-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ejr38TKONGsO29eqoeG3S92p8VSrDFhwpKYoZi+o+IJ/EDW0rTQXqFurEYMhyZwz RZGem/S1nXKqiZJA7NMi6Q== 0000912057-99-009538.txt : 19991216 0000912057-99-009538.hdr.sgml : 19991216 ACCESSION NUMBER: 0000912057-99-009538 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE CLINICAL SOLUTIONS LTD CENTRAL INDEX KEY: 0001002022 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 650617076 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27568 FILM NUMBER: 99775477 BUSINESS ADDRESS: STREET 1: 10 DORRANCE STREET STREET 2: SUITE 400 CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4018316755 MAIL ADDRESS: STREET 1: 10 DORRANCE STREET STREET 2: SUITE 400 CITY: PROVIDENCE STATE: RI ZIP: 02903 FORMER COMPANY: FORMER CONFORMED NAME: PHYMATRIX CORP DATE OF NAME CHANGE: 19951229 FORMER COMPANY: FORMER CONFORMED NAME: CONTINUUM CARE CORP DATE OF NAME CHANGE: 19951010 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ FORM 10-Q ------------ (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended October 31, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from to ------- ------- Commission file number 0-27568 INNOVATIVE CLINICAL SOLUTIONS, LTD. (Exact name of registrant as specified in its charter) Delaware 65-0617076 (State of incorporation) (I.R.S. Employer Identification No.) 10 Dorrance Street, Suite 400, Providence, Rhode Island 02903 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (401) 831-6755 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On December 7, 1999, the number of outstanding shares of the registrant's Common Stock, par value $0.01 per share, was 32,003,429. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INNOVATIVE CLINICAL SOLUTIONS, LTD. QUARTERLY REPORT ON FORM 10-Q INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets October 31, 1999 (unaudited) and January 31, 3 1999 Consolidated Statements of Operations (unaudited) Three and Nine Months 4 Ended October 31, 1999 and 1998 Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended 5 October 31, 1999 and 1998 Notes to Consolidated Financial Statements (unaudited) Three and Nine 6-13 Months Ended October 31, 1999 and 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 14-22 Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23
FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INNOVATIVE CLINICAL SOLUTIONS, LTD. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
OCTOBER 31, JANUARY 31, 1999 1999 ----------- ----------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 38,017 $ 10,137 Receivables: Accounts receivable, net 27,994 15,276 Income tax refund receivable - 10,789 Other receivables 7,082 6,760 Notes receivable 12,819 5,060 Prepaid expenses and other current assets 878 1,260 Assets held for sale 12,512 100,795 -------- -------- Total current assets 99,302 150,077 Property, plant and equipment, net 11,352 11,024 Notes receivable 8,628 7,274 Goodwill, net 28,936 41,007 Management service agreements, net 8,381 28,167 Other assets (including advances to shareholder) 2,328 15,302 -------- -------- Total assets $ 158,927 $ 252,851 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of debt and capital leases $ 16,055 $ 12,192 Accounts payable 13,954 13,602 Accrued compensation 2,088 1,475 Accrued and other current liabilities 15,520 11,623 -------- -------- Total current liabilities 47,617 38,892 Long-term debt less current maturities 4,375 5,465 Convertible subordinated debentures 100,000 100,000 Other long-term liabilities 2,063 1,191 Minority interest 673 1,403 -------- -------- Total liabilities 154,728 146,951 Commitments and contingencies Shareholders' equity: Common stock, par value $.01, 40,000 shares authorized, 33,387 and 33,344 shares issued at October 31, 1999 and January 31, 1999 respectively, 32,003 and 32,916 shares outstanding at October 31, 1999 and January 31, 1999, respectively 320 329 Treasury stock (2,674) (1,202) Additional paid in capital 224,782 224,715 Accumulated deficit (218,229) (117,942) -------- -------- Total shareholders' equity 4,199 105,900 -------- -------- Total liabilities and shareholders' equity $ 158,927 $ 252,851 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. -3- INNOVATIVE CLINICAL SOLUTIONS, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, ------------------ ----------------- 1999 1998 1999 1998 --------- --------- --------- -------- Net revenues from services $ 28,429 $ 42,563 $ 108,953 $ 141,140 Net revenues from management service agreements 15,895 24,812 45,500 79,746 Net revenues from real estate services 47 571 434 8,616 -------- -------- --------- --------- Total revenue 44,371 67,946 154,887 229,502 -------- -------- --------- --------- Operating costs and administrative expenses: Salaries, wages and benefits 13,195 23,029 48,847 69,873 Professional fees 4,689 3,943 14,111 11,549 Supplies 9,930 15,016 34,706 44,047 Utilities 1,240 1,412 3,586 4,125 Depreciation and amortization 2,287 3,827 9,099 10,971 Rent 3,222 5,369 11,921 15,037 Provision for bad debts 463 2,393 2,127 4,282 Provision for writedown of notes receivable - 2,674 - 2,674 Gain on sale of assets - 7 - (5,415) Nonrecurring expenses - - 15,825 5,305 Other - primarily capitation expense 17,182 22,612 58,406 66,502 -------- -------- --------- --------- Total operating costs and administrative expenses 52,208 80,282 198,628 228,950 -------- -------- --------- --------- Interest expense, net 2,207 1,608 6,925 5,254 Income from investment in affiliates (58) (154) (58) (588) -------- -------- --------- --------- 2,149 1,454 6,867 4,666 -------- -------- --------- --------- Loss before provision for income taxes and extraordinary item (9,986) (13,790) (50,608) (4,114) Income tax expense (benefit) (53) (4,671) 47 (1,499) -------- -------- --------- --------- Net loss before extraordinary item (9,933) (9,119) (50,655) (2,615) Extraordinary item - (51,552) (49,632) (51,552) -------- -------- --------- --------- Net loss $ (9,933) $ (60,671) $ (100,287) $(54,167) ======== ========= ========== ========= Net loss per share - basic Loss before extraordinary item $ (0.28) $ (0.27) $ (1.41) $ (0.08) Extraordinary item $ - $ (1.54) $ (1.38) $ (1.55) Net loss $ (0.28) $ (1.81) $ (2.79) $ (1.63) Net loss per share - diluted Loss before extraordinary item $ (0.28) $ (0.27) $ (1.41) $ (0.08) Extraordinary item $ - $ (1.54) $ (1.38) $ (1.55) Net loss $ (0.28) $ (1.81) $ (2.79) $ (1.63) Weighted average shares outstanding - basic 35,583 33,548 35,929 33,245 ======= ======= ======= ====== Weighted average shares outstanding - diluted 35,583 33,548 35,929 33,245 ======= ======= ======= ======
The accompanying notes are an integral part of the consolidated financial statements. -4- INNOVATIVE CLINICAL SOLUTIONS, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED OCTOBER 31, ----------------- 1999 1998 -------- --------- Cash flows from operating activities: Net loss $ (100,287) $ (54,167) Noncash items included in net income: Depreciation and amortization 9,099 10,971 Extraordinary item 49,632 49,444 Gain on sale of assets - (5,415) Nonrecurring charges 14,204 4,401 Amortization of debt issuance costs 1,193 796 Writedown of notes receivable - 2,674 Other (59) 667 Changes in receivables (4,785) (3,074) Changes in accounts payable and accrued liabilities 795 (5,403) Changes in other assets 12,492 (1,724) ------- ------- Net cash used by operating activities (17,716) (830) ------- ------- Cash flows from investing activities: Capital expenditures (4,593) (4,556) Sale of assets 51,171 5,125 Notes receivable, net 1,344 (2,028) Other - (109) Acquisitions, net of cash acquired (1,404) (10,958) ------- ------- Net cash provided (used) by investing activities 46,518 (12,526) ------- ------- Cash flows from financing activities: Advances to shareholder - (3,116) Proceeds from issuance of common stock - 130 Proceeds from issuance of debt 21,709 - Offering costs and other 28 (215) Repayment of debt (21,188) (8,245) Purchase of treasury stock (1,471) (497) ------- ------- Net cash used by financing activities (922) (11,943) ------- ------- Increase (decrease) in cash and cash equivalents $ 27,880 $ (25,299) ========== ========== Cash and cash equivalents, beginning of period $ 10,137 $ 49,536 ========== ========== Cash and cash equivalents, end of period $ 38,017 $ 24,237 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -5- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements include the accounts of Innovative Clinical Solutions, Ltd. ("the Company" or "ICSL") (formerly PhyMatrix Corp.). These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the requirements of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is management's opinion that the accompanying interim financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1999. Operating results for the three and nine months ended October 31, 1999 are not necessarily indicative of results that may be expected for the year. 2. SIGNIFICANT EVENTS During May 1998, the Company announced that the Board of Directors had instructed management to explore various strategic alternatives for the Company that could maximize stockholder value. During August 1998, the Company announced that the Board of Directors approved several strategic alternatives to enhance stockholder value. The Board authorized a series of initiatives designed to reposition the Company as a significant company in pharmaceutical contract research, specifically clinical trials site management and outcomes research. The Company intends to link its nationally focused hospital affiliations and its physician networks with its clinical trials site management and healthcare outcomes research operations. During August 1998, the Board approved, consistent with achieving its stated restructuring goal, its plan to divest and exit the Company's physician practice management ("PPM") business and certain of its ancillary services businesses, including diagnostic imaging, lithotripsy and radiation therapy. Subsequent to August 1998, the Company also decided to divest its home health business and exit its infusion therapy business. During second quarter ended July 31, 1999, the Company also decided to terminate an additional physician practice management agreement, divest its investments in a surgery center and a network of physicians, and sell its real estate service operations. Net loss for the nine months ended October 31, 1998 and net loss for the nine months ended October 31, 1999 includes an extraordinary item of $51.6 million (net of tax benefit of $8.4 million) and $49.6 million (net of tax of $0), respectively, which is primarily a non-cash charge related to these divestitures. In accordance with APB 16, the Company is required to record these charges as an extraordinary item since impairment losses are being recognized for divestitures and disposals expected to be completed within two years subsequent to a pooling of interests (the pooling of interests with Clinical Studies, Ltd. ("CSL") was effective October 15, 1997). Based on fair market value estimates, which have primarily been derived from purchase agreements, letters of intent, letters of interest and discussions with prospective buyers, the Company currently expects to realize net proceeds of approximately $12.5 million (subsequent to October 31, 1999 approximately $7.7 million was realized, prior to the payment of retained liabilities of approximately $3.0 million) from the sale of the remaining businesses identified to be divested or disposed and has recorded this amount as an asset held for sale on the balance sheet at October 31, 1999. As part of the Company's repositioning, management continues to explore options to align the Company's capital structure with its current operations and growth strategy. On December 1, 1999, the Company retained Donaldson, Lufkin & Jenrette Securities Corporation as its financial advisors to assist the Company in evaluating a possible capital restructuring as well as industry consolidation opportunities. -6- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 3. SUPPLEMENTAL CASH FLOW INFORMATION During the nine months ended October 31, 1998 the Company acquired the assets and/or stock, entered into management and employment agreements, and/or assumed certain liabilities of various ancillary service companies, networks and organizations and sold certain assets. During the nine months ended October 31, 1999 and 1998, the Company also made contingent payments and issued shares of stock which had been committed to be issued in conjunction with acquisitions. During the nine months ended October 31, 1999, the Company terminated several physician management and employment agreements, and sold certain ancillary service companies. The transactions had the following non-cash impact on the balance sheets of the Company as of the indicated dates:
October 31, --------------------------------- 1999 1998 --------------- -------------- Current Assets $ (80,392) $ 73,465 Property, plant and equipment 75 (33,418) Intangibles (26,873) (86,138) Other noncurrent assets (485) 7,958 Current liabilities (5,722) (7,063) Noncurrent liabilities 1,512 (196) Debt (1,649) (10,784) Equity 49,562 (27,216)
During the nine months ended October 31, 1998, the Company sold real estate and a radiation therapy center. These sales resulted in gains of $4.5 million and $0.9 million, respectively. 4. ASSETS HELD FOR SALE During the year ended January 31, 1999, the Board approved, consistent with its stated restructuring goal, its plan to divest and exit the Company's PPM business and certain of its ancillary services businesses, including diagnostic imaging, lithotripsy, radiation therapy, home health and infusion therapy. During the nine months ended, October 31, 1999, the Company also decided to terminate an additional physician practice management agreement, divest its investments in a surgery center and a network of physicians, and sell its real estate service operations. During the nine months ended October 31, 1999, the Company exited its infusion therapy business, divested seven physician practices, terminated its relationship with several employed physicians and sold eight radiation therapy centers, its diagnostic imaging division, its remaining lithotripsy business, its real estate service operations, and its investment in a diagnostic imaging center. Subsequent to October 31, 1999, the Company divested two physician practices. Based on fair market value estimates, which estimates were primarily derived from purchase agreements, letters of intent, letters of interest or discussions with prospective buyers, the Company currently expects to realize net proceeds of approximately $12.5 million (subsequent to October 31, 1999 approximately $7.7 million was realized, prior to the payment of retained liabilities of $3.0 million) from the sale of the remaining businesses identified to be divested or disposed and has recorded this amount as an asset held for sale on the balance sheet at October 31, 1999. 5. NONRECURRING CHARGE The $15.8 million charge during the nine months ended October 31, 1999 (which was recorded during the second quarter) is comprised of a $14.1 million impairment charge for a management service organization and a physician practice management agreement and $1.7 million primarily representing additional severance costs in conjunction with the sale of assets and the repositioning of the Company. During the nine months ended October 31, 1998, the Company terminated several of its physician management and -7- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) employment agreements, which resulted in a charge of approximately $5.3 million during the second quarter. The charge is composed primarily of the write-off of the remaining intangible assets as well as severance and legal costs. 6. REVOLVING LINE OF CREDIT During March 1999, the Company entered into a $30.0 million revolving line of credit, which has a three-year term and availability, based upon eligible accounts receivable. The line of credit bears interest at prime plus 1.0% and fees are 0.0875%. Approximately $9.2 million of proceeds from the new line of credit were used to repay the previous line of credit, and approximately $2.0 million were used as cash collateral for a $2.0 million letter of credit. The line of credit is secured by the assets of the Company, limits the ability of the Company to incur certain indebtedness and make certain dividend payments and requires the Company to comply with other customary covenants. Proceeds from asset sales must be used to repay the line of credit to the extent the sold assets included eligible accounts receivable. As of October 31, 1999, there was $14.3 million outstanding under the line of credit, which is included in the current portion of debt and capital leases. 7. TREASURY STOCK The Board of Directors of the Company authorized a share repurchase plan pursuant to which the Company may repurchase up to $15.0 million of its Common Stock from time to time on the open market at prevailing market prices. Through October 31, 1999, the Company has repurchased a total of approximately 1.3 million shares at a net purchase price of approximately $2.2 million. -8- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 8. NET INCOME PER SHARE The following is a reconciliation of the numerators and denominators of the basic and fully diluted earnings per share computations for net income:
(Loss) Per Share (in thousands except per share data) Income Shares Amount ------ ------ ------ THREE MONTHS ENDED OCTOBER 31, 1999 Basic loss per share Loss available to common stockholders $(9,933) 35,583 $(0.28) Extraordinary item - - - ------- ------ ------ Net loss available to common stockholders (9,933) 35,583 (0.28) Effect of dilutive securities - - - ------- ------ ------ Diluted loss per share $(9,933) 35,583 $(0.28) ======= ====== ====== THREE MONTHS ENDED OCTOBER 31, 1998 Loss available to common stockholders $(9,119) 33,548 $(0.27) Extraordinary item (51,552) - (1.54) ------- ------ ------ Net loss available to common stockholders (60,671) 33,548 (1.81) Effect of dilutive securities - - - ------- ------ ------ Diluted loss per share $(60,671) 33,548 $(1.81) ======== ====== ====== NINE MONTHS ENDED OCTOBER 31, 1999 Loss available to common stockholders $(50,655) 35,929 $(1.41) Extraordinary item (49,632) - (1.38) ------- ------ ------ Net loss available to common stockholders (100,287) 35,929 (2.79) Effect of dilutive securities - - - ------- ------ ------ Diluted loss per share $(100,287) 35,929 $(2.79) ======== ====== ===== NINE MONTHS ENDED OCTOBER 31, 1998 Loss available to common stockholders $(2,615) 33,245 $(0.08) Extraordinary item (51,552) - (1.55) ------- ------ ------ Net loss available to common stockholders (54,167) 33,245 (1.63) Effect of dilutive securities - - - ------- ------ ------ Diluted loss per share $(54,167) 33,245 $(1.63) ======== ====== ======
-9- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) For the three and nine months ended October 31, 1999 and 1998, no additional securities or related adjustments to income were made for the common stock equivalents related to the Debentures since the effect would be antidilutive. 9. RATIO OF EARNINGS TO FIXED CHARGES For the three and nine months ended October 31, 1999, the ratio of earnings to fixed charges was less than 1.0. For purposes of computing the ratio of earnings to fixed charges, earnings represent income (loss) from operations before minority interest and income taxes, plus fixed charges. Earnings also includes the equity in less-than-fifty-percent-owned investments only to the extent of distributions. Fixed charges include interest, amortization of financing costs and the portion of operating rental expense which management believes is representative of the interest component of the rental expense. For the three and nine months ended October 31, 1999, for purposes of computing the ratio of earnings to fixed charges, the Company's earnings were inadequate to cover fixed charges by $10.0 million and $50.6 million, respectively. 10. ACCOUNTING CHANGES AND PRONOUNCEMENTS In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 97-2 concerning the consolidation of physician practice revenues. PPMs are required to consolidate financial information of a physician where the PPM acquires a "controlling financial interest" in the practice through the execution of a contractual management agreement even though the PPM does not own a controlling equity interest in the physician practice. EITF 97-2 outlines six requirements for establishing a controlling financial interest. EITF-92 was effective for the Company's financial statements for the year ended January 31, 1999. Adoption of this statement reduced previously reported revenues for the three and nine months ended October 31, 1998 by $15.2 million and $49.9 million, respectively. During August 1998, the Company announced its plan to divest and exit the PPM business. The majority of these assets, which have not yet been divested, are recorded as assets held for sale at October 31, 1999. During the year ended January 31, 1999, the Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This Statement requires reporting of summarized financial results for operating segments as well as established standards for related disclosures about products and services, geographic areas and major customers. Primary disclosure requirements include total segment revenues, total segment profit or loss and total segment assets. FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. It establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. As issued, Statement 133 was effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In August 1999, the FASB issued Statement No. 137, which amended FASB Statement No. 133, and deferred its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of this statement is not expected to have a material impact on the Company's results of operations, financial position or cash flows or to produce any major changes in current disclosures. 11. RELATED PARTY TRANSACTIONS The Company provided construction management, development marketing and consulting services to entities principally owned by Abraham D. Gosman (former Chairman of the Board and former Chief Executive Officer) in connection with the development and operation by such entities of several healthcare related facilities (including a medical office building and a retirement community). During the years ended January 31, 1999 and 1998, the Company recorded revenues in the amount of $1.4 million and $10.5 million, respectively, related to such services. The Company provides these services to such affiliated parties on terms no more or less favorable to the Company than those provided to unaffiliated parties. As of October 31, 1999, the Company advanced $10.9 million, which is due in July 2000, to a company principally owned by Mr. Gosman relating to the development of a healthcare facility. This $10.9 million is included in short term notes receivable on the balance sheet at October 31, 1999. The advance accrues at the prime rate and is guaranteed by Mr. Gosman. To secure his obligation under the guarantee, Mr. Gosman has pledged the stock of another company principally owned by him and (subject to prior pledges) 8.2 million shares of Company Common Stock ("ICSL Pledged Shares"). Until the note has been repaid in full, the Company has the right to vote the ISCL Pledged Shares, subject to the rights of any prior pledges. During November 1999, the Company agreed to waive claims for interest on the note through the maturity date in consideration of waivers of claims for unpaid rent with respect to certain leases and the termination or amendment of these leases. -10- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 12. LEGAL PROCEEDINGS On October 18, 1997, the Florida Board of Medicine, which governs physicians in Florida, declared that the payment of percentage-based fees by a physician to a physician practice management company in connection with practice-enhancement activities subjects a physician to disciplinary action for a violation of a statute which prohibits fee-splitting. Some of the Company's contracts with Florida physicians include provisions providing for such payments. The Company appealed the ruling to a Florida District Court of Appeals and the Board stayed the enforceability of its ruling pending the appeal. Oral arguments were held on May 26, 1999, and the judge upheld the Board of Medicine's ruling. The Company may be forced to renegotiate those provisions of the contracts, that are affected by the ruling. While these contracts call for renegotiation in the event that a provision is not found to comply with state law, there can be no assurance that the Company would be able to renegotiate such provisions on acceptable terms. The contracts affected by this ruling are with the physician practices the Company has sold or has identified to be divested or disposed and for which the assets are included in assets held for sale at October 31, 1999. In conjunction with a physician practice management agreement with a physician practice in Florida, the Company has filed suit against the practice to enforce the guarantees executed in connection with the management agreement. The practice has filed a counterclaim. The Company intends to prosecute and defend the case. In connection with a joint venture partnership (the "Joint Venture") between the Company and Tenet Healthsystem Hospitals, Inc. ("Tenet"), to own and operate an ambulatory surgical center and diagnostic radiology facility in Florida, Tenet has filed suit against the Company on September 23, 1999 in the Palm Beach, Florida circuit court, for (1) recission and (2) damages of approximately $3.0 million for breach of contract, breach of fiduciary duty, and breach of good faith and fair dealing. In a related matter, PBG Medical Mall MOB 1 Properties (the "Mall"), which is principally owned by Abraham Gosman, filed suit against Tenet (as tenant) and the Joint Venture (as subtenant) on September 8, 1999 in the Palm Beach County, Florida county court, for eviction. The Mall also filed suit against Tenet and the Company on September 24, 1999, in the Palm Beach County, Florida circuit court, for damages. The Tenet suit has been stayed while the parties attempt to negotiate an unwind of the Joint Venture. In addition, the parties have reached a tentative settlement on the Mall suit, pending final resolution of the Tenet suit. If the parties are unable to reach agreement, the Company intends to file counterclaims against both Tenet and the Mall, and defend both cases. -11- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 13. SEGMENT INFORMATION For the fiscal year ending January 31, 1999, the Company adopted SFAS 131. The prior year's segment information has been restated to present the Company's reportable segments. The Company has determined that its reportable segments are those that are based on its current method of internal reporting. The reportable segments are: provider network management, site management organization and assets held for sale. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K. There are no intersegment revenues and the Company does not allocate corporate overhead to its segments. The tables below present revenue, pretax income (loss) and net assets of each reportable segment for the indicated periods:
Provider Site Assets Network Management Held for Reconciling Consolidated Management (2) Organization Sale Items (1) Totals -------------- ------------ ---- --------- ------ Quarter ended October 31, 1999 Net Revenues $ 12,876 $ 9,200 $ 22,134 $ 161 $ 44,371 Loss before income taxes and extraordinary item (91) (2,589) (2,199) (5,107) (9,986) Quarter ended October 31, 1998 Net Revenues $ 16,252 $ 7,492 $ 43,392 $ 810 $ 67,946 Loss before income taxes and extraordinary item (2,237) (3,694) (3,803) (4,056) (13,790) Nine months ended October 31, 1999 Net Revenues $ 43,603 $ 26,827 $ 84,236 $ 221 $154,887 Loss before income taxes and extraordinary item (15,724) (8,034) (9,006) (17,844) (50,608) Net Assets 16,648 22,547 12,512 (47,508) 4,199 Nine months ended October 31, 1998 Net Revenues $ 53,785 $ 26,649 $147,958 $ 1,109 $229,502 Income (loss) before income taxes and extraordinary item 573 (3,109) 12,053 (13,631) (4,114) Net Assets 85,768 22,436 123,220 (48,611) 182,813
(1) Reconciling items consist of corporate expenses and corporate net assets (primarily the convertible subordinated debentures, net of cash) which are not allocated. (2) Provider Network Management loss for the nine months ending October 31, 1999 includes an $11.2 million nonrecurring charge. -12- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) 14. SUBSEQUENT EVENTS Subsequent to October 31, 1999, the Company divested of two physician practices. Proceeds from these asset sales were approximately $7.7 million, prior to the payment of retained liabilities of approximately $3.0 million. As part of the Company's repositioning, management continues to explore options to align the Company's capital structure with its current operations and growth strategy. On December 1, 1999, the Company retained Donaldson, Lufkin & Jenrette Securities Corporation as its financial advisors to assist the Company in evaluating a possible capital restructuring as well as industry consolidation opportunities. During December 1999, the Company received notification from Nasdaq that the Company's Common Stock has been delisted from the Nasdaq National Market and is now eligible to trade on the OTC Bulletin Board. 15. RECLASSIFICATIONS Certain prior period balances have been reclassified to conform with the current period presentation. Such reclassifications had no material effect on the previously reported consolidated financial position, results of operations or cash flows of the Company. -13- INNOVATIVE CLINICAL SOLUTIONS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998 (UNAUDITED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION ICSL is repositioning itself as a company that provides diverse services supporting the needs of the pharmaceutical and managed care industries. The Company is focusing its operations on two integrated business lines: pharmaceutical services, including investigative site management, clinical and outcomes research and disease management, as well as multi and single-specialty provider network management. Historically, the Company has been an integrated medical management company that provides medical management services to the medical community, certain ancillary medical services to patients and medical real estate development and consulting services to related and unrelated third parties. In August 1998, the Company announced that it planned to change this business model. The Company is in the process of terminating its management of individual and group physician practices and divesting itself of related assets, and selling and divesting itself of its ancillary medical service businesses, such as diagnostic imaging, radiation therapy, lithotripsy services, home healthcare and infusion therapy. In conjunction with the change in the business model, the Company also significantly downsized and then, during the three months ended October 31, 1999, sold the operation of its real estate services. The Company currently estimates that by the end of its current fiscal year it will have exited the majority of its physician practice management ("PPM") and ancillary medical service businesses. REPOSITIONING During May 1998, the Company announced that the Board of Directors had instructed management to explore various strategic alternatives for the Company that could maximize stockholder value. During August 1998, the Company announced that the Board of Directors approved several strategic alternatives to enhance stockholder value. The Board authorized a series of initiatives designed to reposition the Company as a significant company in pharmaceutical contract research, specifically clinical trials site management and outcomes research. The Company intends to link its nationally focused hospital affiliations and its physician networks with its clinical trials site management and outcomes research operations. During the year ended January 31, 1999, the Board approved, consistent with achieving its stated restructuring goal, its plan to divest and exit the Company's PPM business and certain of its ancillary services businesses, including diagnostic imaging, lithotripsy, radiation therapy, home health and infusion therapy. During the nine months ended October 31, 1999, the Company also decided to terminate an additional physician practice management agreement and divest its investments in a surgery center and a network of physicians, and sell its real estate service operations. The revenue and pretax loss of these businesses which have been identified to be divested or disposed for the nine months ended October 31, 1999 were $84.2 million and $9.0 million, respectively. Net loss for the nine months ended October 31, 1999 included an extraordinary item of $49.6 million (net of tax of $0), which is primarily a non-cash charge related to these divestitures. Based on fair market value estimates, which have primarily been derived from purchase agreements, letters of intent, letters of interest and discussions with prospective buyers, the Company currently expects to realize net proceeds of approximately $12.5 million (subsequent to October 31, 1999 approximately $7.7 million was realized, prior to the payment of retained liabilities of approximately $3.0 million) from the sale of the remaining businesses identified to be divested or disposed and has recorded this amount as an asset held for sale on the balance sheet at October 31, 1999. ACCOUNTING TREATMENT The terms of the Company's relationships with its remaining affiliated physicians are set forth in various asset and stock purchase agreements, management services agreements and employment and consulting agreements. Through the asset and/or stock purchase agreement, the Company acquired the equipment, furniture, fixtures, supplies and, in certain instances, service agreements, of a physician practice at the fair market value of the assets. -14- The accounts receivable typically were purchased at the net realizable value. The purchase price of the practice generally consisted of cash, notes and/or Common Stock of the Company and the assumption of certain debt, leases and other contracts necessary for the operation of the practice. The management services or employment agreements delineate the responsibilities and obligations of each party. Net revenues from services is reported at the estimated realizable amounts from patients, third-party payors and others for services rendered. Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. Provisions for estimated third-party payor settlements and adjustments are estimated in the period the related services are rendered and adjusted in future periods as final settlements are determined. The provision and related allowance are adjusted periodically, based upon an evaluation of historical collection experience with specific payors for particular services, anticipated reimbursement levels with specific payors for new services, industry reimbursement trends, and other relevant factors. Included in net revenues from services are revenues from the diagnostic imaging centers in New York, which the Company operated pursuant to Administrative Service Agreements. These revenues are reported net of payments to physicians. Net revenues from management services agreements include the revenues generated by the physician practices net of payments to physicians. The Company, in most cases, is responsible and at risk for the operating costs of the physician practices. Expenses include the reimbursement of all medical practice operating costs as required under the various management agreements. For providing services under management services agreements entered into prior to April 30, 1996, physicians generally received a fixed percentage of net revenue of the practice. "Net revenues" is defined as all revenue computed on an accrual basis generated by or on behalf of the practice after taking into account certain contractual adjustments or allowances. The revenue is generated from professional medical services furnished to patients by physicians or other clinicians under physician supervision. In several of the practices, the Company has guaranteed that the net revenues of the practice will not decrease below the net revenues that existed immediately prior to the agreement with the Company. Under most management services agreements entered into after April 30, 1996, the physicians receive a portion of the operating income of the practice which amounts vary depending on the profitability of the practice. In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 97-2 concerning the consolidation of physician practice revenues. PPMs are required to consolidate financial information of a physician where the PPM acquires a "controlling financial interest" in the practice through the execution of a contractual management agreement even though the PPM does not own a controlling equity interest in the physician practice. EITF 97-2 outlines six requirements for establishing a controlling financial interest. The Company adopted EITF 97-2 in the fourth quarter of its fiscal year ended January 31, 1999. Adoption of this statement reduced previously reported revenues and expenses for the three and nine months ended October 31, 1998 by $15.2 million and $49.9 million respectively. During August 1998, the Company announced its plan to divest and exit the PPM business. The Company is currently working to complete these divestitures and the majority of these assets are recorded as assets held for sale at October 31, 1999. -15- RESULTS OF OPERATIONS The following table shows the percentage of net revenue represented by various expense categories reflected in the Consolidated Statements of Operations. The information that follows should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein.
Three Months Ended Nine Months Ended October 31, October 31, ---------------------- ---------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Revenues 100.0% 100.0% 100.0% 100.0% Salaries, wages and benefits 29.7% 33.9% 31.5% 30.4% Supplies 22.4% 22.1% 22.4% 19.2% Depreciation and amortization 5.2% 5.6% 5.9% 4.8% Rent expense 7.3% 7.9% 7.7% 6.6% Provision for bad debts 1.0% 3.5% 1.4% 1.9% Gain on sale of assets 0.0% 0.0% 0.0% 2.4% Non-recurring expenses 0.0% 0.0% 10.2% 2.3% Provision for writedown of notes receivable 0.0% 3.9% 0.0% 1.2% Other (primarily capitation expense) 52.1% 41.2% 49.1% 35.8% ----------- ---------- ----------- ---------- Total operating costs and administrative expenses 117.7% 118.2% 128.2% 99.8% Interest Expense, net 5.0% 2.4% 4.5% 2.3% (Income) from investment in affiliate (0.1%) (0.2%) 0.0% (0.3%) ----------- ---------- ----------- ---------- Loss before taxes and extraordinary item (22.5%) (20.3%) (32.7%) (1.8%) Income tax expense (benefit) (0.1%) (6.9%) 0.0% (0.7%) ----------- ---------- ----------- ---------- Loss before extraordinary item (22.4%) (13.4%) (32.7%) (1.1%) Extraordinary item, net of tax 0.0% 75.9% 32.0% 22.5% ----------- ---------- ----------- ---------- Net loss (22.4%) (89.3%) (64.7%) (23.6%) ===== ==== ===== ====
THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1998 The following discussion reviews the results of operations for the three and nine months ended October 31, 1999 (the "2000 Quarter" and "2000 Period"), respectively, compared to the three and nine months ended October 31, 1998 (the "1999 Quarter" and "1999 Period"), respectively. REVENUES During the 2000 Quarter and the 2000 Period the Company derived revenues primarily from the following segments: provider network management, site management organizations and assets held for sale. Revenues from provider network management are derived from management services to management service organizations and administrative services to health plans which include reviewing, processing and paying claims and subcontracting with specialty care physicians to provide covered services. Revenues from site management organizations are derived primarily from services provided to pharmaceutical companies for clinical trials. Revenues from assets held for sale are derived primarily from providing the following services: physician practice management, diagnostic imaging, radiation therapy, home healthcare, infusion therapy, real estate services and lithotripsy. -16- Net revenues were $44.4 million and $154.9 million during the 2000 Quarter and 2000 Period, respectively. Of this amount, $12.9 million and $43.6 million or 29.0% and 28.2% of such revenues was attributable to provider network management; $9.2 million and $26.8 million or 20.7% and 17.3% was related to site management organizations; and $22.1 million and $84.2 million or 49.9% and 54.4% was attributable to assets held for sale. Net revenues were $67.9 million and $229.5 million during the 1999 Quarter and 1999 Period, respectively. Of this amount, $16.3 million and $53.8 million or 23.9% and 23.4% of such revenues was attributable to provider network management; $7.5 million and $26.6 million or 11.0% and 11.6% was related to site management organizations; and $43.4 million and $148.0 million or 63.8% and 64.5% was attributable to assets held for sale. The Company's net revenues from provider network management services decreased by $3.4 million from $16.3 million for the 1999 Quarter to $12.9 million for the 2000 Quarter and by $10.2 million from $53.8 million for the 1999 Period to $43.6 million for the 2000 Period. The decrease is primarily attributable to a reduction in capitation revenue from one contract managed by the Company. The Company's net revenues from site management organizations increased by $1.7 million from $7.5 million for the 1999 Quarter to $9.2 million for the 2000 Quarter and by $0.2 million from $26.6 million for the 1999 Period to $26.8 million for the 2000 Period. The Company's net revenues from assets held for sale decreased by $21.3 million from $43.4 million for the 1999 Quarter to $22.1 million for the 2000 Quarter and by $63.8 million from $148.0 million for the 1999 Period to $84.2 million for the 2000 Period primarily attributable to the asset divestitures including the sale of the real estate service operations. The Company is currently negotiating the termination of a management services agreement to manage a network of over 100 physicians. The ultimate resolution of the negotiations and collection of any receivables due from the beginning of the year is uncertain; therefore, the Company has not recorded revenue from the agreement for the 2000 Quarter and the 2000 Period. For the 1999 Quarter and the 1999 Period, the Company recorded $4.6 million and $14.7 million of net revenues (which are included in revenues from the assets held for sale segment) from this agreement. EXPENSES The Company's salaries, wages and benefits decreased by $9.8 million from $23.0 million or 33.9% of net revenues during the 1999 Quarter to $13.2 million or 29.7% of net revenues during the 2000 Quarter and by $21.1 million from $69.9 million or 30.4% of net revenues during the 1999 Period to $48.8 million or 31.5% of net revenues during the 2000 Period. The decrease in dollars is primarily attributable to the reductions in personnel in conjunction with the asset divestitures. The Company's supplies expense was $15.0 million or 22.1% of net revenues during the 1999 Quarter and $9.9 million or 22.4% of net revenues during the 2000 Quarter and was $44.0 million or 19.2% of net revenues during the 1999 Period and $34.7 million or 22.4% of net revenues during the 2000 Period. The increase in supplies expense as a percentage of net revenues was primarily due to the relative increase, due to other asset divestitures, in the size of the Company's infusion and cancer service businesses, which are more supply intensive and for which the cost of pharmaceutical supplies is higher. The Company's rent expense decreased by $2.2 million from $5.4 million or 7.9% of net revenues during the 1999 Quarter to $3.2 million or 7.3% of net revenues during the 2000 Quarter and by $3.1 million from $15.0 million or 6.6% of net revenues during the 1999 Period to $11.9 million or 7.7% of net revenues during the 2000 Period. The decrease in dollars is primarily a result of the asset divestitures. The Company's gain on sale of assets of $5.4 million during the second quarter of the 1999 Period, represented gains from the sale of real estate of approximately $4.5 million during July 1998 and from the sale of a radiation therapy center of approximately $0.9 million during February 1998. The Company's nonrecurring charge of $5.3 million during the second quarter of the 1999 Period represents the charge resulting from the termination of several physician management and employment agreements. The Company's nonrecurring 17 charge of $15.8 million during the second quarter of the 2000 Period represents a $14.1 million impairment charge for a physician practice management agreement and management service organization and the balance primarily represents additional severance costs in conjunction with the sale of assets and the repositioning of the Company. The Company's provision for the loss on notes receivable of $2.7 million during the 1999 Quarter and the 1999 Period represents the writedown of several notes receivable that were collateralized by shares of Common Stock of the company to their net realizable value. The Company's other expenses decreased by $4.9 million from $28.0 million or 41.2% of net revenues during the 1999 Quarter to $23.1 million or 52.1% of net revenues during the 2000 Quarter and by $6.1 million from $82.2 million or 35.8% of net revenues during the 1999 Period to $76.1 million or 49.1% of net revenues during the 2000 Period. The increase in other expenses as a percentage of net revenues is primarily due to an increase in capitation revenues related to the Company's provider network management services as a percentage of total revenues. The Company's interest expense increased by $0.6 million from $1.6 million or 2.4% of net revenues during the 1999 Quarter to $2.2 million or 5.0% of net revenues during the 2000 Quarter and by $1.6 million from $5.3 million or 2.3% of net revenues during the 1999 Period to $6.9 million or 4.5% of net revenues during the 2000 Period. The acceleration of the amortization of debt issuance costs related to the line of credit which was repaid during the 2000 Period resulted in increased interest expense of $0.3 million during the 2000 Period. The Company's extraordinary item of $49.6 million (net of tax of $0) during the 2000 Period and $51.6 (net of tax benefit of $8.4 million) during the 1999 Period represents the charge resulting from divestitures or disposals that had occurred subsequent to August 1998 as well as the write-down of the assets of the businesses being held for sale at October 31, 1999,and 1998, respectively. The carrying value of the assets of these businesses was written down to their estimated net realizable value (less costs to sell). The Company's loss prior to income taxes and extraordinary item during the 2000 Quarter and 2000 Period was $10.0 million and $50.6 million compared to loss prior to income taxes and extraordinary item during the 1999 Quarter and 1999 Period $13.8 million and $4.1 million. The deterioration of income during the 2000 Quarter and 2000 Period is primarily due to several factors including: (i) the sale of the real estate service operations during the three months ended October 31, 1999, which was done in connection with the repositioning of the Company, and in part due to the resignation of Bruce A. Rendina as Chief Executive Officer of the Company's real estate services (the real estate service operations, which are included in the assets held for sale segment generated a pretax loss of $0.1 million and $1.9 million during the 2000 Quarter and the 2000 Period compared to pretax income of $0.6 million and $6.7 million during the 1999 Quarter and the 1999 Period), (ii) the deterioration of the operating results of certain of the businesses divested or to be divested (the assets held for sale segment, including the real estate service operation discussed above, generated a total pretax loss of $2.2 million and $9.0 million during the 2000 Quarter and the 2000 Period compared to pretax loss of $3.8 million and pretax income of $12.1 million during the 1999 Quarter and the 1999 Period), and (iii) the Company is in the process of repositioning and building infrastructure to expand and integrate its two primary business lines: provider network management and pharmaceutical services (site management organizations) (combined these businesses generated a pretax loss, prior to nonrecurring charges, of $2.7 million and $12.5 million during the 2000 Quarter and the 2000 Period compared to pretax loss of $5.9 million and $2.5 million during the 1999 Quarter and the 1999 Period). -18- REAL ESTATE SERVICES Prior to the repositioning, the Company had historically derived significant revenues from real estate services. During August 1998, Bruce A. Rendina resigned as CEO and President of DASCO (the Company's real estate services subsidiary) and Vice Chairman of the Company. During September 1998, Mr. Rendina entered into a Business Agreement (the "Business Agreement") with the Company. The Business Agreement was entered into in settlement of certain claims by both the Company and Mr. Rendina relating to Mr. Rendina's future competition with the Company. The Business Agreement provides that the Company has the exclusive development rights to 27 separate projects located in 12 separate states. In addition, the Company and Mr. Rendina agreed to share fees with respect to five asset conversion projects and six medical facility development projects whereby Mr. Rendina is entitled to the first 25% of the projected development fees received on any shared fee project and the Company and Mr. Rendina evenly split the remaining portion of the fees for such projects. The Business Agreement also permits Mr. Rendina and his affiliates to pursue independently the development of six separate projects in five states. Finally, the Company and Mr. Rendina have provided mutual releases of each other with respect to any event related to the business and employment relationships of the parties. During the year ended January 31, 1999, the Company recorded a goodwill impairment writedown of $9.1 million which eliminated the remaining goodwill of the real estate services subsidiary. The asset of goodwill was determined to have been impaired because of the Company's decision to significantly downsize the real estate services. During the three months ended October 31, 1999, the Company sold the remaining real estate service operations. LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities was $17.7 million during the 2000 Period. Cash used by operating activities was $0.8 million during the 1999 Period. At October 31, 1999, the Company's principal sources of liquidity consisted of working capital of $51.7 million which included $38.0 million in cash, and $12.5 million in assets held for sale (see below for further discussion of assets held for sale) offset by the current portion of debt and capital leases. The Company also had $47.6 million of current liabilities, including approximately $16.1 million of indebtedness which is comprised primarily of $14.3 million outstanding under the line of credit (see below for further discussion of the line of credit). Cash provided by investing activities was $46.5 million during the 2000 Period and primarily represented the net cash received from the sale of assets of $51.2 million, offset by the funds required by the Company for capital expenditures of $4.6 million and additional purchase price of $1.4 million. Cash used by investing activities was $12.5 million during the 1999 Period. This primarily represents the total funds required by the Company for acquisitions and capital expenditures of $15.5 million and advances under notes receivable of $2.0 million offset by the cash received from the sale of assets of $5.1 million. Cash used by financing activities was $0.9 million during the 2000 Period and primarily represented proceeds from the issuance of debt of $21.7 million, offset by the repayment of debt of $21.2 million and the purchase of treasury stock of $1.5 million. Cash used by financing activities was $11.9 million during the 1999 Period and primarily represented the repayment of debt of $8.2 million and advances to shareholder of $3.1 million. In conjunction with various acquisitions that have been completed, the Company may be required to make various contingent payments in the event that the acquired companies attain predetermined financial targets during established periods of time following the acquisitions. If all of the applicable financial targets were satisfied, for the periods covered, the Company would be required to pay an aggregate of approximately $13.4 million over the next four years, of which $5.0 million represents a minimum option price for an additional 29% ownership interest in a network which may be required to be purchased by the Company any time between November 1999 and November 2001. The payments, if 19 required, are payable in cash and/or Common Stock of the Company. In addition, in conjunction with the acquisition of a clinical research center, an ownership interest in a network and in conjunction with a joint venture entered into by the Company during the year ended January 31, 1998, the Company may be required to make additional contingent payments based on revenue and profitability measures over the next five years. During July 1997, the Company entered into a management services agreement to manage a network of over 100 physicians in New York. In connection with this transaction, the Company may expend, in certain circumstances, up to $40.0 million (of which none has been expended as of October 31, 1999) to be utilized for the expansion of the network. The Company is currently in the process of terminating this management agreement which, if terminated, is expected to result in the elimination of any additional expenditures to expand this network. During February 1998, the Company completed the formation of an MSO in New York, one-third of which it owns. The owners of the remaining two-thirds of the MSO have the right to require the Company to purchase their interests at the option price, which is based upon earnings, during years six and seven. In conjunction with certain of its acquisitions the Company has agreed to make payments in shares of Common Stock of the Company at a predetermined future date. The number of shares to be issued are generally determined based upon the average price of the Company's Common Stock during the five business days prior to the date of issuance. As of October 31, 1999, the Company had committed to issue $1.1 million of Common Stock of the Company using the methodology discussed above. This amount is included in other long-term liabilities on the balance sheet. The Company also guarantees a loan in the amount of $3.5 million which matures in March 2000. In conjunction with the repositioning (as described earlier in "Significant Events"), during the year ended January 31, 1999, the Board of Directors approved its plan to divest and exit the Company's PPM business and certain of its ancillary services businesses including diagnostic imaging, lithotripsy, radiation therapy, home health and infusion therapy. During the nine months ended October 31, 1999, the Company also decided to terminate an additional physician practice management agreement, divest its investments in a surgery center and a network of physicians and sell its real estate service operations. The revenue and pretax loss of these businesses which have been identified to be divested or disposed for the nine months ended October 31, 1999 were $84.2 million and $9.0 million. Based on fair market value estimates, which have primarily been derived from purchase agreements, letters of intent, letters of interest and discussions with prospective buyers, the net realizable value of the remaining assets identified to be divested or disposed was $12.5 million at October 31, 1999 (subsequent to October 31, 1999 approximately $7.7 million was realized, prior to the payment of retained liabilities of $3.0 million) which has been reflected as an asset held for sale on the balance sheet at October 31, 1999. In conjunction with a physician practice management agreement with a physician practice in Florida, the Company has filed suit against the practice to enforce the guarantees executed in connection with the management agreement. The practice has filed a counterclaim. The Company intends to prosecute and defend the case. The Board of Directors of the Company authorized a share repurchase plan pursuant to which the Company may repurchase up to $15.0 million of its Common Stock from time to time on the open market at prevailing market prices. As of October 31, 1999 the Company has repurchased approximately 1.3 million shares at a net purchase price of approximately $2.2 million. The Company's Common Stock was delisted from the Nasdaq National Market as of the close of business on December 8, 1999. The Company's Common Stock is now trading on the OTC Bulletin Board. As a result, current information regarding bid and asked prices for the common stock may be less readily available to brokers, dealers and/or their customers. As a result of reduced availability of current information, there may be a reduction in the liquidity of the market for the Common Stock which, in turn, could result in decreased demand for the Common Stock, a decrease in the stock price and an increase in the spread between the bid and asked prices for the Common Stock. The development and implementation of the Company's management information system will require ongoing capital expenditures. The Company has estimated the total costs to be incurred for completion of its Year 2000 strategy is approximately $3.0 million, which includes costs for new systems and system upgrades which would have been incurred regardless of the need to remedy the Year 2000 issue. The Company expects that its working capital of $51.7 million at October 31, 1999, which includes cash of $38.0 million and the expected cash to be generated from the assets held for sale, will be adequate to satisfy the Company's cash requirements for the next 12 months. The Company's capital needs over the next several years may exceed capital generated from operations. During March 1999, the Company obtained a new $30.0 million revolving line of credit which has a three-year term and availability based upon eligible accounts receivable. Approximately $9.2 million of proceeds from the new line of credit were used to repay the previous line of credit. The new line of credit is secured by the assets of the Company, limits the ability of the Company to incur certain indebtedness and make certain dividend payments, 20 and requires the Company to comply with customary covenants. Proceeds from asset sales must be used to repay the line of credit to the extent the sold assets included eligible accounts receivable. At October 31, 1999, approximately $14.3 million was outstanding under the line. RISKS ASSOCIATED WITH YEAR 2000 The Year 2000 date change issue is believed to affect virtually all companies and organizations. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The Company recognizes the need to ensure its operations will not be adversely impacted by the inability of the Company's information systems to process data having dates on or after January 1, 2000 (the "Year 2000" issue). The Company has completed its full assessment of the Year 2000 issue. The Company has a committee, led by its Chief Information Officer, charged with building, developing and implementing the information systems required for its pharmaceutical and provider network management services business lines and to assess and remediate the effect of the Year 2000 issue on the Company's operations. The Company has contacted its clients, principal suppliers and other vendors to assess whether their Year 2000 issues, if any, will affect the Company. There is no guarantee that the systems of other companies on which the Company relies will be corrected in a timely manner or that the failure to correct such systems will not have a material adverse effect on the Company's systems. Many year 2000 deficiencies have already been identified and addressed through planned systems and infrastructure evolution, replacement or elimination. The continuing program described below is designed to permit the Company to identify and address all remaining Year 2000 systems and deficiencies well in advance of the millenium change. The programs consist of three phases, which are, (i) conducting an inventory of all systems and deficiencies that may be affected by the Year 2000 issue as well as the assessment and categorization of all the inventoried systems and deficiencies by level of priority, (ii) reflecting their potential impact on business continuation, and (iii) bringing each system to full compliance as well as general contingency planning in the event that any critical systems cannot be made fully compliant by January 1, 2000. All phases of the program are substantially complete. The Company's information technology systems ("IT Systems") can be broadly categorized into the following areas: (i) clinical studies information systems, (ii) managed care information systems, (iii) other administrative information systems including financial accounting, payroll, human resource and other desktop systems and applications and (iv) information systems of business held for sale. The Company recognizes that investment in information systems is integral to its operations. The majority of the Company's technology expenditures are related to the development and implementation of both clinical information and managed care information systems that are Year 2000 compliant. The clinical information systems, currently implemented in the Clinical Studies locations, and the managed care information systems are fully operational. The Company believes that the Year 2000 issue-related remediation costs incurred through the 2000 Quarter have not been material to its results of operations. The Company has estimated the total costs to be incurred for completion of its Year 2000 strategy is approximately $3.0 million, which includes costs for new systems and system upgrades which would have been incurred regardless of the need to remedy the Year 2000 issue. The Company's financial accounting system is fully Year 2000 compliant at a total cost of approximately $30,000. The Company expects to complete within the next month the disposition of the majority of the remaining assets held for sale. The Company has completed all three phases of the program discussed above for the remaining assets held for sale in the event that there are assets which are not sold or divested prior to December 31, 1999. The Company believes that it has adequately identified and addressed any Year 2000 issues that may arise related to the assets currently included in assets held for sale which are not sold by December 31, 1999. Risks involved in the managed care applications include the risk that failures in the Company's managed care systems causing a backlog of claims or failures at one or more of the Company's payors will cause a delay in the payment of claims and capitation payments, either of which could negatively affect cash flows of the Company. The Company has developed contingency plans for failures at the Company's electronic trading partners. -21- The nature of the Year 2000 issue, and the lack of historical experience in addressing it, however, could result in unforeseen risks. The Company bills and collects for medical services from numerous third party payors in operating its business. These third parties include fiscal intermediaries that process claims and make payments on behalf of the Medicare program as well as insurance companies, HMO's and other private payors. As part of the Company's Year 2000 strategy, a comprehensive survey has been completed of all significant payors, principal clients, suppliers, and other vendors to assess their timeline for Year 2000 compliance and the impact to the Company of any potential interruptions in services or payments and the Company has been assured that such third party systems are or will be Year 2000 compliant. The foregoing assessment is based on information currently available to the Company. The Company can provide no assurance that applications and equipment that the Company believes to be Year 2000 compliant will not experience problems. Failure by the Company or third parties on which it relies to resolve Year 2000 problems could have a material adverse effect on the Company's results of operations. FACTORS TO BE CONSIDERED The part of this Quarterly Report on Form 10-Q captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains certain forward-looking statements which involve risks and uncertainties. Readers should refer to a discussion under "Factors to be Considered" contained in Part I, Item 1 of the Company's Annual Report on Form 10-K for the year ended January 31, 1999 concerning certain factors that could cause the Company's actual results to differ materially from the results anticipated in such forward-looking statements. This discussion is hereby incorporated by reference into this Quarterly Report. -22- PART II--OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.10 Asset Purchase Agreement made as of July 14, 1999, by and among PresGar Imaging L.C., Innovative Clinical Solutions, Ltd., Phymatrix Management Company, Inc., Phymatrix Diagnostic Imaging, Inc., Biltmore Imaging Center, Inc., BabRad, Inc., Phymatrix Diagnostic Imaging Northeast, Inc., and Deerco, Inc., for the sale of the Imaging Division Exhibit 10.11 (a) Confirmatory Revolving Note dated as of February 1, 1998 in principal amount of $10.9 million payable by Chancellor Development Corp. to Innovative Clinical Solutions, Ltd. Exhibit 10.11 (b) Confirmatory Guarantee of Abraham D. Gosman dated as of February 1, 1998 in favor of Innovative Clinical Solutions, Ltd. Exhibit 10.11 (c) Confirmatory Stock Pledge Agreement made as of November 30, 1999 by and among Abraham D. Gosman, Chancellor Partners Limited Partnership I, Chancellor Development Corp. and Innovative Clinical Solutions, Ltd. Exhibit 10.11 (d) Letter Agreement dated November 30, 1999 by and between PBG Medical Mall MOB 1 Properties, Ltd. and Innovative Clinical Solutions, Ltd. regarding Interest and Lease Payments Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on September 13, 1999 with the Securities and Exchange Commission reporting under Item 2 the sale of the Diagnostic Imaging Division. -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned; thereunto duly authorized, on the 15th day of December, 1999. INNOVATIVE CLINICAL SOLUTIONS, LTD. By: /s/ Gary S. Gillheeney ----------------------------------------- Chief Financial Officer and Treasurer -24- EX-10.10 2 EXHIBIT 10.10 Exhibit 10.10 ASSET PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (the "Agreement") is made as of the 14th day of July, 1999, by and among PresGar Imaging, L.C., a Florida Limited Liability Company, together with any one or more affiliates to which it assigns its rights (but not its obligations) hereunder (collectively the "PURCHASER"), Innovative Clinical Solutions, Ltd., a Delaware corporation ("ICSL"), PhyMatrix Management Company, Inc., a Florida corporation ("PMC"), PhyMatrix Diagnostic Imaging, Inc., a Delaware corporation ("PDI"), Biltmore Imaging Center, Inc., an Arizona corporation ("BILTMORE"), BabRad, Inc., a New York corporation ("BABRAD"), PhyMatrix Diagnostic Imaging Northeast, Inc., a Delaware corporation ("PDI NE"), and Deerco, Inc., a New York corporation ("DEERCO," and collectively with PMC, PDI, Biltmore and BabRad, the "SELLER GROUP"). WHEREAS, PMC, Biltmore, PDI NE, BabRad, Deerco and PDI, each direct or indirect subsidiaries of ICSL, own the assets used by and administer the following diagnostic imaging centers: (i) the Bensonhurst imaging center (the "BENSONHURST CENTER"), (ii) the Queens Open MRI imaging center (the "RAY-X CENTER"), (iii) the Highway imaging center (the "HIGHWAY CENTER"), (iv) the five Bab nuclear radiology centers (the "BAB CENTERS"), (v) Biltmore Advanced Imaging Center (the "BILTMORE CENTER"), (vi) Central Magnetic Imaging North and South Centers (the "CMI NORTH & SOUTH Centers") and (vii) Central Magnetic Imaging Center of Palm Beach County (the "CMI-PALM BEACH CENTER," and collectively with the Bensonhurst Center, the Ray-X Center, the Highway Center, the Bab Centers, the Biltmore Center, and the CMI North & South Centers, the "DIAGNOSTIC CENTERS"); WHEREAS, Purchaser desires to purchase and PMC, PDI NE, Biltmore, BabRad, Deerco and PDI collectively desire to sell, the assets related to the Diagnostic Centers. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. CERTAIN DEFINITIONS As used in this Agreement, the following terms shall have the respective meanings set forth below: 1.01 "Assumed Obligations" shall have the meaning set forth in Section 2.01(b). 1.02 "Balance Sheets" means the balance sheets dated April 30, 1999 of the Seller Group relating to the Business, appearing in the Financial Statements, and the accompanying schedules thereto. 1.03 "Balance Sheet Date" means April 30, 1999. 1.04 "Business" means, collectively, the business of owning the assets of and operating and/or administering the Diagnostic Centers. 1.05 "Closing" means the closing of the transactions contemplated by this Agreement with respect to the purchase and sale of the Transferred Assets and the assumption of the Assumed Obligations. 1.06 "Closing Date" shall have the meaning set forth in Section 5.01. 1.07 "Diagnostic Centers" shall have the meaning set forth in the recitals. 1.08 "Disclosure Schedule" means the disclosure schedule attached hereto as Schedule 1. 1.09 "Eligible Employee" shall have the meaning set forth in Section 3.02. 1.10 "Financial Statements" means the financial statements of the Seller Group relating to the Business attached hereto as EXHIBIT A consisting of the Balance Sheets and the statements of operations for the one year and three month periods ended January 31 and April 30, 1999, respectively. 1.11 "HSR Act" shall have the meaning set forth in Section 11.04. 1.12 "ICSL Group" means, collectively, ICSL and the Seller Group. 1.13 "Liens" shall have the meaning set forth in Section 2.01. 1.14 "Material Adverse Effect" shall have the meaning set forth in Section 7.01. 1.15 "Permitted Liens" shall mean: (a) liens for taxes not due; (b) pledges or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (c) easements, rights-of-way, restrictions and other similar encumbrances which are not material, and which do not materially detract from the value of any such properties or assets or materially interfere with any present use of such properties or assets; (d) liens on deposits which have been made to secure the performance of bids, contracts (other than for borrowed money), leases, statutory obligations, -2- surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) statutory and contractual liens in favor of landlords or lessors securing leases; and (f) liens arising pursuant to Assumed Obligations. 1.16 "Transferred Assets" means the assets listed on EXHIBIT B hereto. 1.17 References to the "knowledge" of any party regarding the existence of any factual matter shall refer to the knowledge that the officers and directors of such party, in the exercise of their corporate law fiduciary responsibilities, had regarding such matter. 2. PURCHASE AND SALE OF ASSETS 2.01 PURCHASE OF ASSETS. (a) ASSETS. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing the Seller Group will sell, transfer and assign to the Purchaser, free and clear of all liens, pledges, security interests, charges, claims or encumbrances other than Permitted Liens (collectively, "LIENS"), those assets, properties and rights related to the ownership and operation of the Diagnostic Centers, which are all listed or described on EXHIBIT B hereto (collectively, the "TRANSFERRED ASSETS"). Excluded from the Transferred Assets are cash and cash equivalents, accounts receivable, books and records (other than patient records which are expressly included in Transferred Assets), and all other assets, properties and rights not expressly listed or described on EXHIBIT B hereto. (b) LIABILITIES. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing the Purchaser will assume only those obligations related to the Transferred Assets that are expressly identified on EXHIBIT C hereto (the "ASSUMED OBLIGATIONS") and will thereafter timely perform the Seller Group's obligations under each and timely pay and discharge the same when due. 3. OTHER PROVISIONS RELATING TO THE PURCHASE AND SALE OF THE TRANSFERRED ASSETS 3.01 FURTHER ASSURANCES. At any time and from time to time after the Closing, at the request and at the expense of the Purchaser, and without further consideration, the ICSL Group will execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation as may be reasonably requested by the Purchaser in order to more effectively transfer, convey and assign to the Purchaser and to confirm Purchaser's title to the Transferred Assets. -3- 4. PURCHASE PRICE 4.01 PURCHASE PRICE. In consideration for the Transferred Assets and the other covenants and agreements set forth herein, including the assumption of the Assumed Obligations, the Purchaser will pay to ICSL Group or their designee(s), an aggregate of Thirty-Three Million Five Hundred Fifty Thousand Dollars ($33,550,000) less the outstanding amount at Closing of the "Long-Term Obligations" identified as such on EXHIBIT C (currently estimated to be approximately $4,000,000) and the amount mutually agreed to by the parties at the Closing to adjust for modifications in the Contracts as a result of the transactions contemplated by this Agreement (which amount is currently estimated by the parties to be approximately $1,500,000), payable by certified or bank check or wire transfer at the Closing. 4.02 PURCHASE PRICE ALLOCATION. The Purchase Price shall be allocated among the Transferred Assets as reasonably determined by the parties and set forth on EXHIBIT D attached hereto, which the parties agree to attach to this Agreement on or before the Closing Date. The parties agree that any reporting of the Purchase Price or the allocation thereof on any federal or state tax return shall be consistent with EXHIBIT D. 5. CLOSING; CLOSING DELIVERIES 5.01 CLOSING. The closing of the sale of the Transferred Assets and the assumption of the Assumed Obligations pursuant to this Agreement (the "CLOSING") shall take place no more than three business days after expiration of the applicable HSR Act waiting period and the fulfillment or satisfaction of all conditions to closing described in Section 6, at 10:00 a.m., local time, at the offices of Nutter, McClennen & Fish, LLP, One International Place, Boston, Massachusetts, and otherwise on such date as may be mutually agreed upon by the parties (the "CLOSING DATE"). 5.02 CLOSING DELIVERIES OF THE SELLER GROUP. At the Closing, as a condition of the Purchaser's obligations to consummate the transactions contemplated by this Agreement, the ICSL Group shall cause to be delivered to the Purchaser the following (or receive the Purchaser's written waiver with respect thereto): (a) BILLS OF SALE AND ASSIGNMENT. Simultaneously with the Closing, the Seller Group will deliver, if applicable, to the Purchaser or its designee(s), Bills of Sale in the form attached hereto as EXHIBIT E, an Assignment and Assumption Agreement in the form attached hereto as EXHIBIT F, and other transfer documents which will be sufficient to vest good and valid title to the tangible Transferred Assets free and clear of any and all Liens. (b) RESOLUTIONS. A copy of the resolutions of the Board of Directors of each member of the Seller Group certified by a duly elected officer as being complete and correct as of such date and satisfactory in form and substance to the Purchaser, authorizing and approving the execution, delivery and performance of this Agreement and the -4- transactions contemplated hereby and the acts of the officers and employees of the Seller Group in carrying out the terms and provisions hereof. (c) CLOSING CERTIFICATE. A certificate of an officer of ICSL delivered pursuant to Sections 6.01(a) and (b). (d) ORGANIZATIONAL DOCUMENTS. A copy of the certificate of incorporation, certified as of a recent date by the Secretary of State of the state of incorporation for each of the members of the Seller Group, and a copy of the By-laws of each member of the Seller Group, certified by a duly elected officer of such company; a certificate or certificates of good standing, also certified as of a recent date by the Secretary of State of the state of incorporation for each of the members of the Seller Group; and certificates of foreign qualification with respect to all jurisdictions in which the Seller Group, by the conduct of their business, are required to be so qualified. (e) OPINIONS OF COUNSEL. An opinion of counsel for the ICSL Group in a form mutually agreed to by the parties. 5.03 CLOSING DELIVERIES OF PURCHASER. At the Closing, as a condition of the ICSL Group's obligation to consummate the transactions contemplated by this Agreement, the Purchaser shall deliver or cause to be delivered to the ICSL Group the following (or receive the ICSL Group's written waiver with respect thereto): (a) PURCHASE PRICE. The Purchaser must pay the Purchase Price as provided in Section 4.01. (b) ASSIGNMENT AND ASSUMPTION AGREEMENT. An Assignment and Assumption Agreement in the form attached hereto as EXHIBIT F pursuant to which the Purchaser shall assume and undertake to perform the Assumed Obligations pursuant to Section 2.01(b). (c) RESOLUTIONS. A copy of the resolutions of the Board of Directors of the Purchaser certified by a duly elected officer as being complete and correct as of such closing date, authorizing and approving the execution, delivery and performance of this Agreement and the transactions contemplated hereby and the acts of the officers and employees of the Purchaser in carrying out the terms and provisions hereof. (d) ORGANIZATIONAL DOCUMENTS. A copy of the Purchaser's Articles of Organization, certified as of a recent date by the Secretary of State of the state of organization of the Purchaser and a copy of the Regulations and Operating Agreement of the Purchaser, certified by a member or manager; a certificate of active status, also certified as of a recent date by the Secretary of State of the state of organization of the Purchaser; and certificates of foreign qualification with respect to all states in which the Purchaser, by the conduct of its business, is required to be so qualified. -5- (e) CLOSING CERTIFICATE. A certificate of a member of the Purchaser delivered pursuant to Sections 6.02(a) and (b). (f) OPINION OF COUNSEL. An opinion of counsel for the Purchaser in a form mutually agreed to by the parties. 6. CONDITIONS 6.01 CONDITIONS TO PURCHASER'S OBLIGATIONS. At the Closing, it shall be a condition of Purchaser's obligation to consummate the transactions contemplated by this Agreement that the following shall be true: (a) REPRESENTATIONS AND WARRANTIES TRUE. All of the representations and warranties of the ICSL Group contained in this Agreement shall be true, correct and complete in all material respects as of the Closing Date. On such date, a duly elected and currently serving officer of ICSL shall have executed and delivered to the Purchaser a certificate to such effect. (b) PERFORMANCE. The ICSL Group shall have performed and complied in all material respects with all covenants and agreements contained herein required to be performed or complied with by them prior to or at the Closing Date. A duly elected and currently serving officer of ICSL shall have executed and delivered to the Purchaser a certificate to such effect. (c) CLOSING DELIVERIES. The ICSL Group shall have delivered all of the resolutions, certificates, documents and instruments required to be delivered by it by this Agreement. (d) ORDERS, DECREES, JUDGMENTS. No order, decree or judgment of any court or governmental body shall have been issued and remain in effect at such date restraining, prohibiting, restricting or delaying the consummation of the transactions contemplated by this Agreement. (e) CONSENTS. All consents or approvals required for the consummation of the transactions contemplated by this Agreement by any third party shall have been obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect (as defined below). (f) GOVERNMENTAL APPROVALS. All approvals, consents, permits or licenses from any federal, state or local governmental agency or body required in connection with the consummation of the transactions contemplated hereby shall have been duly obtained to the extent that such approvals, consents, permits or licenses can be legally obtained prior to -6- such date, except where the failure to obtain any such approval, consent, permit or license would not have a Material Adverse Effect (as defined below). (g) HSR ACT REQUIREMENTS. The filing and waiting requirements under the HSR Act shall have been complied with and shall have expired or terminated. 6.02 CONDITIONS TO THE ICSL GROUP'S OBLIGATIONS. At the Closing, it shall be a condition to the ICSL Group's obligation to consummate the transactions contemplated by this Agreement that the following shall be true: (a) REPRESENTATIONS AND WARRANTIES TRUE. All of the representations and warranties of the Purchaser contained in this Agreement shall be true, complete and correct in all material respects as of the Closing Date. On such date, a member of the Purchaser shall have executed and delivered to the ICSL Group a certificate to such effect. (b) PERFORMANCE. The Purchaser shall have performed and complied with all agreements and covenants contained herein required to be performed or complied with by the Purchaser prior to or at the Closing Date. A member of the Purchaser shall have delivered a certificate to the ICSL Group to such effect. (c) CLOSING DELIVERIES. The Purchaser shall have delivered the Purchase Price and all of the resolutions, certificates, documents and instruments required to be delivered by it by this Agreement. (d) ORDERS, DECREES, JUDGMENTS. No order, decree or judgment of any court or governmental body shall have been issued and remain in effect at such date restraining, prohibiting, restricting or delaying the consummation of the transactions contemplated by this Agreement. (e) GOVERNMENTAL APPROVALS. All approvals, consents, permits or licenses from any federal, state or local governmental agency or body required in connection with the consummation of the transactions contemplated hereby shall have been obtained, except where the failure to obtain any such approval, consent, permit or license would not have a Material Adverse Effect. (f) HSR ACT REQUIREMENTS. The filing and waiting requirements under the HSR Act shall have been complied with and shall have expired or terminated. -7- 7. REPRESENTATIONS AND WARRANTIES OF THE ICSL GROUP RELATING TO THE TRANSFERRED ASSETS The members of the ICSL Group jointly and severally represent and warrant to the Purchaser that, except as disclosed in the DISCLOSURE SCHEDULE, the following representations and warranties are true and correct as of the date hereof. Disclosure appearing on the DISCLOSURE SCHEDULE with respect to any particular representation or warranty shall be deemed disclosure with respect to every other representation and warranty, as applicable. Subject to the rights of the Purchaser pursuant to Section 13.01(b) of this Agreement, the ICSL Group may attach the DISCLOSURE SCHEDULE to this Agreement after the execution hereof by delivering a copy of the DISCLOSURE SCHEDULE to the Purchaser with a notice stating that it is to be attached to this Agreement as the DISCLOSURE SCHEDULE. 7.01 ORGANIZATION. Each corporation constituting the Seller Group is a corporation organized, existing, and in good standing under the laws of the State of its incorporation. Each member of the Seller Group is qualified or licensed and in good standing as a foreign corporation in those states listed on the DISCLOSURE SCHEDULE, which are the only jurisdictions in which the property owned, leased or operated by it or the nature of the business conducted by it in connection with the Business makes such qualification or licensing necessary, except where failure to qualify would not result in a material adverse effect on the Business taken as a whole (a "Material Adverse Effect"). 7.02 POWER AND AUTHORITY. Each member of the Seller Group has corporate power and authority to carry on its business as now being conducted and to own, operate and lease its properties in the places where such business is now conducted and where such properties are now owned, leased or operated. This Agreement and the transactions contemplated hereby have been approved by all necessary corporate action on the part of the ICSL Group. Each member of the ICSL Group has corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and this Agreement and all other agreements to be executed and delivered by the ICSL Group in connection herewith constitute the legal, valid and binding obligations of the ICSL Group enforceable against them in accordance with their respective terms. 7.03 COMPLIANCE. The execution and delivery of this Agreement, together with all documents and instruments contemplated herein (the "Transaction Documents") and the consummation of the transactions contemplated thereby by the ICSL Group will not (i) violate any provision of the organizational documents of the ICSL Group, (ii) violate any material provision of or result in the breach of or entitle any party to accelerate (whether after the giving of notice or lapse of time or both) any material obligation under, any mortgage, lien, lease, contract, license, instrument or any other agreement to which any member of the ICSL Group is a party, (iii) result in the creation or imposition of any material lien, charge, pledge, security interest or other material encumbrance upon the Transferred Assets or (iv) to the best of the ICSL Group's knowledge, violate or conflict with any court order, judgment or decree, or any law, ordinance -8- or regulation to which any member of the ICSL Group or the Transferred Assets is subject, except for such violation or conflict that would not result in a Material Adverse Effect. 7.04 APPROVALS. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other person is required in connection with the execution and delivery of this Agreement by the ICSL Group or the consummation by the ICSL Group of the transactions contemplated hereby, except for the filing to be made in accordance with the HSR Act and except where failure to obtain or make such consent, approval, order, authorization, declaration or filing would not result in a Material Adverse Effect. 7.05 FINANCIAL INFORMATION AND RECORDS; UNDISCLOSED LIABILITIES. (a) RECORDS. The books of account and related records of the Seller applicable to the Business and the Transferred Assets are correct and complete. (b) FINANCIAL STATEMENTS. The Financial Statements (a) correctly reflect the books of account and records of the Seller Group; (b) have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the indicated periods ("GAAP"), except that the Financial Statements contain no footnotes and the interim Financial Statements contain no year-end adjustments; and (c) fairly present the financial condition, assets and liabilities and results of operation of the Business at the dates and for the relevant periods indicated. (c) UNDISCLOSED LIABILITIES. The Seller Group has no liabilities applicable to the Business or the Transferred Assets, except: (a) those reflected or reserved for within the Financial Statements in the amounts shown therein; (b) those not required under GAAP to be reflected or reserved for within the Financial Statements that are expressly quantified and set forth on SCHEDULE 7.05(c) Disclosure Schedule; and (c) those of the same nature as those set forth within the Financial Statements that have arisen or will arise in the ordinary course of business after the date of the Balance Sheet through the Closing Date, all of which have been consistent in amount and character with past practice and experience, and none of which, individually or in the aggregate, has had or will have a Material Adverse Effect on the Business. 7.06 CONDUCT OF BUSINESS SINCE THE BALANCE SHEET DATE. Since the Balance Sheet Date, no member of the Seller Group has taken or agreed to take any action that would obligate any member of the Seller Group to have done or failed to do any of the following with respect to the Business, except where the consequence of such action would not have a Material Adverse Effect: (a) entered into any transaction, agreement or commitment with respect to the Business, other than in the ordinary course of business; -9- (b) incurred indebtedness for borrowed money; (c) mortgaged, pledged or otherwise encumbered (except through a Permitted Lien), or, other than in the ordinary course of business, sold, transferred or otherwise disposed of, any of the Transferred Assets; or (d) made any investment of a capital nature or entered into a commitment for such investment with respect to the Business. 7.07 LEASED AND TANGIBLE PERSONAL PROPERTIES. (a) LIST OF REAL PROPERTY LEASED. The Seller Group owns no real property comprising Transferred Assets. SCHEDULE 7.07(a) of the Disclosure Schedule sets forth as of the date hereof a correct and complete list of all real property possessed and used by any member of the Seller Group under any lease agreement comprising a Transferred Asset (the "LEASED PROPERTY"). All Leased Property is in condition and repair adequate for its current use. (b) STATUS OF LEASES. Each contract pertaining to Leased Property is in full force and effect and such Leased Property is subject to no term or condition other than as contained in such contract. The Seller Group has complied with all commitments and obligations on its part to be performed or observed under each such contract, except for such noncompliance which will not, individually or in the aggregate, have a Material Adverse Effect upon the tenant's right of possession and use. To the knowledge of the Seller Group, each party to each such contract other than any member of the Seller Group has complied with all commitments and obligations on its part to be performed or observed thereunder, except for such noncompliance which is not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect upon tenant's right of possession and use. No member of the ICSL Group has waived any material obligation of any landlord or any right of such member or any other under any lease or sublease of Leased Property. No member of the Seller Group has received any notice of a default, offset or counterclaim under any such contract and no event or condition has occurred or presently exists that constitutes a default or, after notice or lapse of time or both and without a timely cure, would constitute a default under any such contract, except for such notices, defaults, offsets or counterclaims which are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect upon tenant's right of possession or use. No security interests, charges or other encumbrance of any kind attach to any leasehold interest of the Seller Group under any lease or sublease. SCHEDULE 7.07(b) of the Disclosure Schedule identifies each existing lease or sublease of Leased Property which will have to be assigned upon the Closing under circumstances requiring the consent or approval by another person. (c) NO ADVERSE ACTIONS. There are no pending nor, to the knowledge of the ICSL Group, threatened actions or proceedings (including condemnation and foreclosure) -10- involving, or that might have a Material Adverse Effect upon the interest of the Seller Group in any Leased Property. (d) TITLE TO TANGIBLE ASSETS. The Seller Group has good and marketable title to all tangible personal property comprising Transferred Assets ("TANGIBLE PERSONAL PROPERTY"), free and clear of all liens, security interests, charges or encumbrances of any kind, except as identified in SCHEDULE 7.07(d) of the Disclosure Schedule and liens the presence of which would not have a Material Adverse Effect upon ownership or transferability. The Seller Group makes no representation as to the operating condition or state of repair of any of Tangible Personal Property, or as to their suitability or adequacy for the purposes for which they are presently being used by any member of the Seller Group in its conduct of the Business, and Purchaser herein acknowledges that it is acquiring the Tangible Personal Property, in an AS IS, WHERE IS condition. (e) TANGIBLE PERSONAL PROPERTY LEASES. Each Tangible Personal Property lease or sublease is in full force and effect. The Seller Group has complied with all material commitments and obligations on its part to be performed or observed under each such lease or sublease, and has received no notice of a default, offset or counterclaim under any such lease or sublease, and no event or condition has occurred or presently exists which constitutes a material default or, after notice or lapse of time or both, would constitute a material default thereunder. 7.08 PROPRIETARY RIGHTS. SCHEDULE 7.08 of the Disclosure Schedule contains a complete and accurate listing of all proprietary rights that comprise Transferred Assets, which are limited to all registered service marks, medical equipment and billing and collection licenses and any other material licenses, assignments or other rights relating to the operation of the Business and other material proprietary rights that are attributable to the conduct of, used in, or otherwise related to the Business (collectively the "PROPRIETARY RIGHTS"). Except as identified in such Schedule, the ICSL Group maintains sole, valid and transferable right, title and interest in and to each such Proprietary Right, the same are enforceable and unencumbered by any encumbrance, none infringe the rights of others (nor has any claim been made that there is any such infringement), and no royalty or other payment is required in connection with the ownership, use or enjoyment of such Transferred Assets by the ICSL Group. No claim has been asserted against any member of the ICSL Group with respect to the ownership, possession or use of any of such Proprietary Rights or to the effect that such member is infringing on or otherwise acting adversely to the rights of any person in respect of any of such Proprietary Rights, and, to the ICSL Group's knowledge, no valid basis for such claim exists. SCHEDULE 7.08 of the Disclosure Schedule contains a correct and complete listing of all material computer software, databases and programs used by the Seller Group in the conduct of the Business that are being purchased under this Agreement. All such items are owned or properly licensed by the Seller Group, and, except as disclosed in SCHEDULE 7.08 of the Disclosure Schedule, may be transferred to Purchaser without the consent of another. -11- 7.09 CONTRACTS. Set forth on the DISCLOSURE SCHEDULE is a complete and correct list of all material agreements, contracts and commitments (collectively "CONTRACTS") entered into in connection with the Business and to which a member of the Seller Group is a party or by which such party or any of such party's properties used in the Business is bound. Except as set forth on the DISCLOSURE SCHEDULE, the ICSL Group has made, or prior to Closing will make, available to the Purchaser complete and correct copies of all such Contracts (together with all amendments thereto). All such Contracts are in full force and effect on the date hereof and, to the knowledge of the ICSL Group, all parties thereto have performed all obligations required to be performed by them to the date hereof except where the failure to perform would not constitute a material default thereunder. At the CMI North and South Centers, CMI-Palm Beach Center and the Biltmore Center, members of the Seller Group have entered into arrangements with radiologists to provide professional interpretation of diagnostic imaging studies on a percentage of net collected revenue or on a per study basis. At the other Diagnostic Centers members of the Seller Group have entered into service agreements with radiologists that state that such members will provide administrative services on a fixed fee basis. Except as set forth in SCHEDULE 7.09 of the Disclosure Schedule, no such Contract contains a non-competition agreement, "most favored nation" clause, exclusive dealings provision or other provision that would restrict Purchaser's right to freely deal with other third parties, nor extend benefits to any contracting party (other than Purchaser as assignee of the Seller Group) that would not exist if the Closing were not to occur, or impose obligations on Purchaser or its affiliates upon and after Closing that either extend to their business and operations other than the Diagnostic Centers or would not be imposed on any member of the Seller Group if the Closing were not to occur. 7.10 TITLE TO ASSETS. The Seller Group will transfer to the Purchaser at the Closing, good, marketable and undivided title to and possession of all of the owned Transferred Assets, free and clear of any Liens. 7.11 LITIGATION. There are no claims, actions, suits or proceedings (arbitration or otherwise) pending, or, to the best of the ICSL Group's knowledge, threatened against any member of the Seller Group with respect to the Business at law or in equity in any court or before or by any governmental authority which would have a Material Adverse Effect. No member of the Seller Group is in default in respect of any judgment, order, writ, injunction or decree of any court or other governmental authority with respect to the Business or the transactions contemplated by this Agreement. 7.12 EMPLOYMENT MATTERS. (a) COMPLIANCE WITH EMPLOYMENT LAWS. Except as stated in SCHEDULE 7.12(a) of the Disclosure Schedule or to the extent any such non-compliance (of which it has no knowledge) would not reasonably involve aggregate expenditures in excess of $25,000, each member of the Seller Group has, with respect to the Business, complied, and is in compliance, with all laws relating to the employment of labor, including, without limitation, all laws and provisions thereof relating to wages, hours, equal opportunity, -12- collective bargaining, the payment of social security and other taxes, and occupational safety and health; (b) LABOR AGREEMENTS. No member of the Seller Group is a party to or otherwise bound by any labor union or collective bargaining agreement with respect to the Business, and there are no pending labor negotiations with or union organizing efforts by any employees of any member of the Seller Group working in the Business or with any union representing or attempting to represent any such employees. No member of the ICSL Group has knowledge of any grievance under a collective bargaining agreement by an employee of any member of the Seller Group that has not been resolved. To the knowledge of the ICSL Group, no key employee or agent or group of employees or agents of any member of the Seller Group whose principal responsibilities are associated with the operation of the Business has or have any plans to terminate employment by or agency with such member or would not be available for employment by the Purchaser; (c) NON-COMPETITION AGREEMENTS. To the knowledge of the Seller Group, no employee of any member of the Seller Group is subject to any secrecy or non-competition agreement or any other agreement or restriction of any kind that would impede in any material way the ability of such employee to carry out fully all activities of such employee in furtherance of the Business. 7.13 PERMITS. Except as identified in SCHEDULE 7.13 of the Disclosure Schedule, the Seller Group holds all governmental permits, certificates, licenses, franchises, privileges, approvals, registrations and authorizations required under any applicable law or otherwise advisable in connection with the operation of the Business (for purposes of this Section only, each a "PERMIT" and collectively, "PERMITS"). Each Permit is valid, subsisting and in full force and effect, but, except as stated in SCHEDULE 7.13 of the Disclosure Schedule is non-assignable. The Seller Group is in material compliance with and has fulfilled and performed its material obligations under each Permit, and no event, condition or state of facts exists (or would exist upon the giving of notice or lapse of time or both) that could constitute a material breach or default under any Permit. No member of the ICSL Group has received any notice of any violation of law as related to a Permit, and no event has occurred or condition or state of facts exists that, to the ICSL Group's knowledge, could reasonably give rise to any such violation. No member of the ICSL Group has received any notice of non-renewal of any Permit. The ICSL Group makes no representation or warranty about the requirement or lack of requirement to obtain any Permit to engage in the practice of medicine or that the Business does not violate any New York statute, rule or regulation prohibiting the corporate practice of medicine or splitting fees with non-physicians. 7.14 INSURANCE. All general liability insurance policies with respect to which any member of the ICSL Group is the owner, insured or beneficiary and which is applicable to any of the Transferred Assets or the Business have been issued on an "claims made" basis and are reasonable, in both scope and amount, in light of the risks attendant to the Business and -13- comparable in coverage to policies customarily maintained by others engaged in similar lines of business. 7.15 TAXES. Except as disclosed in SCHEDULE 7.15 of the Disclosure Schedule, the Seller Group has filed or caused to be filed on a timely basis, or will file or cause to be filed on a timely basis, all tax returns that are required to be filed by it with respect to the Business prior to the Closing Date, pursuant to the law of each governmental authority with taxing power over it. All such filed tax returns were or will be, as the case may be, correct and complete. The Seller Group has paid or will pay all taxes that have or will become due as shown on such filed tax returns or pursuant to any assessment received as an adjustment to such tax returns, except (a) such taxes, if any, as are being contested in good faith and disclosed on SCHEDULE 7.15 (which remain the obligation of the Seller Group); (b) such taxes as are fully reserved for within the Financial Statements; and (c) such taxes accruing after April 30, 1999 that will be due on or before the Closing Date. No claim has been made by a taxing authority of a jurisdiction where any member of the Seller Group does not file any tax return that it is or may be subject to taxation in that jurisdiction. The Seller Group has withheld and paid all taxes required to have been withheld in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. 7.16 ENVIRONMENTAL MATTERS. Except as disclosed in SCHEDULE 7.16 of the Disclosure Schedule: (a) COMPLIANCE; NO LIABILITY. The Seller Group has managed the Business in material compliance with all applicable Environmental Laws (as defined in subsection (d) below). The Seller Group is not subject to any liability, penalty or expense (including legal fees) as a result of its operation of the Business, and Purchaser will not suffer or incur any loss, liability, penalty or expense (including legal fees) by virtue of any violation by any member of the Seller Group of any Environmental Law, any environmental activity conducted by such member, or any environmental condition existing on or with respect to any Leased Property on or prior to the Closing Date, in each case whether or not the member permitted or participated in such act or omission. (b) TREATMENT; CERCLIS. The Seller Group has not treated, recycled, released or disposed of any Regulated Material (as defined in subsection (h) below) on any Leased Property, and no member of the Seller Group has knowledge of any other person treating, recycling, releasing or disposing of any Regulated Material on any part of the Leased Property. No member of the ICSL Group has transported, or arranged for the transport of, any Regulated Material in connection with the Business to any location that is listed or proposed for listing on the National Priorities List pursuant to Superfund or on CERCLIS or to any other location that is the subject of a federal, state or local enforcement action or other investigation that may lead to claims against such member for cleanup costs, remedial action, damages to natural resources, to other property or for personal injury, including claims under Superfund. To the knowledge of the Seller Group, none of the -14- Leased Property is listed or proposed for listing on the National Priorities List pursuant to Superfund, CERCLIS or any state or local list of sites requiring investigation or cleanup. (c) NOTICES; EXISTING CLAIMS; CERTAIN REGULATED MATERIALS; STORAGE TANKS. No member of the Seller Group has received any request for information, notice of claim, demand or other notification that it is or may be potentially responsible with respect to any investigation, abatement or cleanup of any threatened or actual release of any Regulated Material in connection with the Business nor is required to place any notice or restriction relating to the presence of any Regulated Material upon any Leased Property. There has been no past, and there is no pending or contemplated, claim by any member of the Seller Group under any Environmental Law based on actions of others that may have impacted on the Leased Property, and no member of such Group has entered into any agreement with any person regarding any Environmental Law, remedial action or other environmental liability or expense in connection with the Business. No member of the Seller Group knows of any storage tank to be located on the Leased Property, whether underground or aboveground. (d) Certain of the capitalized terms used in subsections (a), (b) or (c) above, or in this subsection, shall be deemed to have the following meanings: (i) "CERCLIS" means the United States Comprehensive Environmental Response Compensation Liability Information System, as promulgated under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986. (ii) "ENVIRONMENTAL LAW" means any applicable law relating to public health and safety or protection of the environment, including common law nuisance, property damage and law similar to such common law theories. (iii) "NATIONAL PRIORITIES LIST PURSUANT TO SUPERFUND" means the list of Regulated Materials sites established by the United States Environmental Protection Agency. (iv) "PCBS" means polychlorinated biphenyls. (v) "REGULATED MATERIAL" means any pollutant, contaminant, waste or chemical, or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substance as defined by any Environmental Law, and any other substance or material, in each case that is regulated by any applicable Environmental Law, expressly including petroleum, petroleum-related material, crude oil or any fraction thereof, PCBs and friable asbestos. -15- (vi) "SUPERFUND" means the United States Comprehensive Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. Sections 6901 et seq., as amended. 7.17 EMPLOYEE BENEFIT PLANS. (a) LIST OF EMPLOYEE BENEFIT PLANS. Except as set forth in SCHEDULE 7.17(A) of the Disclosure Schedule, no member of the Seller Group, maintains or contributes to, nor is committed to establish, adopt or implement, any of the following agreements, plans or arrangements, whether oral or written and whether formal or informal with respect to any of its employees that perform service for the benefit of the Business, or any of the dependents and beneficiaries of such employees: (a) pension, profit sharing, stock bonus, stock option, supplemental retirement or deferred compensation plans (whether or not qualified or defined in Sections 3(2), 3(34) or 3(35) of the United States Employee Retirement Income Security Act of 1974, as amended, and the applicable rulings and regulations thereunder ("ERISA") or in Sections 414(i) or 414(j) of the Internal Revenue Code of 1986, as amended (the "CODE")); (b) medical, surgical, health care, hospitalization, dental, vision, life insurance, disability, severance, sickness or accident plans (whether or not as defined in Section 3(1) of ERISA); or (c) other benefit plans. All such plans, contracts or arrangements set forth on SCHEDULE 7.17(a) of the Disclosure Schedule are hereinafter in this Section collectively referred to as "BENEFIT PLANS" and separately as a "BENEFIT PLAN.") (b) WRITTEN CONTRACTS, ABSENT EMPLOYEES. SCHEDULE 7.17(b) of the Disclosure Schedule identifies each employee of any member of the Seller Group who normally performs service related to the Business and is currently (A) absent from active employment due to short or long term disability, or (B) employed pursuant to a written contract or agreement specifying the term of employment. (c) CONTINUATION OF RIGHTS. With respect to continuation rights arising under federal or state law as applied to Benefit Plans that are group health plans (as defined in Section 601, ET SEQ. of ERISA), SCHEDULE 7.17(c) of the Disclosure Schedule identifies each employee, former employee and qualifying dependent who has elected continuation coverage as of or prior to June 30, 1999 and whose coverage period had not expired as of such date. (d) CONTRIBUTIONS TO BENEFIT PLANS. With respect to those Benefit Plans set forth in SCHEDULE 7.17(a) of the Disclosure Schedule: (a) all contributions required to be made to or in support of the Benefit Plans as of the date of this Agreement have been made, (b) a proper accrual has been made on the books of the Seller Group for all contributions due in the current fiscal year on or prior to the Closing Date but not made as of the date of this Agreement, and (c) no contribution has been made in support of any Plan that is in excess of the allowable deduction for federal income tax purposes for the year with respect to which the -16- contribution was made (whether under Section 162, Section 280G, Section 404, Section 419 or Section 419A of the Code or otherwise). 7.18 NO REFERRALS BY INTERESTED PARTIES. Except as identified in SCHEDULE 7.18 of the Disclosure Schedule, from and after commencement of administration of the Business by the Seller Group at each Diagnostic Center, and through the Closing Date, there have been no referrals of Medicare or Medicaid patients to any member of the Seller Group by physicians owning any equity interest, whether direct or indirect, in such member or, to the knowledge of the Seller Group, in any of the Diagnostic Centers, or having any financial relationship, other than the right to receive a fee for professional services rendered, with such member, to the knowledge of the Seller Group, or Center (other than Medical Directors.) 7.19 RELATED PARTY TRANSACTIONS. SCHEDULE 7.19 of the Disclosure Schedule identifies each entity, related through "common ownership or control" to any member of the Seller Group or, to the knowledge of the Seller Group, a Diagnostic Center under the definitions of such quoted term set forth under regulations promulgated by the federal Medicare program or by the Medicaid program of any state, that has transacted business with any member of the Seller Group or, to the knowledge of the Seller Group, with a Diagnostic Center. For each such entity, the Schedule also states the nature of the transaction and the nature of the relationship, including, but not limited to, the percentage of common ownership or relationship that creates control. A copy of each contract and written agreement between such entity and the applicable member of the Seller Group or Diagnostic Center have been or will be delivered to the Purchaser prior to or at the Closing. 7.20 DIAGNOSTIC CENTER OPERATION. Each of the Diagnostic Centers is certified for participation in the Medicare, Medicaid and CHAMPUS programs, has a current and valid provider contract with each of such programs, is in compliance in all material respects with the conditions of participation of each of such programs and has received all approvals or qualifications necessary for capital reimbursement, except where the failure to be so certified, to have such contracts to be in such compliance or to have such approvals or qualifications would not have a Material Adverse Effect on the Business or financial condition of any particular Diagnostic Center. No member of the ICSL Group has received notice from the regulatory authorities which enforce the statutory or regulatory provisions in respect of any of the Medicare, Medicaid or CHAMPUS programs of any pending or threatened investigation with respect to the operation of any Diagnostic Center. 7.21 PERIODIC ASSESSMENTS ON HEALTH CARE ENTITIES. Except as disclosed in SCHEDULE 7.21 of the Disclosure Schedule, each member of the Seller Group has timely filed all material reports required of it by federal or state agencies having jurisdiction over any aspect of the operation of the Diagnostic Centers and has timely paid all periodic assessments imposed by law or regulation with respect to the revenues derived from such operation, and will be solely responsible for the payment of any such assessment that becomes payable after the Closing Date as a result of the operation of any of the Diagnostic Centers on or before such Date. 17 7.22 DISCLOSURE. None of the representations or warranties contained in this Section 7 and none of the information contained in the Schedules referred to in such Section is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. The ICSL Group shall, between the date of this Agreement and the Closing Date, timely provide to the Purchaser such additional documents and information concerning the Business or Transferred Assets as may have a Material Adverse Effect upon the accuracy or completeness of the foregoing warranties and representations, the Scheduled information or other written information furnished by the ICSL Group to Purchaser. 8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the ICSL Group, except as set forth in the Purchaser's DISCLOSURE SCHEDULE, that the following representations and warranties are true and correct on the date hereof: 8.01 ORGANIZATION. The Purchaser is a limited liability company organized, existing and in active status under the laws of the state of its incorporation. The Purchaser is duly qualified or licensed and in good standing as a foreign corporation in those states listed on the DISCLOSURE SCHEDULE, which are the only jurisdictions in which the property owned, leased or operated by the Purchaser or the nature of the business conducted by the Purchaser makes such qualification or licensing necessary, except where failure to qualify would not result in a material adverse effect on the business of the Purchaser. 8.02 POWER AND AUTHORITY. The Purchaser has full corporate power and authority to carry on its business as now being conducted and to own, operate and lease its properties in the places where such business is now conducted and such properties are now owned, leased or operated. This Agreement and the transactions contemplated hereby have been duly approved by the Board of Directors of the Purchaser. The Purchaser has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and this Agreement and all other agreements to be executed and delivered by the Purchaser in connection herewith constitute the legal, valid and binding obligations of the Purchaser enforceable against it in accordance with their respective terms. 8.03 COMPLIANCE. The execution and delivery of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby by the Purchaser will not (i) violate any provision of the organizational documents of the Purchaser, (ii) violate any material provision of or result in the breach of or entitle any party to accelerate (whether after the giving of notice or lapse of time or both) any material obligation under, any mortgage, lien, lease, contract, license, instrument or any other agreement to which the Purchaser is a party, (iii) result in the creation or imposition of any material lien, charge, pledge, security interest or other material encumbrance upon any property of the Purchaser or (iv) to the best of the Purchaser's knowledge, violate or conflict with any court order, judgment or decree, or any -18- law, ordinance or regulation to which the Purchaser or its property is subject, except for any such violation or conflict that would not result in a material adverse effect on the business or operations of the Purchaser. 8.04 LITIGATION. There are no material claims, actions, suits or proceedings (arbitration or otherwise) pending or, to the best of the Purchaser's knowledge, threatened against the Purchaser at law or in equity in any court or before or by any governmental authority which would have a material adverse effect on the business or operations of the Purchaser. The Purchaser is not in default in respect of any judgment, order, writ, injunction or decree of any court or other governmental authority with respect to the transactions contemplated by this Agreement. 8.05 APPROVALS. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other person is required in connection with the execution and delivery of this Agreement by the Purchaser or the consummation by the Purchaser of the transactions contemplated thereby. 9. COVENANTS OF THE ICSL GROUP 9.01 COOPERATION. The ICSL Group shall use reasonable efforts in good faith to perform and fulfill all conditions and obligations to be fulfilled or performed by them hereunder, to the end that the transactions contemplated hereby will be fully and timely consummated. 9.02 ACCESS. Until the Closing, the ICSL Group shall give the Purchaser, its attorneys, accountants and other authorized representatives access, upon reasonable notice and at reasonable times, to the ICSL Group's offices, suppliers, employees, business and financial records, contracts, business plans, budgets and projections, agreements and commitments and other documents and information concerning the Seller Group and the Business (the "Information") and persons employed by or doing business with the Seller Group, except such documents covered by the attorney-client privilege. In order that the Purchaser may have full opportunity to make such examination and investigation as it may desire of the Business, the ICSL Group will furnish the Purchaser and its representatives during such period with all such Information as such representatives may reasonably request and cause the respective officers, employees, consultants, agents, accountants and attorneys of the Seller Group to cooperate fully with the representatives of the Purchaser in connection with such review and examination; provided, however, that the Purchaser will hold the documents and information concerning the ICSL Group and the Business confidential in accordance with Section 11.02 hereof. 9.03 ACTIONS PRIOR TO CLOSING. The Seller Group shall conduct the Business pending the Closing only in the ordinary and usual course consistent with past practice. Without limiting the generality of the foregoing, the Seller Group will not, except in the ordinary and usual course, without the prior written consent of the Purchaser, except to the extent that a Material Adverse Effect would not result, (i) make any acquisition or disposition of assets used in connection with the Business; (ii) enter into any contract (other than this Agreement or as otherwise provided for 19 in this Agreement) or terminate any contract or other right relating to the Business; or (iii) make any loans, advances or capital contributions to, or investments in, any other entity or person involved in the operation of the Business, other than travel or other advances to employees in the ordinary course of business consistent with past practice. 9.04 COVENANT NOT TO COMPETE. For a period of three years from and after the Closing Date, no member of the ICSL Group, nor any subsidiary thereof shall, directly or indirectly: (a) own, administer, operate, control or participate in the ownership, management, operation or control of, or be engaged or otherwise connected as a stockholder, partner, member, or otherwise with, any business that at any time during such period directly or indirectly owns, administers or operates diagnostic imaging centers within 25 miles of any of the Diagnostic Centers; or (b) solicit any employee, independent contractor or vendor of the Purchaser to terminate his, her or its employment, consulting arrangement or vending arrangement with the Purchaser. Notwithstanding the foregoing, the following shall not be a violation of this Section 9.04: (a) the ownership of not more than two percent of any publicly traded company that conducts any prohibited activities; (b) ICSL or any member of the ICSL Group engaging in the business of providing (A) clinical investigative site management and outcomes research services, (B) network management services to independent physician associations and specialty care physician networks and management and consulting services to hospitals and (C) management and consulting services to managed care companies; and (c) Any entity which is not currently an affiliate of ICSL which acquires a controlling interest in ICSL from conducting any of the business operations of such entity or its subsidiaries. 10. COVENANTS OF PURCHASER 10.01 COOPERATION. The Purchaser covenants and agrees that it shall use its best efforts in good faith to perform and fulfill all conditions and obligations to be fulfilled or performed by it hereunder, to the end that the transactions contemplated hereby will be fully and timely consummated. 10.02 TAXES AND FEES. The Purchaser shall pay all sales, use, transfer, recordation and documentary taxes and fees, if any, arising out of the transfer of the Transferred Assets pursuant to this Agreement. -20- 10.03 EMPLOYEES OF THE SELLER GROUP. Except as provided in Section 10.03(c) below, Purchaser will offer employment after the Closing Date, on terms and conditions to be determined by Purchaser in its sole discretion, to all of the employees of the Seller Group whose principal current duties are involved with the operation of the Business. (a) WORKERS' COMPENSATION. The Seller Group shall continue to be responsible for each workers' compensation claim and premium relating to the Business which is based on an injury occurring on or prior to the Closing Date, regardless of the date on which such claim is filed, and shall indemnify and hold Purchaser harmless against all Damages arising out of or relating to all such claims and premiums in accordance with Section 12 hereof. Purchaser shall be responsible for all workers' compensation claims relating to the Business based on injuries occurring after the Closing Date, and shall indemnify and hold the Seller Group harmless against all Damages arising out of or relating to all such claims in accordance with Section 12 hereof. (b) DESIGNATION OF PURCHASER AS SUCCESSOR EMPLOYER. If requested by Purchaser, the Seller Group shall consent to the designation of Purchaser as successor employer of the former employees of a member of the Seller Group employed in the Business after the Closing Date for purposes of unemployment insurance, payroll taxes or workers' compensation contribution premium ratings under applicable federal or state law. (c) EMPLOYEE BENEFIT PLANS. (i) Purchaser shall not be required to maintain, or cause to be maintained, any Benefit Plan for the benefit of individuals employed by the Seller Group on the Closing Date who accept Purchaser's offer of employment, nor to provide any retiree health or life benefits with respect to such employees or to any other former employees of the Seller Group or to their spouses or dependents under any of its existing or new benefit plans. (ii) The Seller Group shall remain responsible for all unemployment compensation claims arising out of terminations of its employees who do not accept Purchaser's offer of employment on or prior to the Closing Date, and Purchaser shall be responsible for any such claims arising out of terminations after the Closing Date of former employees of the Seller Group accepting the Purchaser's offer of employment. (iii) The Seller Group shall remain responsible for all benefits payable to each of its employees who, as of the close of business on the day immediately preceding the Closing Date, shall be totally and permanently disabled in accordance with the applicable provisions of any of health, accident, sickness, salary continuation, or disability benefit (whether short-term or long-term) plans or programs of the Seller Group. As of the Closing, any employee who is on -21- approved leave of absence from any member of the Seller Group, including any employee receiving benefits under any short-term disability plan or program of such member, or on workers' compensation leave, shall be deemed to be an employee of the Seller Group until such time as such employee is no longer on such approved leave. At the time such employee is available to return to work, such employee shall be offered employment by the Purchaser in accordance with the terms of this Section if his or her principal job duties, at the time of commencement of such leave, shall have been involved with the operation of the Business. If at such time the subject employee is eligible for long-term disability benefits and declines the Purchaser's employment offer, such employee shall receive such benefits under the long-term disability plan or program of the Seller Group. (d) NO ERISA LIABILITY TO PURCHASER. Nothing in this Agreement shall be construed to constitute a sale of assets under Section 4204 of ERISA, and Purchaser shall have no obligation to contribute to, and shall incur no withdrawal liability, as defined in Section 4201 of ERISA, or any other liability, cost or expense, whether prior to or after the Closing, with respect to, any multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which the Seller Group or any of its affiliates contributes or has ever had an obligation to contribute. 10.04 RECORD RETENTION. The Seller Group shall retain the books and records of the Diagnostic Centers not transferred to Purchaser hereunder for a period of not less than three years following the Closing Date; subject to a right of prior disposal of any of the same following its furnishing to Purchaser of reasonable notice of such intent and to Purchaser's right to obtain from the Seller Group those books and records which it intends to dispose of. The Purchaser shall have the further right, at its expense, (i) to have reasonable access to and examination of such retained books and records during the subject three year period or until such earlier date on which the Seller Group shall have disposed of such books and records as provided above, upon reasonable notice to the Seller Group and during normal business hours, and (ii) to make copies of the same, subject to the obligation to maintain the confidentiality of such books and records in accordance with the reasonable direction of the Seller Group. 11. MUTUAL COVENANTS 11.01 GENERAL COVENANTS. Following the execution of this Agreement, the Purchaser and the ICSL Group agree: (a) If any event should occur, either within or without the knowledge or control of any party, which would prevent fulfillment of the conditions to the obligations of any party hereto to consummate the transactions contemplated by this Agreement, to use its or their reasonable efforts to cure the same as expeditiously as possible; -22- (b) To cooperate fully with each other in preparing, filing, prosecuting, and taking any other actions which are or may be reasonable and necessary to obtain the consent of any governmental instrumentality or any third party to accomplish the transactions contemplated by this Agreement or to comply with the requirements of the HSR Act; (c) To deliver such other instruments of title, certificates, consents, endorsements, assignments, assumptions and other documents or instruments, in form reasonably acceptable to the party requesting the same and its counsel, as may be reasonably necessary to carry out and/or to comply with the terms of this Agreement and the transactions contemplated herein; (d) To confer on a regular basis with the other, report on material operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen could have, a Material Adverse Effect on such party or which would cause or constitute a material breach of any of the representations, warranties or covenants of such party contained herein; and (e) To promptly provide the other (or its counsel) with copies of all other filings made by such party with any state or federal governmental entity in connection with this Agreement or the transactions contemplated hereby (other than HSR Act filings). 11.02 CONFIDENTIALITY. As used herein, "Confidential Information" means any information or data that a party has acquired from another party that is confidential or not otherwise available to the public, whether oral or written, including without limitation any analyses, computations, studies or other documents prepared from such information or data by or for the directors, officers, employees, agents or representatives of such party (collectively, the "Representatives"), but excluding information or data which (i) the party can demonstrate it independently developed, (ii) became available to the public other than as a result of such party's violation of this Agreement, (iii) became available to such party from a source other than the other party if that source was not bound by a confidentiality agreement with such other party and such source lawfully obtained such information or data, or (iv) is required to be disclosed by applicable law, provided that promptly after being compelled to disclose any such information or data, the party being so compelled shall provide prompt notice thereof to the other party so that such other party may seek a protective order or other appropriate remedy. Each party covenants and agrees that it and its Representatives shall keep confidential and shall not disclose any Confidential Information, except to its Representatives and lenders who need to know such information and keep it confidential. Each party shall be responsible for any breach of this provision by its Representatives. In the event that the Closing does not occur, each party will promptly return to the other all copies of such other party's Confidential Information. -23- 11.03 BROKER'S FEE. Except as otherwise provided herein, the Purchaser and ICSL agree that each party is solely responsible for any financial advisory fee, brokerage commission, finder's fee or like payment due any person or firm retained by such party in connection with this Agreement or otherwise. 11.04 HART-SCOTT-RODINO FILING. (a) Purchaser and the ICSL Group agree to file with the Antitrust Division of the United States Department of Justice and the Federal Trade Commission a Notification and Report Form in accordance with the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and to use their best efforts to achieve the prompt termination or expiration of the waiting period or any extension thereof provided for under the HSR Act as a prerequisite to the consummation of the transactions provided for herein. The Purchaser shall bear the expense of any filing fees required under the HSR Act as a result of the proposed acquisition of the Business by Purchaser. (b) Nothing in this Section 11.04 shall be construed as requiring any party to this Agreement or its affiliates to (i) sell or otherwise dispose of any of its assets or voting securities other than as otherwise contemplated by this Agreement and (ii) take any action which either would have a Material Adverse Effect on the operations, business or financial condition of any such party or its affiliates or would materially impair the value of the Business. 11.05 ACCOUNTS RECEIVABLE. For 180 days after Closing, the Purchaser will collect the accounts receivable of the ICSL Group existing at the Closing, except for accounts receivable related to personal injury services (the "Seller Receivables"), using the same diligence and efforts as Purchaser uses to collect its own accounts receivable. The Purchaser will remit to the ICSL Group payments collected by the Purchaser on the Seller Receivables no less frequently than weekly. The ICSL Group and the Purchaser shall cooperate in the collection of the Seller Receivables and the ICSL Group shall have the ability to assist Purchaser in the collection of the Seller Receivables. After 180 days, Purchaser's obligation to collect the Seller Receivables shall cease, and the ICSL Group shall assume full responsibility for such collection. The ICSL Group shall use only commercially reasonable efforts to collect all Seller Receivables. If the ICSl Group at any time receives payment for post-Closing accounts receivable of the Purchaser, or if the Purchaser at any time shall receive accounts receivable of the ICSl Group, each party agrees to forthwith remit such payment to the other party promptly, but not later than one week after receipt of such payment. In determining the proper application of payment with respect to any account receivable, payment will be applied towards the invoice referenced in each particular payment or, in the absence of any such reference, to the oldest invoice for such vendor. -24- 12. SURVIVAL AND INDEMNIFICATION 12.01 SURVIVAL. All representations and warranties made in this Agreement, or in any instrument or document furnished in connection with this Agreement or the transactions contemplated hereby, shall expire six (6) months after the Closing Date. 12.02 AGREEMENT BY THE PURCHASER REGARDING NO OTHER REPRESENTATIONS OR WARRANTIES BY THE ICSL GROUP. The Purchaser agrees that except for the representations and warranties (including the Schedules with respect thereto) made by the ICSL Group expressly set forth in Section 7 of this Agreement, no member of the ICSL Group nor any affiliate, agent or representative thereof has made and shall not be construed as having made to the Purchaser or to any representatives or affiliates thereof, and neither the Purchaser nor any affiliates, agents or representatives thereof has relied upon, any representation or warranty of any kind. 12.03 AGREEMENTS TO INDEMNIFY. (a) As used in this Section 12: (i) "Indemnified Claims" means assertions of indemnification obligations hereunder made by an Indemnified Party. (ii) "Damages" means damages, liabilities, losses, judgments, settlements, and expenses, including, without limitation, all reasonable attorneys' fees; provided that, in no event shall "Damages" mean consequential, special or punitive damages (except where an underlying cause of action giving rise to any such Damages is fraud or intentional misrepresentation). (iii) "Indemnified Party" means (a) with respect to the ICSL Group's obligations hereunder, the Purchaser and each of its subsidiaries and affiliates, and (b) with respect to the Purchaser's obligations hereunder, the ICSL Group and each of their subsidiaries and affiliates. (iv) "Indemnifying Party" means (a) the ICSL Group, jointly and severally with respect to indemnity obligations owed by the ICSL Group on and after the Closing, and (b) the Purchaser, with respect to indemnity obligations owed by the Purchaser on and after the Closing. (b) On the terms and subject to the limitations set forth in this Agreement, each Indemnifying Party shall indemnify, defend and hold each Indemnified Party harmless from, against and in respect of any and all Damages incurred by any Indemnified Party arising from or in connection with any material breach of any representation or warranty, or any breach or non-fulfillment of any covenant or agreement, in each case made by the Indemnifying Party in this Agreement. -25- 12.04 LIMITATIONS OF INDEMNITY OBLIGATIONS. (a) Except as otherwise explicitly provided in this Agreement or by statute to the extent that statutory remedies cannot legally be waived by the person entitled thereto, and except for fraud, deceit or intentional misrepresentation by the Purchaser or a member of the ICSL Group, the indemnity obligations of the Indemnifying Party shall expire eighteen (18) months after the Closing Date and after consummation of the transactions contemplated by this Agreement the sole and exclusive remedy of the Purchaser or the ICSL Group in this Agreement are as set forth in this Section 12. Each party acknowledges and agrees that the other parties would not have entered into this Agreement but for the inclusion herein of this Section 12.04. (b) The aggregate indemnity obligations of the ICSL Group under this Agreement shall not in any event exceed $24,000,000. (c) An Indemnified Party shall be entitled to indemnification only if the aggregate and collective Damages for which it or he otherwise would be entitled to indemnification under this Agreement exceed $460,000, in which event it or he shall be entitled to indemnification of the full amount of Damages for which it would be entitled to indemnification under this Section 12 exceeding such amount. 12.05 NOTICE OF CLAIM. An Indemnified Party shall promptly notify the Indemnifying Party in writing (the "Claim Notice") of any Indemnified Claim asserted by a third person that might give rise to any indemnity obligation hereunder (a "Third Party Claim"), specifying in reasonable detail the nature thereof and indicating the amount (estimated if necessary) of the Damages that have been or may be sustained by the Indemnified Party. Failure of an Indemnified Party to promptly give such notice shall not relieve an Indemnifying Party of its obligation to indemnify under this Section 12, except to the extent that such failure is actually and materially prejudicial to the rights or obligations of the Indemnifying Party, in which event the Indemnifying Party's obligation shall be reduced by the amount of damages it suffers as a direct result of the failure. Together with or following such Claim Notice, the Indemnified Party shall deliver to the Indemnifying Party copies of all notices and documents received by such Indemnified Party relating to the Third Party Claim (including court papers). 12.06 DEFENSE AND SETTLEMENT OF THIRD PARTY CLAIMS. An Indemnifying Party shall have the right (without prejudice to the right of an Indemnified Party to participate at his or its own expense through counsel of his or its own choosing) to defend against any Third Party Claim at his or its expense and through counsel of his or its own choosing and to control such defense if he or it gives written notice of his or its intention to do so within 15 business days of his or its receipt of a Claim Notice of such Third Party Claim. The Indemnified Party shall cooperate fully in the defense of such Third Party Claim and shall make available to the Indemnifying Party or his or its counsel all pertinent information under its or his control relating thereto. The Indemnified Party shall have the right to elect to settle any Third Party Claim; provided, however, the Indemnifying Party shall not have any indemnification obligation with respect to any monetary -26- payment to any third party required by such settlement unless the Indemnifying Party shall have consented in writing thereto. The Indemnifying Party shall have the right to elect to settle any Third Party Claim subject to the written consent of the Indemnified Party which consent shall not be unreasonably withheld; provided, however, that if the Indemnified Party fails to give such written consent within 15 business days of being requested to do so, the Indemnified Party shall, at its or his expense, assume the defense of such Third Party Claim and regardless of the outcome of such matter, the Indemnifying Party's liability hereunder shall be limited to the amount of any such proposed settlement. 13. TERMINATION 13.01 TERMINATION. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) By the Purchaser or ICSL if: (i) consented to by the other of those named parties; (ii) if the Closing shall not have occurred on or before August 15, 1999, unless the failure of the Closing to have occurred by such date is due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein; (iii) any court or governmental body of competent jurisdiction shall have issued an order, decree or ruling, or taken any other action, permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, provided that no termination shall be permitted under this paragraph unless the party seeking such termination shall have used its reasonable best efforts to oppose such issuance or taking; or (iv) the other party commits any material breach of its representations, warranties or covenants set forth herein and such breach, if curable, has not been cured within thirty (30) days after notice is given to terminate this Agreement as a result of such breach. (b) By the Purchaser, if within 24 hours after the ICSL Group delivers to the Purchaser a final DISCLOSURE SCHEDULE (i) the Purchaser determines that the information disclosed in the DISCLOSURE SCHEDULE is materially different than that which the Purchaser expected to be in the DISCLOSURE SCHEDULE based upon its due diligence investigation to the date of such receipt and (ii) the Purchaser provides notice to the ICSL Group of its determination. -27- Upon the occurrence of any of the events specified in this Section 13.01 (other than paragraph (a) hereof), written notice of such event shall forthwith be given to the other parties to this Agreement, whereupon this Agreement shall terminate. 13.02 EFFECT OF TERMINATION. In the event of the termination and abandonment of this Agreement pursuant to Section 13.01, this Agreement, except for the provisions of Sections 11.02, 12.01, 13 and 14, shall forthwith become void and be of no effect, without any liability on the part of any party or its affiliates, directors, officers or shareholders; provided that nothing in this Section 13.02 shall relieve any party to this Agreement of liability for breach of this Agreement. 14. MISCELLANEOUS 14.01 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and either (j) delivered by hand, (ii) made by facsimile transmission, (iii) sent by recognized overnight courier, or (iv) sent by registered or certified mail, return receipt requested, postage prepaid. If to Purchaser: PresGar Imaging, L.C. 15310 Amberly Drive, Suite 315 Tampa, Florida 33647 Attn: Gary W. Wright Facsimile telephone number: 813/977-0143 with a copy to: Jeremy P. Ross Bush Ross Gardner Warren & Rudy, P.A. 220 South Franklin Street Tampa, Florida 33602 Facsimile telephone number: 813/223-9620 If to the ICSL Group (or any member thereof): Innovative Clinical Solutions, Ltd. 10 Dorrance Street, Suite 400 Providence, RI 02903 Attn: President Facsimile telephone number: 401/831-6758 -28- with a copy to: Nutter, McClennen & Fish, LLP One International Place Boston, MA 02110-2699 Attn: James E. Dawson, Esq. Facsimile telephone number: (617) 973-9748 All notices, requests, consents and other communications hereunder shall be deemed to have been properly given (i) if by hand, at the time of the delivery thereof to the receiving party at the address of such party set forth above, (ii) if made by facsimile transmission, at the time that receipt thereof has been acknowledged by electronic confirmation or otherwise, (iii) if sent by overnight courier, on the next business day following the day such notice is delivered to the courier service, or (iv) if sent by registered or certified mail, on the fifth business day following the day such mailing is made. 14.02 ENTIRE AGREEMENT. It is agreed that all offers, statements of intent, understandings and agreements heretofore had among the parties or their affiliates respecting this transaction are merged in this Agreement (including the Schedules and Exhibits thereto), which fully and completely expresses the agreement of the parties, and that there are no other representations, warranties or agreements. 14.03 WAIVER. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any other breach of that or any other provision hereof. 14.04 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the internal laws of the Delaware, without giving effect to the conflict of law principles thereof. 14.05 SEVERABILITY. In the event that any court of competent jurisdiction shall finally determine that any provision, or any portion thereof, contained in this Agreement shall be void or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court determines it enforceable, and as so limited shall remain in full force and effect. In the event that such court shall determine any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Agreement nevertheless shall remain in full force and effect. 14.06 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. -29- 14.07 PUBLICITY. None of the parties hereto shall issue any press release or otherwise make any public statement with respect to the execution of, or the transactions contemplated by, this Agreement without the prior written consent of the others, except as may be required by applicable state or federal securities or other laws. 14.08 COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.09 EXPENSES. All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses. 14.10 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, expressed or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. 14.11 SCHEDULES. All information disclosed in a particular schedule to this Agreement shall be deemed to be disclosed with respect to all other schedules to this Agreement as if such information had been set forth in such other schedules. 14.12 LIMITATION ON DAMAGES. Neither the ICSL Group nor the Purchaser shall be liable for punitive, special or consequential damages in connection with this Agreement or the transactions contemplated thereby (except where an underlying cause of action giving rise to any such damages is fraud or intentional misrepresentation). IN WITNESS WHEREOF, Purchaser and the members of the ICSL Group have executed this Agreement as of the day and year first above written. PRESGAR IMAGING, L.C. By PresGar Management, a member By: /s/ Gary W. Wright ----------------------------------- Gary W. Wright, a managing member INNOVATIVE CLINICAL SOLUTIONS, LTD. BY: /s/ Frederick R. Leathers ----------------------------------- Name: Frederick R. Leathers Title: Treasurer -30- PHYMATRIX MANAGEMENT COMPANY, INC. BY: /s/ Frederick R. Leathers -------------------------------- Name: Frederick R. Leathers Title: Chief Financial Officer PHYMATRIX DIAGNOSTIC IMAGING, INC. By: /s/ Frederick R. Leathers -------------------------------- Name: Frederick R. Leathers Title: Chief Financial Officer PHYMATRIX DIAGNOSTIC IMAGING, NORTHEAST, INC. By: /s/ Frederick R. Leathers --------------------------------- Name: Frederick R. Leathers Title: Chief Financial Officer BABRAD, INC. By: /s/ Frederick R. Leathers ---------------------------------- Name: Frederick R. Leathers Title: Treasurer, Chief Financial Officer DEERCO, INC. By: /s/ Frederick R. Leathers ---------------------------------- Name: Frederick R. Leathers Title: Treasurer, Chief Financial Officer BILTMORE IMAGING CENTER, INC. BY: /s/ Frederick R. Leathers ---------------------------------- Name: Frederick R. Leathers Title: Treasurer, Chief Financial Officer EX-10.11(A) 3 EXHIBIT 10.11(A) EXHIBIT 10.11(a) CONFIRMATORY REVOLVING NOTE $10,900,000 As of February 1, 1998 FOR VALUE RECEIVED, the undersigned, Chancellor Development Corp., a Delaware corporation, having an address at 197 First Avenue, Needham Heights, Massachusetts 02494 (the "Maker") hereby promises to pay to the order of Innovative Clinical Solutions, Ltd., a Delaware corporation of 10 Dorrance Street, Providence, Rhode Island 02903, the principal amount of Ten Million Nine Hundred Thousand Dollars ($10,900,000) or so much thereof as shall be hereafter advanced from time to time by the holder hereof, on or before July 15, 2000, with interest through July 15, 2000 in the amount of $892,113 which amount has been satisfied by agreement of the parties and no further interest shall be due and payable for such period. Payments of principal and interest shall be made in lawful money of the United States of America at 10 Dorrance Street, Providence, Rhode Island 02903, or at such place as the holder hereof shall have designated to the Maker in writing. This Note may be prepaid by the Maker in whole or in part at any time or from time to time, any such prepayments to be applied first to accrued interest and then to principal in the order of their maturities. Maker hereby confirms that advances evidenced by this Note commenced February 1, 1998 and that interest has been paid through October 31, 1999. Notwithstanding anything contained herein to the contrary, the holder hereof shall be under no obligation to make further advances hereunder from and after the date hereof except in the holder's sole and absolute discretion. If any of the following events ("Events of Default") shall occur: (a) if the Maker, or any guarantor hereof, shall default in the payment of principal and interest on this Note when and as herein set forth; or (b) if the Maker, or any guarantor hereof, shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file any answer admitting or not contesting the material allegations of a petition filed against the Maker, or any such guarantor, in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of the Maker, or any such guarantor, or of all or any substantial part of the properties of the Maker, or any such guarantor; or (c) if within sixty (60) days after entry of a final judgment in excess of $250,000 against the Maker, or any guarantor hereof, such judgment shall not have been discharged or execution thereof stayed pending appeal; or if, within sixty (60) days after the expiration of any such stay, such judgment shall not have been discharged; (d) if at any time in the reasonable judgment of Lender the value of the Shares, as such term is defined in that certain Pledge Agreement amongst the Lender, the Guarantor and the Maker of even date herewith (the "Pledge Agreement"), shall be less than seventy-five percent (75%) of the outstanding principal balance of this Note as determined by an appraiser selected by Maker from a list of three unrelated appraisers submitted by Lender to Maker, such selection to be made within ten (10) days of the submission thereto to Maker, and if within ten (10) days after notice thereof by Lender to Guarantor, Guarantor shall not have granted the Lender a first security interest in collateral which when aggregated with all other collateral theretofor provided by the Guarantor or Maker to Lender has a value in the reasonable judgment of Lender equal to or in excess of seventy-five percent (75%) of the principal balance of this Note; (e) if the Guarantor shall breach any of the covenants and agreements contained in that certain Confirmatory Guaranty of even date herewith, or the Pledge Agreement and such breach remains uncured after fifteen (15) days' written notice from the Lender; (f) there shall be a material adverse change in the financial condition of Guarantor; then and in any such event the holder of this Note may at any time (unless all defaults shall have theretofore been remedied) at its option, declare this Note to be due and payable, whereupon the same shall forthwith mature and become due and payable together with interest accrued thereon without presentment, demand, protest or further notice, all of which are hereby expressly waived by the Maker. Commencing July 16, 2000, interest ("Default Interest") shall accrue at "prime rate" announced from time to time in the Wall Street Journal per annum plus 2% until such default is cured or waived or until this Note together with all Default Interest is paid in full. In case any one or more Events of Default shall occur and be continuing, the holder of this Note may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any power granted hereby or by law. In case of a default in the payment of any principal of or Regular Interest on this Note, the Maker will pay to the holder hereof such further amount as shall be sufficient to cover the cost and expenses of collection, including without limitation reasonable attorneys' fees. No course of dealing and no delay on the part of any holder of this Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers and remedies. No right, power or remedy conferred by this Note upon any holder hereof shall be exclusive of any other right, power or remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise. The Maker and each endorser and guarantor or other parties to this Note, if any, and each of them, severally (a) waive notice of and consent to any and all amendments, extensions and renewals of this Note, any and all advances, extensions, settlements, compromises, favors and indulgences, any and all receipts, substitutions, additions and releases of persons primarily or secondarily liable, and any and all acceptances by the holder hereof of negotiable instruments, commercial paper and other property, and agree that none of the foregoing, should there be any, shall discharge or affect in any way the liability of the Maker, any endorser, any guarantor or any other party to this Note or any of them hereunder; (b) agree that all rights and remedies of the holder of this Note hereunder shall survive any discharge, moratorium or other relief granted any person primarily or secondarily liable in any proceeding under federal or state law relating to bankruptcy, insolvency or the relief or rehabilitation of debtors, and any consent by the holder of this Note to, or participation by the holder of this Note in the proceeds of, any assignment, trust or mortgage for the benefit of creditors, or any composition or arrangement of debts, may be made without the Maker, any endorser, any guarantor or any other party to this Note or any of them being discharged or affected in any way thereby; (c) waive any right to require marshalling or exhaustion or any right or remedy against any person, collateral or other property; and (d) waive presentment, demand, protest and notice of default, non-payment and protest and all demands, notices and suretyship defenses generally. Any notice or demand to the Maker required or permitted under this Note shall be in writing and shall be deemed given upon the mailing of such notice or demand to the Maker by certified or registered mail, postage prepaid at the address set forth in the first paragraph hereof or at such other address as may be designated by the Maker from time to time. This Note shall be governed by the laws of the Commonwealth of Massachusetts. WITNESS: CHANCELLOR DEVELOPMENT CORP., a Delaware corporation /s/ Richard Mikels By: /s/ Abraham D. Gosman - --------------------------- ------------------------ Name: Abraham D. Gosman Title: President Dated: November 30, 1999 EX-10.11(B) 4 EXHIBIT 10.11(B) EXHIBIT 10.11(B) CONFIRMATORY GUARANTY For valuable consideration, the receipt of which is hereby acknowledged, and in consideration of Innovative Clinical Solutions, Ltd. (hereinafter called "Lender") having made or now or in the future making, advances or otherwise giving credit to CHANCELLOR DEVELOPMENT CORP., a Delaware corporation (hereinafter called Borrower), pursuant to that certain Confirmatory Revolving Note of even date in the original principal amount of $10,900,000 made by Borrower to the order of Lender (the "Note"), the undersigned does hereby confirm that it has unconditionally guaranteed to Lender, its successors and assigns, full and prompt payment at maturity of all present and future obligations of Borrower to Lender under the Note, including all renewals and extensions thereof of substitutions therefor. Notice of acceptance of and action taken by Lender from time to time under this Guaranty are hereby waived, and this Guaranty shall operate as a continuing and absolute Guaranty covering obligations of Borrower to Lender under the Note (and renewals and extensions thereof or substitutions therefor). Upon any "Event of Default" (as that term is defined in the Note) by Borrower under the Note, the liability of the undersigned shall be effective immediately, without demand, presentment, protest or notice of any kind, all of which are hereby waived, and without any suit or action against Borrower and without further steps to be taken or further conditions to be performed by Lender or anyone. Failure of Lender to make any demand or otherwise to proceed against the undersigned with respect to any default by Borrower or the undersigned shall not constitute a waiver of Lender's right to proceed with respect to any or all other defaults by Borrower or the undersigned. Guarantor shall provide Lender with his personal balance sheet for the six and twelve month periods ending on June 30 and December 31 respectively within thirty (30) days of the expiration of each such period, in each case certified by the Guarantor as being true, complete, and correct in all material respects. The liability of the undersigned shall not be terminated or otherwise affected or impaired by Lender's granting time to Borrower (regardless of the number or length of such grants of time) or by any other indulgence or indulgences granted by Lender to Borrower, or by Lender's heretofore, now or hereafter acquiring, releasing or in any way modifying any guaranty from any other person or persons or any collateral or other security in whatever form for any of the obligations hereby guaranteed, whether or not notice thereof shall have been or be given to the undersigned, or by any failure on Lender's part to take any action with respect to, or to realize upon any security, rights, endorsements or guaranties which Lender may now or hereafter hold with respect to any obligation hereby guaranteed, or by any alteration or modification of any such obligation to which Lender may agree, or because of any fraud, illegal or improper acts of Borrower or because Borrower may, by operation of law or otherwise, be relieved of liability upon its obligations to Lender hereby guaranteed. Any and all sums at any time due from Lender to the undersigned and any and all securities or other property, real or personal, of the undersigned in the possession of Lender, whether as pledged property or as a result of foreclosure or otherwise, shall at all times constitute security for any and all obligations, and Lender may apply or set off such sums against any obligation at any time, whether or not such obligation is then due, and whether or ot other collateral is considered by Lender as adequate. This Guaranty shall be binding upon the heirs, personal representatives and assigns of the undersigned. The death or incapacity of the undersigned shall not relieve his estate of any liability or obligation occurring prior to such death or incapacity, nor accruing prior to the expiration of ten (10) days next following the receipt by Lender of notice of such death or incapacity. For the purposes of this Guaranty, the term "obligations" shall mean and include, without limitation, all indebtedness, liabilities and amounts, liquidated or unliquidated, owing by Borrower to Lender at any time under the Note. Said term shall also include all interest, charges, costs and expenses (including reasonable attorneys' fees) now due or that may hereafter become due from Borrower to Lender under the Note from time to time. This instrument is intended to take effect as a sealed instrument and this instrument and all rights, duties and remedies of the parties shall be governed as to interpretation, validity, effect and enforcement, and in all other respects of the same or different nature, by the domestic law of the Commonwealth of Massachusetts. Any and all payments by the undersigned to Lender under or pursuant to this Guaranty shall be made at 10 Dorrance Street, Providence, Rhode Island 02903, or such other place as Lender shall designate in writing to the undersigned. WITNESS my hand and seal as of the 1st day of February, 1998. Witness: /s/ Richard Mikels /s/ Abraham D. Gosman --------------------- ------------------------ Abraham D. Gosman Dated: November 30, 1999 EX-10.11(C) 5 EXHIBIT 10.11(C) EXHIBIT 10.11(c) CONFIRMATORY STOCK PLEDGE AGREEMENT THIS AGREEMENT is made as of the __ day of November, 1999 by and among ABRAHAM D. GOSMAN (the "Pledgor") and CHANCELLOR PARTNERS LIMITED PARTNERSHIP I, a Delaware limited partnership ("Partners"), both having an address at 513 North County Road, Palm Beach, Florida 33480; CHANCELLOR DEVELOPMENT CORP., a Delaware corporation, having a mailing address at 197 First Avenue, Needham Heights, Massachusetts 02494 (the "Borrower", and together with the Pledgor and Partners, hereinafter collectively referred to as the "Borrowing Parties"); and INNOVATIVE CLINICAL SOLUTIONS, LTD., a Delaware corporation, having its principal address at 10 Dorrance Street, Providence, Rhode Island 02903 (the "Lender"). WITNESSETH : WHEREAS, the Borrower has executed and delivered to the Lender a Confirmatory Revolving Note of even date in the original principal amount of TEN MILLION NINE HUNDRED THOUSAND DOLLARS ($10,900,000.00) made by the Borrower to the order of the Lender (the "Note") which, among other things, was given in confirmation of certain advances made by Lender to the Borrower commencing February 1, 1998, and to evidence advances hereafter to be made by Lender to the Borrower in the Lender's sole and absolute discretion as set forth in the Note; WHEREAS, the Pledgor has executed and delivered that certain Guaranty of even date (the "Guaranty") in favor of Lender whereby Pledgor, among other things, has guaranteed the payment and performance of the Note; WHEREAS, the Pledgor, being a shareholder of the Borrower and the owner of the capital stock of the general partner of Partners, has received and shall receive a direct benefit from advances made by the Lender to the Borrower under the Note and otherwise; WHEREAS, the Lender has made advances from time to time to the Borrower; WHEREAS, it was a condition precedent to the willingness of the Lender to make the advances confirmed and evidenced by the Note that (i) the Pledgor and Partners pledge the Windrows Pledged Shares and the ICSL Pledged Shares (as such terms are hereinafter defined) (collectively all such shares being hereinafter sometimes referred to as the "Pledged Shares"), and (ii) the Pledgor previously delivered the Windrows Pledged Shares to Lender; and WHEREAS, to secure the advances the Pledgor and the Borrower simultaneously execute and deliver this Agreement to and with the Lender confirming Pledgor's pledge of the Windrows Pledged Shares and the ICSL Pledged Shares; NOW, THEREFORE, in confirmation of the Lender's inducement to make the advances made and to be made as set forth above, and in order to induce the Lender to accept the Note and to enter into or accept all documents, instruments and agreements given by either or both of the Borrowing Parties in connection with the Note (collectively, together with the Note, the Guaranty, and this Agreement, the "Loan Documents"), and in consideration therefor, and for Ten Dollar ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, and in consideration of the mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. PLEDGE. (a) The Pledgor hereby confirms that prior to the date hereof pledged, granted a security interest in, mortgaged, assigned, transferred, delivered, and set over unto the Lender, its successors and assigns, all of the Pledgor's right, title and interest in and to Four Thousand Six Hundred Seventy-Two and Five-Tenths (4,672.5) shares of common stock, $.01 par value per share, of The Windrows at Princeton Corporation ("Windrows"), a Delaware corporation, registered in the name of the Pledgor (collectively, the "Pledged Shares"), and the certificates representing or evidencing the Pledged Shares, with stock powers attached duly endorsed in blank, as security for all indebtedness, covenants, liabilities, obligations, agreements and undertakings (other than the Lender's obligations) by any one or more of the Borrowing Parties, as applicable under the Note and the other Loan Documents (collectively hereinafter, the "Obligations"). (b) Pledgor and Partners on the date hereof hereby pledge, grant a security interest in, mortgage, assign, transfer and set over under the Lender its successors and assigns subject to the prior pledges of such shares to the institutions designated herein, shares of the common stock of Innovative Clinical Solutions, Ltd., a Delaware corporation, f/k/a PhyMatrix, Inc. ("ICSL") represented by the certificates for such shares as follows (collectively the "ICSL Pledge Shares") as security for the Obligations with stock powers attached: (i) Certificate No. PMC1657 for 2,117,419 shares registered in the name of Abraham D. Gosman previously pledged to John Fish of Boston, Massachusetts; (ii) Certificate No. PMC1275 representing 2,168,707 shares registered in the name of Chancellor Partners Limited Partnership I previously pledged to John Fish of Boston, Massachusetts; (iii) Certificate No. PMC1658 representing 2,000,000 shares initially registered in the name of Gosman Marital Trust and now registered in the name of Abraham D. Gosman and previously pledged to Colonial Bank; (iv) Certificate No. PMC1012 representing 1,200,000 shares registered in the name of Chancellor Partners Limited Partnership I and previously pledged to Chase Manhattan Bank; and (v) Certificate No. PMC1273 representing 300,000 shares registered in the name of Chancellor Partners Limited Partnership I and previously pledged to Chase Manhattan Bank; and (vi) Approximately 500,000 shares which cannot presently be located with respect to which Pledgor shall execute, acknowledge and deliver all documents reasonably required to allow the transfer agent to issue a replacement certificate or certificates which such replacement certificates shall be delivered to Lender. Lender acknowledges that its rights herein are subject to the prior pledges of such shares as heretofore indicated as the same may be amended from time to time; provided, however, that Pledgor will execute no amendments to any such pledge agreements which will materially and adversely affect the Lender's interest herein without the prior written consent of Lender. 2. REPRESENTATIONS AND WARRANTIES. The Borrowing Parties jointly and severally represent and warrant that at the time of the pledge of the Windrows Pledged Shares, February 1, 1998 and as of the date hereof as follows: (i) except as set forth herein, the Pledgor has good and valid title to the Pledged Shares free and clear of any liens, charges or encumbrances thereon or affecting the title thereto; (ii) the Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has the corporate power and holds all licenses necessary to carry on its business as it is being conducted and (c) is duly qualified to transact business as a foreign corporation in each jurisdiction in which qualification is required and where failure to do so would have a material adverse effect on the business of the Borrower; (iii) the Pledged Shares have been duly and validly authorized and issued and are fully paid and non-assessable and constitute all of the issued and outstanding shares of capital stock of Windrows and ICSL owned by the Pledgor and Partners; (iv) the Windrows Pledged Shares represent 93.45% of the outstanding shares of capital stock of Windrows; (v) there are no outstanding subscriptions, warrants, calls, options, rights, commitments, securities or agreements calling for the issuance of, or convertible or exchangeable into, any shares of capital stock of Windrows or for the issuance of any securities convertible or exchangeable, actually or contingently, into such shares; (vi) the Borrowing Parties have full power, authority and legal right and have any approval required by law to enter into and carry out the terms, provisions and agreements hereof and to make the representations and warranties contained herein; (vii) the execution, delivery and performance of a) this Agreement by the Borrowing Parties and (b) the Note and the delivery of the Windrows Pledged Shares to the Lender by the Pledgor do not contravene and will not result in the breach of any of the terms and provisions of, or constitute a default under, the charter documents of the Borrower or violate any statute, ordinance, by-law, code, rule, ruling, regulation, restriction, order, judgment, decree, writ, judicial or administrative interpretation or injunction of any Governmental Authority having jurisdiction over the Borrowing Parties, or any property owned by any one or more of the Borrowing Parties; (viii) except as previously disclosed by Pledgor to Lender, Pledgor has already obtained or filed, as the case may be, no consent or approval or other authorization of, or exemption by, or declaration or filing with, any Person (as that term is hereinafter defined) and no waiver of any right by any Person is required to authorize or permit, or is otherwise required as a condition to the delivery of the Windrows Pledged Shares to the Lender by the Pledgor or the pledge of the ICSL Pledged Shares by Pledgor and Partners, the execution and delivery of the Note by the Borrower, and of this Agreement by the Borrowing Parties and the performance of their respective obligations hereunder or as a condition to the validity (assuming the due authorization, execution and delivery by the Lender of this Agreement) or enforceability of any of the same; (ix) this Agreement and the previous delivery of the Windrows Pledged Shares to the Lender confirm the previously created duly perfected first and prior possessory security interest in the Windrows Pledged Shares in the Lender's favor; and (x) this Agreement represents the legal, valid and binding obligation of each of the Borrowing Parties enforceable against each of them in accordance with its terms. 3. COVENANTS. The Pledgor covenants that, until such time as the Obligations have been fully paid and performed, the Pledgor, (i) shall not, directly or indirectly, sell, assign, exchange, convey, pledge, alienate, hypothecate, gift, devise or otherwise transfer or grant any option with respect to any of the Pledgor's rights to the Pledged Shares, whether voluntarily or by operation of law; (ii) except as previously disclosed by Pledgor to Lender, Pledgor shall not, directly or indirectly, create or suffer to exist any lien, security interest or other charge or encumbrance against, in or with respect to any of the Pledged Shares; except for the pledge hereunder and the security interest created hereby or any prior pledge disclosed herein; (iii) shall warrant and defend the title to the Pledged Shares and the lien thereon conveyed to the Lender by this Agreement against the claims of all Persons except the claims of such Persons previously disclosed by Pledgor to Lender; (iv) shall pay, when due, all taxes and any other charges which may form the basis of a lien, claim or expense upon or in connection with the Pledged Shares or any interest therein; (v) will not permit Windrows to issue any additional shares of any class of capital stock or pay any cash dividends; (vi) will provide to Lender quarterly and annual financial statements of Windrows within thirty (30) days of the close of each Windrows fiscal quarter and within sixty (60) days of the closing of Windrows' fiscal year; (vii) will cause Windrows to provide Lender with all information concerning Windrows' business, and financial condition as Lender may reasonably request within ten (10) days of any such request; (viii) will not permit Windrows to create any liens against its property or assets, except (a) liens existing on the date hereof , or any substitution or replacement thereof (provided that there is no shortening of the maturity of the obligations secured thereby and that the total amount of the obligation does not exceed $ 76,500,000) (b) liens for taxes not yet due and payable or (c) liens for services by materialmen or contractors providing services or materials to Windrows; and (ix) without limiting the covenants set forth above in clause (ii) of this Section 3, shall provide written notice to the Lender of all encumbrances of any kind or nature hereafter placed on the Pledged Shares, such notice to be delivered to the Lender within five (5) days of the occurrence of any such encumbrance. (x) at the request of the Lender, Pledgor and Partners will each execute one or more financing statements pursuant to the Uniform Commercial Code in order for Lender to project its security interest in the Pledged Shares. The Borrowing Parties jointly and severally covenant that (a) they shall not either knowingly or negligently (with or without knowledge) take any action which would in any manner impair the value of any of the Pledged Shares, (b) shall not agree to a termination of, any supplement to or any amendment or modification of the charter documents of Windrows and (c) no additional shares of capital stock or other securities of Windrows having voting rights, actually or contingently, shall be issued, sold or otherwise disposed of by Windrows after the date hereof other than to the Pledgor pursuant to a Reorganization (as hereinafter defined in Section 4). 4. STOCK DIVIDENDS; REORGANIZATIONS. In the event of any one or more reclassifications, changes, exchanges, stock splits, stock dividends, stock consolidations, or other subdivisions or combinations of the shares of any class of Windrows' or ICSL's capital stock or of any immediate or remote successor to substantially all of Windrows' or ICSL's business or assets pursuant to any one or more of the events described in this sentence, or consolidations of Windrows or any such successor with, or mergers of Windrows, ICSL or any such successor into, other corporations, or other recapitalizations or reorganizations affecting Windrows, ICSL or any such successor, or any one or more sales or conveyances to another corporation of Windrows' or ICSL's property or any such successor as an entirety or substantially as an entirety (a "Reorganization"), the Pledgor shall pledge as collateral hereunder all securities and property which come to the Pledgor as a result of that and subsequent Reorganizations, except for securities and property surrendered or canceled pursuant to any of same, along with appropriate stock transfer powers duly endorsed in blank, and all other instruments the Lender may deem necessary or desirable to vest or confirm title to same or facilitate foreclosure, assignment, sale or other transfer thereof. Such securities and property shall stand pledged and assigned in the same manner as the property described in Section 1 hereof and the term "Pledged Shares" shall include such securities and property. 5. PLEDGED SHARES, VOTING POWER, DIVIDENDS, ETC. (a) Unless and until an Event of Default (as hereinafter defined), the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Windrows Pledged Shares; PROVIDED, HOWEVER, that no vote shall be cast or consent given which would be inconsistent with or violate any of the provisions of this Agreement or the Note. If any Event of Default shall have occurred, then and whether or not the Lender exercises any available option to declare a default under the Note or seeks or pursues any other relief or remedy available to the Lender under the Note: (i) upon written notice from the Lender to the Pledgor, the Lender shall have the right to vote and exercise all consensual and other powers of ownership pertaining to the Windrows Pledged Shares in such manner as the Lender in its sole and absolute discretion may determine and, if the Lender shall so request in writing, the Pledgor agrees to execute and deliver to the Lender such additional powers, authorizations, proxies, dividends and such other documents as the Lender may request to secure to the Lender the rights, powers and authorities intended to be conferred upon the Lender by this Section 5(a); and (ii) if the Lender shall so request in writing, the Pledgor agrees to execute and deliver to the Lender appropriate additional dividend, distribution and other orders and documents to that end. Following an event of Default, the Pledgor may continue to vote the Windrows Pledged Shares as permitted hereunder, unless and until the Lender elects its rights to Vote the Windrows Pledged Shares under clause (ii) above. (b) So long as the Note has not been paid in full, the Lender shall have the right to vote and give all consents, waivers and ratifications with respect to the ICSL Pledged Shares in such manner as Lender , in its sole and absolute discretion may determine, the power being deemed irrevocable and coupled with an interest; subject, however, to the rights of any prior pledges pursuant to any pledge disclosed herein. If Lender shall so request in writing, the Pledgor and Partners agree each to execute and deliver to the Lender such additional powers, authorizations, proxies, dividends and such other documents as Lender may request to secure to the Lender the rights, power and authorities intended to be conferred upon the Lender by this Section 5(b). 6. SALE OF PLEDGED SHARES AFTER AN EVENT OF DEFAULT. If any Event of Default shall have occurred, then, at the Lender's option, in addition to any rights and remedies the Lender may otherwise have, and without further demand, advertisement or notice, and in any manner necessary to comply with the applicable requirements of the Uniform Commercial Code, except as expressly provided for in subsection (i) of this Section 6, the Lender may apply the cash, if any, then held by it as collateral hereunder, for the purposes and in the manner provided in Section 7 hereof, or if there shall be no such cash or the cash so applied shall be insufficient to make in full all payments provided in subsections (i) and (ii) of Section 7 hereof, the Lender may: (i) subject to the provision of any prior pledge disclosed herein, elect to sell the Pledged Shares or its rights in and to them, or any part thereof, in one or more sales, at public or private sale, conducted by any officer or agent of, or auctioneer or attorney for, the Lender, at the Lender's place of business or elsewhere, for cash or on credit, and at such reasonable price or prices as the Lender shall determine, and the Lender may be the purchaser of any or all of the Pledged Shares so sold. The Lender may, in its reasonable discretion, at any such sale restrict the prospective bidders or purchasers as to their number, nature of business and investment intention, including, without limitation, a requirement that the Persons making such purchases represent and agree to the satisfaction of the Lender that they are purchasing the Pledged Shares for their account, for investment, and not with a view to the distribution or resale of any thereof. Upon any such sale the Lender shall have the right to deliver, assign and transfer the Pledged Shares so sold directly to the purchaser thereof. Each purchaser (including the Lender) at any such sale shall hold the Pledged Shares so sold, absolutely free from any claim or right of whatever kind, including, without limitation, any equity or right of redemption, of the Pledgor, which the Pledgor hereby specifically waives, to the extent the Pledgor may lawfully do so, and all rights of redemption, stay or appraisal which the Pledgor has or may have under any rule of law or statute now existing or hereafter adopted. The Lender shall give the Pledgor at least ten (10) days' written notice (which shall constitute reasonable notice) of any public or private sale and shall state the time and place fixed for such sale. Any such public sale shall be held at such time or times within ordinary business hours as the Lender shall fix in the notice of such sale. At any such sale the Pledged Shares may be sold in one lot as an entirety or in separate lots. The Lender shall not be obligated to make any sale pursuant to any such notice. The Lender, without notice or publication, may adjourn any public or private sale from time to time by announcement at the time and place fixed for such sale, or any adjournment thereof, and any such sale may be made at any time or place to which the same may be so adjourned without further notice or publication. In case of any sale of all or any part of the Pledged Shares on credit, the Pledged Shares so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Pledged Shares so sold, and in case of any such failure, such Pledged Shares may again be sold under and pursuant to the provisions hereof; or (ii) proceed by a suit or suits at law or in equity to foreclose upon this Agreement and sell the Pledged Shares, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. The Lender, as attorney-in-fact pursuant to Section 10 hereof may, in the name and stead of the Pledgor, make and execute all conveyances, assignments and transfers of the Pledged Shares sold pursuant to subsection (i) or (ii) of this Section 6. If so requested by the Lender, the Pledgor shall ratify and confirm any sale or sales by executing and delivering to the Lender or to such purchaser or purchasers, all such instruments as may, in the judgment of the Lender, be reasonably necessary or appropriate for such purpose. The receipt by the Lender of the purchase money paid at any such sale made by it shall be a sufficient discharge therefor to any purchaser of the Pledged Shares, or any portion thereof, sold as aforesaid; and no such purchaser (or his or its representatives or assigns), after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money or any part thereof or in any manner whatsoever be answerable for any loss, misapplication or nonapplication of any such purchase money, or any part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. The curing of any Event of Default shall not divest the Lender of its rights under this Section 6 or any other provision of this Agreement unless and until the Lender waives said rights in writing. 7. APPLICATION OF PROCEEDS. The proceeds of any sale, or of collection, of all or any part of the Pledged Shares shall be applied by the Lender, without any marshaling of assets, towards payment of the items immediately set forth below, in the following order: (i) all costs and expenses of such sale, including, without limitation, reasonable compensation to the Lender and its agents, attorneys and counsel, and all other expenses, liabilities and advances made or reasonably incurred by the Lender in connection therewith; and (ii) the Obligations (in such order as the Lender, in its sole and absolute discretion, shall determine); after which, any surplus from such proceeds shall be paid to the Pledgor and the Pledgor's successors assigns, heirs, executors or administrators, or to whomever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 8. EVENTS OF DEFAULT. For purposes of this Agreement, an Event of Default shall mean the occurrence of any one of the following events: (i) any default by the Pledgor, the Guarantor and/or the Borrower in the due observance or performance of any covenant or agreement of the Pledgor, the Guarantor and/or the Borrower, as the case may be, contained herein or any Loan Documents or any breach by the Pledgor, the Guarantor and/or the Borrower of any representation or warranty contained herein or in any of the Loan Documents, and, in each case, failure by the defaulting party or parties to cure such default within thirty (30) days after the date such party or parties firstreceive written notice of such default from the Lender,; or (ii) any one or more Events of Default (as that term is defined in the Note) under the terms of the Note or any other Loan Document. 9. OBLIGATIONS WITH RESPECT TO THE PLEDGED SHARES. The Lender shall have no duty as to the collection or protection of the Pledged Shares or any income thereon, nor as to the preservation of any rights pertaining thereto, beyond the safe custody thereof. The Lender may exercise its rights with respect to the Pledged Shares without resorting or regard to other security or sources of reimbursement. 10. LENDER APPOINTED ATTORNEY-IN-FACT; INDEMNITY. The Lender, is hereby appointed as attorney-in-fact, with full power of substitution, of the Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof. The power of attorney conferred on Lender pursuant to the provisions of this Section 10, being coupled with an interest, shall be irrevocable until all of the Obligations have been fully paid and performed and shall not be affected by any disability or incapacity which the Pledgor may suffer and shall survive the same. Such power of attorney is provided solely to protect the interests of the Lender and shall not impose any duty on the Lender to exercise any such power, and neither the Lender nor such attorney-in-fact shall be liable for any act, omission, error in judgment or mistake of law, except as the same may result from its gross negligence or wilful misconduct. The Pledgor shall and hereby agrees to indemnify and save harmless the Lender from and against any liability or damage which it may incur, in good faith and without negligence, arising out of the execution and delivery of the Pledge Agreement. Each of the parties hereby covenants and agrees that it will not commence, bring, or otherwise, directly or indirectly, voluntarily join in any lawsuit, action or proceeding in which the interests of any other party (the "Other Party") hereto are adverse to the interests of such party which arise out of or relate to the execution and delivery of the Pledge Agreement or the exercise and/or performance of any of the Lender's powers and duties specifically set forth herein and in connection with the enforcement of this Agreement (an "Activity"), provided the Other Party has acted in good faith and without negligence with respect to such Activity. The indemnity provisions of this Section 10 shall survive the complete payment and performance of the Obligations. 11. REMEDIES CUMULATIVE. The rights and remedies set forth under this Agreement are in addition to all other rights and remedies afforded to the Lender under any of the other Loan Documents or at law or in equity, all of which are hereby reserved by the Lender, and this Agreement is made and accepted without prejudice to any such rights and remedies. All of the rights and remedies of the Lender under each of the Loan Documents shall be separate and cumulative and may be exercised concurrently or successively in the Lender's sole and absolute discretion. 12. TERMINATION OF PLEDGE. This Agreement shall be terminated upon the complete payment and performance of the Obligations. Upon the termination of this Agreement, the Lender shall forthwith assign, transfer and deliver to the Pledgor, without representation, warranty or recourse, all of the Pledged Shares, if any, then held by it in pledge hereunder as security for the Obligations and shall execute any instrument reasonably requested by the Pledgor to evidence the termination of this Agreement. 13. NOTICES. Any notice, request, demand, statement or consent made hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when postmarked or placed in the possession of such mail or delivery service and addressed as follows: IF TO THE PLEDGOR Abraham D. Gosman AND PARTNERS: 513 North County Road Palm Beach, Florida 33480 IF TO THE BORROWER: Chancellor Development Corp. 197 First Avenue Needham Heights, Massachusetts 02494 IF TO THE LENDER: Innovative Clinical Solutions, Ltd. 10 Dorrance Street Providence, Rhode Island 02903 or at such other place as any of the parties hereto may from time to time hereafter designate to the others in writing. Any notice given to the Pledgor or the Borrower by the Lender at any time shall not imply that such notice or any further or similar notice was or is required. 14. GENERAL PROVISIONS. No term or condition of this Agreement will be deemed to have been waived or amended unless expressed in writing, and the waiver of any condition or the breach of any term will not be a waiver of any subsequent breach of the same or any other term or condition. This Agreement shall be binding upon, and inure to the benefit of, the parties, their heirs, executors, personal representatives, nominees or assigns. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all such counterparts taken together shall be deemed to constitute one and the same instrument. The Borrowing Parties agree that they will, at any time and from time to time, upon request of Lender, do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged or delivered, all such further acts, deeds, assignments, conveyances and assurances as may reasonably be required for effecting the purposes of this Agreement. This Agreement, the interpretation and enforcement thereof, shall be governed by the laws of the Commonwealth of Massachusetts. As used herein, the term "Person" shall mean any individual, corporation, general partnership, limited partnership, limited liability company, limited liability partnership, stock company, or association, joint venture, company, trust, bank, trust company, land trust, business trust, unincorporated association, unincorporated organization, governmental authority or any other entity of any kind or nature. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal on the day and year first above written. WITNESS: PLEDGOR: /s/ Richard Mikels /s/ Abraham D. Gosman - ------------------------- ------------------------------ Name: Abraham D. Gosman WITNESS: BORROWER: CHANCELLOR DEVELOPMENT CORP, a Delaware corporation /s/ Richard Mikels By: /s/ Abraham D. Gosman - --------------------------- ---------------------------- Name: Richard Mikels Name: Abraham D. Gosman Title: President WITNESS: PARTNERS: THE CHANCELLOR PARTNERS LIMITED PARTNERSHIP I BY CLP, INC. ITS GENERAL PARTNER /s/ Richard Mikels By: /s/ Abraham D. Gosman - --------------------------- --------------------------------- Abraham D. Gosman President WITNESS: LENDER: INNOVATIVE CLINICAL SOLUTIONS, LTD., a Delaware corporation /s/ James P. Redding By: /s/ Michael T. Heffernan - --------------------------- ------------------------------- Name: Name: Michael T. Heffernan Title: President 90051gos1.icsl EX-10.11(D) 6 EXHIBIT 10.11(D) November 30, 1999 Innovative Clinical Solutions, Ltd. 10 Dorrence Street Providence, Rhode Island 02903 Gentlemen: Reference is made to those four certain Lease Agreements between the undersigned and the following entities which are affiliated with you with respect to the space indicated in the office building known as the Medical Mall at Palm Beach Gardens located at 3801 PGA Boulevard, Palm Beach Gardens, Florida 33401 (the "Mall") as follows: 1. Lease with PhyMatrix Management Company, Inc., a Florida corporation, dated January 31, 1997 with respect to Suite No. 801 ("Lease 801"). 2. Lease with PhyMatrix Management Company, Inc. dated January 31, 1997 with respect to Suite 701 ("Lease 701"). 3. Lease with Clinical Studies, Ltd. a Delaware corporation, dated September 25, 1997 with respect to Suite 802 ("Lease 802"). 4. Lease with First Choice Home Care, Inc., a Delaware corporation, dated July 15, 1997 with respect to Suite 107 ("Lease 107"). In consideration of Innovative Clinical Solutions, Ltd.'s agreement to waive any interest through and including July 15, 2000, on that certain Promissory Note of Abraham D. Gosman payable to your order dated as of February 1, 1998 in an original principal face amount of $10,900,000, the parties hereby agree as follows: 1. That Lease 107 shall be terminated effective November 30, 1999 and any claim for unpaid rent with respect to Lease 107 is waived; 2. That Lease 802 shall be terminated effective November 30, 1999 and any claim for unpaid rent with respect to Lease 802 is waived; 3. That the parties hereto further agree to execute an amendment in a mutually agreed-upon form with respect to Lease 701 providing that Lease 701 shall be amended to: (i) waive any claim for unpaid rent with respect to Lease 701 through Page 2 November 15, 1999 the end of the current term without extension; (ii) grant PhyMatrix Management Company, Inc. the right to sublet the Premises (for the remainder of the current term without extension) at prevailing market rates and subject to customary tenant concession without prior written consent of Landlord; and (iii) remove the option to renew or extend the term of Lease 701 beyond the initial term. 4. That the parties hereto further agree to execute an amendment in a mutually-agreed upon form with respect to Lease 801 providing that Lease 801 shall be amended to: (i) waive any claim for unpaid rent with respect to the Lease through the end of the current term without extension; (ii) to provide that the "Premises" shall substitute Suites 600 and 701B, which total 6,400 square feet, for Suite 801; (iii) grant PhyMatrix Management Company, Inc. the right to sublet the Premises (for the remainder of the current term without extension) at prevailing market rates and subject to customary tenant concession without prior written consent of Landlord; and (iv) remove the option to renew or extend the term of Lease 801 beyond the initial term. 5. In the event the Mall is sold on or prior to July 15, 2000, the undersigned shall pay ICSL in cash the sum of (i) $666,603.00 plus (ii) $892,113.00 minus (iii) the product of (x) the number of days from November 1 through the date of payment multiplied by (y) $3,457.80, whereupon such payment ICSL shall assign Leases 701 and 801, and any subleases thereto, to the undersigned. Please acknowledge your agreement to waive interest in accordance with this letter on the copy of which is enclosed. PBG Medical Mall Mob1 Properties, Ltd., a Florida Limited Partnership By: /s/ Abraham D. Gosman ---------------------------- Abraham D. Gosman General Partner ACCEPTED AND AGREED: Innovative Clinical Solutions, Ltd. By: /s/ Michael T. Heffernan ------------------------------- EX-27 7 EXHIBIT 27
5 USD 3-MOS 9-MOS 3-MOS 6-MOS JAN-31-1999 JAN-31-1999 JAN-31-2000 JAN-31-2000 AUG-01-1998 FEB-01-1998 AUG-01-1999 FEB-01-1999 OCT-31-1998 OCT-31-1998 OCT-31-1999 OCT-31-1999 1 1 1 1 24,237 24,237 38,017 38,017 0 0 0 0 65,774 65,774 47,684 47,684 (46,775) (46,775) (19,690) (19,690) 0 0 0 0 185,697 185,697 99,302 99,302 12,773 12,773 15,387 15,387 (1,939) (1,939) (4,035) (4,035) 318,496 318,496 158,927 158,927 28,241 28,241 47,617 47,617 100,000 100,000 100,000 100,000 0 0 0 0 0 0 0 0 333 333 320 320 182,480 182,480 3,879 3,879 318,496 318,496 158,927 158,927 67,946 229,502 44,371 154,887 67,946 229,502 44,371 154,887 0 0 0 0 0 0 0 0 80,128 228,362 52,150 198,570 0 0 0 0 1,608 5,254 2,207 6,925 (13,790) (4,114) (9,986) (50,608) (4,671) (1,499) (53) 47 (9,119) (2,615) (9,933) (50,655) 0 0 0 0 (51,552) (51,552) 0 (49,632) 0 0 0 0 (60,671) (54,167) (9,933) (100,287) (1.81) (1.63) (0.28) (2.79) (1.81) (1.63) (0.28) (2.79)
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