payments for capitalized lease obligations now aggregate
approximately $191,000. The Company also pays aggregate annual rent of
approximately $3.7 million for its 31 facilities. The Company has employment
and consulting agreements with its executive officers and consultants
providing for annual compensation of approximately $2 million in 1996. The
Company also has employment agreements with radiologists at its facilities who
generally receive a percentage of net collected revenues at their center.
ESCROW SHARES
In connection with the initial public offering, stockholders of the
Company deposited the Escrow Shares, which will be released to such stockholders
if the Company attains certain earnings before taxes in 1996. As a result of the
issuance of approximately 12.3 million shares of Common Stock through the
exercise of the Class A and Class B Warrants, the earnings target for the
release of such shares is now over $40 million for 1996. Based on results of
operations for the first six months of 1996, the Company believes that such
earnings will not be attained. Accordingly, such 1,152,000 shares are likely to
be canceled effective December 31, 1996 and contributed to capital, which will
not have any effect on the Company's earnings.
-20-
<PAGE>
PART II
Item 5. OTHER INFORMATION
-----------------
Medical Imaging Centers of America, Inc.
- ----------------------------------------
On August 1, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger" Agreement') with Medical Imaging Centers of America,
Inc., a California corporation ("MICA"), and a wholly owned subsidiary of the
Company, MICA Acquiring Corporation, a California corporation ("Merger Sub").
Pursuant to the Merger Agreement, Merger Sub will be merged with and
into MICA whereupon the separate existence of Merger Sub will cease and MICA
will become a wholly owned subsidiary of the Company (the "Merger"). Pursuant
to the Merger, each outstanding share of MICA's common stock, no par value
("MICA Common Stock"), would be converted into a right to receive $11.75 in
cash (the "Merger Consideration"). Each option to purchase MICA Common Stock
(each a "MICA Option") would be cancelled and each holder of a MICA Option
would be entitled to a cash payment equal to the product of the total number
of shares subject to the MICA Option and the excess of $11.75 over the
exercise price per share of the MICA Common Stock subject to the MICA Option.
The Company currently does not beneficially own, directly or indirectly, any
of MICA's voting securities apart from any beneficial ownership interest it
may have as a result of entering into the Merger Agreement. A copy of the
Merger Agreement is incorporated herein by reference and attached as Exhibit
2.1 hereto.
The Merger is subject to the approval of the shareholders of MICA,
certain regulatory approvals and filings, including expiration of the waiting
period under the Hart-Scott-Rodino Improvements Act of 1976, as amended, and
other customary conditions. If the Merger is not consummated either because
(i) the Company terminates the Merger Agreement by reason of the Company's
material breach of the Merger Agreement and failure to cure such breach within
ten (10) days' notice from the Company, or (ii) the Board of Directors of MICA
withdraws, modifies or changes its approval of the Merger Agreement or the
Merger in any manner adverse to the Company or Merger Sub, or determines in
good faith with the advice of outside legal counsel that, in the exercise of
its fiduciary obligations, termination of the Merger Agreement is required by
reason of an agreement with a third party with respect to a business
combination or similar transaction, MICA is obligated to pay the Company a fee
of 3% of the total Merger Consideration. If the Merger is not consummated
because the Company terminates the Merger Agreement because of MICA's material
breach of any representations or warranties in the Merger Agreement (with such
breach not cured either prior to the closing of the Merger or within thirty
(30) days after written notice from the Company), MICA is obligated to pay the
Company reasonable out-of-pocket expenses and fees up to $200,000. The Merger
Agreement can be terminated by either party if the Merger is not consummated
by November 19, 1996.
The foregoing summary of the terms of the Merger Agreement and the
Merger does not purport to be complete and is qualified in its entirety by
reference to the full test of the Merger Agreement.
Phycor Jacksonville Joint Venture
- ---------------------------------
Effective July 1, 1996, the Company entered into a joint venture with
Phycor of Jacksonville, Inc., a wholly-owned subsidiary of Phycor, Inc. to
lease outpatient imaging equipment and facilities and equipment to affiliated
providers in south Georgia and north Florida through Diagnostic Equity
Partners, a partnership. The Company contributed its Orange Park facility and
will contribute its Salisbury facility. Phycor of Jacksonville contributed its
Orange Park Heart Center and the entities are jointly developing additional
facilities. In July 1996, the Company purchased the 20% of Salisbury owned by
Amos Almand, III, a director and officer of the Company, for $567,437, which
was equal to the pro-rata price for the original purchase in 1995.
-21-
<PAGE>
Warrant Redemptions
- -------------------
As a result of a call for redemption, effective June 28, 1996
approximately 4,220,000 or 99.7% of the 4,237,500 Class A Warrants originally
issued were exercised, resulting in net proceeds of approximately $23.3
million. As a result of a call for redemption, effective July 31, 1996
substantially all of the approximately 8,020,000 or over 99% of the Class B
Warrants originally issued were exercised, resulting in net proceeds of
approximately $63 million.
Sale of Clinical Laboratory Business
- ------------------------------------
In August 1996, the Company entered into an agreement to sell its
clinical laboratory business to Medlab Inc. for $3 million of Medlab preferred
stock. The transaction is expected to close by August 31, 1996. The clinical
laboratory business represented less than 3% of the Company's revenues and was
operating at a slight loss in 1996.
Other
- -----
Since June 30, 1996, the Company also completed the acquisition of
one imaging center in Ft. Lauderdale, Florida and three imaging centers in
southern California, bringing the number of centers owned to 55. The Company
also purchased a majority interest in a managed service organization ("MSO")
in southern California consisting of 17 centers (of which three are owned by the
Company), pursuant to which the Company may provide management services and be
able to negotiate managed care contracts using these centers in a network with
Company-owned centers.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibits:
- ---------
2.1 Agreement and Plan of Merger, dated as of August 1, 1996, among the
Company, MICA Acquiring Corporation, a California corporation and
Medical Imaging Centers of America, Inc., a California Corporation.
10.1 1993 Stock Option Plan
10.2 Asset Purchase Agreement among the Company, Columbus Diagnostic
Center Inc. and Physicians Diagnostic Associates of Columbus. L.P.(1)
10.3 Amended Employment Agreement with Jeffrey Goffman(1)
10.5 Employment Agreement with Robert Burke, M.D.(1)
10.6 Form of Consulting Agreement with HPM Inc.(1)
10.7 Consulting Agreement with MED LNC Inc.(1)
10.8 Equipment Lease with Ventura Partners.(1)
10.9 Form of Lease between the Company and Murry Goodman with respect to
Phillips Point.(1)
10.10 Lease between the Company and United Properties Co.(1)
10.11 Asset purchase Agreement dated as of December 31, 1994 among the
Company, Santa Fe Imaging Center, Ltd. and Santa Fe Imaging Center
Inc., a subsidiary of the Company. (2)
10.12 Equipment Lease dated as of December 31, 1994 between Santa Fe
Imaging Center Ltd.(1) and Santa Fe Imaging Center Inc., a
subsidiary of the Company and the Company.(2)
10.13 Property lease dated as of December 31, 1994 among Santa Fe Imaging
Center, Ltd.(1) and Santa Fe Imaging Center Inc., a subsidiary of
the Company and the Company.(2)
10.14 Asset Purchase Agreement dated as of February 27, 1995 among the
Company, Open Air MRI, Inc., Community Radiology of Virginia, Inc.
and CROV Acquisition Corp., a subsidiary of the Company.(3)
10.15 Radiology Agreement dated as of February 27, 1995 between Stephen
Raskin, M.D., P.C. and CROV Acquisition Corp., a subsidiary of
the Company.(3)
10.16 Management Agreement dated as of February 27, 1995 among the Company,
Open Air MRI, Inc., Community Radiology of Virginia, Inc. and CROV
Acquisition Corp., a subsidiary of the Company.(3)
10.17 Escrow Agreement dated as of February 27, 1995 among the Company, Open
Air MRI, Inc., Community Radiology, Inc. and CROV Acquisition Corp.,
a subsidiary of the Company.(3)
-22-
<PAGE>
10.18 Guaranty dated as of February 27, 1995 of the Company.(3)
10.19 Stock Purchase Agreement dated as of February 15, 1995 among the
Company, Laborde Diagnostic, Inc. and Jeffrey J. Laborde, M.D.(4)
10.20 Employment Agreement dated as of February 15, 1995 among the Company,
the Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(4)
10.21 1995 Long Term Incentive Plan(5)
10.22 Consulting Agreement with Gordon Rausser(5)
10.23 Consulting Agreement with Coyote Consulting(5)
10.24 Consulting Agreement with Sawgrass Consulting(5)
10.25 Asset Purchase Agreement dated as of October 10, 1995 among the
Company, Central Alabama Medical Enterprises, Inc. and Advanced
Medical Imaging Center, Inc., a subsidiary of the Company(6)
10.26 Property Lease dated as of October 10, 1995 among the Company, Central
Alabama Medical Enterprises, Inc. and Advanced Medical Imaging
Center, Inc., a subsidiary of the Company(6)
10.27 Employment Agreement dated as of August 1, 1995 between the Company
and David Cohen(6) 10.28 Employment Agreement dated as of January 1,
1996 between the Company and Todd Smith (7)
10.29 Amendment to Employment Agreement of Jeffrey Goffman (7)
10.30 Amendment to Employment Agreement of Robert Burke, M.D. (7)
10.31 Amendment to Coyote Consulting Agreement (7)
10.32 Merger Agreement dated as of February 27, 1996 among the Company,
U.S. Imaging, Inc. and U.S.I. Acquisition Inc., a subsidiary
of the Company. (8)
10.33 Escrow Agreement dated as of June 4, 1996 among the Company and the
Reese General Trust. (8)
10.34 Asset Purchase Agreement dated as of June 28, 1996 among the Company,
Allegheny Open MRI/CT Group and USDL Pittsburgh Inc., a subsidiary
of the Company. (9)
10.35 Registration and Sale Rights Agreement dated as of June 28, 1996
among the Company and the Allegheny Open MRI/CT Group. (9)
10.36 Employment Agreement dated as of June 18, 1996 between the Company
and Joseph Paul. (9)
10.37 Employment Agreement dated as of June 1, 1996 between the Company
and Michael Karsch. (9)
10.38 Employment Agreement dated as of July 1, 1996 between the Company
and Andrew Shaw. (9)
10.39 Stock Purchase Agreement dated as of June 20, 1996 among the Company,
MediTek Health Corporation and HEICO Corporation. (10)
10.40 Registration and Sale Rights Agreement dated as of June 20, 1996
between the Company and HEICO Corporation (10)
11 Earnings Per Share Calculation
27 Financial Data Schedule
- ---------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (file no. 33-73414)
(2) Incorporated by reference to the Company's Report on Form 8-K dated
January 11, 1995.
(3) Incorporated by reference to the Company's Report on Form 8-K dated
February 27, 1995.
(4) Incorporated by reference to the Company's Report on Form 8-K dated
March 20,1994.
(5) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (file no. 33-93536)
(6) Incorporated by reference to the Company's Report on Form 8-K dated
October 30,1995
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(8) Incorporated by reference to the Company's Report on Form 8-K dated
June 5, 1996
(9) Incorporated by reference to the Company's Report on Form 8-K dated
June 28, 1996
(10) Incorporated by reference to the Company's Report on Form 8-K dated
July 24, 1996
(b) The Company filed a Report on the Form 8-K during the three months
ending June 30, 1996 dated.
(i) May 28, 1996 reporting the redemption of the Class A Warrants
-23-
<PAGE>
(ii) June 5, 1996 reporting the acquisition of U.S. Imaging Inc.
(iii) June 20, 1996 reporting the redemption of the Class B Warrants
(iv) June 28, 1996 reporting the acquisition of the assets of the Allegheny
Open MRI/CT Group and the hiring of Joseph Paul as President, Michael
Karsch as Executive Vice President and General Counsel and Paul Andrew
Shaw as Vice President and Chief Financial Officer
-24-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. DIAGNOSTIC LABS INC.
Dated: August 14, 1996 By: /s/ Jeffrey A. Goffman
-------------------------
Jeffrey A. Goffman
Chairman and Chief
Executive Officer
By: /s/ Paul Andrew Shaw
-------------------------
Paul Andrew Shaw
Vice President and
Chief Financial Officer
<PAGE>
------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
US DIAGNOSTIC LABS, INC.
MICA ACQUIRING CORPORATION
AND
MEDICAL IMAGING CENTERS OF AMERICA, INC.
DATED AUGUST 1, 1996
------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER..............................1
SECTION 1.1 The Merger........................................1
SECTION 1.2 Closing...........................................2
SECTION 1.3 Effective Time of the Merger......................2
SECTION 1.4 Effects of the Merger.............................2
SECTION 1.5 Articles of Incorporation; By-Laws................2
SECTION 1.6 Directors and Officers............................2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES..........3
SECTION 2.1 Effect on Capital Stock...........................3
(a) Common Stock of Merger Sub.............................3
(b) Cancellation of Treasury Stock and Parent-Owned
Company Common Stock...................................3
(c) Conversion of Company Common Stock.....................3
(d) Shares of Dissenting Holders...........................3
(e) Cancellation and Retirement of Company Common Stock....4
SECTION 2.2 Exchange of Certificates..........................4
(a) Exchange Agent.........................................4
(b) Exchange Procedures....................................4
(c) No Further Ownership Rights in Company Common Stock....5
(d) Termination of Exchange Fund...........................5
(e) No Liability...........................................5
(f) Investment of Exchange Fund............................6
SECTION 2.3 Treatment of Employee Options.....................6
ARTICLE III
REPRESENTATIONS AND WARRANTIES ...................7
SECTION 3.1 Representations and Warranties of the Company.....7
(a) Organization and Qualification; Subsidiaries...........7
(b) Articles of Incorporation and By-Laws..................7
(c) Capitalization.........................................7
(d) Authority Relative to Agreement........................8
(e) No Conflict; Required Filings and Consents.............8
(f) Compliance with Laws...................................9
(g) Company Reports and Financial Statements............. 10
-i-
<PAGE>
Page
(h) Information Supplied................................. 11
(i) Absence of Certain Changes or Events................. 11
(j) Absence of Litigation................................ 11
(k) Liabilities.......................................... 12
(l) Labor Matters........................................ 12
(m) Environmental Matters................................ 12
(n) Employee Benefit Company Plans....................... 13
(o) Tax Matters.......................................... 14
(p) Tangible Property.................................... 15
(q) Certain Contracts and Agreements..................... 15
(r) Insurance............................................ 16
(s) Transactions with Affiliates......................... 17
(t) Rights Agreements.................................... 17
(u) Scope of Representations............................. 17
SECTION 3.2 Representations and Warranties of Parent and
Merger Sub..................................... 17
(a) Corporate Organization............................... 17
(b) Charter and By-Laws.................................. 17
(c) Capitalization....................................... 18
(d) Authority Relative to Agreement...................... 18
(e) No Conflict; Required Filings and Consents........... 18
(f) Compliance........................................... 19
(g) Securities Documents................................. 19
(h) Information Supplied................................. 19
(i) Absence of Certain Changes or Events................. 19
(j) Absence of Litigation................................ 19
(k) Financing............................................ 20
(l) Scope of Representations............................. 20
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER; OTHER COVENANTS..... 20
SECTION 4.1 Conduct of Business of the Company
Pending the Merger............................. 20
SECTION 4.2 Conduct of Business of Merger Sub............... 22
SECTION 4.3 Shareholders' Meeting........................... 22
SECTION 4.4 Preparation of the Proxy Statement;
Preparation of Hart-Scott Act Filing .......... 23
SECTION 4.5 Access to Information; Confidentiality.......... 23
SECTION 4.6 No Solicitation................................. 24
SECTION 4.7 Employee Benefits Matters....................... 24
SECTION 4.8 Directors' and Officers' Indemnification
and Insurance.................................. 25
SECTION 4.9 Further Action; Reasonable Best Efforts......... 26
SECTION 4.10 Notification of Certain Matters................. 27
SECTION 4.11 Public Announcements............................ 27
-ii-
<PAGE>
Page
ARTICLE V
CONDITIONS OF MERGER....................... 27
SECTION 5.1 Conditions to Obligation of Each Party
to Effect the Merger........................... 27
(a) Shareholder Approval................................. 27
(b) Other Approvals...................................... 27
(c) No Injunctions or Restraints; Illegality;
Litigation.......................................... 28
(d) Proxy Statement...................................... 28
SECTION 5.2 Conditions to Obligations of Parent
and Merger Sub................................. 28
(a) Representations and Warranties....................... 28
(b) Performance of Obligations of the Company............ 28
(c) Burdensome Condition................................. 28
SECTION 5.3 Conditions to Obligations of the Company........ 28
(a) Opinion of Financial Advisor......................... 29
(b) Representations and Warranties....................... 29
(c) Performance of Obligations of Parent and Merger Sub.. 29
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER................ 29
SECTION 6.1 Termination..................................... 29
SECTION 6.2 Effect of Termination........................... 31
SECTION 6.3 Amendment....................................... 32
SECTION 6.4 Waiver.......................................... 32
ARTICLE VII
GENERAL PROVISIONS........................ 32
SECTION 7.1 Non-Survival of Representations,
Warranties and Agreements...................... 32
SECTION 7.2 Notices......................................... 32
SECTION 7.3 Certain Definitions............................. 33
SECTION 7.4 Severability.................................... 34
SECTION 7.5 Entire Agreement; Assignment.................... 34
SECTION 7.6 Parties in Interest............................. 35
SECTION 7.7 Applicable Law.................................. 35
SECTION 7.8 Headings........................................ 35
SECTION 7.9 Counterparts.................................... 35
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated August 1, 1996 (this
"Agreement"), among US DIAGNOSTIC LABS, INC., a Delaware corporation (the
"Parent"), MICA ACQUIRING CORPORATION, a California corporation and a direct
wholly owned subsidiary of Parent ("Merger Sub"), and MEDICAL IMAGING CENTERS
OF AMERICA, INC., a California corporation (the "Company").
WHEREAS, the Boards of Directors of the Company, Parent and Merger
Sub have approved, and deem it advisable and in the best interests of their
respective stockholders to consummate, the business combination transaction
provided for herein in which Merger Sub will merge with and into the Company
(the "Merger") with the Company being the surviving corporation in the Merger;
WHEREAS, in furtherance of such acquisition, it is proposed that
all the issued and outstanding shares of Common Stock, no par value, of
Company ("Company Common Stock"; shares of Company Common Stock being
hereinafter collectively referred to as the "Common Stock") will be acquired
in connection with the Merger for $11.75 per share in cash upon the terms and
subject to the limitations and conditions of this Agreement;
WHEREAS, the Directors of the Company have unanimously determined
that the Merger is fair to, and in the best interests of, the holders of
Common Stock, approved the Merger and recommended the approval and adoption of
this Agreement by the shareholders of the Company; and
WHEREAS, also in furtherance of such acquisition, the Boards of
Directors of Parent, Merger Sub, and Company have each approved this Agreement
and the Merger in accordance with the California Corporations Code
("California Law") upon the terms and subject to the conditions set forth
herein;
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, mutual covenants and agreements herein
contained and intending to be legally bound hereby, Parent, Merger Sub and the
Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with California Law,
at the Effective Time (as defined in
<PAGE>
2
Section 1.3 below), Merger Sub shall be merged with and into the Company. Upon
the Effective Time, the separate corporate existence of Merger Sub shall
cease, and the Company shall continue as the surviving corporation of the
Merger under the laws of the State of California (the "Surviving Corporation")
under the name "MEDICAL IMAGING CENTERS OF AMERICA, INC."
SECTION 1.2 Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 6.1, and subject to the satisfaction or waiver of the
conditions set forth in Article V, the closing of the Merger (the "Closing")
will take place as promptly as practicable (and in any event within five
business days) following satisfaction or waiver of the conditions set forth in
Article V, other than those conditions which by their terms are to be
satisfied at the Closing (the "Closing Date"), at the offices of Latham &
Watkins, 701 B Street, San Diego, California 92116, unless another date, time
or place is agreed to in writing by the parties hereto.
SECTION 1.3 Effective Time of the Merger. As soon as practicable
after the satisfaction or waiver of the conditions set forth in Article V, the
parties hereto shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") with the Secretary of
State of the State of California, in such form as required by, and executed in
accordance with the relevant provisions of, California Law (the date and time
of the filing of the Certificate of Merger with the Secretary of State of the
State of California (or such later time as is specified in the Certificate of
Merger) being the "Effective Time").
SECTION 1.4 Effects of the Merger. From and after the Effective
Time, the Merger shall have the effects set forth in the applicable provisions
of California Law.
SECTION 1.5 Articles of Incorporation; By-Laws. (a) At the
Effective Time, the Articles of Incorporation of the Surviving Corporation
shall be the Articles of Incorporation of Merger Sub, as in effect immediately
prior to the Effective Time.
(b) At the Effective Time, the By-Laws of the Surviving Corporation
shall be the By-Laws of the Merger Sub, as in effect immediately prior to the
Effective Time, until thereafter amended or repealed in accordance with their
terms and the Articles of Incorporation of the Surviving Corporation and as
provided by law.
SECTION 1.6 Directors and Officers. The Directors of Merger Sub
immediately prior to the Effective Time shall be the initial Directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and By-Laws of the Surviving Corporation, and the officers of
the Company immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed, as the case may be, and qualified.
<PAGE>
3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of the holders of any
shares of Common Stock, or any shares of capital stock of Merger Sub:
(a) Common Stock of Merger Sub. Each share of Common Stock, par
value $.01 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time shall be exchanged for one share of validly issued,
fully paid and nonassessable Common Stock of the Surviving Corporation, which
shall be all of the issued and outstanding capital stock of the Surviving
Corporation as of the Effective Time.
(b) Cancellation of Treasury Stock and Parent-Owned Company Common
Stock. Each share of Company Common Stock that is owned by the Company or by
any subsidiary of the Company, and each share of Company Common Stock that is
owned by Parent, Merger Sub or any other subsidiary of Parent, shall
automatically be cancelled and retired and shall cease to exist, and no other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Company Common Stock. Except as otherwise
provided herein and subject to Section 2.1(d), each issued and outstanding
share of Company Common Stock (other than shares to be cancelled in accordance
with Section 2.1(b)) shall be converted into the right to receive cash from
Parent in an amount equal to $11.75, payable to the holder thereof, without
interest thereon (the "Merger Consideration" or the "Cash Price"). As used in
this Agreement, references to "dollars" and "$" are to the lawful currency of
the United States of America, unless otherwise indicated.
(d) Shares of Dissenting Holders. Notwithstanding anything in this
Agreement to the contrary but only to the extent required by California Law,
shares of Company Common Stock that are issued and outstanding immediately
prior to the Effective Time and that are held by holders of Company Common
Stock who comply with all the provisions of law of the State of California
concerning the right of holders of Company Common Stock to dissent from the
Merger and require appraisal of their shares of Company Common Stock
("Dissenting Shareholders, with the shares of Company Common Stock held by
such Dissenting Shareholders to be referred to as the "Dissenting Shares")
shall not be converted into the right to receive the Merger Consideration but
shall become the right to receive such consideration as may be determined to
be due such Dissenting Shareholder pursuant to the law of the State of
California; provided, however, that (i) if any Dissenting Shareholder shall
subsequently deliver a written withdrawal of his or her demand for appraisal
(with the written approval of the Surviving Corporation, if such withdrawal is
not tendered within 60 days after the Effective Time), or (ii) if any
Dissenting Shareholder fails to establish and perfect his or her entitlement
to appraisal rights as provided by applicable law, or (iii) if within 120 days
of the Effective Time neither any Dissenting Shareholder nor the Surviving
Corporation has filed a petition demanding a determination of the value of all
shares of Company Common Stock outstanding at the
<PAGE>
4
Effective Time and held by Dissenting Shareholders in accordance with
applicable law, then such Dissenting Shareholder or Shareholders, as the case
may be, shall forfeit the right to appraisal of such shares and each of such
shares shall thereupon be deemed to have been converted into the right to
receive, as of the Effective Time, the Merger Consideration as contemplated by
Section 2.1, without interest. The Company shall give Parent and Merger Sub
(A) prompt notice of any written demands for appraisal, withdrawals of demands
for appraisal and any other related instruments received by the Company, and
(B) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal. The Company will not voluntarily make any payment with
respect to any demands for appraisal and will not, except with the prior
written consent of Parent, settle or offer to settle any demand.
(e) Cancellation and Retirement of Company Common Stock. As of the
Effective Time, all shares of Company Common Stock (in each case, other than
shares referred to in Section 2.1(b) and Dissenting Shares) issued and
outstanding immediately prior to the Effective Time, shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease
to exist, and each holder of a certificate representing any such shares of
Company Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration upon surrender of such
certificate in accordance with Section 2.2.
SECTION 2.2 Exchange of Certificates.
(a) Exchange Agent; Exchange Date. (i) Prior to the mailing of the
Company's Proxy Statement (as defined in Section 3.1(e)(ii)), Parent shall
appoint a bank or trust company located in the United States (which may not be
an affiliate of Parent) to act as exchange agent (the "Exchange Agent") for
the payment of the Merger Consideration. At or prior to the Effective Time,
Parent shall deposit with the Exchange Agent, for the benefit of the holders
of shares of Company Common Stock, for exchange in accordance with this
Article II, the Merger Consideration. Each person who, on or prior to the
Exchange Date (as defined in this Section 2.2) is a record holder of shares of
Company Common Stock will be entitled to receive the Merger Consideration as
contemplated by Section 2.1 upon surrender of such certificate in accordance
with this Section 2.2.
(ii) The Company shall prepare and mail the Proxy Statement to
the record holders of Company Common Stock as of the record date for the
Shareholders' Meeting (as defined in Section 4.3). The Company will use its
best efforts to make the Proxy Statement available to all persons who become
holders of Company Common Stock during the period between such record date and
the Exchange Date. For purposes of this Agreement, the "Exchange Date" shall
mean 5:00 p.m., New York City time on the business day next preceding the date
of the Shareholders' Meeting.
(b) Exchange Procedures. As soon as practicable after the Effective
Time, each holder of an outstanding certificate or certificates which prior
thereto represented shares of Company Common Stock shall, upon surrender to
the Exchange Agent of such certificate or certificates and acceptance thereof
by the Exchange Agent, be entitled to the amount of cash into which the
aggregate number of shares of Company Common Stock previously represented by
such certificate or certificates surrendered shall have been converted
pursuant to this Agreement. The Exchange
<PAGE>
5
Agent shall accept such certificates upon compliance with such reasonable
terms and conditions as the Exchange Agent may impose in order to effect an
orderly exchange thereof in accordance with normal exchange practices. After
the Effective Time, there shall be no further transfer on the records of the
Company or its transfer agent of certificates representing shares of Company
Common Stock and if such certificates are presented to the Company for
transfer, they shall be cancelled against delivery of cash as hereinabove
provided. If any cash is to be remitted to a person other than the registered
holder of the certificate for Company Common Stock surrendered for exchange,
it shall be a condition of such exchange that the certificate so surrendered
shall be properly endorsed, with signature guaranteed, or otherwise in proper
form for transfer and that the person requesting such exchange shall pay to
Parent or the Exchange Agent any transfer or other taxes required by reason of
the payment of cash to a person other than the registered holder of the
certificate surrendered, or establish to the satisfaction of Parent or the
Exchange Agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2(b), each certificate for
shares of Company Common Stock shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration as contemplated by Section 2.1. No interest will be paid or will
accrue on any cash payable as Merger Consideration.
(c) No Further Ownership Rights in Company Common Stock. All cash
paid upon the surrender of certificates representing shares of Company Common
Stock in accordance with the terms of this Article II shall be deemed to have
been paid in full satisfaction of all rights pertaining to the shares of
Company Common Stock theretofore represented by such certificates, subject,
however, to the Surviving Corporation's obligation, with respect to shares of
Company Common Stock outstanding immediately prior to the Effective Time, to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this Agreement
or prior to the date of this Agreement and which remain unpaid at the
Effective Time.
(d) Termination of Exchange Fund. Any portion of the Merger
Consideration deposited with the Exchange Agent pursuant to this Section 2.2
(the "Exchange Fund") which remains undistributed to the holders of the
certificates representing shares of Company Common Stock for six months after
the Effective Time shall be delivered to Parent, upon demand, and any holders
of shares of Company Common Stock who have not theretofore complied with this
Article II shall thereafter look only to Parent and only as general creditors
thereof for payment of their claim for cash.
(e) No Liability. None of Parent, Merger Sub, the Company or the
Exchange Agent shall be liable to any person in respect of any cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any certificates representing
shares of Company Common Stock shall not have been surrendered prior to five
years after the Effective Time (or immediately prior to such earlier date on
which any cash in respect of such certificate would otherwise escheat to or
become the property of any Governmental Entity (as defined in Section
3.1(e)(ii)), any such cash shall, to the extent permitted by applicable law,
become the property of Parent, free and clear of all claims or interest of any
person previously entitled thereto.
<PAGE>
6
(f) Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by Parent, on a daily
basis. Any interest and other income resulting from such investments shall be
paid to Parent.
SECTION 2.3 Treatment of Employee Options. Prior to the Effective
Time, the Board of Directors of the Company (or, if appropriate, any Committee
thereof) shall adopt appropriate resolutions and take all other actions
necessary to provide for the cancellation, effective at the Effective Time, of
all the outstanding stock options, stock appreciation rights, limited stock
appreciation rights and performance units (the "Options") heretofore granted
under any stock option, performance unit or similar plan of the Company (the
"Stock Plans"). Immediately prior to the Effective Time, (i) each Option,
whether or not then vested or exercisable, shall no longer be exercisable but
shall entitle each holder thereof, in cancellation and settlement therefor, to
payments in cash (subject to any applicable withholding taxes, the "Cash
Payment"), at the Effective Time, equal to the product of (x) the total number
of shares of Common Stock subject or related to such Option, whether or not
then vested or exercisable, and (y) the excess of the Cash Price over the
exercise price per share of Common Stock subject or related to such Option,
each such Cash Payment to be paid to each holder of an outstanding Option at
the Effective Time; provided, however, that with respect to any person subject
to Section 16 of the Exchange Act (as defined below), any such amount shall be
paid as soon as practicable after the first date payment can be made without
liability to such person under Section 16(b) of the Exchange Act (as defined
below), and (ii) each share of Common Stock previously issued in the form of
grants of restricted stock or grants of contingent shares shall fully vest. As
provided herein, the Stock Plans and any other plan, program or arrangement
providing for the issuance or grant of any other interest in respect of the
capital stock of the Company or any subsidiary (collectively with the Stock
Plans, referred to as the "Stock Incentive Plans") shall terminate as of the
Effective Time and the Company shall ensure that following the Effective Time
no holder of an Option or any participant in any Stock Incentive Plans shall
have any right thereunder to acquire capital stock of the Company, Parent or
the Merger Sub, except as provided in the proviso to clause (i) of this
Section 2.3. The Company will take all reasonable steps to ensure that, as of
the Effective Time, none of the Parent, the Company or any of their respective
subsidiaries is or will be bound by any Options, other options, warrants,
rights or agreements which would entitle any person, other than Parent or its
affiliates, to own any capital stock of the Company, Merger Sub or any of
their respective subsidiaries or to receive any payment in respect thereof.
The Company will use its best efforts to obtain all necessary consents and
releases to ensure that after the Effective Time, the only rights of the
holders of Options to purchase shares of Company Common Stock in respect of
such Options will be to receive the Cash Payment in cancellation and
settlement thereof. Notwithstanding any other provision of this Section 2.3 to
the contrary, payment may be withheld with respect to any Option until
necessary consents and releases are obtained.
(b) All Stock Plans shall terminate as of the Effective Time and
the provisions in any other Company Plans (as defined in Section 3.1(n))
providing for the issuance, transfer or grant of any capital stock of the
Company or any interest in respect of any capital stock of the Company shall
be amended as of the Effective Time to provide no continuing rights to
acquire, hold, transfer or grant any capital stock of the Company or any
interest in capital stock of the Company
<PAGE>
7
(other than in respect of cash payments through the Merger), and the Company
shall ensure that following the Effective Time no holder of an Option or any
participant in any Stock Plans shall have any right thereunder to acquire any
capital stock of the Company, Parent or the Surviving Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company. Except
as set forth in the Disclosure Schedules ("Company Disclosure Schedules"), the
Company hereby represents and warrants to Parent and Merger Sub as follows:
(a) Organization and Qualification; Subsidiaries. Each of the
Company and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
and has the requisite corporate power and authority and any necessary
governmental approvals to own, lease and operate its properties and to carry
on its business as it is now being conducted, except where the failure to be
so organized, existing and in good standing or to have such power, authority
and governmental approvals could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect (as defined below) on
the Company. The Company and each of its subsidiaries is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary, except for such failures to be so duly qualified or
licensed and in good standing which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company.
When used with respect to the Company or any of its subsidiaries,
the term "Material Adverse Effect" means any material adverse change in or
effect on (i) the business, results of operations or condition (financial or
other) of the Company and its subsidiaries taken as a whole or (ii) the
ability of the Company to consummate any of the transactions contemplated
hereby.
(b) Articles of Incorporation and By-Laws. The Company has
heretofore furnished to Parent a complete and correct copy of the Articles of
Incorporation and the By-Laws of the Company and the equivalent organizational
documents of each subsidiary of the Company as currently in effect. Neither
the Company nor any subsidiary thereof is in violation of any of the
provisions of its Articles of Incorporation or By-Laws or equivalent
organizational document.
(c) Capitalization. The authorized capital stock of the Company
consists of 30,000,000 shares of Company Common Stock and 5,000,000 shares of
preferred stock, no par value ("Company Preferred Stock"). As of July 1, 1996
(A) 2,695,226 shares of Company Common Stock were issued and outstanding, all
of which are validly issued, fully paid and nonassessable and not subject to
preemptive rights; (B) 445,593 shares of Company Common Stock were issuable
pursuant
<PAGE>
8
to outstanding Options and warrants; and (C) no more than 360,000 shares were
available for issuance under the Company's outstanding convertible
subordinated debt. The number of Options and warrants, by exercise price,
outstanding on July 1, 1996, are set forth in Schedule 3.1(c) of the Company
Disclosure Schedule. As of the date of this Agreement, no shares of Company
Preferred Stock are issued and outstanding. The authorized capital stock and
issued and outstanding stock of each subsidiary is set forth in Schedule
3.1(c) of the Company Disclosure Schedule. Except as set forth in this Section
3.1(c) or Schedule 3.1(c) of the Company Disclosure Schedule, as of the date
of this Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or
unissued capital stock of, or other equity interests in, the Company or any
subsidiary of the Company obligating the Company or any subsidiary of the
Company to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any subsidiary of the Company. Between July 1,
1996 and the date of this Agreement, no shares of Company Common Stock have
been issued by the Company, except upon the exercise of stock options
described above. Except as set forth in Schedule 3.1(c) of the Company
Disclosure Schedule, there are no outstanding contractual obligations of the
Company or any subsidiary to repurchase, redeem or otherwise acquire any
shares of Company Common Stock or any capital stock of, or any equity interest
in, any subsidiary. Except as described in Schedule 3.1(c) of the Company
Disclosure Schedule, each outstanding share of capital stock of, or other
equity interest in, each subsidiary of the Company is duly authorized, validly
issued, fully paid and nonassessable.
(d) Authority Relative to Agreement. The Company has all necessary
corporate power and authority to execute and deliver this Agreement, to
perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than the approval and adoption of the
Merger and this Agreement by the holders of a majority of the outstanding
shares of Company Common Stock). This Agreement has been duly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by the other parties hereto, constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms. The only vote of the holders of any class or series of outstanding
securities of the Company required for approval of this Agreement and the
Merger is the affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock.
(e) No Conflict; Required Filings and Consents. Except as set forth
on Schedule 3.1(e), and (i) other than in connection with or in compliance
with the specific provisions of (i) the California Law relating to the filing
of the Certificate of Merger and other appropriate merger documents, if any,
and the approval of the Merger by a majority of the shares of Common Stock,
(ii) the Exchange Act (as defined below), (iii) the "blue sky" laws of various
states, (iv) the Hart-ScottRodino Improvements Act of 1976, as amended (the
"Hart-Scott Act") relating to the filing of appropriate documents regarding
the Merger with the Antitrust Division of the Department of Justice and the
Federal Trade Commission (collectively, the "Antitrust Entities") and the
approval of the
<PAGE>
9
Merger by the Antitrust Entities, and (v) applicable local permit laws, rules
and regulations pertaining to the operation of the business of the Company and
its subsidiaries, the execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated hereby
will not: (A) violate any provision of the Articles of Incorporation or
By-Laws (or other organizational document) of the Company or any of its
subsidiaries; (B) violate any statute, ordinance, rule, regulation, order or
decree of any court or of any governmental or regulatory body, agency or
authority applicable to the Company or any of its subsidiaries or by which any
of their respective properties or assets may be bound; (C) require any filing
with, or permit, consent or approval of, or the giving of any notice to, any
governmental or regulatory body, agency or authority; or (D) result in a
violation or breach of, conflict with, constitute (with or without due notice
or lapse of time or both) a default under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or any of its subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease, franchise agreement or other instrument
or obligation to which the Company or any of its subsidiaries is a party, or
by which it or any of their respective properties or assets, except in the
case of clauses (A), (B) and (C) above for such filings, permits, consents,
approvals or violations, which would not have a Material Adverse Effect on the
condition of the Company and its subsidiaries, taken as a whole, or could be
reasonably likely to prevent or materially delay consummation of the
transactions contemplated by this Agreement and except as set forth in
Schedule 3.1(e) of the Company Disclosure Schedule.
(ii) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby by
the Company do not and will not require any consent, approval, authorization
or permit of, action by, filing with or notification to, any United States
federal, state or local court, administrative agency or commission, or entity
created by rule, regulation or order of any United States federal, state or
local commission or other governmental agency, authority or instrumentality (a
"Governmental Entity"), except for: (A) the filing with, and approval by, the
SEC of (1) a proxy statement relating to the Shareholders' Meeting referred to
in Section 4.3 (such proxy statement as amended or supplemented from time to
time, the "Proxy Statement") and (2) such other filings under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in
connection with this Agreement and the transactions contemplated hereby and
the obtaining from the SEC of such orders as may be required in connection
therewith; (B) applicable filings under state anti-takeover laws, if any; (C)
the filing and recordation of the Certificate of Merger as required by
California Law; (D) applicable filings under the Hart-Scott Act; and (E) such
other consents, approvals and authorizations of Governmental Entities as shall
have been specified by the Company to Parent in writing prior to the date of
this Agreement.
(f) Compliance with Laws. Except as disclosed Schedule 3.1(f) of
the Company Disclosure Schedule, the Company and its subsidiaries are in
compliance with all applicable laws, regulations, orders, judgments and
decrees except where the failure to so comply would not have a Material
Adverse Effect on the Company and its subsidiaries taken as a whole or could
be reasonably likely to prevent or materially delay consummation of the
transactions contemplated by this Agreement. There is no claim, action,
proceeding or investigation pending or, to the best
<PAGE>
10
knowledge of the Company, threatened against the Company or any subsidiary of
the Company, by, on behalf of or before any arbitrator or Governmental Entity
which (i) individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect on the Company or (ii) seeks to and is
reasonably likely to significantly delay or prevent the consummation of the
Merger. As of the date of this Agreement, no investigation by any Governmental
Entity with respect to the Company or any of its subsidiaries is pending or,
to the best knowledge of the Company, threatened, other than, in each case,
those the outcome of which, individually or in the aggregate, will not have a
Material Adverse Effect on the Company.
(g) Company Reports and Financial Statements. (i) Since December
31, 1995, the Company has filed all forms, reports and documents with the
Securities and Exchange Commission (the "Commission") required to be filed by
it pursuant to the federal securities laws and the Commission rules and
regulations thereunder (the "Commission Filings"), and all forms, reports and
documents filed with the Commission have complied in all material respects
with all applicable requirements of the federal securities laws and the
Commission rules and regulations promulgated thereunder. As of their
respective dates, the Commission Filings did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets included in the Commission Filings were prepared
in accordance with United States generally accepted accounting principles (as
in effect from time to time) applied on a consistent basis (except as may be
indicated therein or in the notes or schedules thereto), and fairly present in
all material respects the consolidated financial position of the Company and
its consolidated subsidiaries as of the dates thereof and the results of their
operations and their cash flows for the periods then ended (subject, in the
case of any unaudited financial statements, to normal year-end audit
adjustments).
(ii) The Company will deliver to Parent as soon as they become
available true and complete copies of any report or statement mailed by it to
its shareholders generally or filed by it with the Commission subsequent to
the date hereof and prior to the Effective Time. As of their respective dates,
such reports and statements (excluding any information therein provided by
Parent or Merger Sub, as to which the Company makes no representation) will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading and will comply in all material respects with all applicable
requirements of the federal securities laws and the Commission rules and
regulations thereunder. The consolidated financial statements of the Company
to be included in such reports and statements (excluding any information
therein provided by Parent or Merger Sub, as to which the Company makes no
representation) will be prepared in accordance with generally accepted
accounting principles (as in effect from time to time) applied on a consistent
basis (except as may be indicated therein or in the notes or schedules
thereto), and will fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the results of their operations and their cash flows for the
periods then ended (subject, in the case of any unaudited financial
statements, to normal year-end audit adjustments).
<PAGE>
11
(h) Information Supplied. None of the information included in the
Proxy Statement (other than information supplied by Parent or Merger Sub for
inclusion in the Proxy Statement) will, at the date it is first mailed to the
Company's shareholders or at the time of the Shareholders' Meeting, contain
any statement which, in the light of the circumstances under which such
statement is made, is false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the
Shareholders' Meeting or any amendment or supplement thereto. The Proxy
Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with respect
to statements made based on information supplied by Parent or Merger Sub for
inclusion in the Proxy Statement.
(i) Absence of Certain Changes or Events. Except as otherwise
disclosed in Schedule 3.1(i) of the Company Disclosure Schedule or as
otherwise contemplated by this Agreement, since March 31, 1996 and up to the
date of this Agreement, there has not been (i) any change, event or
development in or affecting the Company that constitutes or would reasonably
be expected to have either individually or in the aggregate a Material Adverse
Effect on the Company, (ii) any change by the Company in its accounting
methods, principles or practices, except as required by changes in generally
accepted accounting principles or as recommended by the Company's independent
accountants and consented to in writing by Parent (which consent shall not be
unreasonably withheld) prior to such change, (iii) any declaration, setting
aside or payment of any dividends or distributions in respect of any series of
capital stock of the Company, (iv) any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including without limitation the granting of
stock options, stock appreciation rights, performance awards, or restricted
stock awards), stock purchase or other employee benefit plan or agreement or
arrangement, or any other increase in the compensation payable or to become
payable to any present or former directors, officers above the rank of Vice
President of the Company or any of its subsidiaries, except for increases in
base compensation and annual cash bonuses, in each case in the ordinary course
of business and consistent with past practice or (v) any other action which,
if it had been taken after the date hereof, would have required the consent of
Parent under Section 4.1 hereof.
(j) Absence of Litigation. Except as disclosed in Schedule 3.1(j)
of the Disclosure Schedule, there are no suits, claims, actions, proceedings
or investigations pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries, or any properties or rights of
the Company or any of its subsidiaries, before any court, arbitrator or other
Governmental Entity, domestic or foreign, that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect on
the Company or to delay or prevent the consummation of the transactions
contemplated hereby beyond December 31, 1996. Neither the Company nor any of
its subsidiaries nor any of their respective properties is or are subject to
any order, writ, judgment, injunction, decree, determination or award having,
or which could reasonably be expected to have, a Material Adverse Effect on
the Company or which could prevent or delay the consummation of the
transactions contemplated hereby beyond December 31, 1996.
<PAGE>
12
(k) Liabilities. Except as otherwise contemplated by this Agreement
since March 31, 1996 and up to the date of this Agreement, neither the Company
nor any of its subsidiaries has incurred any material outstanding claims,
liabilities or indebtedness, contingent or otherwise, that would be required
to be disclosed in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles applied on a
consistent basis, other than liabilities incurred subsequent to March 31, 1996
in the ordinary course of business not involving borrowings by the Company.
(l) Labor Matters. Neither the Company nor any of its subsidiaries
is a party to any collective bargaining agreement. Neither the Company nor any
of its subsidiaries has (i) had any employees strikes, work stoppages,
slowdowns or lockouts, (ii) received any requests for certifications of
bargaining units or any other requests for collective bargaining, or (iii)
become aware of any efforts to organize employees of the Company or any of its
subsidiaries into a collective bargaining unit.
(m) Environmental Matters. (i) For purposes of this Agreement, the
following terms shall have the following meanings: (A) "Hazardous Substances"
means a) those substances defined in or regulated under the following federal
statutes and their state counterparts, as each may be amended from time to
time, and all regulations thereunder: the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Water Act,
the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide,
Fungicide, and Rodenticide Act, the Toxic Substances Control Act and the Clean
Air Act; b) petroleum and petroleum products, byproducts and breakdown
products including crude oil and any fractions thereof; c) natural gas,
synthetic gas, and any mixtures thereof; d) polychlorinated biphenyls; e) any
other chemicals, materials or substances defined or regulated as toxic or
hazardous or as a pollutant or contaminant or as a waste under any applicable
Environmental Law; and f) any substance with respect to which a federal, state
or local agency requires environmental investigation, monitoring, reporting or
remediation; and (B) "Environmental Laws" means any federal, state, foreign,
or local law, rule or regulation, now or hereafter in effect and as amended,
and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, relating to
pollution or protection of the environment, health, safety or natural
resources, including without limitation, those relating to a) releases or
threatened releases of Hazardous Substances or materials containing Hazardous
Substances or b) the manufacture, handling, transport, use, treatment, storage
or disposal of Hazardous Substances or materials containing Hazardous
Substances.
(ii) Except as described in Schedule 3.1(m) of the Company
Disclosure Schedule or as would not individually or in the aggregate result in
or be likely to result in any fine tax, assessment, penalty, loss, cost,
damage, liability, expense or other payment related thereto in excess of
$20,000: (A) the Company and each subsidiary are and have been in compliance
with all applicable Environmental Laws; (B) the Company and each subsidiary
have obtained all permits, approvals, identification numbers, licenses or
other authorizations required under any applicable Environmental Laws
("Environmental Permits") and are and have been in compliance with their
requirements; (C) such Environmental Permits are transferable to the Surviving
Corporation
<PAGE>
13
pursuant to the Merger without the consent of any Governmental Authority; (D)
there are no underground or aboveground storage tanks or any surface
impoundments, septic tanks, pits, sumps or lagoons in which Hazardous
Substances are being or have been treated, stored or disposed of on any owned
or leased real property or on any real property formerly owned, leased or
occupied by the Company or any subsidiary; (E) there is, to the best knowledge
of the Company, no asbestos or asbestos-containing material on any owned or
leased real property in violation of applicable Environmental Laws; (F) the
Company and the subsidiaries have not released, discharged or disposed of
Hazardous Substances on any real property owned or leased or on any real
property formerly owned or leased by the Company or any subsidiary and none of
such property is contaminated with any Hazardous Substances; (G) neither the
Company nor any of the subsidiaries is undertaking, and neither the Company
nor any of the subsidiaries has completed, any investigation or assessment or
remedial or response action relating to any such release, discharge or
disposal of or contamination with Hazardous Substances at any site, location
or operation, either voluntarily or pursuant to the order of any Governmental
Authority or the requirements of any Environmental Law; and (H) there are no
pending or, to the knowledge of the Company, past or threatened actions,
suits, demands, demand letters, claims, liens, notices of non-compliance or
violation, notices of liability or potential liability, investigations,
proceedings, consent orders or consent agreements relating in any way to
Environmental Laws, any Environmental Permits or any Hazardous Substances
against the Company or any subsidiary or any of their property, and there are
no circumstances that can reasonably be expected to form the basis of any such
Environmental Claim, including without limitation with respect to any off-site
disposal location presently or formerly used by the Company or any of the
subsidiaries or any of their predecessors.
(iii) The Company and the subsidiaries have made available to Parent
copies of any environmental reports, studies or analyses in its possession or
under its control relating to owned or leased real property or the operations
of the Company or the subsidiaries.
(iv) Schedule 3.1(m) of the Company Disclosure Schedule sets forth
a list of all real property currently owned or owned within the last three
years by the Company or any of the subsidiaries.
(n) Employee Benefit Company Plans. (i) Schedule 3.1(n) of the
Company Disclosure Schedule lists (i) all employee benefit plans, programs and
arrangements maintained for the benefit of any current or former employee,
officer or Director of the Company or any subsidiary (the "Company Plans") and
(ii) all written contracts and agreements relating to employment and all
severance agreements with any of the directors, officers or employees of the
Company or any subsidiaries (other than, in each case, any such contract or
agreement that is terminable by the Company or any subsidiary at will without
penalty or other consequence of Material Adverse Effect). Schedule 3.1(n) of
the Company Disclosure Schedule sets forth the name of each officer or
employee of the Company or any subsidiary with an annual base compensation
greater than $75,000 and the annual base compensation applicable to each such
officer or employee. The Company has made available to Parent a copy of each
Company Plan, each material document prepared in connection with each Company
Plan and each Company employment contract. None of the Company Plans is a
multiemployer plan within the meaning of the Employee Retirement
<PAGE>
14
Income Security Act of 1974, as amended ("ERISA"). Except as set forth in
Schedule 3.1(n) of the Company Disclosure Schedule, none of the Company Plans
promises or provides retiree medical or life insurance benefits to any person.
Each Company Plan intended to be qualified under Section 401(a) of the
Internal Revenue Code, as amended (the "Code") is so qualified. Each Company
Plan has been operated in all material respects in accordance with its terms
and the requirements of applicable law. The Company has not incurred any
direct or indirect material liability under, arising out of or by operation of
Title IV of ERISA in connection with the termination of, or withdrawal from,
any Company Plan or other retirement plan or arrangement and, as of the date
hereof, no fact exists or event has occurred that would reasonably be expected
to give rise to any such liability. Except as set forth in Schedule 3.1(n) of
the Company Disclosure Schedule, no Company Plan is or has been covered by
Title IV of ERISA or Section 412 of the Code. Except as set forth in Schedule
3.1(n) of the Company Disclosure Schedule, the Company and the subsidiaries
have complied in all respects with all laws, rules and regulations pertaining
to employment practices including, without limitation, the Worker Adjustment
Retraining Notification Act, the wage hour laws, the Americans with
Disabilities Act, and the discrimination laws, and no fact or event exists
that could give rise to liability under such acts, laws, rules or regulations,
except for such occurrences, noncompliances and liabilities as would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company.
(o) Tax Matters. Except as set forth in Schedule 3.1(o) of the
Company Disclosure Schedule, the Company and each of the subsidiaries have (i)
filed all federal, state, local and foreign tax returns required to be filed
by them prior to the date of this Agreement (taking into account extensions),
(ii) paid or accrued all taxes shown to be due on such returns and paid all
applicable ad valorem and value added taxes as are due and (iii) paid or
accrued all taxes for which a notice of assessment or collection has been
received (other than amounts being contested in good faith by appropriate
proceedings), except in the case of clause (i), (ii) or (iii) for any such
filings, payments or accruals which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. Except as set forth
in Schedule 3.1(o) of the Company Disclosure Schedule, neither the Internal
Revenue Service nor any other federal, state, local or foreign taxing
authority has asserted any claim for taxes, or to the best knowledge of the
Company, is threatening to assert any claims for taxes, which claims,
individually or in the aggregate, could have a Material Adverse Effect on the
Company. The Company has open years for federal, state and foreign income tax
returns only as set forth in Schedule 3.1(o) of the Company Disclosure
Schedule. The Company and each subsidiary have withheld or collected and paid
over to the appropriate governmental authorities (or are properly holding for
such payment) all taxes required by law to be withheld or collected, except
for amounts which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. There are no liens for taxes upon the assets of
the Company or any subsidiary (other than liens for taxes that are not yet due
or that are being contested in good faith by appropriate proceedings), except
for liens which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(p) Tangible Property.
<PAGE>
15
(i) The Company and the subsidiaries have good and marketable title
to all their tangible properties and assets, with only such exceptions as,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company. All of the assets of the Company and the subsidiaries have been
maintained and repaired for their continued operation and are in good
operating condition, reasonable wear and tear excepted, and usable in the
ordinary course of business.
(ii) Except as set forth in Schedule 3.1(p) of the Company
Disclosure Schedule, all of such property is free and clear of all liens,
except (A) such liens as are disclosed in Schedule 3.1(p) of the Company
Disclosure Schedule, (B) liens for taxes not yet due and payable, (C) liens of
landlords, vendors, warehousemen and mechanics, and (D) such imperfections of
title, easements and encumbrances, if any, as are not material in character,
amount or expense, or do not materially detract from the value or interfere
with the present use of the property subject thereto or affected thereby. To
the best knowledge of the Company, all properties utilized in the Company's
business (whether owned or leased) are in material compliance with all
applicable laws, statutes, rules and regulations (including, without
limitation, building, zoning and environmental laws) and all material
covenants, conditions, restrictions or easements affecting the property or its
use or occupancy, the failure to comply with which could reasonably be
expected to have a Material Adverse Effect, and, to the best knowledge of the
Company, no notices of any material violations thereof have been received.
(iii) Each of the leases under which the material properties of the
Company are leased is unmodified and in full force and effect (in the form
made available pursuant to Section 3.1(p) hereof), and, to the best knowledge
of the Company, there are no other agreements, written or oral, between the
Company and any third parties claiming an interest in the Company's interest
in the leased property or otherwise affecting its use and occupancy thereof.
Except as set forth in Schedule 3.1(p) of the Company Disclosure Schedule, the
Company is not in default under the leases and no material defaults (whether
or not subsequently cured) by the Company have been alleged thereunder which
in either case could be reasonably expected to have a Material Adverse Effect.
To the best of the Company's knowledge, each lessor named in any of the leases
is not in default thereunder, and no defaults (whether or not subsequently
cured) by such lessor have been alleged thereunder.
(q) Certain Contracts and Agreements. Schedule 3.1(q) of the
Company Disclosure Schedule lists (i) each contract which is required by its
terms or is currently expected to result in the payment or receipt by the
Company or any subsidiary of more than $100,000 and which is not terminable by
the Company or any subsidiary without the payment of any penalty or fine on
not more than three months' notice (a "Material Contract"), (ii) all material
agreements relating to joint ventures, partnerships and equity or debt
investments, (iii) all noncompete agreements with the Company or the
subsidiaries (whether as beneficiary or obligor), (iv) all agreements, notes,
bonds, indentures or other instruments governing indebtedness for borrowed
money, and any guarantee thereof or the pledge of any assets or other security
therefor, (v) all agreements with any affiliate (other than the Company or a
wholly owned subsidiary) of the Company or the subsidiaries to which the
Company or any subsidiary is a party, (vi) each agreement affording
registration rights as to any
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16
securities of the Company under the Securities Act of 1933, as amended (the
"Securities Act)," (vii) each category of personal property owned or leased by
the Company and each asset within any such category which has a book value or
current market value in excess of $100,000 or group of related such items
valued in excess of $500,000 or which is leased under an agreement providing
for annual lease payments in respect thereof in an amount in excess of
$100,000, (viii) each registration, certificate or application with respect to
the intellectual property and all licenses of intellectual property by the
Company from or to any third party and all other agreements to which the
Company is a party regarding intellectual property excluding, however those
relating to commercially available ("canned") software, (ix) each policy of
fire, liability, title, errors and omissions and other forms of insurance held
by the Company and of all claims in excess of $50,000 pending thereunder, (x)
each officer and director of the Company and subsidiaries which is a
corporation, (xi) each general partner or joint venture partner of any entity
in which the Company or any subsidiary is a general partner or joint venture
partner other than the Company, (xii) each agreement to which the Company or a
subsidiary is a party restricting or otherwise affecting voting or other
rights with respect to any securities of the Company or subsidiaries,
including voting trusts, voting agreements, irrevocable proxies, preemptive
rights, shareholders' agreements, redemption agreements and buy-sell
agreements, (xiii) each material agreement between the Company or any
subsidiary and any hospital, hospital management company, health maintenance
organization or other managed care payor, (xiv) each agreement between or
among the Company or any subsidiary, (xv) each management contract and
contract with independent contractors or consultants (or similar arrangements)
including exclusive rights or requiring payments in excess of $100,000
individually or $500,000 in the aggregate to which the Company or any
subsidiary is a party, which are not cancelable without penalty or further
payment upon 30 days' or less notice, (xvi) each agreement of the Company or
any of the subsidiaries not made in the ordinary course of business that is to
be performed on or after the date of this Agreement; and (xvii) to the extent
not listed pursuant to subsections (i) through (xvi) of this Section 3.1(q),
each exhibit the Company would be required to file with the SEC in response to
paragraphs 2, 3, 4, 9, 10, 13, 14, 16, 17, 19, 20, 21, 22, 25 and 28 of Item
601 of Regulation S-K promulgated under the Securities Act. Each Material
Contract is in full force and effect and is enforceable against the parties
thereto (other than the Company) in accordance with its terms and no condition
or state of facts exists that, with notice or the passage of time, or both,
would constitute a material default by the Company or, to the knowledge of the
Company, any third party under such Material Contracts. The Company has duly
complied in all material respects with the provisions of each Material
Contract to which it is a party.
(r) Insurance. The Company and subsidiaries have in full force and
effect the policies of fire, liability, title, errors and omissions and other
forms of insurance listed in Schedule 3.1(r) of the Company Disclosure
Schedule. Furthermore, (i) none of the Company and subsidiaries is in default
under any such policies which default could reasonably be expected to have a
Material Adverse Effect and there is no material inaccuracy in any application
for such policies, (ii) each of the Company and subsidiaries' activities and
operations have been conducted in a manner so as to conform in all material
respects to the applicable provisions of such policies, (iii) none of the
Company and subsidiaries has received a notice of cancellation or non-renewal
with respect to any such policy, and (iv) timely notice has been given of any
and all claims under all such policies.
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17
(s) Transactions with Affiliates. Except as set forth in Schedule
3.1(s) of the Company Disclosure Schedule, there are no contracts, agreements,
arrangements or understandings of any kind between any affiliate of the
Company, on the one hand, and the Company or any subsidiary of the Company, on
the other hand, other than any such contracts, agreements, arrangements and
understandings that either individually or in the aggregate are de minimis in
nature.
(t) Rights Agreements. The Company has no shareholder rights plan
or similar agreement in effect.
(u) Scope of Representations. Anything to the contrary in this
Section 3.1 notwithstanding, no representation or warranty made by the Company
in this Agreement shall be deemed to be untrue or incorrect at the date hereof
if the failure of such representation or warranty to be true and correct as of
such date (or as of any other specified date) does not have, individually or
in the aggregate, a Material Adverse Effect on the Company at the date hereof.
SECTION 3.2 Representations and Warranties of Parent and Merger
Sub. Parent and Merger Sub, jointly and severally, hereby represent and
warrant to the Company as follows:
(a) Corporate Organization. Parent is a corporation duly organized,
validly existing and in good standing under the laws of Delaware and Merger
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the State of California, and each of Parent and Merger Sub
has the requisite corporate power and authority and any necessary governmental
authority to own, operate or lease its properties and to carry on its business
as it is now being conducted, except where the failure to be so organized,
existing and in good standing or to have such power, authority and
governmental approvals could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on Parent.
When used with respect to Parent or Merger Sub, the term "Material
Adverse Effect" means any material adverse change in or effect on (i) the
business, results of operations or condition (financial or other) of Parent
and its subsidiaries taken as a whole or (ii) the ability of Parent or Merger
Sub to consummate any of the transactions contemplated hereby.
(b) Charter and By-Laws. Parent has heretofore furnished to the
Company a complete and correct copy of the Certificate of Incorporation and
By-Laws of Parent as currently in effect and of the Articles of Incorporation
and By-Laws of Merger Sub as currently in effect. Neither Parent nor Merger
Sub is in violation of any of the provisions of its respective Certificate of
Incorporation or Articles of Incorporation (as the case may be) or By-Laws.
(c) Capitalization. The authorized capital stock of Parent consists
of 50,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares of
Preferred Stock, $.01 par value. As of the date of this Agreement, no shares
of Parent Preferred Stock are issued and outstanding.
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18
(d) Authority Relative to Agreement. Each of Parent and Merger Sub
has all necessary corporate power and authority to enter into this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by each of Parent and Merger Sub and the consummation by each of Parent and
Merger Sub of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Parent or Merger
Sub, and no other corporate proceedings on the part of Parent or Merger Sub
are necessary to authorize this Agreement or to consummate such transactions.
This Agreement has been duly executed and delivered by each of Parent and
Merger Sub and, assuming due authorization, execution and delivery by the
Company, constitutes a legal, valid and binding obligation of each of Parent
and Merger Sub enforceable against them in accordance with its terms.
(e) No Conflict; Required Filings and Consents. (i) The execution,
delivery and performance of this Agreement by Parent and Merger Sub do not and
will not: (A) conflict with or violate the Certificate of Incorporation or
By-Laws of Parent or the Articles of Incorporation or ByLaws of Merger Sub;
(B) assuming that all consents, approvals and authorizations contemplated by
subsection (ii) below have been obtained and all filings described in such
subsection have been made, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Parent or Merger Sub or by which
either of them or their respective properties are bound or affected; or (C)
result in any breach or violation of or constitute a default (or an event
which with notice or lapse of time or both could become a default) or result
in the loss of a material benefit under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Parent
or Merger Sub pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or Merger Sub is a party or by which Parent or Merger Sub or
any of their respective properties are bound or affected, except, in the case
of clauses (B) and (C), for any such conflicts, violations, breaches, defaults
or other occurrences which could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect on Parent.
(ii) The execution, delivery and performance of this Agreement by
Parent and Merger Sub and the consummation of the transactions contemplated
hereby by Parent and Merger Sub do not and will not require any consent,
approval, authorization or permit of, action by, filing with or notification
to, any United States federal, state or local Governmental Entity, except for:
(A) the filing and recordation of the Certificate of Merger as required by
California Law; (B) applicable filings under the Hart-Scott Act; and (C) such
other consents, approvals and authorizations of Governmental Entities as shall
have been specified by Parent to the Company in writing prior to the date of
this Agreement.
(f) Compliance. (i) Parent and its subsidiaries hold, and are in
compliance with, all permits, licenses, exemptions, orders and approvals of
all Governmental Entities necessary for the operation of the businesses of
Parent and each subsidiary, except to the extent the failure to so hold or
comply will not, individually or in the aggregate, have a Material Adverse
Effect on Parent, and to the best knowledge of Parent there are no proceedings
pending, threatened or contemplated by any
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19
Governmental Entity seeking to terminate, revoke or materially limit any such
permit, license, exemption, order or approval. Neither Parent nor any of its
subsidiaries nor the conduct of their business is in conflict with, or in
default or violation of (i) any law, rule, regulation, order, judgment or
decree applicable to Parent or any of its subsidiaries or by which its or any
of their respective properties are bound or affected, or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or its or any of their
respective properties are bound or affected, except for any such conflicts,
defaults or violations which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Parent. As of the
date of this Agreement, no investigation by any Governmental Entity with
respect to Parent is pending, or to best knowledge of Parent, threatened,
other than, in each case, those the outcome of which, individually or in the
aggregate, will not have a Material Adverse Effect on Parent.
(g) Securities Documents. Parent has filed all required documents
with the SEC and all other federal and state securities regulatory authorities
(the "Securities Authorities") since October 20, 1994 (the "Parent Securities
Documents"). As of their respective dates, the Parent Securities Documents
complied in all material respects with the requirements of the Securities
Authorities and none of the Parent Securities Documents contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(h) Information Supplied. None of the information supplied or to be
supplied by Parent or Merger Sub in writing or otherwise approved by Parent
for inclusion in the Proxy Statement will, at the date the Proxy Statement is
first mailed to the Company's shareholders or at the time of the Shareholders'
Meeting, contain any statement which, in the light of the circumstances under
which such statement is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting or any amendment or supplement thereto.
(i) Absence of Certain Changes or Events. Since March 31, 1996,
there has not been any change, event or development in or affecting Parent
that constitutes or would reasonably be expected to have a Material Adverse
Effect on Parent or to delay or prevent the consummation of the transactions
contemplated hereby beyond December 31, 1996.
(j) Absence of Litigation. Since March 31, 1996, there are no
suits, claims, actions, proceedings or investigations pending or, to the
knowledge of Parent, threatened against Parent or any of its subsidiaries, or
any properties or rights of Parent or any of its subsidiaries, before any
court, arbitrator or other Governmental Entity, domestic or foreign, that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on the Parent. Neither Parent nor any of its
subsidiaries nor any of their respective properties is or are subject to any
order, writ, judgment, injunction, decree, determination or award having, or
which could reasonably be
<PAGE>
20
expected to have, a Material Adverse Effect on the Parent or to delay or
prevent the consummation of the transactions contemplated hereby beyond
December 31, 1996.
(k) Financing. Parent has and will provide, or cause to be provided
to Merger Sub, the funds necessary to consummate the Merger and the
transactions contemplated thereby in accordance with the terms hereof and
thereof.
(l) Scope of Representations. Anything to the contrary in this
Section 3.2 notwithstanding, no representation or warranty made by Parent in
this Agreement shall be deemed to be untrue or incorrect at the date hereof if
the failure of such representation or warranty to be tue and correct as of
such date (or as of any other specified date) does not have, individually or
in the aggregate, a Material Adverse Effect on Parent at the date hereof.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER; OTHER COVENANTS
SECTION 4.1 Conduct of Business of the Company Pending the Merger.
The Company covenants and agrees that, during the period from the date hereof
to the Effective Time, except as otherwise required by the terms of this
Agreement or unless Parent shall otherwise agree in writing, the businesses of
the Company and its subsidiaries shall be conducted only in, and the Company
and its subsidiaries shall not take any action except in, the ordinary course
of business and in a manner consistent with past practice and in compliance
with applicable laws; and the Company and its subsidiaries shall each use its
reasonable best efforts to preserve intact the business organization of the
Company and its subsidiaries, to keep available the services of the present
officers, employees and consultants of the Company and its subsidiaries and to
preserve the present relationships of the Company and its subsidiaries with
their customers, suppliers and other persons with whom the Company or any of
its subsidiaries has significant business relations. By way of amplification
and not limitation of the foregoing, neither the Company nor any of its
subsidiaries shall, between the date of this Agreement and the Effective Time,
directly or indirectly do, or propose or commit to do, any of the following
without the prior written consent of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, (ii) split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock, or (iii) purchase, redeem
or otherwise acquire or agree to acquire any shares of capital stock of
the Company or any of its subsidiaries or any other securities
convertible into shares of capital stock or any rights, warrants or
options to acquire any such shares or convertible securities;
(b) authorize for issuance, issue, deliver, sell or agree or commit
to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise), pledge or otherwise encumber any shares of
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21
its capital stock or the capital stock of any of its subsidiaries, any
other voting securities or any securities convertible into, or any
rights, warrants or options to acquire any such shares, voting
securities or convertible securities or any other securities or equity
equivalents (including without limitation stock appreciation rights),
other than (A) sales of capital stock of any wholly owned subsidiary of
the Company to the Company or another wholly owned subsidiary of the
Company, and (B) the issuance of shares of Company Common Stock upon
exercise of Options that were issued and outstanding on the date of this
Agreement;
(c) except to the extent required under existing Company Plans as
in effect on the date of this Agreement, (i) increase the compensation
or fringe benefits of any of its directors, officers or employees,
except for increases in compensation of employees and officers of the
Company or its subsidiaries in the ordinary course of business in
accordance with past practice, or (ii) grant any severance or
termination pay not currently required to be paid under existing Company
Plans, except on an individual basis in the ordinary course of business
and consistent with past practice, or (iii) establish, adopt, enter into
or amend or terminate any Company Plan or other plan, agreement, trust,
fund, policy or arrangement for the benefit of any directors, officers
or employees except as required by law or as provided in this Agreement;
provided that the provisions of this Section 4.1 shall not prohibit the
Company and its subsidiaries from hiring personnel from time to time in
the ordinary course of their business, consistent with past practice;
(d) amend its Articles of Incorporation, By-Laws or other
comparable charter or organizational documents or alter through merger,
liquidation, reorganization, restructuring or in any other fashion the
corporate structure or ownership of the Company or any subsidiary of the
Company;
(e) acquire or agree to acquire (i) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of,
or by any other manner, any business or any corporation, partnership,
joint venture, association or other business organization or division
thereof, or (ii) any assets (not otherwise subject to paragraph (h)
below) other than in the ordinary course of business consistent with
past practice and in an aggregate amount not to exceed $500,000 prior to
the Effective Time;
(f) sell, lease, license, mortgage or otherwise encumber or subject
to any lien or otherwise dispose of any of its properties or assets
other than in the ordinary course of business consistent with past
practice and in amounts that are not, individually or in the aggregate,
material to the Company and its subsidiaries taken as a whole;
(g) (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person (other than guarantees by the
Company in favor of any of its wholly owned subsidiaries or by any of
its subsidiaries in favor of the Company or endorsements of negotiable
instruments and similar guarantees in the ordinary course of business
consistent with past practice), or (ii) make any loans, advances or
capital contributions to, or investments in, any other person, other
than (A) to any direct or indirect
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22
wholly owned subsidiary of the Company, or (B) loans to employees of the
Company and its subsidiaries not to exceed $100,000 in total
outstandings from the date hereof through November 19, 1996;
(h) except as set forth in Schedule 4.1(h) of the Company
Disclosure Schedule, expend, or commit to expend, funds for capital
expenditures other than in accordance with the Company's current capital
expenditure plans (which plans shall have been disclosed in writing to
Parent on or prior to the date of this Agreement);
(i) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation;
(j) recognize any labor union (unless legally required to do so) or
enter into any collective bargaining agreement;
(k) except as may be required as a result of a change in generally
accepted accounting principles or as recommended by the Company's
independent accountants and consented to in writing by Parent (which
consent shall not be unreasonably withheld) prior to such change, change
any of the accounting methods, practices or principles used by the
Company or any of its subsidiaries;
(l) enter into any new line of business or open any new imaging
facilities except substantially in accordance with the Company's current
business plan as disclosed to Parent in writing prior to the date of
this Agreement; or
(m) authorize any of, or commit or agree to take any of, the
foregoing actions or any action which would make any of the
representations or warranties of the Company contained in this Agreement
untrue and incorrect as of the date when made if such action had then
been taken.
SECTION 4.2 Conduct of Business of Merger Sub. Merger Sub has not
engaged, and during the period from the date of this Agreement to the
Effective Time, Merger Sub shall not engage, in any activities of any nature
except as provided in, or in connection with the transactions contemplated by,
this Agreement.
SECTION 4.3 Shareholders' Meeting. The Company will take all action
necessary in accordance with and subject to applicable law and its Articles of
Incorporation and By-Laws to convene a meeting of its shareholders (the
"Shareholders' Meeting") as soon as practicable after the date of this
Agreement to consider and vote upon the adoption and approval of this
Agreement. Subject to the next succeeding sentence, the Company, through its
Board of Directors, shall recommend to its shareholders approval of the
foregoing matters, and such recommendation shall be included in the Proxy
Statement. The Board of Directors of the Company may fail to make such
recommendation, or withdraw, modify or change such recommendation, if and only
if the Board, as advised by counsel, determines that the making of such
recommendation, or the failure to so
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23
withdraw, modify or change such recommendation, could be deemed to constitute
a breach of its fiduciary duties under applicable law.
SECTION 4.4 Preparation of the Proxy Statement; Preparation of
Hart-Scott Act Filing. (i) Promptly following the date of this Agreement, the
Company shall prepare and file with the SEC the Proxy Statement. Parent shall
review and approve the Proxy Statement before such filing. Each of the Company
and Parent shall use its reasonable best efforts to have the Proxy Statement
approved by the SEC as promptly as practicable after such filing. The Company
will use its reasonable best efforts to cause the Proxy Statement to be mailed
to the Company's shareholders as promptly as practicable after the Proxy
Statement is approved by the SEC. The information provided and to be provided
by Parent, Merger Sub and the Company, respectively, for use in the Proxy
Statement shall, at the time the Proxy Statement is approved by the SEC and on
the date of the Shareholders' Meeting referred to above, be true and correct
in all material respects and shall not omit to state any material fact
required to be stated therein or necessary in order to make such information
not misleading, and the Company, Parent and Merger Sub each agree to correct
any information provided by it for use in the Proxy Statement which shall have
become false or misleading.
(ii) Promptly following the date of this Agreement, the Company and
Parent shall prepare and file with the Anti-Trust Entities all documents and
forms required under the Hart-Scott Act. Each of the Company and Parent shall
use its reasonable best efforts to have the Merger reviewed and approved by
the Anti-Trust Entities as promptly as practicable after such filing.
SECTION 4.5 Access to Information; Confidentiality. (a) From the
date hereof to the Effective Time, the Company (i) shall, and shall cause its
subsidiaries, officers, directors, employees, auditors and other agents to,
afford the officers, auditors and other agents of Parent, reasonable access at
all reasonable times (during normal business hours so as not to unduly or
unreasonably interfere with the business of the Company and its subsidiaries)
to its senior officers, agents, properties, offices and other facilities and
to all books and records, and shall furnish Parent and such other persons with
all financial, operating and other data and information as Parent, through its
officers, may from time to time reasonably request, and (ii) shall make
available its senior officers and the senior officers of its subsidiaries,
upon reasonable prior notice and during normal business hours, to confer on a
regular basis with the appropriate officers of Parent regarding the ongoing
operations of the Company and its subsidiaries, the implementation of the
transactions contemplated hereby and other matters related hereto. No
investigation pursuant to this Section 4.5 shall affect any representations or
warranties of the parties herein or the conditions to the obligations of the
parties hereto.
(b) Each of Parent and Merger Sub will hold information it receives
pursuant to Section 4.5(a)(i) which is nonpublic in confidence and will not
disclose such information to any third party without the written consent of
the Company.
SECTION 4.6 No Solicitation. The Company and its affiliates shall
not, directly or indirectly, through any officer, director, agent or
otherwise, solicit, initiate or encourage the
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24
submission of any proposal or offer from any person relating to any
acquisition or purchase of all or any material portion of the assets of, or
any equity interest in, the Company (or any subsidiary or division thereof) or
any merger, consolidation, share exchange, business combination or other
similar transaction with the Company (or any subsidiary or division thereof)
or solicit, participate in or initiate any negotiations regarding, or furnish
to any other person any information with respect to, or otherwise cooperate in
any way with, or assist or participate in, facilitate or encourage, any effort
or attempt by any other person to do or seek any of the foregoing; provided,
however, that nothing contained in this Section 4.6 shall prohibit the Company
from furnishing information to, or entering into discussions or negotiations
with, any person in connection with an unsolicited written proposal to the
Company by such person to acquire the Company pursuant to a merger,
consolidation, share exchange, business combination or other similar
transaction or to acquire all or substantially all of the assets of the
Company received by the Company after the date of the Agreement ("Acquisition
Proposal"), if, and only to the extent that, (a) the Company's Board, as
advised by counsel of the Company, determines in good faith that such action
is required in order for the Board not to breach its fiduciary duties to
shareholders imposed by law, and (b) prior to furnishing such information to,
or entering into discussions or negotiations with, such person, the Company
gives Parent as promptly as practicable prior written notice (which shall
include a summary of terms and identity of parties except to the extent such
would cause the Board of Directors of the Company to determine that such
disclosure would be a breach of its fiduciary duties to shareholders imposed
by law, as advised by counsel of the Company) of the Company's intention to
furnish such information or begin such discussions. The Company agrees not to
release any third party from or waive any provision of, any confidentiality or
standstill agreement to which the Company is a party.
SECTION 4.7 Employee Benefits Matters. (a) Parent agrees that,
during the period commencing at the Effective Time and ending on the second
anniversary thereof, the employees of the Company and its subsidiaries will
continue to be provided with employee benefit plans (other than stock option
or other plans involving the potential issuance of securities of the Company
or of Parent and incentive compensation or similar programs) which in the
aggregate are not materially less favorable to those currently provided by the
Company and its subsidiaries to such employees, to the extent permitted under
laws and regulations in force from time to time, provided that employees
covered by collective bargaining agreements need not be provided such
benefits, and provided, further, that Parent reserves the right to review all
employee benefits after the Effective Time and to make such changes as it
deems appropriate.
(b) Parent and Merger Sub will cause the Company (and, after the
Merger, the Surviving Corporation) to honor all employee benefit obligations
to current and former employees and directors under the Company's employee
benefit plans in existence on the date hereof and disclosed in Schedule 4.7(b)
of the Company Disclosure Schedule and all employment or severance agreements
entered into by the Company or adopted by the Board of Directors of the
Company prior to the date hereof and disclosed in Schedule 4.7(b); provided,
however, that nothing shall prevent Merger Sub or the Company (and, after the
Merger, the Surviving Corporation) from taking any action with respect to such
plans, obligations or agreements or refraining from taking any such action
which is permitted or provided for under the terms thereof.
<PAGE>
25
(c) Employees of the Company (and, after the Merger, the Surviving
Corporation) shall be given credit for all actual service with the Company and
the subsidiaries under all employee benefit plans, programs and policies of
the Surviving Corporation in which they become participants for all purposes
thereunder, except to the extent that such crediting would produce duplication
of benefits.
SECTION 4.8 Directors' and Officers' Indemnification and Insurance.
(a) The Articles of Incorporation and the By-Laws of the Surviving Corporation
shall contain the provisions with respect to indemnification and exculpation
from liability set forth in the Company's Articles of Incorporation and
By-Laws on the date of this agreement, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who on or prior to the Effective Time were directors, officers,
employees or agents of the Company, unless such modification is required by
law.
(b) The Surviving Corporation shall for the three year period
commencing on the Effective Time either (x) maintain in effect the Company's
current directors' and officers' liability insurance covering those persons
who are currently covered on the date of this Agreement by the Company's
directors' and officers' liability insurance policy (a copy of which has been
heretofore delivered to Parent) and/or by Indemnification Agreements with the
Company as set forth on Schedule 4.8(b) (the "Indemnified Parties"); provided,
however, that in no event shall Parent be required to expend in any one year
an amount in excess of 125% of the annual premiums currently paid by the
Company for such insurance; and; provided, further, that if the annual
premiums of such insurance coverage exceed such amount, the Surviving
Corporation shall be obligated to obtain a policy with the greatest coverage
available for a cost not exceeding such amount; provided, further, that the
Surviving Corporation may substitute for such Company policies, policies with
at least the same coverage containing terms and conditions which are no less
advantageous and provided that said substitution does not result in any gaps
or lapses in coverage with respect to matters occurring prior to the Effective
Time or (y) cause the Parent's directors' and officers' liability insurance
then in effect to cover those persons who are covered on the date of this
Agreement by the Company's directors' and officers' liability insurance policy
with respect to those matters covered by the Company's directors' and
officers' liability policy.
(c) Parent and Merger Sub agree to indemnify and agree to cause the
Surviving Corporation to indemnify all Indemnified Parties to the fullest
extent permitted by applicable law with respect to all acts and omissions
arising out of such individuals' services as officers, directors, employees or
agents of the Company or any of its subsidiaries or as trustees or fiduciaries
of any plan for the benefit of employees of the Company or any of its
subsidiaries, occurring prior to the Effective Time including, without
limitation, the transactions contemplated by this Agreement. Without
limitation of the foregoing, in the event any such Indemnified Party is or
becomes involved in any capacity in any action, proceeding or investigation in
connection with any matter, including without limitation, the transactions
contemplated by this Agreement, occurring prior to, and including, the
Effective Time, Parent, from and after the Effective Time, will pay as
incurred such Indemnified Party's reasonable legal and other expenses
(including the cost of any investigation and
<PAGE>
26
preparation) incurred in connection therewith. Subject to Section 4.8(d)
below, Parent and Merger Sub shall pay all reasonable expenses, including
attorneys' fees, that may be incurred by any Indemnified Party in enforcing
this Section 4.8 or any action involving an Indemnified Party resulting from
the transactions contemplated by this Agreement. If the indemnity provided for
in this Section 4.8 is not available with respect to any Indemnified Party,
then the Surviving Corporation and the Indemnified Party shall contribute to
the amount payable in such proportion as is appropriate to reflect relative
faults and benefits.
(d) Any Indemnified Party wishing to claim indemnification under
paragraph (a) or (c) of this Section, upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify Parent thereof. In
the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), (i) Parent or the
Surviving Corporation shall have the right, from and after the Effective Time,
to assume the defense thereof (with counsel engaged by Parent or the Surviving
Corporation to be reasonably acceptable to the relevant Indemnified Party) and
Parent shall not be liable to such Indemnified Parties for any legal expenses
of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and (iii)
Parent shall not be liable for any settlement effected without its prior
written consent; and provided further that Parent shall not have any
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law.
SECTION 4.9 Further Action; Reasonable Best Efforts. Upon the terms
and subject to the conditions hereof, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including but not limited to (i)
cooperating in the preparation and filing of the Proxy Statement, and any
amendments to any thereof, and (ii) using its reasonable best efforts to make
all required regulatory filings and applications and to obtain all licenses,
permits, consents, approvals, authorizations, qualifications and orders of
Governmental Entities and parties to contracts with the Company and its
subsidiaries as are necessary for the consummation of the transactions
contemplated by this Agreement and to fulfill the conditions to the Merger. To
the extent practicable in the circumstances and subject to applicable laws,
each party shall provide the other with the opportunity to review any
information relating to the other party, or any of its subsidiaries, which
appears in any filing made with, or written materials submitted to, any
Governmental Entity in connection with obtaining the necessary regulatory
approvals for the consummation of the transactions contemplated by this
Agreement. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall use their
reasonable best efforts to take all such necessary action.
SECTION 4.10 Notification of Certain Matters. The Company shall
give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of (i) the occurrence or
<PAGE>
27
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect, and (ii) any failure of the
Company, Parent or Merger Sub, as the case may be, to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 4.10 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 4.11 Public Announcements. Each party shall consult with
the other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation, except
as may be required by law or any listing agreement with its securities
exchange or quotation system.
ARTICLE V
CONDITIONS OF MERGER
SECTION 5.1 Conditions to Obligation of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approval. This Agreement shall have been approved
and adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock entitled to vote thereon.
(b) Other Approvals. Other than the filing contemplated by Section
1.3, all consents, approvals, authorizations or permits of, actions by, or
filings with or notifications to, and all expirations of waiting periods
imposed by, any Governmental Entity (all the foregoing, "Consents") which are
necessary for the consummation of the Merger (including, without limitation,
the filings and approvals required under the Hart-Scott Act and the Exchange
Act) other than immaterial Consents the failure to obtain which would have no
Material Adverse Effect on the consummation of the Merger or the business of
the Surviving Corporation, shall have been filed, occurred or been obtained
(all such permits, approvals, filings and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals"),
all conditions, if any, to such Requisite Regulatory Approvals shall have been
satisfied and all such Requisite Regulatory Approvals shall be in full force
and effect.
(c) No Injunctions or Restraints; Illegality; Litigation. No
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding by any Governmental Entity seeking any of the
foregoing be
<PAGE>
28
pending. There shall not be any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger, which
makes the consummation of the Merger illegal. There shall not be any pending
litigation regarding the Merger which, if adversely determined, would have a
Material Adverse Effect on the Company.
(d) Proxy Statement. The Proxy Statement shall have been filed
with, and approved by, the SEC.
SECTION 5.2 Conditions to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger are subject to the
satisfaction of the following conditions unless waived by Parent and Merger
Sub:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by the
Chairman of the Board and Chief Executive Officer of the Company and by the
Chief Financial Officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall
have performed all obligations required to be performed by it under this
Agreement at or prior to the Closing Date with such exceptions as, either
individually or in the aggregate, do not have, and would not reasonably be
expected to have, a Material Adverse Effect on the Company, and Parent shall
have received a certificate signed on behalf of the Company by the Chairman of
the Board and Chief Executive Officer of the Company and by the Chief
Financial Officer of the Company to such effect.
(c) Burdensome Condition. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any federal or state Governmental Entity which,
in connection with the grant of a Requisite Regulatory Approval, would be
reasonably likely to result in a Material Adverse Effect with respect to the
Surviving Corporation.
SECTION 5.3 Conditions to Obligations of the Company. The
obligation of the Company to effect the Merger is subject to the satisfaction
of the following unless waived by the Company:
(a) Opinion of Financial Advisor. Upon the execution of this
Agreement by all parties hereto, the Company shall have received the opinion
of Batchelder & Partners, Inc., to the effect that, as of the date of this
Agreement, the consideration to be received in the Merger by Company's
shareholders is fair to Company's shareholders from a financial point of view.
(b) Representations and Warranties. The representations and
warranties of Parent and Merger Sub set forth in this Agreement shall be true
and correct in all material respects as of the
<PAGE>
29
date of this Agreement and as of the Closing Date, and the Company shall have
received a certificate signed on behalf of Parent by the Chief Executive
Officer of Parent to such effect.
(c) Performance of Obligations of Parent and Merger Sub. Parent and
Merger Sub shall have performed all obligations required to be performed by
them under this Agreement at or prior to the Closing Date, with such
exceptions as, either individually or in the aggregate, do not have, and would
not reasonably be expected to have, a Material Adverse Effect on Parent, and
the Company shall have received a certificate signed on behalf of Parent by
the Chief Financial Officer of Parent to such effect.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, notwithstanding approval thereof by the shareholders of the Company:
(a) by mutual written consent of Parent and the Company; or
(b) by Parent, (i) upon any breach of any representation, warranty,
covenant or agreement of the Company set forth in this Agreement that, either
individually or in the aggregate, would constitute grounds for Parent to elect
not to consummate the Merger pursuant to Section 5.2(a), (b) or (c), if either
(A) such breach cannot be cured prior to the Closing Date, or (B) has not been
cured within 30 days after the date on which written notice of such breach is
given by Parent to the Company, specifying in reasonable detail the nature of
such breach, or (ii) the Company has breached or failed to comply in any
material respect with any of its obligations under this Agreement which breach
shall not have been cured within 10 days following notice from Parent to the
Company of notice of such breach and the intent of Parent to terminate
pursuant to this provision.
(c) by the Company, if (i) any of the representations and
warranties of Parent or Merger Sub contained in this Agreement were untrue or
incorrect in any material respect when made or have since become, and at the
time of termination remain, incorrect in any material respect, (ii) the
Company does not timely receive the opinion required under Section 5.3(a), or
(iii) Parent or Merger Sub shall have breached or failed to comply in any
material respect with any of their respective obligations under this Agreement
which breach shall not have been cured within ten days following notice from
the Company to Parent of such breach and Company's intent to terminate
pursuant to this provision.
(d) by either Parent or the Company, if any permanent injunction or
action by any Governmental Entity preventing the consummation of the Merger
shall have become final and nonappealable; provided that such right of
termination shall not be available to any party if such
<PAGE>
30
party shall have failed to make reasonable efforts to prevent or contest the
imposition of such injunction or action and such failure materially
contributed to such imposition;
(e) by either Parent or the Company if (other than due to the
willful failure of the party seeking to terminate this Agreement to perform
its obligations hereunder which are required to be performed at or prior to
the Effective Time) the Merger shall not have been consummated on or prior to
November 19, 1996, unless extended in writing by Parent and the Company;
(f) by Parent or the Company, if the approval of the shareholders
of the Company of this Agreement and the Merger required for the consummation
of the Merger shall not have been obtained by reason of the failure to obtain
the required vote at a duly held meeting of shareholders or at any adjournment
thereof;
(g) by Parent, if (i) the Board of Directors of the Company shall
have withdrawn, modified or changed its approval or recommendation of this
Agreement or the Merger in any manner which is adverse to Parent or Merger
Sub, or shall have adopted a resolution to do the foregoing; or (ii) the Board
of Directors of the Company shall have approved or have recommended to the
shareholders of the Company any Business Combination Transaction (as defined
in Section 6.1(i) below) other than the Merger or shall have resolved to do
the foregoing; or (iii) a tender offer or exchange offer for 25% or more of
the outstanding shares of the Company Common Stock is commenced (other than by
Parent or any of its subsidiaries or affiliates), and the Board of Directors
of the Company recommends that the shareholders of the Company tender their
shares in such tender or exchange offer or otherwise fails to recommend that
such shareholders reject such tender offer or exchange offer within ten
business days of the commencement thereof; or
(h) by the Company prior to the Shareholders' Meeting, if the Board
of Directors of the Company (i) shall fail to make or shall withdraw or modify
its recommendation of this Agreement or the Merger and there shall exist at
such time a tender offer or exchange offer for not less than a majority of the
outstanding voting stock of the Company or a written, bona fide proposal by a
third party to acquire not less than a majority of the outstanding voting
stock of the Company pursuant to a merger, consolidation, share exchange,
business combination, tender or exchange offer or other similar transaction,
in either case at a price per share (whether payable in cash or securities) of
Company Common Stock that is higher than the Merger Consideration, or (ii)
recommends to the Company's shareholders approval or acceptance of any such
transaction, in each case if, and only to the extent that, the Board of
Directors of the Company, as advised by legal counsel, determines that failure
to take such action could be deemed to constitute a breach of the Board's
fiduciary duties under applicable law.
(i) Fees and Expenses. The Company shall pay Merger Sub a fee (an
"Alternative Proposal Fee") of 3% of the total Merger Consideration, which
amount is inclusive of all of Merger Sub Expenses (as defined in Section
6.2(k) below) (i) within one business day following the termination of this
Agreement by Parent, if this Agreement is terminated pursuant to 6.1(b)(ii),
or (ii) within one business day following notice of the termination of this
Agreement, if this Agreement is terminated pursuant to Section 6.1(g) or (h).
As used herein, the term "Business Combination
<PAGE>
31
Transaction" shall mean any of the following involving the Company: (1) any
merger, consolidation, share exchange, business combination or other similar
transaction (other than the Merger); (2) any sale, lease, exchange, transfer
or other disposition (other than a pledge or mortgage) of 20% or more of the
assets of the Company in a single transaction or series of related
transactions; (3) the acquisition by a person or entity or any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership of 40% or more of the shares
of Company Common Stock, whether by tender offer, exchange offer or otherwise;
or (4) the adoption by the Company of a plan of liquidation or the declaration
or payment of an extraordinary dividend.
(j) Merger Sub shall be entitled to receive the Merger Sub Expenses
(but not the Alternative Proposal Fee) in immediately available funds (not
later than one business day after submission of statements therefor) in the
event that this Agreement is terminated by Parent pursuant to Section
6.1(b)(i).
(k) As used herein, "Merger Sub Expenses" means all out-of-pocket
expenses and fees up to $200,000 actually incurred by Merger Sub or on their
respective behalf in connection with the Merger prior to the termination of
this Agreement (including, without limitation, all fees and expenses of
counsel, financial advisors, accountants, banks or other entities providing
financing to Merger Sub (including financing, commitment and other fees
payable thereto), accountants, environmental and other experts and consultants
to Merger Sub and its affiliates, and all printing and advertising expenses)
and in connection with the negotiation, preparation, execution, performance
and termination of this Agreement, the structuring of the Merger, any
agreements relating thereto and any filings to be made in connection
therewith.
(l) Except as set forth in this Section 6.1, all costs and expenses
incurred in connection with this Agreement and the Merger shall be paid by the
party incurring such expenses, whether or not any Transaction is consummated.
SECTION 6.2 Effect of Termination. In the event of the termination
of this Agreement pursuant to Section 6.1, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto
except as set forth in Section 4.5(b), Section 6.1 and Section 7.1; provided,
however, that nothing herein shall relieve any party from liability for any
willful and material breach hereof; provided further, however that the
recommendation of another transaction by the Company's Board of Directors in
accordance with Section 4.6 shall not constitute a willful and material breach
of this Agreement by the Company.
SECTION 6.3 Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of Parent and the respective Boards of
Directors of Merger Sub and the Company at any time prior to the Effective
Time; provided, however, that, after approval of the Merger by the
shareholders of the Company, no amendment may be made which would reduce the
amount or change the type of consideration into which each share of Company
Common Stock shall be converted upon consummation of the Merger. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
<PAGE>
32
SECTION 6.4 Waiver. At any time prior to the Effective Time, any
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1 Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this
Agreement pursuant to Section 6.1, except that those set forth in Section
4.5(b), Section 4.7, Section 4.8, Section 6.1 and this Article VII shall
survive termination indefinitely (or to such earlier date as shall be
specified by the terms of such provisions).
SECTION 7.2 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person,
by cable, telecopy, telegram or telex or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
if to Parent or Merger Sub:
US Diagnostic Labs, Inc.
777 South Flagler Drive
West Palm Beach, FL 33140
Attention: Jeffrey A. Goffman, Chairman
and Michael D. Karsch
Facsimile: (561) 833-8391
if to the Company:
Medical Imaging Centers of America, Inc.
9444 Farnham Street, Suite 100
San Diego, California 92123
Attention: Robert Muehlberg
Facsimile: (619)
with a copy to:
Latham & Watkins
<PAGE>
33
701 B Street, Suite 2100
San Diego, California 92101
Attention: Scott N. Wolfe, Esq.
Facsimile: (619) 696-7419
SECTION 7.3 Certain Definitions. For purposes of this Agreement,
the term:
(a) "affiliate" of a person means a person that directly or
indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, the first mentioned person;
(b) "beneficial owner" with respect to any shares of Company Common
Stock means a person who shall be deemed to be the beneficial owner of
such shares of Company Common Stock (i) which such person or any of its
affiliates or associates beneficially owns, directly or indirectly, (ii)
which such person or any of its affiliates or associates (as such term
is defined in Rule 12b-2 of the Exchange Act) has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement,
arrangement or understanding or (iii) which are beneficially owned,
directly or indirectly, by any other persons with whom such person or
any of its affiliates or person with whom such person or any of its
affiliates or associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any
shares;
(c) "business day" means any day other than a Saturday, Sunday or
other day on which commercial banks in San Diego, California are
required or permitted to be closed;
(d) "control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of
the management policies of a person, whether through the ownership of
stock, as trustee or executor, by contract or credit arrangement or
otherwise;
(e) "knowledge" means knowledge after reasonable inquiry of, in the
case of the Company, any Executive Vice President or more senior officer
of the Company, and in the case of Parent, any Executive Vice President
or more senior officer of Parent.
(f) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group
(as defined in Section 13(d)(3) of the Exchange Act); and
(g) "subsidiary" or "subsidiaries" of the Company, the Surviving
Corporation, Parent or any other person means any corporation,
partnership, joint venture or other
<PAGE>
34
legal entity of which the Company, the Surviving Corporation, Parent or
such other person, as the case may be (either alone or through or
together with any other subsidiary), owns, directly or indirectly, 50%
or more of the stock or other equity interests the holder of which is
generally entitled to vote for the election of the board of directors or
other governing body of such corporation or other legal entity.
SECTION 7.4 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to
the fullest extent possible.
SECTION 7.5 Entire Agreement; Assignment. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and undertakings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof. This Agreement shall not be assigned by operation of
law or otherwise, except that Parent and Merger Sub may assign all or any of
their respective rights and obligations hereunder to any other direct
subsidiary or subsidiaries of Parent, provided that no such assignment shall
relieve the assigning party of its obligations hereunder if such assignee does
not perform such obligations.
SECTION 7.6 Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 7.7 Applicable Law. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflict of
laws rules thereof. ALL ACTIONS AND PROCEEDINGS ARISING OUT OF OR RELATING TO
THIS AGREEMENT SHALL BE HEARD AND DETERMINED IN ANY COURT SITTING IN THE CITY
OF SAN DIEGO, CALIFORNIA.
SECTION 7.8 Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 7.9 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when
<PAGE>
35
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
<PAGE>
36
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused
this Agreement to be executed by their respective officers thereunto duly
authorized, all as of the date written above.
"Parent" US DIAGNOSTIC LABS, INC.
By /s/ Jeffrey Goffman
------------------------------
Name: Jeffrey Goffman
Title: Chief Executive Officer
"Merger Sub" MICA ACQUIRING CORPORATION
By /s/ Jeffrey Goffman
------------------------------
Name: Jeffrey Goffman
Title President
"Company" MEDICAL IMAGING CENTERS OF AMERICA,
INC.
By /s/ Robert Muehlberg
------------------------------
Name: Robert Muehlberg
Title: President
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
- ---------------------------
Weighted average shares outstanding (1) 7,572 4,230 6,895 4,131
Dilutive effect of assumed warrant conversion 7,791 - 2,782 -
Dilutive effect of actual warrant conversion 696 - 815 -
----- ----- ----- -----
Primary weighted average shares of common stock
and common stock equivalents outstanding 16,059 4,230 10,492 4,131
====== ===== ====== =====
Net Income $2,511 606 4,601 1,203
Adjustments to net income for interest savings 810 - 1,048 -
----- ----- ----- -----
Adjusted net income $3,321 606 5,649 1,203
Earnings per share - primary $.21 $.14 $.54 $.29
FULLY DILUTED EARNINGS PER SHARE:
- ---------------------------------
Weighted average shares outstanding (1) 7,572 4,230 6,895 4,131
Dilutive effect of assumed warrant conversion 7,791 4,972 7,791 4,972
Dilutive effect of actual warrant conversion 892 - 1,115 -
Dilutive effect of assumed conversion -
convertible debt 6,799 - 3,469 -
----- ---- ----- -----
Fully diluted weighted average shares of common
stock and common stock equivalents outstanding 23,054 9,202 19,270 9,103
====== ===== ====== =====
Net Income $ 2,511 $ 606 $ 4,601 $ 1,203
Adjustments to net income for interest savings 1,499 775 2,144 1,546
----- ----- ----- -----
Adjusted Net Income $4,010 $1,381 $6,745 $2,749
Earnings Per Share - Fully Diluted $.17 $.15 $.35 $.30
</TABLE>
(1) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although it is contrary to paragraph 40 of APB
Opinion No. 15 because it may produce anti-dilution. For the 1995 periods
the effects of common stock equivalents was anti-dilutive and therefore
excluded from the calculation of earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 58,532,625
<SECURITIES> 0
<RECEIVABLES> 35,661,382
<ALLOWANCES> (10,957,864)
<INVENTORY> 0
<CURRENT-ASSETS> 86,760,970
<PP&E> 43,936,779
<DEPRECIATION> (5,060,178)
<TOTAL-ASSETS> 180,646,190
<CURRENT-LIABILITIES> 16,844,569
<BONDS> 85,946,505
0
0
<COMMON> 149,556
<OTHER-SE> 75,825,890<F1>
<TOTAL-LIABILITY-AND-EQUITY> 180,646,190
<SALES> 0
<TOTAL-REVENUES> 36,362,446
<CGS> 0
<TOTAL-COSTS> 25,937,609
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,854,361
<INCOME-PRETAX> 7,025,872
<INCOME-TAX> 2,425,001
<INCOME-CONTINUING> 4,600,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,600,871
<EPS-PRIMARY> .54
<EPS-DILUTED> .35
<FN>
<F1>* Retained Earnings - $7,096,549
Cumlative translation adjustment -$
</FN>
</TABLE>
