<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of l934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
US Diagnostic Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
---------------------------------------------
2) Aggregate number of securities to which transaction applies:
---------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
---------------------------------------------
4) Proposed maximum aggregate value of transaction:
---------------------------------------------
5) Total fee paid:
---------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE> 2
US DIAGNOSTIC INC.
777 SOUTH FLAGLER DRIVE, SUITE 1201 EAST
WEST PALM BEACH, FLORIDA 33401
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, OCTOBER 20, 1998
---------------------
To the Stockholders:
Notice is hereby given that the Annual Meeting of Stockholders of US
Diagnostic Inc., a Delaware corporation ("the Company"), will be held on
Tuesday, October 20, 1998, at 10:00 a.m. local time at the Sheraton West Palm
Beach Hotel, 630 Clearwater Park Road, West Palm Beach, FL 33401. The meeting is
called for the following purposes:
1. To elect a board of seven directors; and
2. To consider and take action upon such other matters as may properly come
before the meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement which is attached and made a part hereof.
The close of business on September 11, 1998 has been fixed as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting and any adjournment or postponement thereof.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR
NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
POSTAGE-PREPAID ENVELOPE PROVIDED TO ENSURE YOUR REPRESENTATION AND THE PRESENCE
OF A QUORUM AT THE ANNUAL MEETING. IF YOU SEND IN YOUR PROXY CARD AND THEN
DECIDE TO ATTEND THE ANNUAL MEETING TO VOTE YOUR SHARES IN PERSON, YOU MAY STILL
DO SO. YOUR PROXY IS REVOCABLE IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN
THE PROXY STATEMENT.
By Order of the Board of Directors,
/s/ FRANCIS J. HARKINS, JR.
FRANCIS J. HARKINS, JR.
Secretary
West Palm Beach, Florida
September 21, 1998
<PAGE> 3
US DIAGNOSTIC INC.
777 SOUTH FLAGLER DRIVE, SUITE 1201 EAST
WEST PALM BEACH, FLORIDA 33401
(561) 832-0006
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
OCTOBER 20, 1998
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of US Diagnostic Inc., a Delaware corporation (the
"Company"), of proxies in the accompanying form for use in voting at the Annual
Meeting of Stockholders of the Company (the "Annual Meeting") to be held at the
Sheraton West Palm Beach Hotel, 630 Clearwater Park Road, West Palm Beach, FL
33401, on Tuesday, October 20, 1998, at 10:00 a.m. local time, and for any
adjournment or postponement thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. The shares represented by
the proxies received, properly marked, dated, executed and not revoked will be
voted at the Annual Meeting.
It is anticipated that this Proxy Statement and the accompanying form of
proxy will be mailed to stockholders on or about September 21, 1998. The
Company's Annual Report, including audited financial statements for the fiscal
year ended December 31, 1997, is being mailed or delivered concurrently with
this Proxy Statement. The Annual Report is not to be regarded as proxy
soliciting material.
REVOCABILITY OF PROXY
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is exercised by: (i) delivering to the Company
(to the attention of Francis J. Harkins, Jr., the General Counsel of the
Company) a written notice of revocation or a duly executed proxy bearing a later
date or (ii) attending the Annual Meeting and voting in person.
SOLICITATION AND VOTING PROCEDURES
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing and
mailing proxy materials for the Annual Meeting and reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's common stock, par value $0.01 per share (the "Common Stock"). The
Company may conduct further solicitation personally, telephonically or by
facsimile through its officers, directors and regular employees, none of whom
will receive additional compensation for assisting with the solicitation. The
Company may retain a proxy solicitation firm to assist in the solicitation of
proxies and estimates that such services would cost approximately $5,000 (plus
reasonable out-of-pocket expenses).
The close of business on Friday, September 11, 1998 has been fixed as the
record date (the "Record Date") for determining the holders of shares of Common
Stock of the Company entitled to notice of and to vote at the Annual Meeting. As
of the close of business on the Record Date, the Company had 22,712,433 shares
of Common Stock outstanding and entitled to vote at the Annual Meeting. The
presence at the Annual Meeting of a majority, or approximately 11,356,217 shares
of Common Stock, either in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. Each outstanding share of Common
Stock on the Record Date is entitled to one vote on all matters.
An automated system administered by the Company's transfer agent will
tabulate votes cast by proxy, and an employee of the Company will tabulate votes
cast in person at the Annual Meeting. Abstentions and broker non-votes (shares
represented by a limited proxy but, as to a specific proposal, brokers are
prohibited
<PAGE> 4
from exercising discretionary authority) are each included in the determination
of the number of shares present and voting in determining the existence of a
quorum at the Annual Meeting, and each is tabulated separately. Election of
directors requires a plurality of the votes cast. Abstentions and broker
non-votes have no legal effect on the election of directors. As to all other
matters, in determining whether a proposal has been approved, abstentions are
counted as votes against the proposal and broker non-votes have no legal effect
on whether a matter is approved. If no specific instructions are given with
respect to matters to be acted upon at the Annual Meeting, shares of Common
Stock represented by a properly executed proxy will be voted (i) FOR the
election of management's nominees for directors listed in Proposal No. 1 and
(ii) in accordance with the best judgment of the persons acting under the proxy
concerning such other matters that are properly brought before the meeting or
any adjournment or postponements thereof.
Your vote is important. Accordingly, you are urged to sign and return the
accompanying proxy card whether or not you plan to attend the meeting. If you do
attend, you may vote by ballot at the meeting, thereby canceling any proxy
previously given.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and By-Laws provide that the
number of directors shall be not more than nine directors and shall be fixed
from time to time by the Board of Directors. The Board of Directors is currently
fixed at seven members. Directors are elected by the Company's stockholders at
each annual meeting or, in the case of a vacancy, are appointed by the directors
then in office, to serve until the next annual meeting or until their successors
are elected and qualified.
The nominees for election as directors at the Annual Meeting are Messrs.
Hartley, Jennings, McIntosh, O'Hanlon, Paul, Rausser and Richey. Except for
Messrs. Jennings and McIntosh, all of the nominees are currently members of the
Board of Directors of the Company. The Board of Directors recommends that all of
the nominees be elected as directors of the Company, and it is intended that the
accompanying proxy will be voted for the election of the seven nominees as
directors, unless the proxy contains contrary instructions.
The Company has no reason to believe that any of the nominees will not be a
candidate or will be unable to serve as a director. However, in the event that
any of the nominees should become unable or unwilling to serve as a director,
the persons named in the proxy have advised that they will vote for the election
of such person or persons as shall be nominated by the Board of Directors.
The Company's By-Laws set forth procedures by which stockholders of the
Company who are stockholders of record as of the record date entitled to vote in
the election of directors may nominate persons for election to the Board of
Directors. Such nominations shall be considered timely, in the case of an annual
meeting, if received by the Company not less than 60 days nor more than 90 days
prior to the meeting; provided, however, that in the event that less than 70
days' notice of the date of the meeting is given to stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the 10th day following the day on which notice of the meeting was sent
(estimated for the 1998 Annual Meeting of Stockholders to be September 21,
1998). The stockholder's nomination must include: (a) all information required
to be disclosed in the solicitation of a proxy pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended (including the nominee's written
consent to serve as a director if elected); (b) the nominating stockholder's
name and address as they appear on the Company's books; and (c) the number of
shares of Common Stock of the Company beneficially owned by such nominating
stockholder.
NOMINEES
The following sets forth the names and ages of the seven nominees for
election to the Board of Directors, their respective principal occupations or
employment histories and, if applicable, the period during which each has served
as a director of the Company.
C. Keith Hartley -- age 56 -- has been a member of the Board of Directors
of the Company since September 1996 and served as Co-Chairman of the Board from
December 1, 1997 to June 1998. Since August
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1995, Mr. Hartley also has been Managing Partner, Corporate Finance, of Forum
Capital Markets LLC, an investment banking firm. From May 1991 to August 1995,
Mr. Hartley was an independent financial consultant, and from February 1990 to
May 1991, he was a Managing Director of Peers & Co., a merchant banking firm.
From 1973 to 1989, Mr. Hartley was a Managing Director of Drexel Burnham Lambert
Incorporated. Mr. Hartley also is a director of Comdisco, Inc. and Swisher
International Group, Inc.
Kenneth R. Jennings -- age 43 -- is newly nominated to the Board of
Directors of the Company. Since 1993, Dr. Jennings has been a partner with
Andersen Consulting where his area of focus is the health care management
industry, specifically the development of high performance health care
organizations. He also directs the firm's health care merger and acquisition
practice. He is one of the authors of the book, "Changing Health
Care -- Creating Tomorrow's Winning Health Enterprise Today," and his writings
on health care have been published frequently in numerous journals. Dr. Jennings
is a director of Lumenol, a medical products and molecular diagnostics company.
David McIntosh -- age 51 -- is newly nominated to the Board of Directors of
the Company. Since June 1998, Mr. McIntosh has been the Chief Executive Officer
of Fire Protection, Inc., a developer and distributor of a fire-blocking gel.
Previously, Mr. McIntosh was the Chief Executive Officer of Gunster, Yoakley,
Valdes-Fauli and Stewart, P.A., a prominent Florida-based international law
firm, from 1984 through April 1998. Prior to 1984, Mr. McIntosh was a partner
with Coopers & Lybrand, a public accounting firm. He is a director, officer and
active member of numerous local, state and national foundations, committees,
task forces, associations and charitable organizations.
Michael A. O'Hanlon -- age 51 -- has served as a director of the Company
since January 20, 1998. Since November 1995, Mr. O'Hanlon has served as the
President and Chief Executive Officer of DVI, Inc. ("DVI"), the largest
independent financier to the health care market in the United States. Mr.
O'Hanlon was President and Chief Operating Officer of DVI from September 1994 to
November 1995, and previously served as Executive Vice President of DVI. For
nine years prior to joining DVI, Mr. O'Hanlon served as President and Chief
Executive Officer of Concord Leasing, Inc., a provider of medical, aircraft,
shipping, industrial and medical imaging equipment financing. Mr. O'Hanlon is a
director of DVI.
Joseph A. Paul -- age 40 -- has been a member of the Company's Board of
Directors and its President since July 1, 1996, its Chief Operating Officer from
July 1, 1996 through October 31, 1997, its interim Chief Executive Officer
effective February 1, 1997 and became the Company's Chief Executive Officer in
March 1997. From May 1994 to June 30, 1996, he was President of MediTek Health
Corporation ("MediTek"), a corporation acquired by the Company from HEICO
Corporation ("HEICO") in July 1996. Mr. Paul joined HEICO in 1991 as a Vice
President and was responsible for forming MediTek. From 1981 until June 1997,
Mr. Paul was a Vice President of Ambassador Square, Inc., a real estate
development and management company, and from 1988 until June 1997, served as a
Vice President of Columbia Ventures, Inc., a private investment company. Mr.
Paul is a member of the American Institute of Certified Public Accountants and
the Florida Institute of Certified Public Accountants.
Gordon C. Rausser, Ph.D. -- age 54 -- has been a director of the Company
since October 1994 and a consultant to the Company since January 1995. Dr.
Rausser is co-founder, principal and director of LECG, Inc., an economics
consulting group that provides consulting and litigation support services
primarily to Fortune 500 companies. LECG, Inc. was publicly traded on the New
York Stock Exchange until a recent merger. He is Chairman of the Board of
TriColor Lines, a commercial real estate and export/import company with offices
in San Francisco, London and Prague. Dr. Rausser has served as the Dean of the
College of Natural Resources at the University of California at Berkeley
("UC-Berkeley") since 1994 and has been the Robert Gordon Sproul Distinguished
Professor since 1986. He has won 15 national awards for his innovative economic
research and strategic analysis. He was also the Chairman of the Department of
Agricultural and Resource Economics at UC-Berkeley from 1979 to 1985 and again
from 1992 to 1994. While on leave from his professorship position at
UC-Berkeley, he served as Senior Economist on the Council of Economic Advisors
from 1986 to 1987 and as Chief Economist of the Agency for International
Development from 1988 to 1990.
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<PAGE> 6
L.E. Richey, M.D. -- age 69 -- has been a director of the Company since
June 1997, became Co-Chairman of the Board on December 1, 1997 and Chairman of
the Board in June 1998. Dr. Richey is a radiologist with over 30 years of
medical and entrepreneurial experience, including medical hospital ownership and
management. In 1991, Dr. Richey founded U.S. Imaging, Inc., a group of eight
multi-modality outpatient diagnostic imaging centers located in Houston and San
Antonio, Texas, and served as its President from 1991 until it was acquired by
the Company in June 1996. From 1965 until 1990, Dr. Richey served as the
Director of Radiology at Polly Ryon Hospital, and currently, Dr. Richey serves
as the Medical Director of four of the Company's imaging centers in Houston,
Texas. Dr. Richey is founder and President of L.E. Richey Associates PLLC which
provides radiology services in Houston and San Antonio, Texas.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES NAMED ABOVE.
BOARD OF DIRECTORS
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company held 18 meetings during the fiscal
year ended December 31, 1997. During 1997, each director attended at least 75%
of the meetings of the Board of Directors and any committee on which such
director served. The Board currently has three committees: the Audit Committee,
the Compensation Committee and the Executive Committee.
The Audit Committee currently consists of two non-employee directors, Mr.
Hartley and Dr. Richey. The Audit Committee is authorized by the Board of
Directors to review, with the Company's independent accountants, the annual
financial statements of the Company; to review the work of, and approve
non-audit services performed by, such independent accountants; and to make
annual recommendations to the Board of Directors for the appointment of
independent public accountants for the ensuing year. The Audit Committee also
reviews the effectiveness of the financial and accounting functions,
organization, operations and management of the Company. The Audit Committee met
twice in 1997.
The Compensation Committee currently consists of two non-employee
directors, Mr. Hartley and Dr. Richey. The Compensation Committee reviews and
recommends to the Board of Directors the compensation and benefits of all
officers of the Company, reviews general policy matters relating to compensation
and benefits of employees of the Company, administers the Company's 1995
Long-Term Incentive Plan and the issuance of stock options to the Company's
officers, employees and consultants and also has authority to grant options to
directors who are not employees of the Company. The Compensation Committee held
three meetings in 1997.
The Executive Committee of the Board of Directors currently consists of
Messrs. Hartley and Paul and Drs. Richey and Rausser. The Executive Committee
exercises the powers and authority of the Board of Directors in the management
and affairs of the Company between meetings of the Board of Directors, to the
extent permitted by law. During 1997, the Executive Committee met four times.
In January 1997, the Board appointed a Special Advisory Committee,
consisting of non-employee directors Messrs. Laurans Mendelson (now a former
director) and Hartley and Dr. Rausser, to review the Company's former
relationship with Coyote Consulting and Financial Services, LLC and Keith
Greenberg, a former independent consultant of the Company, and the Company's
prior public disclosure regarding that relationship. In addition, in March 1997,
the Special Advisory Committee recommended, and the Board adopted, certain
procedures regarding the management of the Company, including background
investigations of management and consulting candidates, strengthening disclosure
review, and the election of two additional outside directors to the Board. The
Special Advisory Committee was disbanded in July 1997 after having completed its
function.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
A member of the Company's Board of Directors and Compensation Committee,
Keith Hartley, is the managing partner of Forum Capital Markets LLC ("Forum").
Forum was the underwriter of the Company's
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<PAGE> 7
$57.5 million subordinated convertible debenture offering in 1996, and was paid
an underwriting fee of $2.9 million. In addition, the Company sold to Forum, for
nominal consideration, warrants which entitle Forum to purchase 319,445 shares
of Common Stock at an exercise price of $9.00 per share. Mr. Hartley was elected
to the Board of Directors of the Company on September 19, 1996, subsequent to
the debenture offering.
In June 1996, the Company acquired U.S. Imaging, Inc. ("U.S. Imaging") in a
merger transaction pursuant to which U.S. Imaging merged into a wholly-owned
subsidiary of the Company. The merger consideration paid to the former sole
stockholder of U.S. Imaging, the Reese General Trust (the "Reese Trust"), was
$7,000,000 in cash and 1,671,000 shares of Common Stock, of which 671,000 shares
were placed in escrow. The Reese Trust subsequently transferred the shares to
Lighthouse Capital Insurance Company. Dr. Richey does not have beneficial
ownership of these shares. The shares held in escrow were to be released to
Lighthouse if certain financial results were achieved by U.S. Imaging in 1997
and 1998. Of the shares held in escrow, 400,000 shares were released in 1997 and
the balance was released in 1998. L. E. Richey, a director, Chairman of the
Board of the Company and a member of the Compensation Committee, was the
President of U.S. Imaging at the time of the merger. Dr. Richey became a
director of the Company in June 1997 and was not a director or an employee of
the Company at the time that the Company acquired U.S. Imaging.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Company receive a
payment of $1,000 for each meeting of the Board that they attend and receive
$500 for each committee meeting they attend. Board members are also reimbursed
for their reasonable expenses incurred in serving as a director of the Company.
In November 1997, the Board of Directors adopted a policy of granting
options to purchase shares of the Company's Common Stock to directors who are
not employees or principal stockholders of, or referring physicians to, the
Company ("Director Options"), on the following terms: options to purchase 10,000
shares of Common Stock are granted to each such director (i) on the date such
director is first elected or appointed to the Board of Directors and (ii) each
year thereafter on the day of the first meeting of the board of directors
immediately following any annual meeting of stockholders (so long as the
director's term as a director continues after such annual meeting). Director
Options have a term of five years, vest as determined by the Board of Directors
and have an exercise price equal to the fair market value of the Common Stock on
the date immediately preceding the date of the option grant. See "Stock Option
Cancellation and Reissuance."
Dr. Rausser is paid $25,000 each fiscal quarter pursuant to the terms of a
Consulting Agreement with the Company dated January 1, 1995, and amended
effective September 1995 and September 1996. See "Certain Relationships and
Related Transactions."
Charles Jacobson, a former director of the Company, and an entity in which
he owns an equity interest, have management consulting arrangements with the
Company lasting through the year 2000, pursuant to which the Company paid an
aggregate of $104,312 to Mr. Jacobson and such entity in 1997 for management
consulting services.
EXECUTIVE OFFICERS
The following sets forth certain information with respect to the current
executive officers of the Company (other than Messrs. Richey and Paul):
David Cohen -- age 45 -- has been with the Company since August 1995 and is
an Executive Vice President responsible for the Company's West Coast Operations.
Mr. Cohen has been responsible for and/or involved with the development of
diagnostic imaging centers for the past 16 years. From October 1994 until August
1995, Mr. Cohen served the Company as an independent consultant. From November
1992 to September 1994, Mr. Cohen was the President of FutureCare Affiliates,
Inc., a company which he co-founded and that was acquired by the Company in
November 1995. During 1991 and 1992, he was the Western Regional Manager for New
Ventures and Acquisitions for DVI Health Services, Inc., a publicly-traded
national health services organization. From 1986 to 1991, he served as an MRI
consultant for Diasonics/
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<PAGE> 8
Toshiba America Medical Systems. Mr. Cohen was also an initial stockholder of
Diversified Therapy Corp., a corporation in which the Company owns approximately
a 25% interest.
Francis J. Harkins, Jr. -- age 49 -- joined the Company in December 1997
as Executive Vice President, General Counsel and Corporate Secretary. Prior to
joining the Company, Mr. Harkins served as Assistant General Counsel from 1993
to 1996, as Corporate Secretary from 1995 to 1997 and as Vice President and
Associate General Counsel from 1996 to 1997 of Peoples Telephone Company, Inc.,
the largest independent operator of public pay telephones in the United States.
Leon F. Maraist -- age 55 -- has served as Executive Vice President and
Chief Operating Officer of the Company since November 1997. From 1993 to 1997,
Mr. Maraist served as Vice President of NMC Diagnostic Services, Inc. ("NMC"),
which provides mobile imaging diagnostics in physicians' offices and diagnostics
in fixed sites. His responsibilities with NMC included marketing, sales, finance
and operations. From 1992 to 1994, Mr. Maraist directed operations of the $1
billion nationwide dialysis division of NMC.
J. Wayne Moor -- age 46 -- has been Chief Financial Officer of the Company
since June 1997 and is an Executive Vice President and Assistant Secretary. From
October 1994 until June 1997, Mr. Moor was an independent accounting consultant,
and he served in that capacity for the Company from February 1997 until June
1997. From 1989 to October 1994, he was Executive Vice President in charge of
commercial real estate and business lending at Cartaret Savings and AmeriFirst
Banks.
Len V. Platt -- age 45 -- has been with the Company since November 1996 and
is Executive Vice President responsible for the Company's Southeast operations.
From January 1995 until November 1996, Mr. Platt has held various sales and
management positions, including National Sales Manager at Elscint, Inc., a
manufacturer of imaging equipment. From August 1991 until January 1995, he was
Regional Sales Manager of Otsuka Electronics.
Arthur E. Quillo -- age 56 -- has been Executive Vice President of the
Company since November 1996 and is responsible for the Company's South Central
and Midwest regional operations. From June 1995 until he joined the Company in
November 1996, Mr. Quillo was the Director of Operations at Voxel, Inc., a
medical device company. From January 1993 through June 1995, Mr. Quillo served
as Vice President of Field Operations of the Resonex Corporation, a manufacturer
of magnetic resonance imaging equipment, and from August 1991 through October
1992, he served as President and Chief Operating Officer of MRI Medical
Diagnostics ("MRI"), a start-up imaging center company. Mr. Quillo also held a
broad range of positions at the Xerox Corporation for approximately 13 years and
has accumulated over 14 years of experience in the medical imaging industry.
Alan M. Winakor -- age 39 -- has been with the Company since October 1996
and is Executive Vice President responsible for the operations of the Company's
Northeast Region. In 1986, he founded Medical Marketing Development, Inc., an
owner and operator of six outpatient facilities in the New York area, which the
Company acquired in October 1996.
Amos F. Almand, III -- age 49 -- was elected Senior Vice President in May
1995. Mr. Almand served as a director of the Company from May 1995 to November
1997. Mr. Almand organized and was the owner of the general partner of Salisbury
Imaging Ltd. from its founding in 1990 until it was acquired by the Company in
1995. Mr. Almand was also an initial stockholder, and is Chairman of the Board,
of Diversified Therapy Corp., a corporation in which the Company owns
approximately a 25% interest.
Todd R. Smith -- age 34 -- has been Vice President and Chief Information
Officer since January 1996. From October 1992 until its acquisition by the
Company in November 1995, Mr. Smith was the President and, previously, Vice
President of FutureCare Affiliates, Inc., a company he co-founded in 1992. From
June 1991 to October 1992, he was an Assistant Vice President of DVI Health
Services Corp., a publicly traded national health services organization, where
he oversaw the acquisition and development of six health care service
businesses. From 1990 to 1991, he was the President of Premier Health
Strategies. From 1986 to 1991, he was Director of Project Development of TME,
Inc. where he oversaw the development of a number of outpatient diagnostic
imaging center limited partnerships.
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<PAGE> 9
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
1997, 1996 and 1995, the compensation paid or accrued by the Company to its
current Chief Executive Officer, its former Chief Executive Officer (whose
employment concluded on March 31, 1997) and the four other most highly
compensated executive officers for the fiscal year ended December 31, 1997 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ -----------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND COMPENSATION AWARD(S) OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($)(2) (#)(3) ($)
------------------ ---- --------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Paul(4) 1997 222,346 50,000 15,240 -- 200,000 7,450(5)
Chief Executive Officer, 1996 98,485 25,000 6,000 573,125 300,000 45,555(6)
President and Director 1995 -- -- -- -- -- --
David Cohen(7) 1997 200,000 114,645 15,240 -- -- 3,000(5)
Executive Vice President -- 1996 197,307 123,205 12,000 -- 50,000 1,615(5)
West Coast Operations 1995 41,538 26,000 5,000 -- 150,000 --
Alan M. Winakor(8) 1997 204,000 50,000 -- -- -- 6,620(5)
Executive Vice President -- 1996 45,508 16,667 -- -- 100,000 942(5)
Northeast Region 1995 -- -- -- -- -- --
Todd R. Smith (9) 1997 120,769 68,250 12,651 -- -- 1,873(5)
Vice President and Chief 1996 126,923 27,500 12,000 -- 20,000 542(5)
Information Officer 1995 -- -- -- -- 80,000 --
Len V. Platt(10) 1997 125,779 92,500 9,488 -- 10,000 69,281(11)
Executive Vice President -- 1996 13,942 30,385 -- -- 50,000 --
Southeast Region 1995 -- -- -- -- -- --
Jeffrey A. Goffman(12) 1997 53,846 -- -- -- -- 1,615(5)
Former Director 1996 189,038 -- 14,747 2,510,625 350,000 2,826(5)
Former Chief Executive Officer and 1995 137,500 100,000 12,000 256,250 150,000 --
Former Chairman of the Board
</TABLE>
- ---------------
(1) Represents car allowance.
(2) The number of shares of restricted stock outstanding at December 31, 1997
totaled 580,000 shares. The aggregate value of the restricted stock was
$2,138,750 at December 31, 1997 based upon the closing market price of the
Company's Common Stock on that date. The total number of shares of
outstanding restricted stock included in the Summary Compensation Table that
have vested, or will vest, in whole or in part, within three years after
date of grant is 280,000 shares. Of these 280,000 shares, 260,000 shares
vested in 1997, 15,000 shares will vest in 1998 and 5,000 shares will vest
in 1999. Dividends will be paid on restricted stock to the extent paid on
Common Stock.
(3) In 1996, the Company granted 100,000, 50,000, 20,000 and 100,000 options to
Messrs. Goffman, Cohen, Smith and Paul, respectively, with an exercise price
that was below the market price of the underlying Common Stock. The exercise
price per underlying share was $7.125, and the market price of the
underlying Common Stock at the date the options were granted was $12.875 per
share. See "Stock Option Cancellation and Reissuance."
(4) Joseph A. Paul joined the Company in July 1996 and became its Chief
Executive Officer in March 1997. The 1996 amounts only include Mr. Paul's
compensation as President for the period from July 1, 1996 through December
31, 1996 and do not include a $200,000 bonus and $17,512 of vacation pay
earned at MediTek Health Corporation and accrued prior to the acquisition of
MediTek Health Corporation by the Company and paid by the Company in July
1996 subsequent to the date of acquisition. These amounts do not include Mr.
Paul's 1996 salary and bonus earned for the period prior to the acquisition
of MediTek Health Corporation by the Company (January 1, 1996 to June 30,
1996) in the amounts of $70,488 and $37,500, respectively. Mr. Paul's salary
and bonus at MediTek Health Corporation were $140,413 and $50,000,
respectively, in 1995.
(5) Company contributions to the 401(k) Plan. The Company did not make
contributions in 1995.
7
<PAGE> 10
(6) Reimbursement for Mr. Paul's relocation expenses totaled $43,040, and
Company contributions to the 401(k) Plan on his behalf totaled $2,515.
(7) Mr. Cohen's employment began in August 1995.
(8) Mr. Winakor's employment began in October 1996.
(9) Mr. Smith was granted 80,000 options in December 1995 pursuant to his
employment contract. His employment commenced in December 1995, but all
cash compensation was paid commencing in January 1996.
(10) Mr. Platt's employment began in November 1996.
(11) Reimbursement for Mr. Platt's relocation expenses totaled $66,783 and
Company contributions to the 401(k) Plan totaled $2,498.
(12) On February 3, 1997, Mr. Goffman was placed on voluntary administrative
leave by the Company's Board of Directors. During this administrative
leave, he was relieved of all of his corporate duties and was not permitted
to participate in any meetings of the Company's Board of Directors. In
March 1997, Mr. Goffman ceased his employment with the Company. The Company
entered into a Settlement Agreement and General Release with Mr. Goffman
pursuant to which Mr. Goffman resigned as a director, officer and employee
effective as of March 31, 1997. See "Certain Relationships and Related
Transactions."
STOCK OPTIONS
The following table sets forth information concerning the Named Executive
Officers who were granted stock options during the fiscal year ended December
31, 1997:
OPTION/SAR GRANTS IN 1997(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) IN 1997 ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Paul................... 200,000(3) 29.6% 6.25 4/23/2007 786,118 1,992,178
Len V. Platt..................... 10,000(4) 1.5% 4.56 11/21/2002 12,598 27,839
</TABLE>
- ---------------
(1) See "Stock Option Cancellation and Reissuance."
(2) The potential realizable value is based on the term of the option at the
time of grant. An assumed stock price appreciation of 5% and 10% is used
pursuant to rules promulgated by the SEC. The potential realizable value is
calculated by assuming that (i) the stock price on the date of grant was
equal to the exercise price and (ii) such price appreciates at the indicated
rate, compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term at this appreciated
price. The potential realizable value is not intended to forecast the future
appreciation of the Common Stock and actual gains, if any, on stock option
exercises will depend upon the future performance of the Common Stock and
the date on which the options are exercised.
(3) The options granted vest immediately upon the earlier of (i) the Common
Stock trading at a price per share of $10.00 or more as reported on the
Nasdaq National Market and (ii) a change of control of the Company.
(4) The options granted vest in three equal annual installments beginning
November 21, 1998.
8
<PAGE> 11
The following table sets forth fiscal year end option values for the Named
Executive Officers who held unexercised options at December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT FISCAL
ACQUIRED ON VALUE FISCAL YEAR END (#) YEAR END($)
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Joseph A. Paul................. 0 N/A 33,334/466,666 N/A
David Cohen.................... 0 N/A 141,667/58,333 N/A
Alan M. Winakor................ 0 N/A 25,000/75,000 N/A
Todd R. Smith.................. 0 N/A 44,999/40,001 N/A
Len V. Platt................... 0 N/A 16,666/43,334 N/A
Jeffrey A. Goffman(3).......... 0 N/A 140,000/400,000 N/A
</TABLE>
- ---------------
(1) See "Stock Option Cancellation and Reissuance."
(2) As of December 31, 1997, none of the options was in-the-money.
(3) See "Certain Relationships and Related Transactions."
9
<PAGE> 12
STOCK OPTION CANCELLATION AND REISSUANCE
As discussed in the Compensation Committee Report, and as previously
reported in the Company's Form 10-Q for the quarter ended June 30, 1998, in July
1998, the Company offered certain holders of stock options, including certain
executive officers, the opportunity to cancel their outstanding stock options in
exchange for the issuance of replacement stock options. The exercise price on
the newly issued stock options was set at the fair market value of the Company's
Common Stock on the date of issuance, which price was lower than the exercise
price of the canceled options. This action was taken in order to provide an
appropriate incentive to these individuals. The following option table sets
forth certain information concerning the cancellation and new grants of stock
options to executive officers of the Company in July 1998 and within the
previous ten years.
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS(1)
LENGTH OF ORIGINAL
NUMBER OF SECURITIES MARKET PRICE OF EXERCISE PRICE OPTION TERM
UNDERLYING STOCK AT TIME AT TIME OF NEW REMAINING AT DATE
OPTIONS/SARS OF REPRICING OR REPRICING OR EXERCISE OF REPRICING OR
NAME DATE(2) REPRICED OR AMENDED AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT (YRS.)
- ---- ------- --------------------- --------------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Paul 7/13/98 75,000 3.50 7.13 3.50 2.9
Chief Executive Officer, 7/13/98 150,000 3.50 12.13 3.50 3.2
President and Director 7/13/98 150,001 3.50 6.25 3.50 8.8
-------
375,001
David Cohen 7/13/98 93,750 3.50 5.00 3.50 7.0
Executive Vice President, 7/13/98 31,250 3.50 7.13 3.50 7.9
West Coast Region -------
125,000
Francis J. Harkins, Jr. 7/13/98 35,000 3.50 3.69 3.50 4.4
Executive Vice President,
General Counsel and
Corporate Secretary
Leon F. Maraist 7/13/98 75,000 3.50 6.50 3.50 4.3
Executive Vice President
and Chief Operating Officer
J. Wayne Moor 7/13/98 75,000 3.50 6.69 3.50 3.9
Executive Vice President,
Chief Financial Officer
and Assistant Secretary
Len V. Platt 7/13/98 41,667 3.50 11.25 3.50 3.4
Executive Vice President, 7/13/98 8,333 3.50 4.56 3.50 4.4
Southeast Region -------
50,000
Arthur E. Quillo 7/13/98 50,000 3.50 11.25 3.50 3.4
Executive Vice President,
South Central and Midwest
Region
Andrew P. Shaw 7/13/98 19,780 3.50 12.50 3.50 3.0
Executive Vice President 7/13/98 16,484 3.50 12.13 3.50 3.2
7/13/98 3,956 3.50 10.00 3.50 3.4
7/13/98 19,780 3.50 6.25 3.50 3.8
-------
60,000
Alan M. Winakor 7/13/98 50,000 3.50 10.00 3.50 3.1
Executive Vice President,
Northeast Region
Amos F. Almand, III 7/13/98 11,905 3.50 7.13 3.50 7.9
Senior Vice President 7/13/98 11,905 3.50 7.13 3.50 7.9
7/13/98 26,190 3.50 6.00 3.50 3.8
-------
50,000
C. Keith Hartley 7/13/98 11,818 3.50 12.13 3.50 5.2
Former Co-Chairman of the 7/13/98 41,364 3.50 8.63 3.50 3.7
Board and Director 7/13/98 11,818 3.50 6.50 3.50 4.3
-------
65,000
L.E. Richey, M.D. 7/13/98 12,500 3.50 7.50 3.50 3.9
Chairman of the Board and 7/13/98 12,500 3.50 6.50 3.50 4.3
Director -------
25,000(3)
</TABLE>
- ---------------
(1) For an explanation of the repricing, see "Compensation Committee
Report -- Stock Option Cancellation and Reissuance."
(2) The date reflects the date on which stock options to purchase shares of
Common Stock were canceled and the date on which replacement stock options
were issued.
(3) Also on July 13, 1998, the Board of Directors of the Company granted Dr.
Richey options to purchase 345,000 shares of Common Stock in recognition of
the extensive amount of time he has devoted to the Company and in
anticipation of his future contributions as Chairman. The options are
exercisable at a
10
<PAGE> 13
price of $3.50 per share, which represents the closing price of the Common
Stock on the day immediately preceding the date of grant, and fully vest one
year from date of grant.
REPORT OF THE COMPENSATION COMMITTEE
THE COMMITTEE
The two member Compensation Committee of the Company's Board of Directors
is responsible for annually recommending to the Board of Directors the cash
compensation payable to the Company's executive officers. Compensation decisions
by the Compensation Committee are submitted to the Board of Directors for
approval. During 1997, the Compensation Committee was comprised of Mr. C. Keith
Hartley and Dr. L.E. Richey, each of whom is a non-employee director of the
Company.
COMPENSATION STRUCTURE
The key components of the compensation of the Company's Chief Executive
Officer and the other executive officers named in the Summary Compensation Table
are base salary, annual bonus and stock-based incentives. The objective of the
Company is to create a compensation package for executive officers that is
competitive with compensation payable by comparable medical imaging and other
companies of similar size and complexity, as well as to provide both short-term
rewards and long-term incentives for positive individual and corporate
performance. This policy is expected to attract, motivate and retain the
qualified management necessary to promote continuing improvement in the
Company's performance and long-term stockholder value.
Based on both objective and subjective determinations, the Chief Executive
Officer recommends to the Compensation Committee the amount of total
compensation payable to the executives named in the Summary Compensation Table
other than himself for each fiscal year. The Committee undertakes a review of
such recommendations in light of the factors noted by the Chief Executive
Officer and the various factors discussed below. The Committee sets the
compensation payable to the Chief Executive Officer relying on similar factors.
In the compensation process, predetermined performance targets are used for
purposes of compensation decisions. Relevant subjective criteria are used as
well in the Committee's reasonable business discretion. The compensation
recommendations of the Chief Executive Officer have historically been approved
by the Committee and the Board of Directors.
The various components of the Company's executive compensation are
discussed below.
Salaries
The base salaries of the executives named in the Summary Compensation
Table, including the base salary of the Chief Executive Officer of the Company,
are deliberately set at a level the Company believes to be comparable to
salaries paid to executive officers of companies of comparable size. The
objective of the Company is to attract and retain the best possible individuals
while setting compensation at levels which are sufficiently competitive with
companies of similar size and complexity. The base salary is reviewed annually.
Joseph A. Paul became President of the Company in June 1996 and permanent
Chief Executive Officer in March 1997. Mr. Paul's base salary as an employee of
the Company is set at $235,000 annually and includes other terms as set forth in
the "Employment Agreements" section of this Proxy Statement. These terms were
established after arms-length negotiations between the Company and Mr. Paul and
are believed by the Company to be appropriate for an executive of Mr. Paul's
experience in the increasingly competitive and rapidly evolving medical imaging
industry.
Bonuses
The emphasis on annual discretionary bonuses allows the Company greater
flexibility in rewarding favorable individual and corporate performance and in
motivating executives. The bonus for the Chief Executive Officer is tied to
earnings per share, among other considerations. Further, the Compensation
11
<PAGE> 14
Committee generally considers in reviewing bonus recommendations the increase in
the Company's revenues, scan volume, new center openings, EBITDA, collection of
accounts receivable, employee growth and the completion and integration of
significant acquisitions, among other factors.
Stock-Based Incentives
The third component of the Company's executive compensation is comprised of
stock-based incentive plans. The Committee considers the current year's vesting
of previously issued shares under the Company's 1995 Long Term Incentive Plan in
evaluating the executive compensation recommendations of the Chief Executive
Officer. Whereas the cash bonus payments are intended to reward positive
short-term individual and corporate performance, grants under the stock-based
plans are intended to provide executives with longer term incentives which
appreciate in value with the continued favorable performance of the Company.
Such options generally vest over a period of years and thus are helpful in
retaining qualified executives. The use of stock incentives is intended to align
the interests of the Company's executives with that of the Company's
stockholders. In 1997, the Committee granted options with respect to 675,000
shares of the Company's Common Stock. Of those options, 595,000 were granted to
executive officers of the Company, representing 88.1% of the total options
granted to all employees. Options with respect to an aggregate of 210,000 shares
of Common Stock were granted to Named Executive Officers.
Stock Option Cancellation and Reissuance
Pursuant to the 1995 Long Term Incentive Plan, the Compensation Committee
had granted stock options to certain members of management and other senior
employees at exercise prices ranging from $3.69 to $13.50 per share. After the
decline in the market price of the Company's Common Stock, the Compensation
Committee considered whether or not, in conjunction with the other forms of
compensation, the outstanding stock options were sufficient to motivate and
retain certain members of management and other senior employees. The
Compensation Committee concluded that the outstanding options were insufficient
to motiviate and retain these key employees and, therefore, the Compensation
Committee granted new options to certain employees in consideration of their
agreement to cancel their outstanding options. Accordingly, in July 1998, the
Compensation Committee approved a resolution canceling 1,461,000 options
outstanding under the 1995 Long Term Incentive Plan and reissuing 1,175,001
options with an exercise price of $3.50 per share, which was the market price
per share of Common Stock at that time. For information regarding the stock
options reissued to each named executive officer as well as to other executive
officers, see "Ten-Year Option/ SAR Repricings."
The Compensation Committee
C. Keith Hartley
L.E. Richey, M.D.
12
<PAGE> 15
PERFORMANCE GRAPH
The graph below compares the cumulative total returns (as described below)
of the Company's Common Stock with the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Health Services Index for the period commencing October 20, 1994 (the
date on which trading in the Company's Common Stock commenced) and ending
December 31, 1997. The interim measurement points are the last days of the years
during the measurement period: December 31, 1994, December 31, 1995, December
31, 1996, and December 31, 1997.
Stockholder returns are calculated assuming $100 was invested at the
closing market prices on October 20, 1994, assuming in all cases reinvestment of
any subsequent dividends. The Performance Graph below is presented in accordance
with Securities and Exchange Commission requirements. Stockholders are cautioned
that historical stock price performance shown on the Performance Graph is not
necessarily indicative of future stock price performance and in no way reflects
the Company's forecast of future stock price performance.
<TABLE>
<CAPTION>
US NASDAQ NASDAQ
Measurement Period DIAGNOSTIC STOCK HEALTH
(Fiscal Year Covered) INC. MARKET SERVICES
--------------------- ---------- ------ --------
<S> <C> <C> <C>
10/20/94 100 100 100
12/94 86 99 97
12/95 138 140 123
12/96 176 172 123
12/97 70 211 125
</TABLE>
EMPLOYMENT AGREEMENTS
Joseph A. Paul and the Company entered into a five-year employment
agreement, dated June 18, 1996, for Mr. Paul to serve as President and a
director of the Company. Effective in February 1997, he was also appointed as
interim Chief Executive Officer of the Company, and in March 1997, he became
Chief Executive Officer. The agreement provides for an annual base salary of
$200,000 during the first year of its term, and for annual increases in each of
the remaining years of at least 5% per year. The agreement also provides for an
annual bonus of $50,000 during the first year and a bonus in each subsequent
year as determined by the Compensation Committee. In April 1997, the
Compensation Committee recommended and the Board of Directors approved that
effective May 1, 1997, Mr. Paul receive a salary of $235,000 per year, subject
to an annual increase of 5% per year, and a bonus based upon the Company meeting
certain financial targets. The agreement provides that all options and
restricted stock awards granted to Mr. Paul will vest if he is terminated
without cause or upon a change of control of the Company. During the term of his
employment with the Company, Mr. Paul is also entitled to (i) participation in
all other benefit plans provided by the Company to its executives, (ii) four
weeks paid vacation per year and (iii) a $1,000 per month non-accountable car
allowance. The agreement also provides that, upon the occurrence of the
following events, Mr. Paul has the right to elect to deem his employment to have
been terminated by the Company without
13
<PAGE> 16
cause and receive a lump sum payment equal to 2.9 times the annual salary and
incentive or bonus payments made to him by the Company during the most recent
fiscal year: (i) Mr. Paul no longer exercises all of the duties and
responsibilities and no longer possesses substantially all of the authority
provided for in the agreement; (ii) the Company materially breaches the
agreement or the performance of its duties and obligations thereunder; or (iii)
there are certain changes of control or ownership of the Company. The agreement
also restricts Mr. Paul from competing with the Company or soliciting customers
or other business for any entity other than the Company during the term of the
agreement and for a period of one year following termination, and from
disclosing certain confidential information with respect to the Company. If,
however, Mr. Paul's employment is terminated without cause or he terminates his
agreement upon a material breach by the Company, his non-compete and non-solicit
restrictions will not apply following termination.
David Cohen and the Company entered into a four-year employment agreement
in August 1995, as amended in May 1997. Mr. Cohen currently serves as Executive
Vice President of West Coast Operations. The agreement provides that Mr. Cohen's
annual base salary was $120,000 for the first year of the agreement and will be
no less than 110% of the previous year's base salary. Currently, Mr. Cohen's
annual base salary is $200,000. Mr. Cohen is entitled to an annual bonus equal
to the greater of five percent of the net income before taxes of the Company's
San Francisco Magnetic Resonance Center ("SFMRC") or $50,000. Mr. Cohen was also
entitled to a cash bonus of three percent of the net income before taxes
resulting from Mr. Cohen's identification and development of certain mergers and
acquisitions that were consummated by the Company prior to June 1, 1997. Under
the terms of his agreement, Mr. Cohen was granted (i) 100,000 fully vested stock
options at an exercise price of $5.125 per share and (ii) 50,000 options with an
exercise price of $5.125 per share, which vest at the rate of 12,500 options per
year, but only for each year in which the SFMRC earns a minimum of $250,000
before taxes. See "Stock Option Cancellation and Reissuance." In the event that
Mr. Cohen's duties and authority are materially diminished or the Company
materially breaches the agreement, Mr. Cohen is entitled to deem his employment
terminated without cause and receive all compensation which would have accrued
to him under the agreement for the longer of the remainder of the term or for a
period of one year. Mr. Cohen is entitled to (i) participation in all other
benefit plans provided by the Company to its executives, (ii) four weeks paid
vacation per year and (iii) a $1,000 per month non-accountable car allowance.
The agreement also restricts Mr. Cohen from competing with the Company and from
disclosing confidential information with respect to the Company, although if Mr.
Cohen so deems his employment terminated without cause, he may, under certain
circumstances, waive certain payments from the Company and be relieved from the
non-competition restrictions.
Todd R. Smith and the Company entered into a three-year employment
agreement, dated December 7, 1995, effective December 5, 1995, which was amended
and restated on August 9, 1996, pursuant to which Mr. Smith serves as the
Company's Chief Information Officer and Vice President. The agreement provides
for an annual base salary of not less than $120,000 during 1997 and $125,000 for
1998. Mr. Smith is also entitled to an annual discretionary bonus, and a bonus
of $750 for each facility the computer system of which is brought on-line
pursuant to certain specifications. In addition, Mr. Smith received 80,000 stock
options in December 1995 at an exercise price of $6.50 per share which were to
vest in three equal installments on December 7, 1996, 1997 and 1998. All options
granted to Mr. Smith will vest upon the earlier of (i) Mr. Smith's employment
terminating without cause and (ii) upon a change of control of the Company.
During the term of his employment, Mr. Smith is also entitled to (i)
participation in all other benefit plans provided by the Company to its
executives, (ii) four weeks paid vacation per year and (iii) a $1,000 per month
non-accountable car allowance. In the event that the Company materially breaches
the employment agreement or in the event of certain changes in control or
ownership of the Company, Mr. Smith may elect to deem his employment terminated
by the Company without cause and in accordance with this provision, Mr. Smith
would be entitled to receive lump sum compensation, bonus and certain
reimbursements and benefits equal to two years' annualized compensation (unless
the remaining term of the agreement is less than one year, in which case Mr.
Smith is entitled to one year's annualized compensation, bonus and certain
reimbursements and benefits). If Mr. Smith releases the Company from its
obligation to pay such lump sum compensation, the Company will release him from
the post-termination non-compete and non-solicitation restrictions of the
agreement. The employment agreement restricts Mr. Smith from competing with the
Company and soliciting Customers (as defined in the agreement) during a 12 month
period after the date of
14
<PAGE> 17
termination and from disclosing certain confidential information with respect to
the Company. The non-compete and non-solicit restrictions will not apply if the
agreement is terminated by the Company without cause or by Mr. Smith upon a
material breach by the Company.
Len V. Platt and the Company entered into a three-year employment
agreement, dated October 15, 1996, effective November 1, 1996, pursuant to which
Mr. Platt serves as the Company's Executive Vice President in charge of the
Southeast Region. The agreement provides for an annual base salary of $125,000
during the first year of the term of his employment, $132,500 for the second
year and $140,000 for the third year. Mr. Platt was guaranteed a minimum bonus
of $25,000 for the first 12 months of his employment, payable at the same
intervals as his base salary. In addition, Mr. Platt is also entitled to a bonus
based on achievement of certain earnings goals outlined in the employment
agreement not to exceed 40% of his base salary and to compensation for any
forfeited commission/bonus from a former employer. In addition, Mr. Platt (i)
was granted 50,000 stock options with an exercise price of $11.25 per share,
which vest over the three-year term of his employment with the Company, (ii)
will be eligible to receive 10,000 additional stock options at the end of years
one and two of his term of employment and (iii) is entitled to future
discretionary grants of options. See "Stock Option Cancellation and Reissuance."
All options granted to Mr. Platt will vest upon the earlier of (i) the
termination of Mr. Platt's employment with the Company without cause and (ii) a
change of control of the Company. During the term of his employment, Mr. Platt
is entitled to (i) health insurance in accordance with the Company's existing
benefit package for senior management, (ii) three weeks paid vacation per year
and (iii) a $750 per month car allowance. In the event that the Company
materially breaches the employment agreement or in the event of certain changes
in control or ownership of the Company, Mr. Platt may elect to deem his
employment terminated by the Company without cause. In accordance with this
provision of his employment agreement, Mr. Platt would be entitled to receive
lump sum compensation, bonus and certain reimbursements and benefits equal to
two years' annualized compensation (unless the remaining term of the agreement
is less than one year, in which case Mr. Platt is entitled to one year's
annualized compensation, bonus and certain reimbursements and benefits). If Mr.
Platt releases the Company from its obligation to pay such lump sum
compensation, the Company will release him from the post-termination non-compete
and non-solicitation restrictions of the agreement. The employment agreement
restricts Mr. Platt from competing with the Company and soliciting Customers (as
defined in the agreement) during a 12 month period after the date of termination
and from disclosing certain confidential information with respect to the
Company. Such restrictions will not apply if the agreement is terminated by the
Company without cause or by Mr. Platt upon a material breach by the Company.
Alan M. Winakor and the Company entered into a five-year employment
agreement, dated September 4, 1996. Mr. Winakor currently serves as Executive
Vice President of the Company in charge of the Northeast Region. The agreement
provides for an annual base salary of $200,000 during the first year of its
term, and for annual increases in each of the remaining years of at least 5% per
year. The agreement also provides for an annual bonus of $50,000 in each of the
first two years of the term of the agreement and a $50,000 bonus in each
subsequent year that the net income before taxes attributable to the six imaging
centers previously operated by Medical Marketing Development, Inc., a subsidiary
of the Company, meets certain targets (the "Income Target"). In addition, Mr.
Winakor was granted options to purchase 100,000 shares with an exercise price of
fair market value on date of grant, 25,000 options of which will vest in each
year that the Income Target is met beginning on the first anniversary of the
date of grant. Mr. Winakor is also entitled to discretionary grants of options.
All options granted to Mr. Winakor will vest upon the earlier of (i) the
termination of his employment without cause and (ii) a change in control of the
Company. See "Stock Option Cancellation and Reissuance." During the term of his
employment with the Company, Mr. Winakor is also entitled to (i) participation
in all other benefit plans provided by the Company to its executives, (ii) four
weeks paid vacation per year and (iii) a $1,000 per month non-accountable car
allowance. The agreement restricts Mr. Winakor from competing with the Company
or soliciting customers or other business for any entity other than the Company
during the term of the agreement and for a period of one year following
termination, and from disclosing certain confidential information with respect
to the Company. If, however, Mr. Winakor's employment is terminated without
cause or he terminates his agreement upon a material breach by the Company, the
non-compete and non-solicit restrictions will not apply following termination.
15
<PAGE> 18
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth, as of September 11,
1998, the beneficial ownership of the Company's Common Stock ("Common Stock") by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each director and Named Executive Officer of the
Company and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
-----------------------
NAME AND ADDRESS(1) COMMON STOCK PERCENT
- ------------------- ------------ -------
<S> <C> <C>
Lighthouse Capital Insurance Company........................ 1,687,750 7.4
C. Keith Hartley............................................ 319,445(3) 1.4
L. E. Richey, M.D........................................... 15,000 *
Michael A. O'Hanlon......................................... 8,000 *
Gordon C. Rausser, Ph.D..................................... 625,000(4) 2.8
Joseph A. Paul.............................................. 167,475(5) *
David Cohen................................................. 34,750(6) *
Alan M. Winakor............................................. 327,128(7) 1.4
Len V. Platt................................................ 16,162(8) *
Todd R. Smith............................................... 44,999(9) *
All directors and executive officers as a group
(14 persons).............................................. 1,781,173(10) 7.8
</TABLE>
- ---------------
* Less than 1%.
(1) The address for all of the Directors and Named Executive Officers is in
care of US Diagnostic Inc., 777 South Flagler Drive, Suite 1201 East, West
Palm Beach, Florida 33401.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. Each beneficial owner's
percentage ownership is determined by assuming that convertible securities,
options or warrants that are held by such person (but not those held by any
other person) and which are exercisable within 60 days after September 11,
1998 have been exercised. Calculation of percentage ownership was based on
22,712,433 shares of Common Stock outstanding as of September 11, 1998.
(3) Mr. Hartley is a Managing Partner, Corporate Finance, of Forum Capital
Markets LLC ("Forum"), which served as an underwriter in connection with
the Company's $57.5 million subordinated convertible debenture offering.
Forum is the holder of record of warrants to purchase 319,445 shares of
Common Stock. Mr. Hartley disclaims beneficial ownership of such shares.
(4) Includes 400,000 shares subject to warrants and 75,000 shares of restricted
stock granted under the 1995 Long Term Incentive Plan (the "1995 Plan")
over which Dr. Rausser exercises voting power, 24,000 shares of which are
subject to a five-year vesting period and 51,000 shares of which are
subject to a three-year vesting period. Accordingly, Dr. Rausser does not
currently have investment power over 53,200 shares of the 75,000 shares of
restricted stock which have not yet vested.
(5) Includes 93,750 shares subject to options (See "Stock Option Cancellation
and Reissuance") and 45,000 shares of restricted stock granted under the
1995 Plan over which Mr. Paul exercises voting power, 20,000 of which will
vest in four additional equal annual installments beginning in October 1998
or immediately upon a change in control of the Company. Accordingly, Mr.
Paul does not currently have investment power with respect to 20,000 of the
45,000 shares of restricted stock which have not yet vested.
(6) Includes 31,250 shares subject to options. (See "Stock Option Cancellation
and Reissuance").
(7) Includes 12,500 shares subject to options. (See "Stock Option Cancellation
and Reissuance").
(8) Includes 12,500 shares subject to options. (See "Stock Option Cancellation
and Reissuance").
(9) Includes 44,999 shares subject to options.
(10) Includes all shares and options described in footnotes 3-9 above.
16
<PAGE> 19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1998, the Company purchased a condominium from J. Wayne Moor, the
Company's Chief Financial Officer, for $200,000 to facilitate Mr. Moor's
relocation to Palm Beach County, Florida. The Company is currently negotiating a
contract for the sale of the condominium to a third party for substantially the
same price.
In March 1998, the Company completed reimbursement to Leon Maraist for
approximately $65,000 in relocation costs to facilitate his relocation to Palm
Beach County, Florida.
In July 1996, in an arm's length transaction and prior to the time that
Laurans A. Mendelson, a former director and Chairman of the Company, became a
director of the Company, the Company acquired all of the outstanding capital
stock of MediTek Health Corporation from HEICO. Mr. Mendelson is the Chief
Executive Officer, President and Chairman of the Board of HEICO. The
consideration paid by the Company to HEICO was approximately $13 million in cash
plus a five-year, $10 million convertible note bearing interest at a rate of
6 1/2% per annum. The Note was originally convertible into the Company's Common
Stock at $9.25 per share, or an aggregate of 1,081,081 shares. The Company
granted HEICO certain registration rights with respect to these shares of Common
Stock. The Note was redeemable at any time prior to the registration under the
Securities Act of 1933 of the shares into which the Note is convertible. In
September 1997, the Note was amended such that (i) the Note is convertible into
shares of the Company's Common Stock at $8.50 per share, or an aggregate of
1,176,471 shares, and (ii) the Note is due and payable in full on June 30, 2001,
subject to earlier redemption at the option of the Note holders commencing on
January 1, 1999 if the shares into which the Note is convertible have not at
that time been registered under the Securities Act. In September 1997,
subsequent to the amendment of the Note, HEICO sold the Note to Forum Capital
Markets LLC ("Forum"), of which C. Keith Hartley, a director of the Company, is
a Managing Partner (see discussion below regarding Mr. Hartley). In September
1997, Forum resold the Note to purchasers who are unaffiliated with the Company,
Forum, HEICO, or Mr. Mendelson. In accordance with the MediTek acquisition
agreements, Mr. Mendelson, as designee of HEICO, was elected by the stockholders
to the Company's Board of Directors on September 19, 1996. Mr. Mendelson became
Chairman of the Board of the Company on February 2, 1997. On December 1, 1997,
Mr. Mendelson resigned from the Board of Directors.
In 1997, the Company paid to HEICO, as reimbursement for time Mr. Mendelson
spent on the Company's business, an amount equal to $225 per hour that Mr.
Mendelson worked for the Company. The total amount paid to HEICO under this
arrangement was $100,350. In September 1997, the reimbursement arrangement was
terminated, and no further payments will be made to HEICO under the arrangement.
The Company is a party to a Consulting Agreement effective as of January 1,
1995, with Gordon C. Rausser, as amended, pursuant to which Dr. Rausser, a
Director of the Company, acts as a consultant to the Company on economic,
financial and strategic matters. Under the agreement, as amended, Dr. Rausser is
entitled to a consulting fee of $25,000 per quarter until December 31, 1999,
provided that he offers or agrees to serve as a Director of the Company and
offers or agrees to serve as a consultant under the agreement. In connection
with entering into the agreement, as amended, Dr. Rausser received a warrant to
purchase 400,000 shares of Common Stock of the Company exercisable at $5.00 per
share at any time through December 31, 1999. In addition, in October 1996, the
Company issued 24,000 restricted shares of Common Stock with a fair market value
of $12.625 per share to Dr. Rausser under the 1995 Plan, and in January 1997,
the Company issued an additional 51,000 restricted shares of Common Stock with a
fair market value of $8.625 per share to Dr. Rausser under the 1995 Plan, in
connection with the Consulting Agreement.
In December 1996, the Company and Jeffrey Goffman, who was at the time the
Company's Chief Executive Officer, entered into a Settlement Agreement with
Consolidated General Ltd., U.K. Errington Ltd., and certain other persons
(collectively, the "Claimants"). Under the Settlement Agreement, the Company
issued an aggregate of 68,400 shares of its Common Stock, with a fair market
value of $654,000 at the date of issuance, to the Claimants and paid to the
Claimants an aggregate of $1.3 million in cash. In exchange, the Claimants
executed general releases in favor of the Company and Mr. Goffman. Under the
Settlement Agreement, the Claimants settled claims relating to allegations that
they had escrowed too many shares of their Common Stock under the escrow
agreement entered into in connection with the Company's initial public
17
<PAGE> 20
offering. The Claimants also released their claims relating to promissory notes
in the aggregate principal amount of $850,000 executed by Mr. Goffman in favor
of the Claimants, which promissory notes were collateralized by 150,000 shares
of the Company's Common Stock owned by Mr. Goffman. After the execution of these
promissory notes, Mr. Goffman executed an assignment and assumption agreement on
behalf of himself and the Company, under which the Company purportedly assumed
Mr. Goffman's obligations under such promissory notes. These promissory notes
were executed by Mr. Goffman in payment of consideration to the Claimants under
consulting agreements between Mr. Goffman and the Claimants, which Mr. Goffman
asserted were entered into by him for the benefit of the Company. Under the
terms of these consulting agreements, the Claimants were to provide consulting
and advisory services to Mr. Goffman, purportedly on behalf of the Company, to
assist in funding, evaluating and structuring business opportunities and
transactions. The fair market value of the shares issued and the cash paid
totaled $2 million and is included in loss on settlement of claims in the
accompanying 1996 consolidated statements of operations. Subsequently, the
Claimants alleged that the Company had not registered the aforementioned 68,400
shares of Common Stock by the date contemplated in the December 1996 Settlement
Agreement and made claims against the Company. The dispute was settled as to
Consolidated in November 1997 and as to Errington in January 1998 by payment by
the Company to the Claimants of a total of approximately $364,000 to settle all
additional claims and the Company was released from any further liability under
the December 1996 Settlement Agreement. The settlement amount was expensed in
the accompanying 1997 consolidated statement of operations.
On February 3, 1997, Jeffrey Goffman, at the time the Company's Chairman
and Chief Executive Officer, was voluntarily placed on administrative leave by
the Company's Board of Directors. During this administrative leave, he was
relieved of all corporate duties and did not participate in any meetings of the
Company's Board of Directors. On March 25, 1997, Mr. Goffman declared his
election to treat himself as having been terminated without cause by the Company
under his employment contract, thus invoking constructive termination provisions
of his employment agreement. This action followed the recommendation of a
Special Committee of the Board of Directors reviewing the Company's former
relationship with Coyote Consulting and Keith Greenberg, an employee of Coyote
who had provided services to the Company.
On April 24, 1997, the Company and Mr. Goffman entered into a Letter of
Intent (the "Letter") with respect to the resolution of employment related
disputes between them. Pursuant to the terms of the Letter, Mr. Goffman resigned
as an officer, director and employee of the Company effective as of March 31,
1997, and received $165,000 upon execution of the Letter. On July 11, 1997, the
Company and Mr. Goffman entered into a Settlement Agreement and General Release
(the "Settlement Agreement"), pursuant to which, among other things, the Company
paid Mr. Goffman an additional $33,000 implementing the terms of the Letter and
agreed to pay an additional $267,000 in sixteen equal monthly consecutive
installments of $17,000 beginning in August 1997. Mr. Goffman also agreed to
transfer or vote, as required by the Company, all proxies or other agreements by
which he exercised the right to vote or exercise legal control over the
Company's stock in which others have a beneficial interest. As part of this
settlement, it was agreed that all previously vested restricted stock and stock
options granted to Mr. Goffman would be retained by him and all unvested
restricted stock as of March 31, 1997 (220,000 shares) would become vested and
be placed in an escrow account. In addition, unvested options for 100,000 shares
of Company Common Stock which are exercisable at $5.125 per share were placed in
the escrow account. Notwithstanding Mr. Goffman's resignation, these options
will vest in accordance with the schedule originally established at the time
such options were awarded to Mr. Goffman or, if earlier, upon the sale of the
Company or a change of control on or before March 31, 1999. All other options
which were unvested as of March 31, 1997 (specifically the 100,000 options
granted on June 1, 1996 exercisable at $7.125 and the 250,000 options granted on
October 9, 1996 exercisable at $12.125) will vest only upon the sale of the
Company or a change in control on or before March 31, 1999.
The $165,000 paid to Mr. Goffman upon execution of the Letter, the $33,000
paid within two days of the execution of the Settlement Agreement, the $267,000
to be paid over sixteen months and unamortized deferred compensation relating to
Mr. Goffman in the amount of $2.3 million were recorded in Settlement with
Former Chief Executive Officer during the second quarter of fiscal year 1997
ended June 30, 1997.
18
<PAGE> 21
On September 30, 1997 the Company entered into a second settlement with Mr.
Goffman which fully resolved the remaining issues between them including
ownership of the escrow account previously established. Pursuant to this
settlement, Mr. Goffman agreed to contribute $1 million to the Company's
settlement of the class actions in the form of $850,000 cash and the forgiveness
of the next nine monthly payments totaling $150,000 which would otherwise be due
to him from the Company under the earlier settlement. Mr. Goffman delivered the
$850,000 to the Company on March 17, 1998. The Company thereafter released its
claim to the securities covered by the Escrow and Settlement Agreement. During
the quarter ended September 30, 1997, a credit of $1.0 million was recorded in
Settlement with Former Chief Executive Officer to reflect the expected
contributions from Mr. Goffman which were subsequently received.
Michael D. Karsch, former Senior Vice President, General Counsel and
Secretary of the Company, and the Company were parties to a five-year employment
agreement dated June 1, 1996. On February 3, 1997, Mr. Karsch was placed on
administrative leave by the Company's Board of Directors. This action followed
the recommendation of a Special Committee of the Board of Directors reviewing
the Company's former relationship with Coyote Consulting and Keith Greenberg.
During this administrative leave, Mr. Karsch was relieved of all corporate
duties and did not participate in any meetings of the Company's Board of
Directors. On March 25, 1997, Mr. Karsch declared his election to treat himself
as having been terminated without cause by the Company under his employment
contract, thus invoking constructive termination provisions of his employment
agreement. The Company has treated this election as a resignation. The Company
has not yet agreed to any severance arrangements with Mr. Karsch. The Company is
currently exploring, through counsel, the possibility of resolving any claims
with respect to Mr. Karsch's employment contract. At December 31, 1997, the
Company has deferred compensation totaling $467,000 relating to Mr. Karsch.
A member of the Company's Board of Directors, C. Keith Hartley, is the
Managing Partner of Forum Capital Markets LLC ("Forum"). Forum was the
underwriter of the Company's $57.5 million subordinated convertible debenture
offering, and was paid an underwriting fee of $2.9 million. In addition, the
Company sold to Forum, for nominal consideration, warrants which entitle Forum
to purchase 319,445 shares of Common Stock of the Company at an exercise price
of $9.00 per share. Mr. Hartley was elected to the Board of Directors of the
Company on September 19, 1996, subsequent to the debenture offering.
The Company entered into an Installation Agreement ("Installation
Agreement") dated February 27, 1997, and a Network Support Agreement ("Support
Agreement") dated July 31, 1997, with CIERRA Solutions, Inc. ("CSI"). A brother
of Todd Smith, Vice President and Chief Information Officer of the Company, is a
substantial minority stockholder with CSI. CSI has been providing project
management services to the Company in connection with the deployment of a wide
area computer network to over 100 of the Company's locations and other services
since February 1996. The effective date of the Installation Agreement is
February 1, 1997, and has a one-year term. The effective date of the Support
Agreement is July 31, 1997 and has a six-month term. Payments made to CSI in the
year ended December 31, 1997 totaled $1.1 million, including reimbursement for
expenses and equipment purchases of $268,000. Payments made to CSI in the year
ended December 31, 1996 totaled $334,000, including reimbursement for expenses
and equipment purchases of $64,000.
In June 1996, the Company acquired U.S. Imaging, Inc. ("U.S. Imaging") in a
merger transaction pursuant to which U.S. Imaging merged into a wholly-owned
subsidiary of the Company. The merger consideration paid to the former sole
stockholder of U.S. Imaging, the Reese General Trust (the "Reese Trust"), was
$7,000,000 in cash and 1,671,000 shares of the Company's Common Stock, of which
671,000 shares were placed in escrow. The Reese Trust transferred the shares to
Lighthouse Capital Insurance Company. Dr. Richey does not have beneficial
ownership of these shares. The shares held in escrow were to be released to
Lighthouse if certain financial results were achieved by U.S. Imaging in 1997
and 1998. Of the shares held in escrow, 400,000 shares were released in 1997 and
the balance was released in 1998. L. E. Richey, a director and Chairman of the
Board of the Company, was the President of U.S. Imaging at the time of the
merger. Dr. Richey became a Director of the Company in June 1997 and was not a
Director or an employee of the Company at the time that the Company acquired
U.S. Imaging.
19
<PAGE> 22
In October 1996, the Company purchased 100% of the capital stock of Medical
Marketing Development ("MMD") from Alan Winakor, an Executive Vice President of
the Company. Mr. Winakor was not an employee of the Company on the date that the
Company acquired MMD. In 1996, the Company also acquired four other partnerships
of which Mr. Winakor was the President and general partner. Pursuant to the
purchase agreements, the payment of a portion of the consideration for the
purchases of MMD and the other acquired entities was contingent upon the
achievement of certain financial results by the acquired entities, and an
aggregate of 88,679 shares of the Company's Common Stock were held in escrow
pending release to Mr. Winakor upon the achievement of such results. In 1997,
the requisite milestones were reached so (i) the 88,679 shares of the Company's
Common Stock were released from escrow to Mr. Winakor and (ii) the Company paid
$732,000 to Mr. Winakor and issued 79,135 shares of Common Stock to Mr. Winakor.
Pursuant to the terms of a Subscription Agreement dated December 1, 1996,
the Company purchased approximately 5,000,000 shares (which as a result of the
reverse 4:1 stock split in 1998 currently number 1,250,000 shares) of common
stock of Diversified Therapy Corp. ("DTC" ) for $3.5 million, representing
approximately 25% of all of the outstanding common stock of DTC at September 11,
1998. DTC commenced operations in 1996 to develop a leadership position in the
ownership and operations of U.S. wound care treatment facilities utilizing
hyperbaric chambers. On the date of the Subscription Agreement and on December
31, 1996, the President of DTC was Keith Greenberg. Mr. Greenberg, on behalf of
Coyote Consulting previously had provided consulting services to the Company. In
January 1997, Mr. Greenberg resigned as President of DTC. Mr. Almand, an
executive officer and former director of the Company, is the Chairman of the
Board and a more than 5% beneficial owner of DTC. Mr. Rausser, a director of the
Company, and Mr. Jacobson, a former director of the Company, are also directors
of DTC. As a result of losses incurred by DTC, the Company recorded a loss of
$3,537,184 as of June 30, 1997, representing the Company's entire recorded
investment in DTC.
In December 1994, the Company entered into a five-year consulting agreement
with Coyote Consulting, which was amended in October 1995 and amended and
restated on June 1, 1996, effective January 1, 1996, pursuant to which the
Company paid Coyote Consulting an annual draw of $185,000. Coyote Consulting was
also entitled to a finder's fee of 2% of the aggregate purchase price of any
entity acquired by the Company as a result of an introduction by Coyote
Consulting. It is believed that Coyote Consulting is owned by Keith Greenberg's
wife, Elise Nulman Greenberg, and a family trust. Mrs. Greenberg is a former
employee of the Company. Cash compensation paid to, and the value of restricted
stock granted and compensatory stock options issued to Coyote Consulting for the
years ended December 31, 1996 and 1995, totaled $5,596,750 and $138,126,
respectively.
In December 1996, the Company negotiated a Termination Agreement with
Coyote Consulting (the "Termination Agreement"), which terminated the existing
consulting agreement, subject to ratification by the Company's Board. As of this
date, the Company's Board has deferred the issue of ratification pending further
study. In connection with the terms of the unratified Termination Agreement, the
Company paid to Coyote Consulting the sum of $620,000 representing one-half of
the finder's fees due Coyote Consulting upon closing of the then-pending
acquisition of Medical Diagnostics, Inc., which was closed in February 1997, and
the then-pending acquisition of American Shared Hospital Services. Under the
terms of the unratified Termination Agreement, the remaining portion of the
finder's fees on such acquisitions would be payable at closing of the
acquisitions. In the event that the Company's acquisition of American Shared
Hospital Services did not close, the payment on account of the finder's fee was
to be credited toward finder's fees on future acquisitions as discussed below.
On April 28, 1997, the Company announced it had terminated further negotiations
to acquire American Shared Hospital Services.
The unratified Termination Agreement would also provide that all unvested
shares of restricted stock and unvested options to purchase the Company's Common
Stock held by Coyote Consulting would be vested as of the date of the Agreement,
except that 50,000 unvested stock options granted June 1, 1996, with an exercise
price of $7.125 per share would, pursuant to the terms of the original grant,
vest only if the Company's Common Stock trades at a price in excess of $15.00
per share prior to June 1, 1999. At January 21, 1997, Coyote Consulting held
105,000 shares of restricted stock, of which 25,000 were vested prior to the
Termination Agreement and a total of 250,000 stock options, of which 50,000 were
vested prior to the
20
<PAGE> 23
Termination Agreement. Mr. Greenberg has not received a certificate for 50,000
of these restricted shares, and the Company is disputing his entitlement to
these shares.
Coyote Consulting and Keith Greenberg have sued the Company alleging that
they are entitled to receive additional cash, stock and/or options in an
unspecified amount in connection with the termination of the Consulting
Agreement. The Company has not yet been required to answer the complaint but
intends to vigorously defend the claims and to assert cross-claims exceeding the
amount claimed by Coyote and Mr. Greenberg.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who own more than 10% of
the Company's Common Stock (collectively, "Reporting Persons") file reports of
ownership and changes in ownership of the Company's Common Stock to the
Securities and Exchange Commission and The Nasdaq Stock Market. Copies of these
reports are also required to be delivered to the Company.
Except as set forth below, the Company believes that, based solely on its
review of the copies of such reports received and written representations that
no other reports were required, during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements applicable to its Reporting Persons were
complied with, except that Wayne Moor inadvertently filed a Form 3 late; Leon
Maraist inadvertently filed on Form 4 late for two transactions; Len Platt
inadvertently filed a Form 3 late and a Form 4 for one transaction late; David
Cohen filed a timely Form 5 in February 1998 reporting one transaction for which
he inadvertently failed to file a Form 4 and inadvertently failed to file a Form
4 for one transaction; L.E. Richey inadvertently filed a Form 3 late and a late
Form 5 reporting a grant of options; and Arthur Quillo inadvertently failed to
file a Form 3.
RELATIONSHIP WITH THE COMPANY'S AUDITORS
Representatives of Arthur Andersen LLP, the independent certified public
accountants who audited the Company's financial statements for 1997, are
expected to be present at the Annual Meeting. Such representatives will be
afforded the opportunity to make a statement, if they so desire, and are
expected to be available to respond to appropriate questions from stockholders.
The Company is not required to obtain stockholder approval or ratification of
its selection of its auditors under the laws of the State of Delaware, and the
Audit Committee and the Board of Directors have the discretion to select the
Company's auditors as appropriate.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented at
the Annual Meeting. However, if any matter is properly presented at the Annual
Meeting, the persons named in the enclosed proxy will have discretionary
authority to vote in accordance with their best judgment.
21
<PAGE> 24
STOCKHOLDER PROPOSALS
The Annual Meeting of Stockholders for the fiscal year ending December 31,
1998 is expected to be held no later than October 20, 1999. All proposals
intended to be presented at the Company's next Annual Meeting of Stockholders
must be received at the Company's executive office no later than May 24, 1999,
for inclusion in the Proxy Statement and form of proxy related to that meeting.
Any proxy received by the Company in connection with the 1999 annual meeting may
confer discretionary authority to vote on any stockholder proposal not received
by the Company by August 6, 1999. Any such proposal should be addressed to
Francis J. Harkins, Jr., Secretary, US Diagnostic Inc., 777 South Flagler Drive,
Suite 1201 East, West Palm Beach, Florida 33401.
By Order of the Board of Directors,
/s/ FRANCIS J. HARKINS, JR.
FRANCIS J. HARKINS, JR.
Secretary
Dated: September 21, 1998
22
<PAGE> 25
Appendix A
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
US DIAGNOSTIC INC.
FOR THE 1998 ANNUAL MEETING OF THE STOCKHOLDERS
OCTOBER 20, 1998
The undersigned stockholder of US Diagnostic Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
Proxy Statement, each dated September 21, 1998, and the 1997 Annual Report on
Form 10-K, and hereby appoints Joseph A. Paul and L.E. Richey, M.D. or either of
them, proxies, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1998 Annual Meeting
of Stockholders of US Diagnostic Inc. to be held on Tuesday, October 20, 1998 at
10:00 a.m., local time, at the Sheraton West Palm Beach Hotel, 630 Clearwater
Park Road, West Palm Beach, Florida 33401, and at any adjournment or
adjournments thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth on the reverse side.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL SET FORTH HEREIN.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed below (except as indicated) [ ] WITHHOLD AUTHORITY
to vote for all nominees listed below
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW.
<TABLE>
<S> <C> <C> <C>
C. Keith Hartley Kenneth R. Jennings David McIntosh Michael A. O'Hanlon
Joseph A. Paul Gordon C. Rausser, Ph.D. L.E. Richey, M.D.
</TABLE>
(Continued and to be SIGNED on the OTHER SIDE)
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
DATED: ___________________, 1998
----------------------------------
SIGNATURE
----------------------------------
SIGNATURE IF SHARES HELD JOINTLY
NOTE: Please sign exactly as name
appears hereon. When shares are
held by joint tenants, both should
sign. When signing as attorney,
executor, administrator, trustee
or guardian, please give full
title as such. If a corporation,
please sign in full corporate name
by the President or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
