-----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, LRcJ6hRlBpSrHzFs6ta2a6aeQBmza0SdXXvlWJoCRaHacrUsPgGzkw/ggz6QR3v8 HjZsw8Q5ysna1tFj1t+Xjw== 0000950132-97-000211.txt : 19970327 0000950132-97-000211.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950132-97-000211 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMT HEALTH SERVICES INC CENTRAL INDEX KEY: 0000881917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 251672183 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19897 FILM NUMBER: 97563405 BUSINESS ADDRESS: STREET 1: 10521 PERRY HIGHWAY CITY: WEXFORD STATE: PA ZIP: 15090 BUSINESS PHONE: 4129333300 MAIL ADDRESS: STREET 1: 10521 PERRY HIGHWAY CITY: WEXFORD STATE: PA ZIP: 15090 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10 - K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 OR [ ] 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 0-19897 ------- SMT HEALTH SERVICES INC. ------------------------------------------------------ (Exact name of registrant as specified in charter) Delaware 25-1672183 --------------------------------------------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 10521 Perry Highway Wexford, Pennsylvania 15090 --------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412-933-3300 ------------ Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Warrants to Purchase Preferred Stock Value $.01 Per Share Common Shares Purchase Rights --------------------- --------------------- --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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 ____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $41.0 million based upon the closing trading price of the Common Stock on the National Association of Securities Dealers, Inc. Automated Quotations System on March 19, 1997. As of March 19, 1997, the Registrant had 5,685,080 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts II and III incorporate information by reference from the Registrant's definitive Proxy Statement filed with the Commission within 120 days after the close of the Registrant's fiscal year. PART I ITEM 1. BUSINESS -------- General SMT Health Services Inc. ("SMT"), a Delaware Corporation formed in 1991, and its subsidiaries (collectively, the "Company") are primarily engaged in the business of operating mobile Magnetic Resonance Imaging (MRI) units ("Mobile Units"). The Company, through its subsidiaries, currently operates eighteen Mobile Units, including a unit purchased in February 1996, two new units purchased from another mobile provider in March 1996 and the addition of four new units late in the third quarter and early in the fourth quarter of 1996. The Company's mobile MRI fleet currently services healthcare providers located in Pennsylvania, North Carolina, West Virginia, Kentucky, Virginia, South Carolina and Ohio. The Company announced in February 1997 that it intends to purchase and begin operation of its nineteenth mobile unit during April 1997. The MRI equipment is transported in specially designed vans that are driven to the healthcare provider's facility where the imaging occurs. The Company typically charges fees on a fee-per-scan basis. For financial information regarding the Company, please see Item 6 "Selected Financial Data" and the Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference. Current Operations The Company's mobile MRI operations continue to grow. In 1994, healthcare costs came under great scrutiny and healthcare market forces began their own healthcare reform. This reform continues, and mobile diagnostic imaging has benefitted from such market reform of the healthcare system as shared equipment is a key to containing healthcare costs while still delivering advanced and cost effective medical technology. As hospitals continue to look for ways to reduce capital expenditures and contain costs, SMT and shared mobile diagnostic imaging units/systems allow hospitals to add or increase the range of quality, state-of-the-art diagnostic services with no capital expenditure by providing an outsourcing alternative. Further, many states, including those in which the Company operates, have strengthened their Certificate of Need ("CON") review systems, whereby healthcare providers must justify a need in a community before the state will permit capital expenditures for medical equipment. As a result of CON review systems, hospitals and other healthcare providers are less able to install fixed site facilities thus providing an opportunity for mobile suppliers whose equipment will be shared among many hospitals (see Government Regulation). Unit Purchases and Upgrades The Company upgraded one of its .5 Tesla Signas to a 1.0 Tesla Horizon unit. The new unit was financed at a net total cost of approximately $2.0 million and was delivered in late February 1996. The Company financed the purchase of this new unit with a 60 month dollar-out lease (bargain purchase option of one dollar) requiring monthly payments of approximately $44,000. -2- ITEM 1. BUSINESS (continued) -------- The Company contracted with several new hospital clients and purchased a new Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $41,000. In April 1996, the Company upgraded one of the units purchased from another mobile provider (See Note 16 of the Company's Consolidated Financial Statements incorporated herein by reference) to a Siemens 1.0 Tesla Impact unit. The new unit was financed at a net total cost of approximately $1.9 million. The Company financed this new unit with a 60 month loan requiring monthly payments of approximately $43,000. In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens 1.0 Tesla Impact unit. The new unit was financed at a net total cost of approximately $2.0 million with a 60 month dollar-out lease requiring monthly payments of approximately $43,000. The Company in May 1996 signed an agreement with Siemens Medical Systems to upgrade the second unit purchased from another mobile provider (see Note 16 of the Company's Consolidated Financial Statements incorporated herein by reference) and to purchase a new unit during the fourth quarter of 1996. Delivery of the upgraded unit occurred in July 1996 and the new unit was delivered and began operation on October 1, 1996. The upgrade's net cost approximated $1.9 million and the Company financed approximately $1.7 million with a 60 month finance agreement requiring monthly payments of approximately $36,000. The Company's new unit cost approximately $1.9 million and the Company financed approximately $1.7 million requiring a monthly payment of approximately $37,000. During September 1996, the Company upgraded an older unit to a new Siemens 1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $39,000. The Company purchased and took delivery of two new GE 1.0 Tesla Horizon units in late September 1996. These units were purchased at a cost of approximately $1.8 million each and the Company financed approximately $1.6 million and $1.5 million with 60 month finance agreements requiring monthly payments of approximately $34,000 and $32,000, respectively. The Company completed a previously negotiated upgrade of a .5 Tesla Signa to a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net cost of approximately $1.5 million with a 60 month finance agreement requiring monthly payments of approximately $32,000. On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto Community Health Network (the "Network") for approximately $390,000 and signed new service contracts with six South Carolina hospitals which are members of the Network. This new unit represents the Company's eighteenth mobile MRI unit and the seventh new unit acquired during 1996. -3- ITEM 1. BUSINESS (continued) -------- In December 1996, the Company upgraded the mobile MRI unit purchased from the Network to a new 1.0T Horizon. The new unit was financed at a net cost of approximately $1.4 million with a 60 month finance agreement requiring monthly payments of approximately $30,000. Lease Refinancing During July 1996, the Company refinanced two of its Mobile MRI Units to more favorable lease terms. The refinancing of the two units will reduce the Company's annual debt service approximately $200,000. Equipment All of the Company's mobile MRI equipment is financed through capital leases and finance agreements. Generally, the Company orders its equipment from the manufacturer while simultaneously contracting with healthcare providers for its use, thereby reducing the Company's risk. The Company expects that future acquisitions of equipment will be made pursuant to capital leases or purchase financing and the Company expects to utilize working capital of $200,000 to $400,000 per unit to fund initial down payments on the purchases, financing the balance of $1.5 million to $1.6 million over typically a 60 month term. MRI Equipment. Magnetic resonance imaging involves the use of high strength magnetic fields and radio waves to produce cross-sectional images of the anatomy. MRI and other medical diagnostic imaging systems facilitate the diagnosis of disease and disorders at an early stage, often minimizing the amount and cost of care needed to stabilize or cure the patient and frequently obviating the need for invasive diagnostic procedures, such as exploratory surgery. Diagnostic imaging systems are based on the ability of energy waves to penetrate human tissue and generate images of the body which can be displayed either on film or on a video monitor. The major components of an MRI system are a large magnet, radio wave equipment, and a computer for data storage and image processing. During an MRI study, a patient lies on a table which is then placed into the magnet. The patient spends approximately 15 to 45 minutes inside the magnet, depending upon the type of diagnostic study, during which time images of multiple planes are acquired. Images obtained from an MRI examination are displayed on a computer screen in the form of a cross-section of the organ or tissue. This information can be stored on magnetic media for future access or printed on film for interpretation by a physician and retention in the patient's files. Other diagnostic imaging techniques include CAT scans, nuclear medicine, radiography/fluoroscopy, ultrasound, mammography and conventional x-ray. Available evidence suggests that MRI has advantages over other diagnostic imaging methods, leading to its increased use. Except for ultrasound, these other methods use ionizing radiation. MRI does not use ionizing radiation and is thought to be risk-free for most patients. In addition, MRI provides superior soft-tissue contrast, without artifacts from bony structures that are sometimes apparent with x-ray based imaging techniques. -4- ITEM 1. BUSINESS (continued) -------- In addition to the absence of ionizing radiation, MRI offers several significant advantages to CAT scanning. MRI has the ability to obtain images of equally high resolution in multiple planes without moving the patient. In certain cases, particularly those involving the nervous system, MRI provides superior image resolution. In addition, the presence or amount of certain abnormal tissue masses which may be undetected utilizing CAT scanning may be detected utilizing MRI. This factor is important in the early diagnosis of cancer, multiple sclerosis and other diseases. Research is currently being conducted for additional uses of MRI and the Company believes more applications for MRI may be discovered in the future. Contrast agents enhance the use of MRI in the detection of neurological lesions, including specific types of brain tumors. Contrast agents also enhance images of the post-operative spine, and are under investigation for use in the liver and other organ systems. MRI's role in the evaluation of cardiac disease and diseases of the bone marrow and joints is also on the increase. New technological developments are expected to extend the clinical uses of this technology and to increase the number of scans performed by the Company's customers. In October 1995, Medicare began to reimburse MR Angiography (MRA) procedures on a limited basis. MRA utilizes MRI technology to view blood flow of the head and neck. Prior to October 1995, MRA procedures were considered experimental and were not reimbursed by Medicare. It is expected that additional MRA procedures will be approved by Medicare in the near future. The use of advanced imaging technologies has grown significantly in the United States during the last several years due to increasing physician acceptance of the value of advanced imaging technologies in the early diagnosis of disease, the expanding applications of MRI (partially because they do not involve ionizing radiation) and the growing patient base attributable to an aging population. Hospitals and other healthcare providers are facing competitive pressures to provide these technologies and related services despite strict budgetary limitations and are increasingly utilizing third parties such as the Company to provide the necessary facilities and related services due to the substantial equipment and personnel costs. Changes in Medicare reimbursement systems have resulted in declining profit margins for many hospitals and other healthcare providers, thereby reducing capital available to purchase new and expensive equipment. In addition, many medical professionals have become increasingly aware of the risks of medical malpractice suits and believe that such risks would be reduced by utilizing state-of-the-art medical technology and related services. MRI has undergone a significant expansion since it became commercially available to healthcare providers in 1983. Numerous significant developments have occurred since that time, and further developments are expected primarily in the computer software. MRI units are in general easily upgraded and, therefore, can remain abreast of technological changes through software updates. The Company has user agreements with the MRI manufacturers which state, among other things, that such manufacturers will provide software updates at no additional charge during the term of such agreements. However, the development of new technologies or refinements of existing ones might make the Company's existing equipment technologically or economically obsolete or cause a reduction in the value of the Company's equipment or reduce the need for its equipment. -5- ITEM 1. BUSINESS (continued) -------- All of the Company's MRI equipment is located in Mobile Units. The MRI equipment is installed by the manufacturer in a specifically constructed van jointly designed by the van's manufacturer and the equipment manufacturer. The van is designed to provide medical facilities comparable to those found in fixed-site MRI facilities. Equipment Maintenance Timely, effective service is essential to maintaining high utilization rates on the Company's mobile MRI equipment. Should the Company experience greater than anticipated malfunctions of its equipment or should it be unable to promptly obtain the service necessary to keep its equipment functioning effectively, its business would be adversely affected. The Company's business also might be adversely affected if its suppliers stopped providing maintenance service because, although other service providers are available, it is uncertain whether or how effectively such other service providers could provide equipment maintenance. The Company contracts with the MRI equipment manufacturers for comprehensive maintenance programs on its equipment to minimize downtime (the period of time equipment is unavailable during scheduled use hours because of malfunctions). These maintenance contracts are long-term in nature (greater than five years), commencing upon the expiration of the applicable warranty period. The equipment is generally warranted by the equipment manufacturer for a specified period of time, usually one year to eighteen months from the date of purchase. During the warranty period and maintenance contract term, the Company receives uptime guarantees (a guarantee that the equipment will function for a specified percentage of scheduled use hours.) However, these guarantees are not expected to substantially compensate the Company for loss of revenue for downtime. The Company also carries a business interruption insurance policy, which provides for an aggregate $1.0 million of coverage for its diagnostic equipment, to help protect itself from unexpected long-term equipment failures which would cost the Company more than the deductible amount. Healthcare Providers Many healthcare providers do not own MRI equipment because of insufficient patient volume to justify the costs associated with the acquisition and operation of such equipment. Depending upon type, features and options selected, the MRI equipment costs between $1.6 million and $2.2 million. Many healthcare providers cannot afford a capital investment of this size or cannot utilize the equipment in a cost-effective manner. Moreover, a healthcare provider with sufficient patient volume and resources to purchase in-house diagnostic imaging equipment may still contract for the use of the Company's services to supplement in-house imaging equipment primarily to service patient backlogs or to have access to more state-of-the-art equipment. -6- ITEM 1. BUSINESS (continued) -------- Among the reasons for such use of the Company's equipment are elimination of the need to recruit and employ qualified technicians, avoidance of the risk of technological obsolescence of the equipment, provision of short-term mobile services to allow the customer to learn the technology, establishment of a patient base before an in-house unit is installed, provision of additional coverage when patient demand exceeds in-house capacity, lack of a suitable interior location, reduction of the risks of medical malpractice suits by utilizing state-of-the-art medical technology and related services and changes in third-party reimbursement systems. Marketing The Company's executive officers currently spend a portion of their time marketing the Company's services. In addition, the Company's regional vice presidents spend a portion of his or her time attempting to attract additional business. The Company currently has four marketing personnel, including two hired during 1996, to market the Company's mobile MRI business to referring physicians and existing customers. A significant marketing resource for the Company has been existing customer referrals. Additionally, the Company is the preferred vendor of services for Amerinet, which is a nonprofit consortium of approximately 3,000 hospitals and other healthcare providers nationwide. The Company intends to concentrate much of its marketing efforts in Pennsylvania, West Virginia, North Carolina, Virginia, Kentucky, Ohio, South Carolina, and certain other southern states. Competition The healthcare industry in general, and the market for mobile diagnostic imaging services in particular, is highly competitive. In addition to direct competition from other diagnostic imaging providers, the Company must compete with larger healthcare providers as well as private clinics and radiology practices that own diagnostic imaging equipment and with equipment manufacturers which sell equipment to healthcare providers for in-house installation. In addition, existing healthcare providers who are customers of the Company may purchase equipment if their volume of patients increases to the point that it becomes cost effective to own and operate their own equipment, although the Company believes that the large capital expenditure required to purchase such equipment and CONs (see Government Regulation) may discourage many hospitals from doing so. Several competitors operate fixed-site centers and/or Mobile Units in the Company's primary service areas. Moreover, certain of these competitors may have substantially greater financial resources than those of the Company, which may give them advantages in negotiating equipment acquisitions and responding quickly to new demand. The Company believes that it competes effectively against other fixed-site and/or mobile providers based on its ability to provide high quality equipment at competitive prices and because of its reputation for service and reliability. -7- ITEM 1. BUSINESS (continued) -------- MRI competes with less expensive imaging devices and procedures which may provide similar information to the physician. Alternative imaging technology includes CAT scans, nuclear medicine, radiography/fluoroscopy, ultrasound, mammography, and conventional x-ray. The cost of a particular study depends upon the complexity of the procedure, the length of time of equipment utilization and whether the procedure requires introduction of contrast agents into the body. The Company believes that MRI's significant benefits justify any pricing differential between MRI and other modalities. Diagnostic imaging does not require proprietary information, trade secrets or similar non-public intellectual property. Consequently, there are no significant barriers to entry other than the costs of the equipment, hiring of qualified technicians and management and, where applicable, Certificate of Need regulations and other regulatory constraints (see Government Regulation). The diagnostic imaging industry is highly fragmented. Consolidation of the diagnostic imaging industry has begun and is expected to continue into the foreseeable future as companies acquire and merge and as numerous smaller, inefficient companies discontinue business. Reimbursement The Company's revenues are currently derived from payments by hospitals pursuant to mobile service contracts between the Company and the hospitals. Under existing laws and regulations of certain states, the Company, as an outside supplier, is prohibited from directly billing most hospital inpatients or outpatients, or their insurers, for the services provided by the Company. Payments made by the hospitals are generally subject to the various laws, regulations and practices of governmental and commercial insurance programs, including Medicare, Medicaid and Blue Cross and Blue Shield Plans, because the insurers' reimbursement practices indirectly affect the level of fees the Company may charge. However, hospital payment obligations to the Company under the service contracts are not directly conditioned upon the hospital's receipt or level of reimbursement from the third party payor or the patient. Payments for Company Services to Hospital Patients. Medicare, which was enacted as part of the Social Security Act of 1965, and frequently amended since then, provides for the payment of certain healthcare benefits, including inpatient and outpatient hospital services, to persons who are 65 years of age or older, disabled or who qualify for the End Stage Renal Disease program. Beginning October 1, 1983, Medicare implemented a prospective payment system ("PPS") for most inpatient hospital services. Under PPS, reimbursement for the operating costs of inpatient services was shifted from a reasonable and allowable cost-based system to a system providing a fixed payment for each Medicare discharge without regard to the actual cost incurred. Each patient is classified into one of approximately 490 diagnosis-related groups ("DRG") and payment is made according to the DRG. With certain exceptions, the PPS payment is not adjusted for variations in length of stay or intensity or utilization of services. Consequently, the DRG reimbursement received by the hospital for inpatient services rendered to a Medicare beneficiary may not be adequate to cover its costs of providing services. -8- ITEM 1. BUSINESS (continued) -------- Under PPS, payment for the Company's services furnished to an inpatient is included in the DRG payment to the hospital. The Medicare patient is also responsible for reimbursing the hospital for certain co-insurance and deductible amounts for the inpatient services furnished. Since 1985, only minimal increases in the Medicare PPS rates have been authorized by Congress. In addition, payments to hospitals by Medicare have been subject to automatic reductions from time to time under the Balanced Budget and Emergency Deficit Control Act of 1987 (the "Gramm-Rudman Act"). The OMNIBUS Budget Reconciliation Act of 1993 ("OBRA 1993") calls for a reduction in spending by Medicare of $55.8 billion over a five year period beginning October 1, 1993, including payments for inpatient hospital and outpatient care. Beginning October 1, 1991, Medicare phased in a PPS system to reimburse hospitals for a portion of their capital costs incurred in providing services to Medicare beneficiaries. Previously, such capital costs were reimbursed on a reasonable cost basis. This new reimbursement system will have varying impacts on hospitals, including those hospitals with which the Company has contracted, in terms of their capabilities to acquire MRI and other diagnostic equipment and provide services that may compete with those of the Company. While a PPS system has not been implemented for hospital outpatient services, beginning October 1, 1988, payment to hospitals for outpatient radiology services, including MRI technical services provided by the Company, became subject to certain limitations. Under the Omnibus Budget Reconciliation Act of 1987, Medicare payment is limited to the lesser of (a) the lower of the hospital's costs or charges or (b) a "blended amount" of 50% of the hospital's specific costs and 50% percent of the Medicare fee schedule amount applicable to similar services furnished in a physician's office. The Omnibus Budget Reconciliation Act of 1986 prohibited mobile vendors, such as the Company, from billing Medicare directly for services to Medicare outpatients. This "rebundling" was designed to provide a basis for the future implementation of a PPS system for hospital outpatients. Such changes in the reimbursement system for outpatient services may lead to further reductions in payments by Medicare which could adversely affect the Company's charge levels. During 1995 and 1996, Congress and the President debated a balanced budget amendment which called for balancing the federal budget in seven years. To date, such debate has included discussions of reducing the rate of growth of Medicare, Medicaid and Social Security. Such debate continues and the Company is not able to predict the outcome of the final budget compromise, the effect of the final budget compromise on Medicare and Medicaid reimbursements nor the effect of these proposed changes on the Company's operations. Medicaid is a joint federal and state program, administered primarily by the states, which is designed to provide reimbursement for healthcare services to certain medically and financially needy individuals. Medicaid reimbursement principles vary among states, although they are generally based on Medicare reimbursement principles, including PPS and rebundling of services provided by vendors, such as the Company, for payment purposes. Medicaid payments to hospitals in many states have been lower than Medicare reimbursements and, in recent years, the adequacy of Medicaid payment rates has been successfully challenged by providers in various states, including Pennsylvania. However, because of the fiscal difficulties which many states are experiencing, there -9- ITEM 1. BUSINESS (continued) -------- can be no guarantee that the payments made by the states for healthcare services will be adequate to cover the costs incurred by providers or will not adversely affect the Company's level of charges. Blue Cross and Blue Shield Plans and other commercial insurers provide third party reimbursement to hospitals for inpatient and outpatient services to their subscribers on the basis of various formulas. Renegotiation of such formulas and reductions in reimbursement may indirectly affect charge levels or payment by the hospitals for the Company's mobile services, although it is not possible to predict the effect of such changes at this time. Other Reimbursement Matters. Many insurance companies, employers and other payors are increasing their use of managed care plans such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") as a means of controlling their healthcare costs. In addition to contracting with selected healthcare providers to provide healthcare services, often at a discount or on a capitation basis, such plans engage in strict utilization review activities to more closely control the utilization of services by their subscribers. The Company has begun discussions with certain HMOs and PPOs. However, there can be no certainty that the Company will be able to contract with such HMOs or PPOs and there can be no assurance that the increased use of managed care plans in the Company's service areas will not affect its level of charges or the demand for its services. Numerous changes have been made in governmental and commercial insurance programs in recent years in an effort to reduce the extent to which these third-party payors absorb increases in medical costs. Some third-party payors have also experienced difficulties in meeting their payment obligations whether on a timely basis or otherwise. In addition, a number of bills proposing to regulate, control or alter the methods of financing and delivering healthcare, including proposals for a national health insurance program, have been discussed and introduced in Congress and various state legislatures. The effect of any of these proposals or changes by existing insurers in their reimbursement methodologies on the healthcare industry and the Company cannot be determined at this time. Government Regulation General. The provision of diagnostic imaging services is subject to a number of federal, state and local laws, regulations and rules, some of which are very complex. Although the Company believes that it is currently in compliance with applicable laws, regulations and rules, some of such laws are broadly written and subject to little or no interpretation by courts or administrative authorities. Hence, there can be no assurance that a third party or governmental agency will not contend that certain aspects of the Company's operations or procedures are not in compliance with such laws, regulations or rules or that state agencies or courts would interpret such laws, regulations and rules in the Company's favor. The sanctions for failure to comply with such laws, regulations or rules could be denial of the right to conduct business, significant fines and/or criminal penalties. The Federal Health Insurance Portability and Accountability Act, enacted in August 1996, expanded the -10- ITEM 1. BUSINESS (continued) -------- Civil and Criminal sanctions for violations of such laws and provided for increased governmental and private enforcement programs. Additionally, an increase in the complexity or substantive requirements of such laws, regulations or rules could adversely affect the Company's business. Certificate of Need. In addition, several states in which the Company operates have CON laws and regulations that control and regulate the establishment of healthcare facilities and services and the acquisition and operation by hospitals and other providers of major equipment such as MRI units and other diagnostic imaging equipment. In several states in which the Company operates, a hospital or the Company may need a CON before the Company can provide its diagnostic imaging services. CON regulations could inhibit the expansion of the Company's business. Pennsylvania's CON law expired in December 1996 and a new CON law has not been enacted. While discussions of a new CON law are on-going, it is not known whether the Pennsylvania legislature will adopt a new CON law. However, the Pennsylvania Department of Health issued a Policy Statement on December 14, 1996 addressing its intent to strictly enforce the licensing requirements which continue in effect under the Healthcare Facilities Act. Practice of Medicine. The establishment, marketing and operation of the diagnostic imaging units are subject to laws prohibiting the practice of medicine by non-physicians. The Company's employees provide only the technical services relating to the diagnostic procedures (under the supervision of licensed physicians) and the related non-medical administrative support services. Professional medical services, such as the reading of the diagnostic imaging studies and related diagnosis, are separately provided by licensed physicians. The Company does not employ any physicians to provide medical services. There can be no assurance, however, that state authorities or courts will not determine that the Company's services and/or relationships with providers constitute the unauthorized practice of medicine by the Company. Fraud and Abuse Laws. The Social Security Act and certain provisions of state law provide civil and criminal penalties for persons who knowingly and willfully solicit, pay, offer or receive any remuneration, directly or indirectly, as an inducement to make a referral of a patient for services or items for which payment may be made under the Medicare or Medicaid programs. Often termed "fraud and abuse" or "anti-kickback" laws, the provisions have been broadly interpreted by the courts. The Office of Inspector General of the Department of Health and Human Services ("HHS") has issued regulations specifying certain business arrangements and payment practices involving providers or other entities, such as the Company, which will not be considered prohibited activities. Commonly termed "safe harbor regulations," the regulations set forth certain standards which, if satisfied, will ensure that the arrangement will not be subject to criminal prosecution or civil sanctions under the fraud and abuse laws. Failure to satisfy the safe harbors in and of itself does not render an arrangement illegal. The Company believes it is in compliance with the safe harbor regulations applicable to its current operations. -11- ITEM 1. BUSINESS (continued) -------- One principal focus of the fraud and abuse laws has been on arrangements in which profit distributions are made by a partnership or other business venture for health-related items or services to investors who make or are otherwise in a position to influence referrals of Medicare or Medicaid patients to the venture. Where such arrangements exist, a question is raised as to whether the profit distributions are illegal payments in exchange for referrals. Certain safe harbors set forth criteria which, if met, will insure that investors in business ventures for health-related items or services will not be subject to scrutiny under the fraud and abuse laws. One safe harbor involves investments in publicly traded companies with tangible assets of more than $50 million. At present, the Company does not satisfy this safe harbor. Another safe harbor covers investment interests in small entities. The conditions for compliance with this safe harbor include requirements that no more than 40% of the investment interests of each class of investments in the entity may be held by persons who are in a position to make or influence referrals (including hospitals and physicians), furnish items or services to the entity or otherwise generate business of the entity, so-called "tainted investors," and that no more than 40% of the entity's gross revenues may come from referrals, items or services furnished or business otherwise generated by "tainted investors." Unless a large percentage of the Company's Common Stock is held by "tainted investors," it would appear that investments in the Company will fall within the safe harbor for investment interests. None of the Company's mobile MRI activities are carried out through partnerships or other ventures with hospitals, physicians or other third parties. The Company believes that its investments in partnerships which operated the cardiac care centers complied with current fraud and abuse laws. Such investments were sold in June 1995. There can be no assurance that enforcement agencies or courts will determine that any existing arrangements comply with all applicable laws and regulations. Other Patient Referral Restrictions. Pennsylvania, as well as other states in which the Company operates, prohibits the referral of Medicaid patients for services or items by a provider in which the referring physician has an ownership interest. Certain states do not restrict patient referrals but do require the disclosure to a patient by the referring physician of a financial interest in a facility or vendor to which the patient is being referred for services or items. Stark II. The Omnibus Budget Reconciliation Act of 1993, enacted new federal anti-referral legislation, more commonly know as "Stark II" after its prime sponsor, Rep. Fortney "Pete" Stark (D. Calif.). Effective January 1, 1995, Stark II bans referrals by physicians of Medicare and Medicaid patients to entities for certain designated health services, including MRI services, if a physician or immediate family member has a prohibited financial relationship with the entity providing the service. A financial relationship is generally defined as an ownership or investment interest in, or compensation arrangement with the entity, subject to certain exceptions. Penalties include nonpayment for services rendered pursuant to a prohibited referral, civil money penalties and fines and possible exclusion from the Medicare and Medicaid programs. The Company believes it is currently in compliance with the requirements of Stark II. However, there can be no assurance -12- ITEM 1. BUSINESS (continued) -------- that enforcement agencies or courts will determine that existing arrangements comply with all applicable laws and regulations. Other Requirements Concerning Licensing, Permits and Approvals. Most states do not currently license MRI providers such as the Company. Hospitals with which the Company has contracted are subject to a variety of regulations and standards of state licensing and other authorities and accrediting bodies such as the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO"). As an outside vendor, the Company may be required to comply with such regulations and standards to enable the hospitals with which it has contracted to maintain their permits, approvals and accreditation. During January 1997, the Company received Accreditation with Commendation from the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO"). There can be no assurance that future changes in the laws and regulations relating to the delivery of healthcare items and services may require the Company or any venture involving the Company to obtain and maintain certain governmental approvals for continued operations. It is not possible to predict the effect of such changes in the law on the Company at this time. For the most part, the Company's employees need not have special licenses. Drivers of trucks must have certain special driving licenses. MRI technicians are not required to have licenses in any of the states in which the Company does business. However, many states are holding discussions to require such licensing. The Company believes that any such licensing requirement would not have an adverse impact on the Company. Beginning in 1995, MRI technologists were required to meet certain continuing education requirements. The Company and its employees are fully complying with this requirement. Freestanding Healthcare Centers During 1991 and 1992, the Company initiated what it then believed was a natural progression into the operation of outpatient full service diagnostic imaging centers and freestanding radiation therapy facilities (outpatient healthcare centers). The Company's expansion into these businesses was based upon the belief that (i) numerous opportunities existed to develop or acquire outpatient healthcare facilities due to new regulatory changes enacted (see "Fraud and Abuse Laws" and "Other Patient Referral Restrictions"), (ii) once mature, the healthcare facilities it developed or acquired could generate substantial incremental earnings and (iii) freestanding healthcare facilities would complement the Company's current mobile MRI business. During 1992, the Company acquired one full-service freestanding diagnostic imaging center and developed one freestanding radiation oncology facility. However, through December 31, 1993, these outpatient healthcare centers operated below expectation and incurred substantial losses while the Company's core mobile business sustained an increase in revenues and profit. Further, with continued uncertainty in the healthcare industry surrounding the Clinton Administration's efforts to reform healthcare, the Company has seen an increase in the demand for its mobile MRI services. Based upon continued growth and profitability of its core mobile MRI business, as well as the belief that the Company's capital and other resources were insufficient to properly support continued growth in its core mobile -13- ITEM 1. BUSINESS (continued) -------- MRI business and the opening of outpatient healthcare centers, the decision was made in December 1993 to sell the freestanding full-service diagnostic imaging center and the freestanding radiation oncology center. The Company sold substantially all of the assets of the Auburn Regional Center for Cancer Care on October 31, 1994. The sale price of the Auburn Regional Center for Cancer Care was approximately $1.3 million comprised of $400,000 in cash and the assumption of certain liabilities of the Center. The Company remains obligated on approximately $270,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have the Company released from these leases and has secured its obligations to the Company to perform on these leases through a pledge of certain assets in favor of the Company (see Note 3 and Note 13 of the Company's Consolidated Financial Statements incorporated herein by reference). On June 30, 1995, the Company completed the sale of substantially all of the assets of its remaining freestanding diagnostic imaging center, Airport Regional Imaging Center ("Airport Center"), located in Coraopolis, Pennsylvania for a total sale price of approximately $300,000, including cash and net trade receivables. Although the buyer assumed all future operating liabilities of the Airport Center, the Company remains obligated on approximately $600,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have the Company released from these leases and has secured its obligations to the Company to perform on these leases through a pledge of stock and certain assets in favor of the Company (see Note 3 and Note 13 of the Company's Consolidated Financial Statements incorporated herein by reference). On June 30, 1995, in conjunction with the sale of the Airport Center, the Company sold its majority ownership and general partner rights in four cardiac care partnerships for a total sale price of $300,000 comprised of $200,000 in cash and a $100,000, thirty-month note. The Company recognized a pre-tax gain on this sale of $48,219. The partnerships, which constituted approximately seven percent of the Company's revenues, had total assets of approximately $1.4 million, comprised primarily of diagnostic equipment and accounts receivable, and total liabilities of approximately $1.2 million comprised primarily of capital lease obligations associated with the diagnostic equipment. Tractor Leases Prior to July 1, 1995, the Company subleased certain truck cabs from Shared Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an independent third party leasing company. Effective July 1, 1995, SME released the Company from its obligations under ten long-term subleases in exchange for the issuance to SME of 120,000 unregistered Common Shares valued at $3 per share, the weighted average closing price for the stock for the prior thirty trading days. The Company received an opinion from an independent financial advisor that the transaction was fair to the Company and its shareholders. At the same time, with the concurrence of the third party leasing company, the Company assumed SME's obligations under its original lease and modified that lease by (1) extending the lease term by one additional year and (2) adding one additional truck cab to the schedule of leased property with a corresponding increase in base rental payments. The $360,000 -14- ITEM 1. BUSINESS (continued) -------- value of the shares represents the present value of the excess of the sublease payments over the original lease payments. The Company has capitalized the $360,000 and is amortizing this prepaid rent over a period which approximates the lease term. SME was one hundred percent beneficially owned by certain officers/directors and a former director/consultant of the Company who own approximately 14% of the Company's outstanding Common Shares. Insurance SMT carries workers' compensation insurance, comprehensive and general liability coverage, business interruption insurance, and fire and allied perils coverage in amounts deemed adequate by management. While the Company's Mobile Units are at a customer's facility, they operate only under the direction of licensed physicians on the customer's staff who direct the procedures, supervise the Company's technologists and interpret the results of the examinations. The Company requires that the licensed physicians carry malpractice insurance to cover their individual practices. Currently, there are no known biological hazards associated with MRI. However, there is a risk of harm to a patient who has a ferrous material or a cardiac pacemaker within his or her body. Patients are carefully screened to safeguard against this risk. To protect against possible exposure for professional liability, the Company maintains a professional liability policy to cover all of its operations. There is no assurance that the insurance coverage maintained by the Company, now or in the future, will be adequate. Employees As of December 31, 1996, the Company had 96 full-time employees, including six executive personnel, six accounting, marketing, administrative and clerical personnel, seven managers, 59 imaging technologists and eighteen drivers. The Company also employs 21 part-time employees. None of the Company's employees are represented by labor organizations and the Company is not aware of any activity seeking such representations. The Company considers its relationships with its employees to be excellent. ITEM 2. PROPERTIES ---------- The Company owns no real property and leases approximately 5,500 square feet of office space in Wexford, Pennsylvania. The lease for the Company's principal facility expires on April 30, 1999. -15- ITEM 3. LEGAL MATTERS ------------- The Company had been named as a defendant along with a hospital which contracts for the Company's MRI services, in a claim filed by a woman who alleged to have incurred partial paralysis as a result of being mishandled during an MRI procedure. The claim had been filed for $6.0 million in damages. This claim was settled by the Company's insurance company in November 1996 with no admission of liability by the Company and no financial effect to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- There were no matters submitted to a vote of security holders during the three months ended December 31, 1996. Executive Officers of the Registrant The following persons are the current executive officers of the Company:
Name Age Position - ---------------------------------------- --- ----------------------------------- Jeff D. Bergman 42 President, Chief Executive Officer, Chairman of the Board & Director Daniel Dickman 50 Executive Vice President, Chief Operating Officer, Secretary & Director David Spindler 45 Senior Vice President of Clinical Operations & Marketing David A. Zynn 33 Chief Financial Officer, Treasurer & Assistant Secretary
Mr. Bergman has been Chief Executive Officer, Chairman of the Board, President and a Director of the Company since its formation in 1991 and held the same positions with the Company's predecessor since 1987. From 1979 to 1982, he was employed by BOC-AIRCO as a Marketing Representative for the Corporate Steel Division. In 1983, Mr. Bergman joined Mobile Diagnostech, Inc. ("MDI"), a provider of mobile CAT scanners and MRI equipment and as a developer and manager of fixed-site oncology centers. Mr. Bergman received his B.S.B.A. from Robert Morris College. In 1987, Mr. Bergman left MDI and formed the Company. Mr. Bergman is also an official in the National Football League. Mr. Bergman officiated Super Bowl XXXI in New Orleans, LA in January 1997. -16- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued) Mr. Dickman has been Executive Vice President, Chief Operating Officer, Secretary and a Director of the Company since 1991 and held the same positions with the Company's predecessor since 1988. From 1985 to 1987, Mr. Dickman was responsible for the management and day-to-day operations of Mobile Diagnostech, Inc.'s ("MDI") MRI equipment and CAT scanners. In 1987, Mr. Dickman joined the Company to manage the Company's equipment routes. He has over 12 years' experience in healthcare management consulting and systems design, and was formerly employed by Blue Cross of Western Pennsylvania as Manager of Hospital Consulting. Mr. Dickman received his B.S.B.A. from Notre Dame University and his M.B.A. from Gannon University. Mr. Spindler has been Vice President of Clinical Operations and Marketing for the Company since 1991 and held the same positions with the Company's predecessor since 1988. From 1979 to 1984, Mr. Spindler was a Sales Representative with BOC-AIRCO (a major supplier of cryogens for MRI systems). In 1984, he joined M.G. Industries where he was an Account Representative. In 1986, Mr. Spindler joined Helium Technologies where he was a Division Manager. Mr. Spindler received his B.S.B.A. from Slippery Rock University and his M.B.A. from Robert Morris College. Mr. Spindler is also a Captain in the United States Army Reserves. Mr. Zynn has been Chief Financial Officer, Treasurer and Assistant Secretary since September 1991. From January 1986 to December 1989 and August 1990 to August 1991, Mr. Zynn was employed by KPMG Peat Marwick LLP in several capacities, first as a staff accountant and finally as an audit manager and a national instructor of auditing and accounting. From January 1990 to August 1990, Mr. Zynn was employed by Black Box Incorporated as the Manager of Financial Reporting. Mr. Zynn is a certified public accountant and a member of the Healthcare Financial Management Association and American Management Association. Mr. Zynn received his B.S.B.A. from Indiana University of Pennsylvania. -17- PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED --------------------------------------------------- STOCKHOLDER MATTERS ------------------- The following table sets forth the range of high and low prices of the Common Stock (SHED) and Warrants (SHEDW) from January 1, 1995 through December 31, 1996. On November 3, 1995 and November 16, 1995, respectively, the Company's Common Stock and Warrants began to trade on the NASDAQ National Market System. Prior to trading on the NASDAQ National Market System, the Company's Common Stock and Warrants traded on the NASDAQ Small Cap Market. For the period through January 1, 1995 through October 31, 1995, the table sets forth the range of high and low closing bid prices of the Common Stock and Warrants. For the period November 1, 1995 through December 31, 1996, the table sets forth the range of high and low trading prices of the Common Stock and Warrants. Such prices represent inter-dealer quotations, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. COMMON STOCK AND WARRANTS
Common Stock Warrants ------------ -------- High Low High Low ------------ -------- ------ ----- Quarter ended March 31, 1995 3 1/16 2 9/16 3/8 Quarter ended June 30, 1995 3 7/8 2 5/8 7/16 1/4 Quarter ended Sept. 30, 1995 4 5/8 3 5/8 11/16 5/16 Quarter ended Dec. 31, 1995 4 7/8 3 7/8 23/32 15/32 Quarter ended March 31, 1996 4 9/16 3 3/4 7/16 1/4 Quarter ended June 30, 1996 10 3/4 4 1/16 3 7/8 3/8 Quarter ended Sept. 30, 1996 8 5/8 5 3/8 2 3/4 13/16 Quarter ended Dec. 31, 1996 8 5/8 6 5/8 2 1/16 7/8
The Company has not paid out cash dividends since its inception and does not anticipate paying cash dividends in the foreseeable future on the Common Stock. Cash dividends, if any, which may be paid in the future to holders of the Common Stock will be payable when, if and as declared by the Board of Directors of the Company, based upon the Board's assessment of, among other things, the financial condition of the Company, its earnings, need for funds, capital requirements and other factors, including any applicable laws. The Company estimates that as of December 31, 1996 there were approximately 1,550 beneficial holders of the Common Stock. -18- ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED -------------------------------------------------- STOCKHOLDER MATTERS (continued) ------------------- Recent Sales of Unregistered Securities --------------------------------------- As additional compensation in connection with the initial public offering, the Company granted to the Company's Initial Public Offering underwriter an option to purchase options which covered 120,000 units, each unit consisted of 1.05 shares of Common Stock and one Company Warrant to purchase 1.05 shares of Common Stock. The Option was exercisable until March 4, 1997 and entitled the underwriter to purchase each unit at an exercise price equal to $5.94, subject to adjustment in certain events. The underwriter subsequently transferred the Options to principles of the underwriter (Transferees), who exercised the Options during 1996 resulting in net proceeds to the Company of approximately $719,000. During August 1996, one of the Transferrees exercised 24,000 Warrants to purchase 25,200 shares of Common Stock of the Company resulting in additional proceeds to the Company of approximately $168,000. In February 1994, the Board of Directors granted additional vested options to purchase 42,000 shares of the Company's Common Stock at an exercise price of $1.78 per share, the fair market value of the Common Stock at the date of grant, to two non-management members of the Board of Directors. During June and September 1996, the two non-management members of the Board of Directors (one now a former director), exercised the 42,000 options and sold 42,000 shares of Common Stock received upon the option exercise. The Company realized net proceeds of approximately $75,000 from the exercise of the 42,000 options. On August 9, 1995, the Company adopted the 1995 Director Warrant Plan (the "Plan") pursuant to which eligible directors received unregistered warrants to purchase Common Stock (the "Directors' Warrants"). The Plan allows for issuance of warrants to purchase up to 700,000 shares of Common Stock. On August 9, 1995, warrants to purchase up to 500,000 shares of Common Stock at an initial exercise price of $3.875 (the closing price of the Company's stock on the date of issue) were issued to five directors pursuant to the Plan. Separately, unregistered warrants to purchase 114,500 shares of Common Stock at an initial exercise price of $4.01 were also issued to an outside director, who was also a consultant to the Company, who was ineligible to participate in the Plan. During May 1996, the outside director who was also a consultant to the Company exercised the 114,500 Warrants and sold 114,500 shares of Common Stock. The Company received cash proceeds of approximately $459,000 related to the exercise of such Warrants. During January 1997, the Company's three outside directors each exercised 25,000 Director Warrants and sold 26,750 shares of Common Stock (after adjustment for the January 1997 7% Common Stock dividend). The Company received cash proceeds of approximately $291,000 as a result of the exercise of the 75,000 Director Warrants. -19- ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED -------------------------------------------------- STOCKHOLDER MATTERS (Continued) ------------------- Recent Sales of Unregistered Securities (continued) --------------------------------------- In October 1995, the Company signed an agreement retaining Commonwealth Associates ("Commonwealth") as its investment banking firm. Commonwealth, a New York-based investment banking firm specializing in serving the financial needs of emerging growth companies, had been engaged to assist the Company in establishing a long-term financial strategy and in evaluating possible transactions involving other mobile diagnostic providers. In addition to a cash retainer, the Company granted to Commonwealth 100,000 five-year Warrants to purchase the Company's Common Stock at $4.47, the closing bid price of the Common Stock on the day the Agreement was executed. The agreement with Commonwealth expired in April 1996. During July and October 1996, Commonwealth or a designated employee of Commonwealth exercised the 100,000 Warrants in a net transaction and the Company issued to Commonwealth or the designated employee an aggregate of 36,061 shares of Common Stock of the Company. All of the above Warrants, options and shares which were privately placed were issued without registration in reliance upon Section 4(2) of the Securities Act of 1933, as amended. -20- ITEM 6. SELECTED FINANCIAL DATA ----------------------- The following table sets forth the consolidated financial data and operating information of the Company. The following data should be read in conjunction with the Company's Consolidated Financial Statements and accompanying footnotes to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ------------ ------------ ----------- Consolidated Statement of Earnings Data: Revenues $19,212,353 $15,157,845 $13,282,185 $11,906,319 $ 8,735,137 Depreciation and amortization 4,724,909 3,679,246 3,163,606 2,755,824 2,070,095 Interest 2,041,247 1,757,551 1,637,556 1,715,529 1,567,712 Write-down of leased medical equipment -- -- -- 625,000 -- Income (loss) from continuing operations before income taxes 3,588,861 1,851,217 635,758 (105,217) 211,288 Income (loss) attributable to Common Stockholders from continuing operations 2,410,861 1,373,217 542,258 (93,067) 198,486 Net income (loss) from continuing operations per Common Share (1) $.61 $.46 $.20 ($ .04) $.08 Weighted average Common Shares outstanding (1) 3,232,505 2,770,230 2,705,388 2,641,188 2,258,128 December 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ----------- ----------- ----------- ----------- Consolidated Balance Sheet Data: Working capital (deficit) $ 587,040 $ 405,349 ($ 251,536) ($ 421,086) $ 1,956,009 Total assets 39,497,563 23,347,805 20,622,953 18,391,871 18,739,079 Long-term debt and capital lease obligations less current portion 20,859,964 12,709,905 12,618,013 11,077,532 9,477,846 Minority interests -- -- 145,188 165,356 122,435 Stockholders' equity (2) 11,399,543 5,401,653 3,653,312 3,243,054 5,553,613
(1) Weighted average shares outstanding for 1996 and 1995 have been calculated using the Modified Treasury Stock Method. Weighted average Common Shares outstanding for all periods presented have been adjusted to reflect a 1995 5% Common Stock dividend and a 7% Common Stock dividend paid January 1997 (See Note 2 and Note 12 to the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference). (2) During the periods presented, the Company did not pay any cash dividends on its Common Stock. -21- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- Any statements released by the Company that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may affect the Company's business and prospects, including economic, competitive, governmental, technological and other factors discussed in the Company's filings with the Securities and Exchange Commission. Results of Operations - --------------------- The following table sets forth, for the period indicated, the percentages which the items in the Statement of Earnings bear to revenue and the dollar increase (decrease) of such items as compared to the prior year.
Percentage of Revenue Increase (Decrease) ----------------------- ------------------- Year Ended December 31, ----------------------- 1996 1995 Versus Versus 1996 1995 1994 1995 1994 ----------------- ---------- ----------- ------------------- --------------- Revenues 100% 100% 100% $4,055,000 $1,876,000 ---- ---- ---- ---------- ---------- Costs & expenses: Operating 33% 36% 44% 884,000 (496,000) Depreciation and amortization 24% 24% 24% 1,046,000 516,000 S, G & A 15% 16% 14% 405,000 578,000 Interest 11% 12% 13% 284,000 120,000 Other ( 2%) -- -- ( 300,000) -- ---- ---- ---- ---------- ---------- Total costs & expenses 81% 88% 95% 2,319,000 718,000 ---- ---- ---- ---------- ---------- Income from continuing operations before taxes, minority interests and gain on sale 19% 12% 5% 1,736,000 1,158,000 Minority interests -- -- -- ( 50,000) ( 9,000) ---- ---- ---- ---------- ---------- Income from continuing operations before taxes and gain on sale 19% 12% 5% 1,786,000 1,167,000 Gain on sale of partnership interests -- -- -- ( 48,000) 48,000 ---- ---- ---- ---------- ---------- Income from continuing operations before income taxes 19% 12% 5% 1,738,000 1,215,000 Income taxes 6% 3% 1% 700,000 384,000 ---- ---- ---- ---------- ---------- Income from continuing operations 13% 9% 4% 1,038,000 831,000 Discontinued operations, net -- -- ( 1%) -- 132,000 ---- ---- ---- ---------- ---------- Net income 13% 9% 3% $1,038,000 $ 963,000 ==== ==== ==== ========== ==========
-22- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- 1996 Versus 1995 ---------------- The Company achieved a considerable increase in profitability during 1996. Net income during 1996 increased $1,038,000, or 76%, to $2,411,000 (or $.61 per share) from $1,373,000 (or $.46 per share) during 1995 (see Note 2 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference, for a discussion of the Modified Treasury Stock Method of computing earnings per share). The earnings per share data for both periods has been adjusted to reflect the 7% Common Stock dividend paid January 14, 1997 to all shareholders of record on January 10, 1997 (See Note 12 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference). The increase in profitability is principally due to increased revenues attributed to new units placed into service in late 1995, seven additional units placed into service throughout 1996, the upgrade of four units to newer technology in 1996, as well as increased utilization of the Company's mobile MRI units. Lower financing costs and higher down payments on new and upgraded mobile MRI units have also contributed to the increased profitability during 1996. The Company operated an average of approximately 14 units during 1996. Revenues during 1996 increased $4,055,000, or 27%, to $19,212,000 compared to $15,158,000 in 1995. Excluding 1995 revenues of approximately $548,000 related to the Company's cardiac partnerships, which were sold on June 30, 1995, mobile MRI revenues increased approximately 32%. This increase in revenue was primarily attributed to the aforementioned new units placed into service during late 1995, the seven additional units placed into service during 1996, the upgrade of four units to newer technology in 1996 and the increased utilization of the Company's existing mobile MRI units. Revenues derived from hospitals which the Company serviced in both comparable periods increased approximately 13% in 1996 compared to 1995 primarily as a result of increased MRI procedures. During 1996, the Company performed 45,185 MRI scans, representing an increase of 12,103 scans, or 37%, over the 33,082 MRI scans during 1995. Average scans per day per unit increased .5 to 10.9 scans per day during 1996 compared to 10.4 during 1995. The average fee per scan for 1996 approximated $408 for 1996 versus $435 for 1995. The $27, or 6% decrease in average fee per scan primarily related to discounted fees provided to customers based upon higher scan volumes. Operating expenses increased $884,000, or 16%, to $6,280,000 during 1996 compared to $5,396,000 in 1995. Excluding approximately $179,000 of operating expenses associated with the cardiac partnerships which were sold on June 30, 1995, mobile MRI operating expenses increased $1,063,000 primarily due to approximately $1,350,000 of operating expenses associated with the Company's new units purchased in late 1995 and the seven units added during 1996, partially offset by a decrease of approximately $287,000, or 6%, in operating expenses of units in operation for both comparable periods. This 6% decrease is primarily a result of $141,000 savings on state sales tax on certain units, $122,000 savings on lower maintenance and cryogen contracts, $64,000 savings on -23- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- 1996 Versus 1995 (continued) ---------------- the rental of tractors used to transport the MRI units and $42,000 savings on general repairs and maintenance costs, partially offset by higher payroll costs for operating personnel. Operating expenses per scan decreased $24, or 15%, to approximately $139 compared to $163 per scan during 1995. Depreciation and amortization expenses increased $1,046,000, or 28%, in 1996 to $4,725,000 from $3,679,000 in 1995. This increase was primarily due to depreciation expense associated with the Company's new units purchased during late 1995, the seven additional units placed into service in 1996, as well as the four units upgraded during 1996. Selling, general and administrative costs for 1996 increased $405,000 to $2,877,000, or 15% of revenues, compared to $2,472,000, or 16% of revenues in 1995. The increase is primarily due to an approximate $200,000 increase in executive compensation and costs related to the Company's management bonus plan. The remaining increase is due to higher corporate expenses such as travel, insurance and costs associated with the Company's Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") accreditation. Interest expense for 1996 increased $284,000 to $2,041,000 from $1,758,000 in 1995, primarily as a result of the new units purchased during late 1995, the seven additional units placed into service in 1996 as well as the four units upgraded during 1996. However, interest expense decreased as a percentage of revenue to 11% in 1996 compared to 12% of revenue in 1995. This decrease as a percentage of revenue is primarily due to higher down payments on new and upgraded mobile MRI units as well as more favorable lease terms obtained on unit financings and refinancings during 1995 and 1996. Other expense in 1996 reflects a $300,000 net state sales tax refund. The refund is the result of sales tax paid to a certain state over a period of time which the Company determined (by obtaining a private letter ruling from the state) was actually exempt from such tax. The Company obtained formal notice of the refund in September 1996 and received the cash refund in January 1997. The Company reported net income of $2,411,000, or $.61 per share, in 1996 versus $1,373,000, or $.46 per share, in 1995. Income tax expense for 1996 was $1,178,000, an effective tax rate of approximately 33%, as compared to income tax expense of $478,000, an effective tax rate of approximately 26%, for 1995. Income tax expense for 1996 reflects a net $105,000 deferred tax benefit resulting from an adjustment to the Company's federal net operating loss carryforward (see Note 4 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference). Excluding the $105,000 tax adjustment, the Company's effective tax rate for 1996 approximated 36%. The increase in income tax expense reflects the significant increase in profitability of the Company during 1996. -24- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- 1995 Versus 1994 ---------------- The Company realized a significant increase in profitability during 1995. Net income during 1995 increased $963,000, or 235%, to $1,373,000 (or $.46 per share) from $410,000 (or $.15 per share) during 1994. (Please refer to Note 2 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference, for a discussion of the Modified Treasury Stock Method of computing earnings per share). The earnings per share data for both periods has been adjusted to reflect the 7% Common Stock dividend paid January 14, 1997 to all shareholders of record on January 10, 1997 (See Note 12 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference). The increase in profitability is primarily due to increased revenues, lower costs due to increased utilization of the Company's units, the impact of a cost reduction program begun in 1994 and lower financing costs. Revenues during 1995 increased $1,876,000, or 14%, to $15,158,000 in comparison to $13,282,000 in 1994. Revenues, excluding $548,000 and $1,018,000 for 1995 and 1994, respectively, related to the Cardiac and Nuclear SPECT partnerships which the Company sold on June 30, 1995 (see Note 14 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference), increased 19% from 1994 to 1995. This increase is primarily due to increased utilization of the Company's MRI units. Revenues of existing units increased approximately 8% in 1995 compared to 1994. Further, the Company operated an average of ten units during 1995 versus nine units in 1994. During 1995, the Company performed 33,082 MRI scans, representing an increase of 7,587 scans, or 30%, over the 25,495 scans performed during 1994. Average scans per day averaged 10.4 during 1995 compared to approximately 9.0 scans per day during 1994. The average fee per scan for 1995 approximated $435 versus $476 per scan during 1994. The $41, or 9% decrease in average fee per scan is primarily due to discounted fees provided to customers based upon higher scan volumes. Operating expenses during 1995 decreased $496,000, or 8%, to $5,396,000 compared to $5,892,000 in 1994. This decrease was primarily due to various cost containment measures implemented during late 1994 and early 1995, as well as the purchase and upgrade during November 1994 of a Mobile Unit which had previously been leased on an annual basis by the Company pursuant to an operating lease (accordingly, its lease payment was treated entirely as an operating expense). As a result of the purchase and upgrade, the lease costs were treated as depreciation and interest expenses. Operating expenses of existing units decreased approximately 2% in 1995 compared to 1994, excluding the aforementioned lease adjustment. During 1994 and early 1995, the Company renegotiated its mobile unit maintenance contracts, property insurance rates and several other major operating expenditures resulting in annual cost savings of approximately $250,000. Operating expense per unit decreased $68, or 29%, to $163 from $231 per scan during 1994. -25- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- 1995 Versus 1994 (continued) ---------------- Depreciation and amortization expense increased $516,000, or 16%, to $3,679,000 in 1995 from $3,164,000 in 1994. The increase was primarily due to higher depreciation expense associated with the Company's new units purchased in February and September of 1995 as well as its upgraded and refinanced units. Selling, general and administrative costs for 1995 increased $578,000 to $2,472,000, or 16% of revenues, compared to $1,894,000, or 14% of revenues for 1994. The increase was primarily due to increased marketing expenses, increases in professional expenses related to the Company's shareholder rights plan and various securities filings and increased compensation costs related to the Company's management bonus plan. Interest expense for 1995 increased $120,000 to $1,758,000 from $1,638,000 but decreased as a percentage of revenue to 12% of revenue versus 13% of revenue in 1994. The increase in interest expense primarily reflects the interest payments on the two new units purchased during 1995. The decrease in interest expense as a percentage of revenues reflects the more favorable lease terms obtained on the units refinanced during 1994 and 1995. Income tax expense for 1995 was $478,000 as compared to income tax expense of $94,000 for 1994. This increase reflects the significant increase in profitability of the Company during 1995 (see Note 4 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference). Liquidity and Capital Resources ------------------------------- During 1996, the Company's cash provided by operations was $7,441,000 as compared to $5,541,000 during 1995. This increase of $1,900,000 is primarily due to approximately $2,084,000 of increased income before depreciation and amortization and $1,288,000 of deferred income tax expense, partially offset by a $545,000 increase in accounts and notes receivable and a $471,000 increase in other current assets. The increase in other current assets is primarily due to a sales tax refund receivable which was collected in January 1997. The Company used cash in investing activities during 1996 of $2,567,000, primarily related to down payments and deposits on the purchase of new MRI units totaling approximately $2,977,000 as well as the purchase of a mobile MRI company in March 1996 for approximately $643,000 (see Note 16 of the Company's Consolidated Financial Statements included in Item 8, which information is incorporated herein by reference) partially offset by a reduction of $1,200,000 in the amount of restricted cash related to equipment financing. -26- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- Liquidity and Capital Resources (continued) ------------------------------- The Company used cash in financing activities during 1996 of approximately $2,573,000 primarily related to $4,800,000 of principal payments under loan agreements and capital leases partially offset by approximately $2,227,000 received upon exercise of stock options and warrants during 1996. The Company experienced a net increase in unrestricted cash and cash equivalents of approximately $2,302,000 during 1996 and maintained an unrestricted cash balance at December 31, 1996 of approximately $4,643,000. The Company also maintained a restricted cash balance of $400,000 at December 31, 1996. The Company's trade accounts receivable balance increased by $667,000 to $1,726,000 at December 31, 1996, primarily due to higher service revenues during the fourth quarter of 1996. In the experience of the Company, average accounts receivable collections typically do not exceed 40 days, as there are no billings subject to traditional third-party payors, and the accounts receivable balance turned over approximately fourteen times during 1996. Approximately 29% of the Company's billings and collections are processed through Hospital Shared Services ("HSS"), a representative of certain hospitals. As a fee for these services, HSS retains approximately 2.5% of gross billings to these hospitals and the Company records the service revenues and related receivables net of such fees. At December 31, 1996, the Company had a working capital surplus of $587,000. In addition, the Company's cash flow from operations totaled $7,441,000 for 1996 and the Company continues a positive cash flow. Further, $6,350,000 of the $7,238,000 of current liabilities relate to the current portion of capital leases and long-term debt which will be due over the next twelve months, as opposed to current assets of $7,825,000 which are highly liquid and turn over frequently. The Company has been able to meet all past debt service obligations, currently is able to meet all such obligations, and anticipates it will continue to meet such obligations. As in the past, management anticipates that such obligations will be funded by the revenues generated by the Mobile Units. To date, the Company has financed its equipment acquisitions and working capital requirements with loans and leases, from internal cash flow and capital contributions. As of December 31, 1996, the Company was a party to leases and loans covering all of its mobile MRI units. The aggregate outstanding principal balance of all such leases and loans was approximately $27,210,000 at December 31, 1996. The Company's mobile MRI operation grew at a record pace during 1996. In 1994, healthcare costs came under great scrutiny and the healthcare market forces began their own healthcare reform. This reform continues, and mobile diagnostic imaging has benefited from such market reform of the healthcare system as shared equipment is a key to containing healthcare costs while still delivering advanced and cost effective medical technology. As hospitals continue to look for ways to reduce -27- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- Liquidity and Capital Resources (continued) ------------------------------- capital expenditures and contain costs, SMT and shared mobile diagnostic imaging units/systems allow hospitals to add or increase the range of quality, state-of-the-art diagnostic services with no capital expenditure by providing an outsourcing alternative. Further, many states, including those in which the Company operates, have strengthened their Certificate of Need ("CON") review systems, whereby healthcare providers must justify a need in a community before the state will permit capital expenditures for medical equipment. As a result of CON review systems, hospitals and other healthcare providers are less able to install fixed site facilities thus providing an opportunity for mobile suppliers whose equipment will be shared among many hospitals. The Company upgraded one of its .5 Tesla Signa units to a 1.0 Tesla Horizon unit. The new unit was financed at a net total cost of approximately $2.0 million and was delivered in late February 1996. The Company financed the purchase of this new unit with a 60 month dollar-out lease requiring monthly payments of approximately $44,000. The Company contracted with several new hospital clients and purchased a new Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $41,000. On March 21, 1996, the Company purchased certain assets of a mobile provider which operated mobile units in the state of North Carolina (the "Seller"). The purchase price approximated $600,000 in cash [net of negotiated trade-in value of approximately $500,000 (which approximated the purchase price of the units acquired) for two of the Seller's mobile MRI units] in exchange for MRI Programs including Certificate of Need licenses or exemptions and certain customer service contracts. In April 1996, the Company upgraded one of the units purchased from the Seller to a Siemens 1.0 Tesla Impact unit with a net total cost of approximately $1.9 million. The Company financed this new unit with a 60 month loan requiring monthly payments of approximately $43,000. In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens 1.0 Tesla Impact unit. The new unit was financed at a net total cost of approximately $2.0 million with a 60 month dollar-out lease requiring monthly payments of approximately $43,000. The Company in May 1996 signed an agreement with Siemens Medical Systems to upgrade the second unit purchased from the Seller and to purchase a new unit during the fourth quarter of 1996. Delivery of the upgraded unit occurred in July 1996 and is currently contracted to provide temporary interim services to hospitals through July 1997. The new unit was delivered and began operation on October 1, 1996. The upgrades net cost approximated $1.9 million and the Company financed approximately $1.7 million with a 60 month finance agreement requiring monthly payments of -28- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- Liquidity and Capital Resources (continued) ------------------------------- approximately $36,000. The Company's new unit cost approximately $1.9 million and the Company financed approximately $1.7 million requiring a monthly payment of approximately $37,000. During September 1996, the Company upgraded an older unit to a new Siemens 1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $39,000. The Company purchased and took delivery of two new GE 1.0 Tesla Horizon units in mid-to-late September 1996. These units were purchased at a cost of approximately $1.8 million each and the Company financed approximately $1.6 million and $1.5 million with 60 month finance agreements requiring monthly payments of approximately $34,000 and $32,000, respectively. The Company completed a previously negotiated upgrade of a .5 Tesla Signa to a 1.0 Tesla Horizon in November 1996. The new unit was financed at a net cost of approximately $1.5 million with a 60 month finance agreement requiring monthly payments of approximately $32,000. On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto Community Health Network (the "Network") for approximately $390,000 and signed new service contracts with six South Carolina hospitals which are members of the Network. The Company began servicing the new hospitals immediately with the MRI unit purchased from the Network and subsequently upgraded the purchased unit to a new 1.0 Tesla Horizon in December 1996. The upgraded unit was financed at a net cost of approximately $1.4 million with a 60 month finance agreement requiring monthly payments of approximately $30,000. This new unit represents the Company's eighteenth mobile MRI unit and the seventh new unit acquired during 1996. The Company has outstanding a letter-of-credit totaling $400,000 related to equipment financing at a freestanding diagnostic imaging center which it sold in June 1995 and on which it remains obligated (see Note 3 and Note 10 of the Company's Consolidated Financial Statements incorporated herein by reference). In November 1994, the Company issued a letter-of-credit in the amount of $270,000 related to the purchase and financing of a new Mobile Unit. The lessor holding this letter-of-credit allowed the letter-of-credit to terminate October 31, 1996. In relation to a refinancing of four Mobile Units in February and March 1995, the Company issued two letters-of-credit in the aggregate amount of $930,000. In February 1996, the lessor holding one of the letters-of-credit totaling $330,000 allowed the letter-of-credit to expire. -29- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- Liquidity and Capital Resources (continued) ------------------------------- On July 31, 1996, the Company refinanced two MRI units which had previously been refinanced in March 1995 to more favorable lease terms. The new leases totaled approximately $2.3 million (net of a $150,000 down payment) in the aggregate and are being financed over a thirty-six month period at an interest rate of 9.25%. The refinancing resulted in annual cash flow savings to the Company of approximately $200,000. As a result of this refinancing, the $600,000 letter-of-credit which had been issued in March 1995 was terminated. During 1996, the Company signed long-term contracts with approximately 22 new customers and extended for an additional two to three years approximately 27 existing customer contracts. As of December 31, 1996, the Company serviced approximately 75 total customers. At December 31, 1996, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $8.2 million and $10.1 million, respectively, which are available to offset future federal and state taxable income through 2010 and 1999, respectively (See Note 4 of the Company's Consolidated Financial Statements). The Company had been named as a defendant, along with the hospital which contracts for the Company's MRI services, in a claim filed by a woman who alleged to have incurred partial paralysis as a result of being mishandled during an MRI procedure. The claim had been filed for $6.0 million in damages. The claim was settled by the Company's insurance company in November 1996 with no admission of liability and no financial effect to the Company. On January 14, 1997, the Company paid a 7% Common Stock dividend to all shareholders of record on January 10, 1997 (See Note 12 of the Company's Consolidated Financial Statements incorporated herein by reference). The Company received Accreditation with Commendation from the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO") in January 1997. During January through March 4, 1997, approximately 1,677,000 Warrants were exercised and the Company issued approximately 1,882,000 shares of its Common Stock. The Company received net cash proceeds of approximately $11.7 million as a result of such Warrant exercises (See Note 18 of the Company's Consolidated Financial Statements incorporated herein by reference). -30- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------- Liquidity and Capital Resources (continued) ------------------------------- In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In summary, SFAS 125, as amended by SFAS 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective beginning January 1, 1997 with certain provisions delayed to January 1, 1998 as a result of SFAS 127. Earlier or retroactive application is not permitted. The Company does not anticipate a material impact resulting from adoption of these pronouncements. Management believes that the healthcare industry continues to be in a period of consolidation characterized by mergers, joint ventures, acquisitions, sales of all or part of healthcare companies or their assets, and other partnering and investment transactions of various structures and sizes involving healthcare companies. The Company continues to evaluate new opportunities that allow for the expansion of its business through the acquisition of additional Mobile Units in geographic proximity to its existing regional markets or in locations that can serve as a basis for new market areas. The Company, like other healthcare companies, has participated from time to time and is participating in preliminary discussions with third parties regarding a variety of potential transactions, and the Company has considered and expects to continue to consider and explore potential transactions of various types with other healthcare companies. However, no assurances can be given as to whether any such transactions may be consummated or, if so, when. -31- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SMT Health Services Inc. and Subsidiaries Independent Auditors' Report of KPMG Peat Marwick LLP .................. 33 Consolidated Balance Sheets as of December 31, 1996 and 1995............ 34 Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and 1994 .................................... 36 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 .................................... 38 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 .................... 40 Notes to Consolidated Financial Statements.............................. 41 -32- Independent Auditors' Report The Board of Directors and Stockholders SMT Health Services Inc.: We have audited the accompanying consolidated balance sheets of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule as of and for the years ended December 31, 1996, 1995 and 1994, as listed in Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 31, 1997, except as to Note 18 which is as of March 4, 1997 -33- SMT Health Services Inc. and Subsidiaries Consolidated Balance Sheets
December 31, ------------------------ 1996 1995 ----------- ------------ ASSETS - ----- CURRENT ASSETS: Cash and cash equivalents - unrestricted $ 4,643,158 $ 2,341,519 Cash and cash equivalents - restricted (Note 10) 400,000 1,600,000 Accounts receivable - no allowance for doubtful accounts 1,726,442 1,059,567 Notes receivable - current portion 52,240 47,760 Receivable from the sale of leases secured by equipment - current portion (Note 3) 387,999 342,789 Other current assets 615,257 249,961 ----------- ----------- Total current assets 7,825,096 5,641,596 ----------- ------------- PROPERTY AND EQUIPMENT: Equipment 200,709 174,556 Furniture and fixtures 43,055 59,712 Vehicles 162,915 125,103 Leasehold improvements 28,495 27,915 Leased medical equipment 35,932,207 22,167,551 ----------- ----------- Total property and equipment 36,367,381 22,554,837 Less accumulated depreciation and amortization (6,734,353) (6,613,759) ----------- ----------- Property and equipment, net 29,633,028 15,941,078 ----------- ----------- OTHER ASSETS: Notes receivable - noncurrent -- 52,240 Receivable from the sale of leases secured by equipment - noncurrent (Note 3) 490,591 878,590 Contract and license acquisition costs, net of accumulated amortization of $889,000 and $788,000, respectively 631,933 109,260 Deposits and other assets 594,915 506,041 Deferred income taxes, net of valuation allowance of $103,000 at December 31, 1995 (Note 4) 322,000 219,000 ----------- ----------- Total other assets 2,039,439 1,765,131 ----------- ----------- TOTAL ASSETS $39,497,563 $23,347,805 =========== ===========
See Notes to Consolidated Financial Statements. -34- SMT Health Services Inc. and Subsidiaries Consolidated Balance Sheets (Continued)
December 31, ------------------------ 1996 1995 ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 363,682 $ 270,277 Accrued wages and related taxes 111,664 57,823 Current portion of long-term debt and capital lease obligations 6,349,962 4,380,930 Other current liabilities 412,748 527,217 ----------- ----------- Total current liabilities 7,238,056 5,236,247 ----------- ----------- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - less current portion 20,859,964 12,709,905 ----------- ----------- Total liabilities 28,098,020 17,946,152 ----------- ----------- STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 3,695,030 and 2,654,400, respectively 36,950 26,544 Cumulative Convertible Preferred Stock; $0.01 par value; authorized 994,600 shares; no shares issued and outstanding -- -- Additional paid-in capital (Note 5) 12,081,614 6,636,070 Retained earnings/(accumulated deficit) (719,021) (1,260,961) ----------- ----------- Total Stockholders' equity 11,399,543 5,401,653 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,497,563 $23,347,805 =========== ===========
See Notes to Consolidated Financial Statements. -35- SMT Health Services Inc. and Subsidiaries Consolidated Statements of Earnings
Year Ended December 31, ----------------------------------------------- 1996 1995 1994 --------------- ------------ ---------------- REVENUES: Service revenue $19,021,954 $15,020,428 $13,235,019 Interest income 190,399 137,417 47,166 ----------- ----------- ----------- Total revenues 19,212,353 15,157,845 13,282,185 ----------- ----------- ----------- COSTS AND EXPENSES: Operating expenses - third parties 6,279,915 5,216,121 5,054,997 Operating expenses - lease expenses - related parties -- 180,000 837,000 Depreciation and amortization 4,724,909 3,679,246 3,163,606 Selling, general and administrative 2,877,421 2,472,023 1,894,037 Interest - third parties 2,005,429 1,671,013 239,193 Interest - related parties 35,818 86,538 1,398,363 Other (Note 17) (300,000) -- -- ----------- ----------- ----------- Total costs and expenses 15,623,492 13,304,941 12,587,196 ----------- ----------- ----------- Income from continuing operations before income taxes, minority interests and gain on sale 3,588,861 1,852,904 694,989 Minority interests in earnings of subsidiaries (Note 14) -- 49,906 59,231 ----------- ----------- ----------- Income from continuing operations before income taxes and gain on sale 3,588,861 1,802,998 635,758 Gain on sale of partnership interests -- 48,219 -- ----------- ----------- ----------- Income from continuing operations before income taxes 3,588,861 1,851,217 635,758 Income taxes (Note 4) 1,178,000 478,000 93,500 ----------- ----------- ----------- Net income from continuing operations 2,410,861 1,373,217 542,258 ----------- ----------- ----------- Discontinued operations: Loss on disposal of discontinued operations, net of tax benefit of $102,000 and $68,000 in 1995 and 1994, respectively -- (198,000) (132,000) Extraordinary item, debt forgiveness, net of income tax expense of $102,000 -- 198,000 -- ----------- ----------- ----------- -- -- (132,000) ----------- ----------- ----------- Net income $ 2,410,861 $ 1,373,217 $ 410,258 =========== =========== ===========
See Notes to Consolidated Financial Statements. -36- SMT Health Services Inc. and Subsidiaries Consolidated Statements of Earnings (Continued)
Year Ended December 31, --------------------------- 1996 1995 1994 ----- ------ ----- C> Earnings (Loss) per Common Share (Note 2): Primary: Continuing operations $ .61 $ .46 $ .20 Discontinued operations -- -- (.05) ----- ----- ------ Earnings Per Common Share $ .61 $ .46 $ .15 ===== ===== ====== Fully Diluted: Continuing operations $ .59 $ .46 $ .20 Discontinued operations -- -- (.05) ----- ----- ------ Earnings Per Common Share $ .59 $ .46 $ .15 ===== ===== ======
See Notes to Consolidated Financial Statements. -37- SMT Health Services Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, --------------------------------------- 1996 1995 1994 ---------- ---------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $2,410,861 $ 1,373,217 $ 542,258 Adjustments to reconcile net income to net cash provided by continuing operating activities: Depreciation and amortization 4,724,909 3,679,246 3,163,606 Negative amortization on capital lease obligations -- 5,521 51,017 Minority interests in subsidiaries -- 49,906 59,231 Deferred income tax expense 1,288,000 288,000 48,500 Gain on sale of partnership interests -- (48,219) -- Other -- 10,467 110,658 Changes in assets and liabilities of continuing operations: Accounts and notes receivable (544,660) 17,705 143,231 Other current assets (470,751) 12,182 (72,347) Accounts payable and other (21,064) 143,049 (14,348) Accrued wages and related taxes 53,841 10,134 8,073 ---------- ----------- ------------ NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES 7,441,136 5,541,208 4,039,879 ---------- ----------- ------------ NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES -- (64,264) (410,108) ---------- ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 7,441,136 5,476,944 3,629,771 ---------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment (2,977,334) (269,354) (234,833) Payment for purchase of acquired entities, net of cash acquired (642,840) -- (44,000) Net change in cash restricted for equipment financing purposes 1,200,000 (1,131,500) (270,000) Net cash received for sale of partnership interests -- 122,854 -- Net cash received for sale of discontinued entities -- 110,000 380,183 Other (146,472) (212,409) (92,496) ---------- ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES (2,566,646) (1,380,409) (261,146) ---------- ----------- ------------
See Notes to Consolidated Financial Statements. -38- SMT Health Services Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued)
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ---------- ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under long-term debt and capital leases: Continuing operations: Third parties (4,735,551) (3,241,524) (633,485) Related parties (64,329) (329,627) (2,593,808) Discontinued operations: Third parties -- -- (254,612) Related parties -- (27,807) (182,918) Issuance of Common Stock from exercise of stock options and warrants 2,227,029 -- -- Other -- (4,562) 116,505 ---------- ------------ ---------- NET CASH USED IN FINANCING ACTIVITIES (2,572,851) (3,603,520) (3,548,318) ---------- ------------ ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,301,639 493,015 (179,693) CASH AND CASH EQUIVALENTS - (unrestricted) - Beginning of year 2,341,519 1,848,504 2,028,197 ---------- ------------ ---------- CASH AND CASH EQUIVALENTS - (unrestricted) - End of year $4,643,158 $2,341,519 $ 1,848,504 ========== ========== ===========
See Notes to Consolidated Financial Statements. -39- SMT Health Services Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1994, 1995 and 1996
Retained Common Stock Preferred Stock Additional Earnings/ Total ----------------------------- --------------------- Paid-In (Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit) Equity ------------ --------------- ------- ------------ ------------- ------------ ----------- BALANCES - December 31, 1994 2,408,000 $24,080 -- -- $ 5,940,858 ($2,311,626) $ 3,653,312 Stock Dividend (Note 12) 120,400 1,204 -- -- 321,348 (322,552) -- Issuance of Common Stock (Note 9) 120,000 1,200 -- -- 358,800 -- 360,000 Exercise of Stock Options 6,000 60 -- -- 15,064 -- 15,124 Net Income -- -- -- -- -- 1,373,217 1,373,217 --------- ------- ------- ------------ ----------- ----------- ----------- BALANCES - December 31, 1995 2,654,400 26,544 -- -- 6,636,070 (1,260,961) 5,401,653 Exercise of Stock Options and Warrants (Notes 5 and 7) 793,500 7,935 -- -- 2,219,094 -- 2,227,029 Tax Adjustment Regarding Stock Option and Warrant Exercises (Notes 4, 5 and 7) -- -- -- -- 1,360,000 -- 1,360,000 Stock Dividend (Note 12) 247,130 2,471 -- -- 1,866,450 (1,868,921) -- Net Income -- -- -- -- -- 2,410,861 2,410,861 --------- ------- ------- ------------ ----------- ----------- ----------- BALANCES - December 31, 1996 3,695,030 $36,950 -- $ -- $12,081,614 ($ 719,021) $11,399,543 ========= ======= ======= ============ =========== ========== ===========
See Notes to Consolidated Financial Statements. -40- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Note 1. ORGANIZATION ------------ SMT Health Services Inc. and its wholly-owned subsidiaries (the "Company") are engaged primarily in providing medical diagnostic imaging services to hospitals, physicians and patients. The Company, through its subsidiaries, operates eighteen mobile Magnetic Resonance Imaging (MRI) Units ("MRI Units") in Pennsylvania, West Virginia, North Carolina, Virginia, South Carolina, Kentucky and Ohio. The Company began operation of seven new MRI units during 1996, including four MRI units which began operations during the last four months of the year. The Company's Common Stock and Warrants (Note 18) trade on the National Association of Securities Dealers, Inc. Automated Quotations Systems (NASDAQ) National Market System under the symbols "SHED" and "SHEDW", respectively. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Consolidation Policy: The consolidated financial statements include the -------------------- accounts of SMT Health Services Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Revenue Recognition: Revenue from diagnostic imaging services is ------------------- recognized as patient services are performed. Service Agreements: The Company provides services directly to hospitals ------------------ under Mobile MRI Service Agreements which expire at various times between 1997 and 2002 and accordingly, bills and collects the fees for such services directly from the hospitals. Approximately 29% of the Company's billings and collections under these service contracts are processed through Hospital Shared Services (HSS), a representative of certain hospitals. As a fee for these services, HSS retains approximately 2.5% of gross billings to these hospitals and, accordingly, the Company records related revenues on a net basis. Such fees totaled approximately $150,000, $146,000 and $120,000 for 1996, 1995 and 1994, respectively. Cash and Cash Equivalents: Cash equivalents include highly-liquid -------------------------- investments with original maturities of ninety days or less. Property and Equipment: Property and equipment are stated at cost ----------------------- and are depreciated using the straight-line method over the estimated useful lives of the related assets, which is generally five years. Leased medical equipment is being amortized to its estimated residual value using the straight-line method over the lease or finance term of generally five years. -41- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ------------------------------------------ Contract and License Acquisition Costs: Contract acquisition costs --------------------------------------- primarily represent the value of mobile service contracts acquired relating to the purchase of VA-MRI in November 1994 (Note 9) and are being amortized over an approximate four-year period which approximates the lives of the contracts. License acquisition costs represent the value of Certificate of Need licenses acquired in March 1996 (Note 16) and are being amortized over a ten year period. Income Taxes: The Company files a consolidated federal income tax return. ------------- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Earnings Per Common and Common Share Equivalent: The net earnings --------------------------------------------------- per common and common share equivalent are calculated using the weighted average common and common share equivalents outstanding during the year, except where anti-dilutive. Common share equivalents include shares issuable upon the exercise of stock options, rights and warrants less the number of shares assumed purchased with the proceeds available from the assumed exercise of the options, rights and warrants. The Treasury Stock Method of reflecting the use of proceeds from options and warrants may not adequately reflect potential dilution if options and warrants to acquire a substantial number of Common Shares (greater than 20% of the number of Common Shares outstanding for the period for which the computation is being made) are outstanding. In such instances, the Modified Treasury Stock Method must be utilized. The Company's options and warrants to acquire Common Shares exceeded 20% of the number of Common Shares outstanding for 1996 and 1995 and accordingly, the Treasury Stock Method has been modified in determining the dilutive effect of the options and warrants on earnings per share data for those years. -42- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ------------------------------------------ For purposes of the earnings per share calculation, the Modified Treasury Stock Method resulted in adjusted net income for the year ended 1996 of approximately $3,435,000 and adjusted shares outstanding of 5,668,000, resulting in earnings per Common Share of $.61 for the year ended December 31, 1996 after giving effect to a seven percent (7%) Common Stock dividend paid to shareholders in January 1997 (Note 12). Actual net income for the year ended December 31, 1996 of $2,410,861 divided by the actual weighted average shares outstanding for the year of 3,232,505 resulted in earnings per Common Share of $.75 for the year ended December 31, 1996. The Modified Treasury Stock Method resulted in adjusted net income for the year ended 1995 of approximately $2,699,000 and adjusted shares outstanding of approximately 5,884,000, resulting in earnings per Common Share of $.46 for the year ended December 31, 1995. Actual net income for the year ended December 31, 1995 of $1,373,217 divided by the actual weighted average shares outstanding for the year of 2,770,230 resulted in earnings per Common Share of $.50 for the year ended December 31, 1995. The 1995 earnings per share calculations have reflected a retroactive adjustment to reflect the January 1997 7% stock dividend (Note 12). Earnings per share for the year ended December 31, 1994 were not subject to the Modified Treasury Stock Method as this method was anti-dilutive. Accordingly, weighted average shares outstanding were 2,705,400 for 1994. The weighted average shares outstanding for 1994 reflect a retroactive adjustment increasing the weighted average shares outstanding by 297,400 shares to reflect the July 1995 5% and January 1997 7% stock dividends as if such dividends had occurred at the beginning of the respective period (Note 12). Fully diluted earnings per Common Share for 1996 were $.59 reflecting the higher year-end stock price. Fully diluted earnings per Common Share were anti-dilutive in 1995 and 1994. Certain Concentrations and Significant Risks and Uncertainties: The Company --------------------------------------------------------------- is engaged primarily in providing mobile MRI services to small-to-medium- sized hospitals in Pennsylvania, West Virginia, North Carolina, Virginia, South Carolina, Kentucky and Ohio. -43- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ------------------------------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain Significant Estimates: The Company operates mobile MRI units which ------------------------------ are capital intensive and subject to changes in technology. The Company primarily finances such equipment over a 48 to 60 month period and depreciates the equipment over the respective finance period to an estimated residual value which typically approximates 20% of the original cost of the equipment. The useful lives and residual values estimated by management are considered significant estimates. During 1995 and 1996, the Company upgraded its fleet of mobile MRI units to newer state-of-the-art technology. Management does not currently anticipate significant technological advances which could materially affect its estimates. The Company is not dependent on any one customer or geographic region as a source of its revenues. However, the Company utilizes the services of HSS to process approximately 29% of its billings and collections (Note 2 - Service Agreements). Long-Lived Assets: Effective January 1, 1996, the Company adopted Statement ------------------ of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. In accordance with SFAS 121, management evaluates long-lived assets and related intangible assets for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. No evidence existed which indicated any long-lived assets and related intangible assets were impaired and, therefore no write-down of recorded assets was necessary. Financial Instruments: Management believes that the carrying values of its ---------------------- financial instruments approximates their fair values and any differences which may exist between the carrying values and fair values are not material. Stock-Based Compensation: During 1996, the Company adopted SFAS 123, ------------------------- Accounting for Stock-Based Compensation. As permitted for under SFAS 123, the Company has elected to continue to follow the guidance of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based employee compensation arrangements. Because the Company elected -44- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ------------------------------------------ the disclosure-only method available under SFAS 123, the adoption of SFAS 123 did not have any impact on the Consolidated Financial Statements (Note 7). Common Stock Dividend: On January 14, 1997, a 7% Common Stock dividend was ---------------------- paid to shareholders of record at the close of business on January 10, 1997. All stock related data in the Consolidated Financial Statements reflect the stock dividend for all periods presented (Note 12). Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS ------------------------------------ Long-term debt and capital lease obligations consist of the following:
December 31, ------------------------ 1996 1995 ----------- ----------- Capital lease and loan obligations $27,209,926 $17,090,835 Less current portion 6,349,962 4,380,930 ----------- ----------- $20,859,964 $12,709,905 =========== ===========
Future minimum lease payments under capital leases and maturities of long-term debt as of December 31, 1996 are as follows:
Year Ending Long-Term Capital Lease December 31, Debt Obligations ----------- ----------- -------------- 1997 $2,037,232 $ 5,792,078 1998 2,223,518 5,537,301 1999 2,291,825 4,686,822 2000 2,476,641 3,098,604 2001 1,107,289 1,440,719 ---------- ----------- 20,555,524 Less amounts representing interest (3,482,103) ----------- $10,136,505 $17,073,421 =========== ===========
-45- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued) ------------------------------------ As of December 31, 1996, the cost and accumulated amortization of property securing capital lease and loan obligations were $35,932,000 and $6,508,000, respectively. Interest rates under the long-term debt and capital leases ranged from approximately 8.0% to 13.5%. On July 31, 1996, the Company refinanced two MRI units which had previously been refinanced in March 1995 to more favorable lease terms. The new leases totaled approximately $2.3 million (net of a $150,000 down payment) in the aggregate and are being financed over a thirty-six month period at an interest rate of 9.25%. The refinancing resulted in annual cashflow savings to the Company of approximately $200,000 (Note 10). The Company upgraded one of its .5 Tesla Signa units to a 1.0 Tesla Horizon unit. The new unit was financed at a net total cost of approximately $2.0 million and was delivered in late February 1996. The Company financed the purchase of this new unit with a 60 month dollar-out (bargain purchase option of one dollar) lease requiring monthly payments of approximately $44,000. The Company contracted with several new hospital clients and purchased a new Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $41,000. In April 1996, the Company upgraded one of the units purchased from another mobile provider (Note 16) to a Siemens 1.0 Tesla Impact unit. The new unit was financed at a net total cost of approximately $1.9 million. The Company financed this new unit with a 60 month loan requiring monthly payments of approximately $43,000. In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens 1.0 Tesla Impact unit. The new unit was financed at a net total cost of approximately $2.0 million with a 60 month dollar-out lease requiring monthly payments of approximately $43,000. The Company in May 1996 signed an agreement with Siemens Medical Systems to upgrade the second unit purchased from another mobile provider (Note 16) and to purchase a new unit during the fourth quarter of 1996. Delivery of the upgraded unit occurred in July 1996 and the new unit was delivered and began operation on October 1, 1996. The upgrade's net cost approximated $1.9 million and the Company financed approximately $1.7 million with a 60 month finance agreement requiring monthly payments of approximately $36,000. The Company's new unit cost approximately $1.9 million and the Company financed approximately $1.7 million requiring a monthly payment of approximately $37,000. -46- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued) ------------------------------------ During September 1996, the Company upgraded an older unit to a new Siemens 1.0 Tesla Impact. The cost of this new unit approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $39,000. The Company purchased and took delivery of two new GE 1.0 Tesla Horizon units in September 1996. These units were purchased at a cost of approximately $1.8 million each and the Company financed approximately $1.6 million and $1.5 million with 60 month finance agreements requiring monthly payments of approximately $34,000 and $32,000, respectively. The Company completed a previously negotiated upgrade of a .5 Tesla Signa to a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net cost of approximately $1.5 million with a 60 month finance agreement requiring monthly payments of approximately $32,000. On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto Community Health Network (the "Network") for approximately $390,000 and signed new service contracts with six South Carolina hospitals which are members of the Network. This new unit represents the Company's eighteenth mobile MRI unit and the seventh new unit acquired during 1996. In December 1996, the Company upgraded the mobile MRI unit purchased from the Network to a new 1.0 Tesla Horizon. The new unit was financed at a net cost of approximately $1.4 million with a 60 month finance agreement requiring monthly payments of approximately $30,000. The long-term debt and capital lease obligations balance includes approximately $880,000 of capital lease obligations due to third parties related to the equipment at the Auburn Regional Center for Cancer Care and Airport Regional Imaging Center which the Company had treated as discontinued operations and sold in October 1994 and in June 1995, respectively. Accordingly, the Company has recorded an offsetting receivable for the lease receivables due from the purchaser of the centers. Such lease receivables are secured by the equipment and accounts receivable of the centers (Note 13). The Company leases certain tractors for the transportation of Mobile Units. Operating lease expenses related to such tractor rentals totaled $346,000, $313,000 and $257,000 for 1996, 1995 and 1994 respectively. Prior to July 1, 1995, the Company rented certain tractors from Shared Mobile Enterprises (Note 9). -47- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 3. LONG-TERM DEBT AND LEASE OBLIGATIONS (continued) ------------------------------------ The future minimum lease payments (excluding variable mileage costs of $.063 per mile) required under these operating leases are as follows:
Year Ended December 31, ----------- 1997 $ 349,300 1998 326,700 1999 326,700 2000 326,700 2001 169,600 Thereafter 3,300 ---------- Total $1,502,300 ==========
Note 4. INCOME TAXES ------------ Income tax expense attributable to income from continuing operations for the years ended December 31, 1996, 1995 and 1994 are as follows:
Current Deferred Total ------------------------------ ----------------------------- ----------------------------- 1996 1995 1994 1996 1995 1994 1996 1995 1994 ----------- -------- ------- ---------- -------- ------- ---------- -------- ------- Federal $ -- $ 10,000 $ -- $1,014,000 $254,000 $44,000 $1,014,000 $264,000 $44,000 State (110,000) 180,000 45,000 274,000 34,000 4,500 164,000 214,000 49,500 ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- ($110,000) $190,000 $45,000 $1,288,000 $288,000 $48,500 $1,178,000 $478,000 $93,500 ========== ======== ======= ========== ======== ======= ========== ======== =======
In addition to the deferred tax expense disclosed above, approximately $1,360,000 of deferred tax benefits were allocated to equity in connection with the tax deductions generated by the exercise of certain stock options and warrants. -48- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ NOTE 4. INCOME TAXES (continued) ------------ The difference between the Company's effective income tax rate and its statutory rate is reconciled below:
1996 1995 1994 -------- ---------- --------- Income tax expense at statutory rate $1,220,213 $629,414 $ 216,158 Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit 110,000 137,000 32,670 Change in state net operating loss carryforward rules (61,000) -- (90,000) Decrease in valuation allowance (103,000) (312,000) (72,500) Other items 11,787 23,586 7,172 ---------- --------- --------- $1,178,000 478,000 $ 93,500 ========== ========= =========
The components of the net deferred tax asset recognized in the December 31, 1996 and 1995 consolidated balance sheets of the Company are presented below:
1996 1995 --------- ---------- Deferred tax assets: Net operating loss carryforwards $3,518,800 $1,415,794 Non-deductible accrued expenses 75,000 139,291 Other 19,000 37,203 ---------- ---------- 3,612,800 1,592,288 Deferred tax liabilities: Diagnostic medical equipment, principally due to differences in depreciation (3,290,800) (1,270,288) ---------- ---------- 322,000 322,000 Less valuation allowance -- (103,000) ---------- ---------- Net deferred tax asset $ 322,000 $ 219,000 ========== ============
-49- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 4. INCOME TAXES (continued) ------------ Deferred income taxes are provided to account for temporary differences between financial statement accounting and income tax reporting and relate principally to differences in reporting for diagnostic medical equipment, depreciation and net operating loss carryforwards. The net change in the total valuation allowance for the years ended December 31, 1996 and 1995 was a decrease of $103,000 and a decrease of $312,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate relation of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits for these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. At December 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $8,200,000 which are available to offset future federal taxable income through 2010. The Company has approximately $10,100,000 of available carryforwards as of December 31, 1996 for state purposes which are available principally through 1999. Note 5. STOCKHOLDERS' EQUITY -------------------- In accordance with the Company's March 1992 Initial Public Offering, the Company issued Warrants to purchase shares of Common Stock of the Company. Pursuant to the Warrant Agreement, the outstanding Warrants have been recapitalized to reflect the July 1995 5% and January 1997 7% Common Stock dividends (Note 12). Accordingly, the outstanding Warrants' exercise price of $7.00 entitled the holder to purchase 1.1235 shares of Common Stock of the Company (Note 18). As additional compensation in connection with the initial public offering, the Company granted to the Company's Initial Public Offering underwriter an option to purchase options which covered 120,000 units, each unit consisted of 1.05 shares of Common Stock and one Company Warrant to purchase 1.05 shares of Common Stock. The Option was exercisable until March 4, 1997 and entitled the underwriter to purchase each unit at an exercise price equal to $5.94, subject to adjustment in certain events. The underwriter subsequently transferred the Options to principles of the underwriter (Transferees), who exercised the Options during 1996 resulting in net proceeds to the Company of approximately $719,000. During August 1996, one of the Transferees exercised 24,000 Warrants to purchase 25,200 shares of Common Stock of the Company resulting in additional proceeds to the Company of approximately $168,000. As a result of the 7% Common Stock dividend paid in January 1997 (Note 12), the remaining 96,000 underwriter Warrants were convertible to 107,856 shares of Common Stock. -50- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 5. STOCKHOLDERS' EQUITY (continued) -------------------- On August 9, 1995, the Company adopted the 1995 Director Warrant Plan (the "Plan") pursuant to which eligible directors received unregistered warrants to purchase Common Stock (the "Directors' Warrants"). The Plan allows for issuance of warrants to purchase up to 700,000 shares of Common Stock. On August 9, 1995, warrants to purchase up to 500,000 shares of Common Stock at an initial exercise price of $3.875 (the closing price of the Company's stock on the date of issue) were issued to five directors pursuant to the Plan. Separately, unregistered warrants to purchase 114,500 shares of Common Stock at an initial exercise price of $4.01 were also issued to an outside director, who was also a consultant to the Company, who was ineligible to participate in the Plan. During May 1996, the outside director who was also a consultant to the Company exercised the 114,500 Warrants and sold 114,500 shares of Common Stock. The Company received cash proceeds of approximately $459,000 related to the exercise of such Warrants. During January 1997, the Company's three outside directors each exercised 25,000 Director Warrants and sold 26,750 shares of Common Stock (after adjustment for the January 1997 7% Common Stock dividend - Note 12). The Company received cash proceeds of approximately $291,000 as a result of the exercise of the 75,000 Director Warrants. Pursuant to the 1995 Director Warrant Plan, the Director Warrants have been recapitalized to reflect the January 1997 7% Common Stock dividend (Note 12). Accordingly, the outstanding Director Warrants' exercise price of $3.875 now entitles the holder to purchase 1.07 shares of Common Stock of the Company. As of January 31, 1997, 425,000 Director Warrants to purchase 454,750 shares of Common Stock of the Company were outstanding. In October 1995, the Company signed an agreement retaining Commonwealth Associates ("Commonwealth") as its investment banking firm. Commonwealth, a New York-based investment banking firm specializing in serving the financial needs of emerging growth companies, had been engaged to assist the Company in establishing a long-term financial strategy and in evaluating possible transactions involving other mobile diagnostic providers. In addition to a cash retainer, the Company granted to Commonwealth 100,000 five-year Warrants to purchase the Company's Common Stock at $4.47, the closing bid price of the Common Stock on the day the Agreement was executed. The agreement with Commonwealth expired in April 1996. During July and October 1996, Commonwealth or a designated employee of Commonwealth exercised the 100,000 Warrants in a net transaction and the Company issued to Commonwealth or the designated employee an aggregate of 36,061 shares of Common Stock of the Company. -51- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 5. STOCKHOLDERS' EQUITY (continued) -------------------- In November 1995, the Company adopted a Preferred Stock Purchase Rights Plan (the "Rights Plan") which contains provisions to protect the Company in the event of an unsolicited offer to acquire control of the Company on terms which the Company's Board of Directors determines not to be in the best interest of the Company. The Rights Plan provides for the distribution to shareholders of one right for each share of Company Common Stock outstanding. When exercisable, each right will entitle shareholders to buy one one-hundredth of a newly issued share of the Company's Class A Series One Preferred Stock at an exercise price of $22.00. Each right has terms designed to make it substantially the economic equivalent of one share of Common Stock. Shareholders of record as of the close of business on November 8, 1995 and thereafter will receive the rights. The rights will expire on November 30, 2005, unless further extended, and will be subject to redemption by the Board of Directors at $.01 per right at any time prior to the first date upon which they become exercisable. The rights themselves have no voting power, nor will they entitle a holder to receive dividends. Note 6. PREFERRED STOCK --------------- The Company is authorized to issue 994,600 shares of preferred stock ("Preferred Stock") issuable in series. The Company had one authorized series of 5,400 Preferred Shares, par value $.01, designated as Series A Preferred Stock, which was converted to Common Stock in July 1993. Note 7. STOCK OPTION PLANS ------------------ The Company's 1991 and 1996 Employee Stock Option Plans (the "Employee Plans") currently provide for the granting of options to employees to purchase up to 1,110,125 shares of the Company's Common Stock at the fair market value at the date of grant. Options granted to employees may either be incentive stock options (as defined in the Internal Revenue Code of 1986, as amended) or non-qualified stock options and expire ten years from date of grant. -52- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 7. STOCK OPTION PLANS (continued) ------------------
Options Outstanding --------------------------- Number Price Per Share -------- --------------- Balance - December 31, 1993 145,514 $3.11 Granted 203,179 $1.28 - $2.00 Exercised -- -- Expired -- -- ------- Balance - December 31, 1994 348,693 $1.28 - $3.11 Granted 431,349 $2.30 - $3.56 Exercised -- -- Expired -- -- ------- Balance - December 31, 1995 780,042 $1.28 - $3.56 Granted 309,770 $3.92 - $6.43 Exercised (439,900) $1.28 - $3.11 Expired (10,480) $3.11 -------- Balance - December 31, 1996 639,432 $1.28 - $6.43 ========
All of the above outstanding options are non-qualified options. At December 31, 1996, options to purchase 639,432 shares were exercisable and no additional shares were available for future grant in accordance with the Employee Plans. The total number of options to purchase shares of Common Stock and the exercise prices of any options which were granted pursuant to the Employee Plan prior to July 1995 have been adjusted to reflect the July 1995 5% Common Stock dividend (Note 12). In January 1997, the Company granted a 7% Common Stock dividend. The aforementioned number of options to purchase shares of Common Stock and the exercise prices of such options reported above have been adjusted to reflect the January 1997 dividend (Note 12). The Company's 1991 Director Stock Option Plan for non-employee directors (the "Directors' Plan") currently provides for the granting of options to non-employee directors to purchase up to 112,350 shares of the Company's Common Stock at the fair market value on the date of grant. Under the Directors' Plan, each eligible director automatically receives options to purchase 2,247 shares of the Company's Common Stock on December 31 of each year. Options granted under the Directors' Plan may be exercised within ten years of the date of grant and while the recipient of the option is a director of the Company. -53- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 7. STOCK OPTION PLANS (continued) ------------------
Options Outstanding -------------------------- Number Price Per Share ---------- --------------- Balance - December 31, 1993 21,294 $1.66 - $3.00 Granted 10,647 $2.06 Exercised -- -- Expired -- -- ------- Balance - December 31, 1994 31,941 $1.66 - $3.00 Granted 8,547 $4.09 Exercised (6,000) $1.66 - $3.00 Expired (300) $1.66 - $3.00 ------- Balance - December 31, 1995 34,188 $1.66 - $4.09 Granted 6,741 $7.94 Exercised (23,100) $1.66 - $4.09 Expired (2,100) $4.09 ------- Balance - December 31, 1996 15,729 $1.66 - $7.94 =======
As of December 31, 1996, options to purchase 15,729 shares of Common Stock were exercisable under the Directors' Plan and 65,484 shares were available for future grant in accordance with the Director Plan. The total number of options to purchase shares of Common Stock and the exercise prices of any options which were granted pursuant to the Directors' Plan prior to July 1995 have been adjusted to reflect the July 1995 5% Common Stock dividend (Note 12). In February 1994, the Board of Directors granted additional vested options to purchase 42,000 shares of the Company's Common Stock at an exercise price of $1.78 per share, the fair market value of the Common Stock at the date of grant, to two non-management members of the Board of Directors. During June and September 1996, the two non-management members of the Board of Directors (one now a former director), exercised the 42,000 options and sold 42,000 shares of Common Stock received upon the option exercise. The Company realized net proceeds of approximately $75,000 from the exercise of the 42,000 options. In January 1997, the Company granted a 7% Common Stock dividend. The aforementioned number of options to purchase shares of Common Stock and the exercise prices of such options reported above have been adjusted to reflect the January 1997 dividend (Note 12). -54- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 7. STOCK OPTION PLANS (continued) ------------------ SFAS 123 requires companies who continue to apply APB Opinion No. 25 to account for their stock-based employee compensation arrangements to provide pro forma net income and earnings per share as if the fair value based method had been used to account for compensation cost (Note 2). The per share weighted average fair value of stock options granted during 1996 and 1995 approximated $393,000 and $672,000 on the date of grant using the Black Scholes option - pricing model with the following weighted-average assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate of 7.05%, expected volatility of the stock 33%, and expected life of three years; 1995 - expected dividend yield 0.0%, risk-free interest rate of 7.05%, expected volatility of the stock of 33%, an expected life of three years. Accordingly, pro forma net income and earnings per share would have been $2,017,000 ($.54 per share) and $771,000 ($.37 per share) for the years ended December 31, 1996 and 1995, respectively, if the Company had accounted for its stock based employee compensation arrangements using the fair value method. The 1995 and 1996 effects of applying SFAS 123 for providing pro forma disclosures are not likely to be representative of the effects on pro forma net income and earnings per share for future years because the number of option grants and the fair value assigned to the grants could differ. Note 8. BENEFIT PLANS ------------- The Company maintains an annual bonus plan for key executives and employees which is based primarily upon the pre-tax earnings of the Company. The Company expensed approximately $584,000, $348,000 and $115,000 for the program during 1996, 1995 and 1994, respectively. The Company maintains and administers an employee savings plan pursuant to Internal Revenue Code Section 401(k). The Plan provides for discretionary contributions as determined by the Company's Board of Directors. The Company contributed approximately $34,000, $18,000 and $18,000 to the Plan in 1996, 1995 and 1994, respectively. Note 9. RELATED PARTY TRANSACTIONS -------------------------- A former shareholder/director of the Company was also a consultant to the Company and the Company had entered into a five-year consulting agreement with him through November 1996 pursuant to which he was to receive a fee of $75,000 per year. On March 27, 1996, the Company prepaid the remaining $50,000 due under the Consulting Agreement and terminated the Consultant Agreement. Fees paid to this former shareholder/director totaled approximately $75,000 for each of the past three years. -55- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 9. RELATED PARTY TRANSACTIONS (continued) -------------------------- Prior to July 1, 1995, the Company subleased certain truck cabs from Shared Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an independent third party leasing company. Effective July 1, 1995, SME released the Company from its obligations under ten long-term subleases in exchange for the issuance to SME of 120,000 unregistered Common Shares valued at $3 per share, the weighted average closing price for the stock for the prior thirty trading days. The Company received an opinion from an independent financial advisor that the transaction was fair to the Company and its shareholders. At the same time, with the concurrence of the third party leasing company, the Company assumed SME's obligations under its original lease and modified that lease by (1) extending the lease term by one additional year and (2) adding one additional truck cab to the schedule of leased property with a corresponding increase in base rental payments. The $360,000 value of the shares represents the present value of the excess of the sublease payments over the original lease payments. The Company has capitalized the $360,000 and is amortizing this prepaid rent over a period which approximates the lease term. SME was one hundred percent beneficially owned by certain officers/directors and a former director/consultant of the Company who owned approximately 14% of the Company's outstanding Common Shares. Total rental expense paid to SME for the years ended December 31, 1995 and 1994 were approximately $180,000 and $257,000, respectively (Note 3). Certain shareholders/officers of the Company, who own approximately 14% of the outstanding Common Stock of the Company, also collectively owned 50% of the outstanding capital stock of Upstate MRI, Inc., a.k.a., Virginia MRI, Inc. ("VA MRI"), which owned and operated a Mobile Unit which provided service in Virginia and North Carolina. The Company and the shareholders/officers of the Company guaranteed the lease on such Mobile Unit. On June 1, 1993, the Company entered into a one-year operating lease with VA MRI where the Company leased the VA MRI Mobile Unit ("VA Mobile Unit") and related service contracts in return for a monthly rental of $58,000, which lease was renewed on June 1, 1994. A previously negotiated management agreement between VA MRI and the Company, pursuant to which the Company received $5,000 per month in administrative fees, plus reimbursement of all expenses, in return for managing the operations of VA MRI was terminated. On November 14, 1994, the Company purchased the VA Mobile Unit in consideration for the assumption of all of VA MRI's lease obligations totaling approximately $400,000 (approximate fair market value of the equipment). In addition, VA MRI transferred and assigned to the Company its rights in the service contracts related to the VA Mobile Unit in consideration for the forgiveness of the remaining approximately $50,000 owed to the Company pursuant to a note and the payment by the Company of $44,000. The Company capitalized the approximately $94,000 as contract acquisition costs which are being amortized over the term of the service contracts which approximates four years (Note 2). -56- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 9. RELATED PARTY TRANSACTIONS (continued) -------------------------- In addition, on November 14, 1994, upon completion of the VA Mobile Unit purchase, the Company traded in the VA Mobile Unit and upgraded this Unit to a General Electric 1.0 Tesla Signa which the Company has financed with a 66 month lease requiring monthly payments of approximately $41,000. This new lease transfers the ownership of such Mobile Unit to the Company at the completion of the lease. The original VA Mobile Unit lease assumed by the Company has been terminated in conjunction with this transaction. A certain director of the Company is a director of, consultant to and shareholder of DVI Inc., the parent of DVI Financial Services Inc. ("DVI"). During 1992 and 1993, the Company entered into numerous leasing transactions with DVI pertaining to both continuing and discontinued operations involving total financing of approximately $15.6 million. During 1994, the Company did not enter into any new leases with DVI and refinanced with third parties $3.2 million of leases held by DVI. During the first quarter of 1995, the Company refinanced its remaining leases with DVI, totaling approximately $6.5 million, with third-party lease companies. Interest rates under financing agreements with DVI ranged from 11% to 14%. During 1996, the Company financed the acquisition of a new mobile MRI unit with DVI. The Company and DVI entered into a 60 month capital lease financing approximately $1.5 million at an interest rate of approximately 9.5%. Total payments to DVI during 1996, 1995 and 1994 with respect to capital lease obligations were approximately $100,000, $440,000 and $3.9 million, respectively, including $36,000, $87,000, and $1.4 million, respectively, of interest expense associated with such capital leases. In March 1995, DVI sold 368,000 shares of the Company's Common Stock which it had received during the Company's Initial Public Offering, pursuant to registration statements under the Securities Act of 1933, as amended (the "Securities Act"). Note 10. COMMITMENTS AND CONTINGENCIES ----------------------------- The lease for the Company's principal facility expires in April 1999. Rent expense for the Company's principal facility was $76,000, $76,000 and $69,000 for 1996, 1995 and 1994, respectively. Future minimum lease payments under this lease are as follows:
Year Ended Future Minimum December 31, Lease Payments ------------ -------------- 1997 87,900 1998 87,900 1999 29,300 -------- Total $205,100 ========
-57- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 10. COMMITMENTS AND CONTINGENCIES (continued) ----------------------------- Pursuant to capital lease obligations (Note 3) and related maintenance contracts, which begin upon expiration of the manufacturer's warranty period of generally 12 to 18 months and which contracts expire at various dates through the year 2001, the Company is currently obligated to pay approximately $118,000 per month for maintenance of equipment. In November 1992, the Company issued a letter-of-credit in the amount of $198,500 pursuant to a lease transaction related to its freestanding full- service diagnostic imaging center (Note 13). In exchange for restructuring the terms of the debt of this Center, the Company increased the outstanding letter-of-credit to an aggregate $400,000. In November 1994, the Company issued a letter-of-credit in the amount of $270,000 related to the purchase and financing of a new Mobile Unit. The lessor holding this letter-of-credit allowed the letter-of-credit to terminate on October 31, 1996. In relation to the refinancing of four Mobile Units in February and March 1995 (Note 3), the Company issued two letters-of-credit in the aggregate amount of $930,000. In February 1996, the lessor holding one of the letters-of-credit totaling $330,000 allowed the letter-of-credit to expire. On July 31, 1996, the Company refinanced two MRI units which had previously been refinanced in March 1995 to more favorable lease terms. As a result of this refinancing, the $600,000 letter-of-credit which had been issued in March 1995 was terminated (Note 3). The Company must maintain a cash balance of $400,000 on deposit with the bank which issued the aforementioned letter-of-credit. Note 11. SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- The Company entered into various capital leases or financing arrangements (including new units and unit upgrades) aggregating approximately $15,135,000, $4,800,000 and $4,350,000 during 1996, 1995 and 1994, respectively. These amounts were recorded as obligations under capital leases and as leased diagnostic medical equipment. The Company refinanced various capital leases during 1996, 1995 and 1994 aggregating approximately $2,474,000, $7,092,000 and $3,231,000, respectively. Interest paid during 1996, 1995 and 1994 was approximately $2,062,000, $1,736,000 and $1,474,000, respectively. Taxes paid during 1996, 1995 and 1994 approximated $240,000, $71,000 and $46,000. -58- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 12. COMMON STOCK DIVIDENDS ---------------------- On July 10, 1995, the Company issued 120,400 Common Shares in conjunction with a 5% Common Stock dividend for all shareholders of record on June 30, 1995. As a result of the stock dividend, approximately $323,000 was charged to accumulated deficit and, in accordance with Accounting Principles Board Opinion 15, Earnings Per Share, (APB 15), the Company reflected the 5% Common Stock dividend in calculating earnings per share for 1994. On January 14, 1997, the Company issued 247,130 Common Shares in accordance with a 7% Common Stock dividend for all shareholders of record on January 10, 1997. The December 31, 1996 financial statements have been adjusted to reflect this post balance sheet equity activity (Note 2). Further, in accordance with APB 15, the Company has reflected the 7% Common Stock dividend in calculating earnings per share for all periods presented (Note 2). In accordance with the Company's Warrant Agreement, the Company's publicly- traded Warrants were recapitalized to reflect the Common Stock dividend. As a result, each Warrant certificate entitled the holder to purchase 1.1235 shares of stock for $7.00. In July 1995, the Company issued a similar 5% Common Stock dividend. Such publicly traded warrants expired on March 4, 1997 (Note 18). Note 13. DISCONTINUED OPERATIONS ----------------------- On December 30, 1993, the Company formally adopted a plan to sell its freestanding full-service diagnostic imaging center and its radiation oncology center during 1994 and 1995. The following table presents net revenues, net losses from discontinued operations, net losses on disposal of discontinued operations and selected balance sheet information relating to the freestanding full-service diagnostic imaging and radiation oncology businesses as of, and for the years ended, December 31, 1995 and 1994:
1995 1994 -------- ---------- Net revenues $821,000 $1,660,077 Loss from discontinued operations -- -- Loss on disposal of discontinued operations, net of tax benefit of $68,000 in 1994 -- 132,000 Accounts receivable, net -- 148,189 Leased medical equipment, net -- 1,305,897 Leasehold improvements, net -- 277,176 Deferred costs, net -- 197,297 Other assets, net -- 137,291 Accounts payable and accrued expenses -- 88,154 Long-term debt and capital lease obligations -- 1,305,728 Reserve for loss on discontinued operations -- 456,302
-59- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 13. DISCONTINUED OPERATIONS (continued) ----------------------- The Company sold substantially all of the assets of the Auburn Regional Center for Cancer Care on October 31, 1994. The sale price of the Center was approximately $1.3 million comprised of $400,000 in cash and the assumption of the Center's liabilities. The Company remains obligated on approximately $270,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have the Company released from these leases and has secured its obligations to the Company to perform on these leases through a pledge of certain assets in favor of the Company (Note 3). The Company had previously established a discontinued operations reserve and accordingly, no gain or loss was recorded as a result of this sale. In January 1995, the Company restructured the majority of the long-term debt and capital lease obligations of the freestanding imaging center resulting in debt forgiveness of approximately $300,000, a lower interest rate and extension of the term to 66 months, including interest only payments for the first six months. The debt forgiveness was considered in determining the adequacy of the reserve for loss on discontinued operations as of December 31, 1994. In relation to this debt restructuring, the Company increased the letter-of-credit outstanding to $400,000 (Note 10). On June 30, 1995, the Company completed the sale of substantially all of the assets of its remaining freestanding diagnostic imaging center, Airport Regional Imaging Center ("Airport Center"), located in Coraopolis, Pennsylvania for a total sale price of approximately $300,000, including cash and net trade receivables. Although the buyer assumed all future operating liabilities of the Airport Center, the Company remains obligated on approximately $600,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have the Company released from these leases and has secured its obligations to the Company to perform on these leases through a pledge of stock and certain assets in favor of the Company (Note 3). The Company had previously established a discontinued operations reserve and accordingly, no gain or loss was recognized as a result of this sale. Note 14. SALE OF PARTNERSHIP INTERESTS ----------------------------- On June 30, 1995, in conjunction with the sale of the Airport Center which had been treated as a discontinued operation (Note 13), the Company sold its majority ownership and general partner rights in four cardiac care partnerships for a total sale price of $300,000 comprised of $200,000 in cash and a $100,000, thirty-month note. The Company recognized a pre-tax gain on this sale of $48,219. The partnerships, which constituted approximately seven percent of the Company's revenues, had total assets of approximately $1.4 million, comprised primarily of diagnostic equipment and accounts receivable, and total liabilities of approximately $1.2 million comprised primarily of capital lease obligations associated with the diagnostic equipment. -60- SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------ Note 15. LITIGATION ---------- The Company had been named as a defendant, along with a hospital which contracts for the Company's MRI services, in a claim filed by a woman who alleged to have incurred partial paralysis as a result of being mishandled during an MRI procedure. The claim had been filed for $6.0 million in damages. The claim was settled by the Company's insurance company in November 1996 with no admission of liability by the Company and no financial effect to the Company. Note 16. ACQUISITION ----------- On March 21, 1996, the Company purchased certain assets of a mobile provider which operated mobile units in the state of North Carolina (the "Seller"). The purchase price approximated $600,000 in cash [net of negotiated trade-in value of approximately $500,000 (which approximated the purchase price of the units acquired) for two of the Seller's mobile MRI units] in exchange for MRI Programs including Certificate of Need licenses or exemptions and certain customer service contracts. The Company traded-in and upgraded one of the purchased units to newer technology in April 1996 and traded-in and upgraded the second unit during July 1996 (Note 3). Note 17. SALES TAX REFUND ---------------- During September 1996, the Company received formal notification of a state sales tax refund of approximately $300,000, net of expenses. The refund is the result of sales tax paid to a certain state over a period of time which the Company determined (by obtaining a private letter ruling from the state) was actually exempt from such tax. Payment of the refund was received in January 1997. Note 18. SUBSEQUENT EVENT ---------------- During January through March 4, 1997 (the Warrants expired at 5:00 p.m. on March 4, 1997) 1,677,000 Warrants (Note 5) were exercised and the Company issued 1,882,000 shares of Common Stock of the Company. The Company received net cash proceeds of approximately $11.7 million as a result of such Warrant exercises. The Warrants ceased trading on March 5, 1997. -61- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information set forth above in Part I under the caption "Executive Officers of the Registrant" is incorporated herein by reference. The other information required by this item is incorporated herein by reference to the information set forth under the captions "Election of Directors", "Board of Directors and Certain Board Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement (the "Proxy Statement") for the May 7, 1997, Annual Meeting of Stockholders filed or to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by this item is incorporated herein by reference to the information set forth in the second paragraph under the caption "Board of Directors and Certain Board Committees" and the information set forth under the caption "Executive Compensation and Other Information" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by this item is incorporated herein by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by this item is incorporated herein by reference to the information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement. -62- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is included in the consolidated financial statements or notes thereto, or is not applicable or required. (a) (1) A listing of the consolidated financial statements, notes and independent auditors' report required hereunder is set forth in Item 8 of this Report on Form 10-K. (2) Financial Statement Schedule: The following are included in this Report: Schedule II - Valuation and Qualifying Accounts (3) Exhibits.
Exhibit No. Reference - ----------- --------- 3.1 Certificate of Incorporation of SMT, as amended Incorporated herein by reference is Exhibit 3.1 to Registration Statement No. 33-44329 on Form S-1 (the "Form S-1") 3.2 By-Laws of SMT Incorporated herein by reference is Exhibit 3.2 to the Form S-1. 4.1 Warrant Agreement dated March 11, 1992 Incorporated herein by reference is Exhibit 4.2 to SMT's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1992. 4.2 Rights Agreement between SMT Health Incorporated herein by reference is Exhibit 1 to Services Inc. and American Stock Transfer the Registrant's Registration Statement on Form and Trust Company dated November 8, 1995 8-A Amendment No. 1, filed on December 6, 1995. 10.1 Lease for SMT's facility Incorporated herein by reference is Exhibit 10.01 to SMT's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1994. 10.2* Employment Agreements with Jeff D. Bergman Incorporated herein by reference are Exhibit 10.41 to SMT's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994 and Exhibit 10.01 to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1996.
__________________ *Denotes management agreement or compensatory plan or arrangement. -63-
10.3* Employment Agreements with Daniel Dickman Incorporated herein by reference are Exhibit 10.41 to SMT's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994 and Exhibit 10.02 to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1996. 10.4* 1996 Employee Stock Option Plan Filed herewith. 10.5* 1991 Employee Stock Option Plan (as amended Incorporated herein by reference is Exhibit 10.04 on April 27, 1995) to the Company's Form 10-Q for the Quarter Ended June 30, 1995. 10.6* 1991 Directors Stock Option Plan for Non- Incorporated herein by reference is Exhibit 10.05 Employee Directors (as amended April 27, to the Company's Form 10-Q for the Quarter 1995) Ended June 30, 1995. 10.7* SMT Profit Sharing Plan Incorporated herein by reference is Exhibit 10.30 to SMT's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1992. 10.8 Master Security Agreement, dated October 6, Incorporated herein by reference is Exhibit 10.42 1992, between U.S. Concord, Inc. and Airport to SMT's Annual Report on Form 10-K for the Regional Imaging Center, L.P. , including Fiscal Year Ended December 31, 1992. exhibits thereto 10.9 Lease renewal and upgrade dated March 15, Incorporated herein by reference is Exhibit 1993, between SMT Health Services Inc. and 10.03 to the Company's Form 10-Q for the Quarter GE Medical Systems Ended September 30, 1994. 10.10 Master Equipment Lease Agreement dated as Incorporated herein by reference is Exhibit 10.06 of September 15, 1994, between Financing for to the Company's Form 10-Q for the Quarter Science International, Inc. and SMT Health Ended September 30, 1994. Services Inc., including exhibits thereto 10.11 Master Maxi-service Agreement Number Incorporated herein by reference is Exhibit 10.07 dated October 6, 1994, by and between GE to the Company's Form 10-Q for the Quarter Ended Medical Systems and SMT Health Services September 30, 1994. Inc., including exhibits thereto 10.12 Asset Purchase Agreement between Universal Incorporated herein by reference is Exhibit 10.08 Treatment Centers, Inc. and SMT Health to the Company's Form 10-Q for the Quarter Ended Services Inc., dated as of October 31, 1994, September 30, 1994. including schedules thereto 10.13 Master Equipment Lease dated November 21, Incorporated herein by reference is Exhibit 10.31 1994, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto
__________________ *Denotes management agreement or compensatory plan or arrangement. -64-
10.14 Master Equipment Lease dated January 26, Incorporated herein by reference is Exhibit 10.32 1995, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto 10.15 Master Equipment Lease dated January 26, Incorporated herein by reference is Exhibit 10.33 1995, by and between Laurel Capital Corpora- to SMT's Annual Report on Form 10-K for the tion and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto 10.16 Master Equipment Lease dated February 3, Incorporated herein by reference is Exhibit 10.34 1995, by and between Copelco Capital, Inc. to SMT's Annual Report on Form 10-K for the and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto 10.17 Master Equipment Lease dated February 20, Incorporated herein by reference is Exhibit 10.35 1995, by and between Heller Financial Leasing, to SMT's Annual Report on Form 10-K for the Inc. and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto 10.18 Master Equipment Lease dated February 20, Incorporated herein by reference is Exhibit 10.36 1995, by and between Heller Financial Leasing, to SMT's Annual Report on Form 10-K for the Inc. and SMT Health Services Inc. and exhibits Fiscal Year Ended December 31, 1994. thereto 10.19 Loan Modification Agreement dated January 1, Incorporated herein by reference is Exhibit 10.37 1995, by and between Airport Regional Imaging to SMT's Annual Report on Form 10-K for the Center, L.P. and Marine Midland Business Loans, Fiscal Year Ended December 31, 1994. Inc., formerly known as U.S. Concord, Inc. 10.20 Master Lease/Service Agreement, Agreement Incorporated herein by reference is Exhibit 10.01 Number 8003 dated March 28, 1995 by and to the Company's Form 10-Q for the Quarter Ended between G.E. Medical Systems and SMT June 30, 1995. Health Services Inc. 10.21 Agreement of Purchase and Sale By and Incorporated herein by reference is Exhibit 10.02 Between Airport Regional Imaging Center, to the Company's Form 10-Q for the Quarter Ended L.P. and SMT Cardiac Corp., as Seller and June 30, 1995. C.F. Services, Inc. and C.F. Airport Health Services, Inc. as Buyers (and related schedules; Equipment Sublease by and between Airport Regional Imaging Center, L.P. and C.F. Airport Health Services, Inc. dated June 30, 1995; Credit Agreement dated June 30, 1995; Security Agreement dated June 30, 1995; Pledge of Securities Agreement dated June 30, 1995; and Continuing Agreement of Guaranty and Suretyship including Authority to Confess Judgment after Default)
-65-
10.22 Agreement between Shared Medical Enterprises Incorporated herein by reference is Exhibit 10.03 and SMT Health Services Inc. dated July 1, 1995 to the Company's Form 10-Q for the Quarter Ended June 30, 1995. 10.23 Loan and Security Agreement, Agreement Incorporated herein by reference is Exhibit 10.01 Number 130-0001386-000 dated September to the Company's Form 10-Q for the Quarter 27, 1995 by and between Siemens Credit Ended September 30, 1995. Corporation and SMT Health Services Inc. 10.24* Employment Agreements with David A. Zynn Incorporated herein by reference is Exhibit 10.04 to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1996 and Exhibit 10.44 to SMT's Annual Report on Form 10-K for Fiscal Year Ended December 31, 1995. 10.25* Employment Agreements with David Spindler Incorporated herein by reference is Exhibit 10.03 to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1996 and Exhibit 10.45 to SMT's Annual Report on Form 10-K for Fiscal Year Ended December 31, 1995. 10.26* Warrant Agreement dated August 9, 1995 by Incorporated herein by reference is Exhibit 10.46 and between SMT Health Services Inc. and to the Company's Annual Report on Form 10-K for Mark A. DeSimone the Fiscal Year Ended December 31, 1995. 10.27* Warrant Agreement dated August 9, 1995 by Incorporated herein by reference in Exhibit 10.47 and among Jeff D. Bergman, Daniel Dickman, to SMT's Annual Report on Form 10-K for the Gerald Cohn, Alan Novich and David J. Malone Fiscal Year Ended December 31, 1995. 10.28 Agreement of Purchase and Sale Between Incorporated herein by reference is Exhibit 10.49 Trans-Carolina Imaging, LLC, as Seller, and to SMT's Annual Report on Form 10-K for the SMT Mobile V Corp., as Buyer dated as of Fiscal Year Ended December 31, 1995. February 27, 1996 10.29 Engagement Letter by and among SMT Health Incorporated herein by reference is Exhibit 10.02 Services Inc. and Commonwealth Associates to the Company's Form 10-Q for the Period Ended September 30, 1995. 10.30 Warrant Agreement by and among SMT Health Incorporated herein by reference is Exhibit 10.03 Services Inc. and Commonwealth Associates to the Company's Form 10-Q for the Period Ended September 30, 1995. 10.31 Promissory Note and Loan and Security Incorporated herein by reference is Exhibit 10.52 Agreement by and between Siemens Credit to SMT's Annual Report on Form 10-K for the Corporation and SMT Health Services Inc. Fiscal Year Ended December 31, 1995. dated February 9, 1996
__________________ *Denotes management agreement or compensatory plan or arrangement. -66-
10.32 Amended Schedule of Leased Equipment by Incorporated herein by reference is Exhibit 10.53 and between Laurel Capital Corporation and to SMT's Annual Report on Form 10-K for the SMT Health Services Inc. dated January 4, 1996 Fiscal Year Ended December 31, 1995. 10.33* SMT Health Services Inc. 1995 Directors Incorporated herein by reference is Exhibit 10.54 Warrant Plan to SMT's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995. 10.34 Master Equipment Lease dated August 28, 1996 Incorporated herein by reference is Exhibit 10.05 by and between SMT Health Services Inc. and to the Company's Form 10-Q for the Quarterly DVI Financial Services Inc. Period Ended September 30, 1996 10.35 Loan and Security Agreement dated September Incorporated herein by reference is Exhibit 10.06 11, 1996 by and between Siemens Credit to the Company's Form 10-Q for the Quarterly Corporation and SMT Health Services Period Ended September 30, 1996 10.36 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.07 September 26, 1996 by and between Laurel to the Company's Form 10-Q for the Quarterly Capital Corporation and SMT Health Services Period Ended September 30, 1996 Inc. 10.37 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.08 July 26, 1996 by and between Laurel Capital to the Company's Form 10-Q for the Quarterly Corporation and SMT Health Services Inc. Period Ended September 30, 1996 10.38 Finance Lease and Security Agreement dated Incorporated herein by reference is Exhibit 10.09 July 26, 1991 by and between Laurel Capital to the Company's Form 10-Q for the Quarterly Corporation and SMT Health Services Inc. Period ended September 30, 1996 (Lease 2166) 10.39 Finance Lease and Security Agreement dated Filed herewith. December 15, 1996 by and between Laurel Capital Corporation and SMT Health Services Inc. 10.40 Agreement of Purchase and Sale between Palmetto Filed herewith. Community Health Network and SMT Health Services Inc. 11.1 Computation of Earnings Per Share Filed herewith. 21.1 List of Subsidiaries Filed herewith. 23.1 Consent of Independent Public Accountants Filed herewith. 27.1 Financial Data Schedule Filed herewith. 99.1 Press Release dated March 17, 1997 Filed herewith.
__________________ *Denotes management agreement or compensatory plan or arrangement. -67- PART V SMT will furnish to the Commission upon request copies of any instruments not filed herewith, if any, which authorize the issuance of long-term obligations of SMT not in excess of 10% of SMT's total assets on a consolidated basis. (b) During the quarter ended December 31, 1996, SMT filed no report on Form 8-K. (c) SMT hereby files as exhibits to this Form 10-K the exhibits set forth in Items 14(a)(3) hereof which are not incorporated by reference. (d) SMT hereby files as financial statement schedules to this Form 10-K the financial statement schedules set forth in Item 14(a)(2) hereof. -68- SMT HEALTH SERVICES INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS -----------------------------------------------
Balance at Additions Additions Balance Beginning Charged to Charged to at End Descriptions of Period Costs & Expenses Other Accounts Deductions of Period - ---------------------------- ---------- ---------------- -------------- ---------- --------- Year Ended December 31, 1994 Provision for loss on disposal of discontinued operations $1,400,000 $200,000 $ -- $1,144,000 $456,000 ========== ======== ====== ========== ========= Valuation allowance related to deferred tax assets $ 487,500 $ -- $ -- $ 72,500 $415,000 ========== ======== ====== ========== ========= Allowance for doubtful accounts $ 13,000 $ -- $ -- $ 13,000 $ -- ========== ======== ====== ========== ========= Year Ended December 31, 1995 Provision for loss on disposal of discontinued operations $ 456,000 $ -- $ -- $ 456,000 $ -- ========== ======== ====== ========== ========= Valuation allowance related to deferred tax assets $ 415,000 $ -- $ -- $ 312,000 $ 103,000 ========== ======== ====== ========== ========= Year Ended December 31, 1996 Valuation allowance related to deferred tax assets $ 103,000 $ -- $ -- $ 103,000 $ -- ========== ======== ====== ========== =========
-69- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 in the city of Pittsburgh, Commonwealth of Pennsylvania, on March 20, 1997. SMT HEALTH SERVICES INC. By: /s/ Jeff D. Bergman --------------------------------------- Jeff D. Bergman, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 20, 1997. Signature Title --------- ----- Principal Executive Officer: /s/ Jeff D. Bergman ---------------------------- Jeff D. Bergman President, Chief Executive Officer and Director Principal Financial and Accounting Officer: /s/ David A. Zynn ---------------------------- David A. Zynn Chief Financial Officer, Treasurer, Chief Accounting Officer and Assistant Secretary Directors: /s/ Gerald L. Cohn /s/ Alan Novich ---------------------------- -------------------------- Gerald L. Cohn Alan Novich /s/ Daniel Dickman /s/ David J. Malone ---------------------------- -------------------------- Daniel Dickman David J. Malone -70- EX-10.39 2 FINANCE LEASE & SECURITY AGREEMENT LAUREL CAPITAL CORPORATION FINANCE LEASE 3810 McKnight East Drive Pittsburgh, PA 15237 [412] 366-6440 Finance Lease No. 2205 This Lease, made this 9th day of December 1996 by and between LAUREL CAPITAL CORPORATION ("Lessor") and SMT HEALTH SERVICES INC.("Lessee"). 1. LEASE AGREEMENT. Lessor hereby leases to Lessee, and Lessee hereby rents from Lessor, all the machinery, equipment and other personal property (individually "Item of Equipment" and collectively"Equipment") described in Equipment Lease Schedules which are or may from time to time hereafter be executed by Lessor and Lessee and attached hereto or incorporated herein by reference ("Schedules") upon the terms and conditions set forth in this Lease, as supplemented, as regards each Item of Equipment, by the terms and conditions set forth in the Schedule identifying that Item of Equipment. Whenever reference is made herein to "this Lease", it shall be deemed to include each of the several Schedules and the Insurance Schedule(s)referred to herein all of which constitute one undivided lease of the Equipment. 2. TERM. (a) The obligations under this Lease commence upon the written acceptance hereof by Lessor and shall end upon full performance and observance of each and every term, condition and covenant set forth in this Lease and any extensions hereof. The rental term for Equipment listed in each Schedule shall commence on the date indicated on such Schedule and shall terminate on the last day of the term stated in such Schedule. (b) In the event Lessor shall make payments on the Equipment prior to the commencement date of the rental term as indicated on the Schedule, Lessee shall pay interim rental payments from the date of such payments by Lessor to the commencement date of the rental term. The interim rental payments shall be based on the daily equivalent of two (2.00%) percent over the prime interest rate (fully floating) as announced from time to time by PNC Bank, National Association. Interim rental payments are due monthly. 3. RENT. The rent, including interim rental payments, for the Items of Equipment described in each Schedule shall be the amount stated in such Schedule. Rent is an absolute obligation of Lessee due upon the inception of each rental or interim rental term and payable as specified in each particular Schedule irrespective of any claims, demands, set-offs, actions, suits or proceedings that Lessee may have or assert against Lessor or any supplier of Equipment. Rent and interim rent shall be payable to Lessor at its office, 3810 McKnight East Drive, Pittsburgh, Pennsylvania 15237, or at such other place as Lessor or its assigns may designate in writing to Lessee from time to time. 4. DELINQUENT RENT PENALTY. If Lessee shall fail to pay any rent, interim rent installment or other amount due hereunder within ten (10)days after the due date and until all sums due hereunder have been declared due and payable in accordance with Paragraph 24, Lessee shall pay to Lessor a late charge of five (5%) percent of such amount due for each month or part thereof for which said rent or other sums shall be delinquent. After all sums are declared due and payable in accordance with Paragraph 24, Lessee shall pay interest at the rate of fifteen (15%) percent per annum or the maximum contract rate permitted by law, whichever is less, on such accelerated sums from the date of acceleration until paid, and whether or not judgment hereon has been entered. 5. DELIVERY AND INSTALLATION. Lessee will select the type, quantity and supplier of each Item of Equipment and in reliance thereon such Equipment will then be ordered by Lessor from such supplier or Lessor may at its option elect to accept an assignment of any existing purchase order. Lessor shall not be liable for loss or damage occasioned by any cause, circumstance or event of whatsoever nature, including, but not limited to, failure of or delay in delivery, delivery to wrong location, delivery of improper equipment or property other than the Equipment, damage to the Equipment, governmental regulations, strikes, embargoes or other causes, circumstances or events whether of a like or unlike nature. Lessee, at its expense, will pay all transportation, packing, installation, testing and other charges in connection with the delivery, installation and use of each Item of Equipment. In the event that the cost of any Item of Equipment differs from the price set forth in the purchase order therefor, the monthly rental shall be changed accordingly to fully reflect any such difference. In the event that Lessee fails or refuses to accept delivery of the Equipment within ninety (90) days following the execution of the Lease (unless such period is extended by an agreement between Lessor and Lessee in writing), Lessor may terminate the Lease and Lessee will remit to the Lessor an amount equal to the down payment and installments previously paid by the Lessor to the vendor or supplier of the Equipment, together with interest accrued thereon at the highest contractual rate enforceable against Lessee under applicable law but never at a rate higher than fifteen (15%) percent per annum. Lessor shall assign to Lessee without recourse all of Lessor's interest in and to the Equipment under the vendor purchase agreements. 6. WARRANTY OF LESSEE'S QUIET POSSESSION. Lessor warrants and covenants that so long as Lessee faithfully performs this Lease, Lessee, subject to the disclaimer of warranties set forth immediately below, shall be entitled to quietly possess and use the Equipment without interference. 7. DISCLAIMER OF WARRANTIES. EXCEPT FOR THE WARRANTIES SET FORTH ABOVE, LESSOR, NOT BEING THE MANUFACTURER OF THE EQUIPMENT NOR THE MANUFACTURER'S AGENT, MAKES NO EXPRESS OR IMPLIED WARRANTY OF ANY KIND WHATSOEVER WITH RESPECT TO THE EQUIPMENT. THIS DISCLAIMER OF WARRANTIES INCLUDES BUT IS NOT LIMITED TO ANY WARRANTY REGARDING: THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR ANY PARTICULAR PURPOSE; THE DESIGN OR CONDITION OF THE EQUIPMENT; THE QUALITY OR CAPACITY OF THE EQUIPMENT; THE WORKMANSHIP OF THE EQUIPMENT; COMPLIANCE OF THE EQUIPMENT WITH THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT PERTAINING THERETO; PATENT INFRINGEMENT; OR LATENT DEFECTS; it being agreed that all such risks, as between Lessor and Lessee, are to be borne by the Lessee. Lessor is not responsible or liable for any direct, indirect, incidental or consequential damage to, or loss resulting from, the installation, operation or use of any Item of Equipment or any product manufactured thereby. 8. NATURE OF EQUIPMENT. Not withstanding anything to the contrary contained in this Agreement, including the characterization of this Agreement as a lease, the parties hereto acknowledge and agree that, legal title to each Item of Equipment leased hereunder shall be with the Lessee. Each Item of Equipment shall remain personal property, notwithstanding the manner in which it may be affixed to any real property. Lessee will otherwise take all action required to keep the Equipment free and clear of all levies, liens and encumbrances which result from any act or omission of the Lessee. Lessor assumes no liability and makes no representation as to the treatment by Lessee of this Lease, the Equipment, or to the rental payments for financial statement or tax purposes. 9. LOCATION OF EQUIPMENT. Each Item of Equipment shall be placed into service at the location specified in Exhibit B, Location of Equipment attached to the Schedule. Lessee shall promptly provide written notice to Lessor of any and all location changes. 10. LESSOR'S RIGHT OF INSPECTION. Lessor and its agents shall have the right during business hours to enter upon the premises where any Item of Equipment is located (to the extent Lessee can permit) for the purpose of inspection. 11. USE OF EQUIPMENT. Lessee must use the Equipment in a careful and proper manner in conformity with (i) all statutes and regulations of each governmental authority having jurisdiction over the Lessee and/or the Equipment and its use, and (ii) all policies of insurance relating to the Equipment and/or its use. In addition, Lessee shall not (i)use any Item of Equipment in any manner that would impair the applicability of manufacturer's warranties or render any Item of Equipment unfit for its originally intended use; nor (ii) permit anyone other than authorized and competent personnel to operate any Item of Equipment. 12. ALTERATIONS. Without the prior written consent of Lessor, which consent shall not be unreasonably withheld, Lessee shall not make any alterations, modifications or attachments to the Equipment. All alterations, modifications and attachments of whatsoever kind or nature made to any Item of Equipment must be removed without damaging the functional capabilities or economic value of the affected Item of Equipment upon the termination of the Lease. Under no circumstances shall any such alteration, modification or attachment be encumbered by Lessee. 13. MAINTENANCE AND REPAIRS. Lessee shall at its own expense and without authority to bind Lessor maintain each Item of Equipment in good mechanical condition and running order, normal wear and tear excepted. Immediately upon installation, Lessee shall provide to Lessor a perfected first lien security interest in any and all replacement parts. 14. RISK OF LOSS, DAMAGE AND THEFT. (a) All risk of loss, damage, theft or destruction, partial or complete, to any Item of Equipment incurred or occasioned by any cause, circumstance or event of whatever nature will be borne by Lessee from and after delivery of each Item of Equipment to a carrier FOB point of origin. Lessee shall promptly notify Lessor of any theft of or loss or damage to the Equipment. (b) Neither total nor partial loss of use or possession of any Item of Equipment shall abate the rent. (c) An Item of Equipment shall be deemed subjected to total loss when (i) it has disappeared regardless of the reason for disappearance or (ii) when it has sustained physical damage and the estimated cost of repair exceeds 75% of the fair market value (as determined by an independent appraiser chosen by Lessor) on the date of damage. Lessee's duty to pay rent for any Item of Equipment subjected to total loss shall be discharged by paying to Lessor the sum of the then unpaid principal plus accrued interest plus the purchase option at the price specified on the Schedule plus any applicable prepayment penalty plus all costs associated with releasing the Lessor's security interest plus any other sums then due and payable under the Lease. The amount of applicable insurance proceeds, if any, actually received by Lessor shall be subtracted from the amount for which Lessee is liable under this Paragraph 14. (d) Lessee shall cause any Equipment subjected to partial loss to be restored to original capability. Lessor shall, upon receiving satisfactory evidence of restoration, promptly pay to Lessee the proceeds of any insurance or compensation received by Lessor, by reason of such partial loss, provided however, that Lessor shall release such proceeds, to the extent such proceeds have been received by Lessor, in advance of restoration to the extent necessary to purchase materials or make progress payments upon the submission of appropriated work orders, invoices, estimates, or other satisfactory documentation. (e) Lessor shall not be obligated to undertake the collection of any claim against any person for either total or partial loss of any Item of Equipment. After Lessee discharges its obligations to Lessor under either 14(c) or 14(d) above, Lessee may, for Lessee's own account, proceed to recover from third parties and shall be entitled to retain any amount recovered. Lessor shall supply Lessee with any necessary assignment of claim. 15. INDEMNIFICATION. (a) Non-tax Liability. Lessee assumes liability for, and hereby agrees to ------------------ indemnify, protect and hold harmless, Lessor, its agents, servants, employees, officers, successors and assigns from and against, any and all liabilities, obligations, losses, damages, injuries, claims, demands, penalties, actions, costs and expenses, including reasonable attorney's fees, of whatsoever kind and nature, arising out of (i) the manufacture, installation, use, condition(including, but not limited to, latent and other defects and whether or not discoverable by Lessee or Lessor), operation, ownership, selection, delivery, leasing, removal or return of any Item of Equipment, regardless of where, how and by whom operated, or (ii) any failure on the part of Lessee to perform or comply with any covenantor condition of this lease. (b) Direct Tax Costs. In addition to all other rents payable hereunder, the ----------------- Lessee agrees to indemnify, protect and hold harmless Lessor, its agents, servants, employees, officers, successors and assigns from and against any and all taxes, license fees, assessments and other governmental charges, fees, fines or penalties of whatsoever kind or character and by whomsoever payable, which are levied, assessed, imposed or incurred during the lease term, (i) on or relating to each Item of Equipment, including any tax on the sale, ownership, use, leasing, shipment, transportation, delivery or operation thereof, (ii) on the exercise of any option, election or performance of an obligation by the Lessee hereunder, (iii) of the kind generally referred to in items (i) and (ii) above which may remain unpaid as of the date of delivery of any Item of Equipment to the Lessee irrespective of when the same may have been levied, assessed, imposed or incurred, and (iv) by reason of all gross receipts, business and occupation, and like taxes on or measured by rents payable hereunder levied by any state or local taxing authority having jurisdiction where any Item of Equipment is located. The Lessee agrees to comply with all state and local laws requiring the filing of ad valorem tax returns relating to each Item of Equipment. Any statements for such taxes received by the Lessor shall be promptly forwarded to the Lessee. This subparagraph shall not be deemed to obligate the Lessee to pay (i) any taxes, fees, assessments and charges which may have been included in the Lessor's cost of each Item of Equipment as set forth in Schedule(s) hereto, or (ii) any income or like taxes against the Lessor on or measured by the net income from the rents payable hereunder. The Lessee shall not be obligated to pay any amount under this subparagraph so long as it shall, at its expense and in good faith and by appropriate proceedings, contest the validity or the amount thereof unless such contest would adversely affect the title of the Lessee, or any security interest of Lessor, to an Item of Equipment or would subject any Item of Equipment to forfeiture or sale. The Lessee agrees to indemnify the Lessor against any loss, claim, demand and expense including legal expense resulting from such nonpayment or contest. (c) Indemnity Payment. The amount payable pursuant to subparagraphs 15(a) ------------------ and 15(b) shall be payable upon demand of the Lessor accompanied by a statement describing in reasonable detail such loss, liability, injury, claim, expense or tax and setting forth the computation of the amount so payable. (d) Survival. The indemnities and assumptions of liabilities and obligations --------- provided for in this Paragraph 15 shall continue in full force and effect notwithstanding the expiration or other termination of this Lease. 16. LESSEE'S ASSIGNMENT. Without the prior written consent of the Lessor, Lessee shall not bail, hypothecate, transfer or dispose of any Item of Equipment or any interest in this Lease nor impair the Lessor's title to the Equipment. Lessee shall not assign this Lease, nor shall this Lease or any rights under this Lease or in any Item of Equipment inure to the benefit of any trustee in bankruptcy, receiver, creditor, or other successor of Lessee whether by operation of law or otherwise, without prior written consent of the Lessor. 17. LESSOR'S ASSIGNMENT. All rights of Lessor hereunder and in any Item of Equipment may be assigned, pledged, mortgaged, transferred, or otherwise disposed of, either in whole or in part, without notice to Lessee. No such assignee shall be obligated to perform any duty, covenant, or condition required to be performed by Lessor under the terms of this Lease. Such assignee shall have all rights, powers and remedies given to Lessor by this Lease, and upon notice to Lessee, shall be named as loss payee or co-insured under all policies of insurance maintained pursuant to Paragraph 18 hereof. If Lessor assigns this Lease or the monies due or to become due hereunder or any other interest herein, Lessee agrees not to assert against Lessor's assignee any defense, set-off, recoupment, claim or counterclaim which Lessee may have against Lessor, whether arising under this Lease or any other transaction between Lessor and Lessee. Subject to Paragraph 16 hereof and this Paragraph 17, this Lease inures to the benefit of, and is binding upon, the heirs, legatees, personal representatives, successors and assigns of the parties hereto. 18. INSURANCE. Lessee will at its own expense insure each Item of Equipment in compliance with the terms and conditions of the Insurance Schedule(s) attached hereto or incorporated herein by reference inform satisfactory to Lessor with insurance carriers approved by Lessor and in an amount not less than one hundred five (105%) percent of the unpaid principal balance due hereunder. The proceeds of any insurance policy due by reason of theft or loss of or damage to any Item of Equipment shall be applied as provided in Paragraph 14 hereof. In addition to the compliance with the terms and conditions of the Insurance Schedule(s) and the other terms and conditions of this Paragraph 18, the Lessee shall comply with the following conditions: (a) Lessee, prior to the inception of any rental term, shall deliver to Lessor all required policies of insurance or in the alternative certificates of insurance (in triplicate); (b) Lessee shall cause each insurer to agree by endorsement on the policies or certificates of insurance or by an independent instrument furnished Lessor that each such insurer will give at least thirty (30) days written notice to Lessor before any such policy or policies of insurance will be altered or cancelled for any reason, including without limitation, failure of the Lessee to pay premiums; (c) All coverage required by the Insurance Schedule(s) must be in effect when Lessor takes delivery or causes delivery to be made FOB point of origin; (d) All insurance policies must indicate that the Lessor is an additional insured for all aspects of liability insurance coverage and is loss payee for all aspects of insurance coverage relating to the theft or loss of or damage to Equipment and the proceeds of any public liability or property damage insurance shall be applied first to the extent of the Lessor's liability; (e) Lessee will furnish renewal policies or renewal certificates of insurance (in triplicate) listing Lessor as an additional insured and/or loss payee, as required by this Lease, no later than thirty(30) days prior to the expiration of any insurance coverage required hereby. 19. ADDITIONAL DOCUMENTS. If Lessor shall so request, Lessee shall execute and deliver to Lessor such documents, including without limitation, UCC Financing and Continuation Statements, as Lessor shall deem necessary or desirable for purposes of continuing this Lease or recording or filing to protect the interest of Lessor in each Item of Equipment. Any such filing or recording shall not be deemed evidence of any intent to create a security interest. 20. FURNISHING FINANCIAL INFORMATION. During the term of this Lease and any extensions or renewals hereof, Lessee will furnish to Lessor: (a) Within forty five (45) days after the end of each of the first three quarterly periods of Lessee's fiscal year, a balance sheet and statement of income of Lessee as at the close of such quarterly period from the beginning of the fiscal year to the date of such statement, prepared in accordance with generally accepted accounting principles, consistently applied, and in such reasonable detail as Lessor may request, certified as true, complete and correct by an authorized officer of the Lessee. (b) As soon as practicable, but in any event within ninety (90)days after the end of each fiscal year, a copy of its annual audit prepared by a certified public accountant selected by Lessee and satisfactory to Lessor. (c) In a timely manner such financial statements, reports and other information as the Lessee shall send from time to time to its stockholders and/or file with the Securities and Exchange Commission and/or other materials which Lessor shall reasonably request. 21. PERFORMANCE OF OBLIGATIONS OF LESSEE BY LESSOR. If Lessee fails to promptly perform any of its obligations under this Lease, Lessor may perform the same for the account of Lessee without waiving Lessee's failure as a default. All sums paid or expense or liability incurred by Lessor in such performance (including reasonable legal fees) together with interest thereon at the highest contractual rate enforceable against Lessee, but never at a higher rate than 15% per annum simple, shall be payable by the Lessee upon demand as additional rent. 22. PURCHASE OPTION. Provided Lessee is not in default hereunder, Lessee may purchase all, but not less than all, of the Items of Equipment listed on each individual Schedule at the price specified in such Schedule at the end of the rental term. The purchase of the Items of Equipment shall occur AS IS, WHERE IS, WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER except that Lessor shall deliver title to the Items of Equipment free of any lien or encumbrance created by any act of the Lessor. In the event the Lessee fails to exercise its purchase option, Lessee will return those Items of Equipment not purchased, freight and insurance prepaid, to Lessor(or Lessor's nominee) at a location designated by Lessor. If Lessee fails to exercise its purchase option and fails to return any Item of Equipment, then at Lessor's option this Lease may be extended on a month-to-month basis, with rent payable on the first of each month, at the rate applicable during the lease term just ended. 23. EVENTS OF DEFAULT. Any of the following events or conditions shall constitute an Event of Default hereunder and entitle the Lessor, at its option, to avail itself of the remedies more fully set forth in Paragraph 24 hereof: (a) Non-payment by Lessee of any rent or other amount provided for in this Lease when the same becomes due whether by acceleration or otherwise; (b) Failure of the Lessee to perform any of the non-monetary obligations, terms or conditions of this Lease within thirty (30) of receipt of written notification thereof from Lessor; (c) The Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or the taking possession by any official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of its creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (d) If an involuntary case or other proceeding should be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of thirty (30) days; (e) The occurrence of any event described in this Paragraph 23(c) through (d) hereof with respect to any guarantor or any other party liable for payment or performance of this Lease; (f) Any certificate, statement, representation, warranty or financial statement heretofore or hereafter furnished pursuant to or in connection with this Lease by or on behalf of Lessee or any guarantor or other party liable for payment or performance of this Lease is false in any material respect at the time as of which the facts therein set forth were stated or certified, or omits any substantial contingent or unliquidated liability or claim against Lessee or any such guarantor or other party, or, upon the date of execution of this document or any Schedule, there shall have been any materially adverse change in any of the facts disclosed by any such certificate, statement, representation or warranty, which shall not have been disclosed in writing to Lessor at or prior to the time of the execution of this document or such Schedule. 24. REMEDIES. Upon the happening of any Event of Default hereunder, the rights and duties of the parties shall be as set forth in this Paragraph 24. (a) Upon Lessor's demand, the Equipment shall be promptly delivered to Lessor, at that place or those places designated by Lessor. If Lessee does not so deliver the Equipment, Lessee shall make the Equipment available for retaking and authorizes Lessor, its employees and agents to enter the premises of the Lessee and any other premises (insofar as Lessee can permit) for the purpose of retaking. In the event of retaking, Lessee expressly waives all rights to possession and all claims for injuries suffered through or loss caused by retaking. Any repossession accomplished under this Paragraph 24(a)shall not release Lessee from liability for damages of Lessor sustained by reason of Lessee's default hereunder. (b) Lessor may revoke Lessee's privilege of paying rent in installments and, upon Lessor's demand, the Lessee shall promptly pay to Lessor the portion of the rent then remaining unpaid plus all other sums due and unpaid. (c) Lessor may sell or release the Equipment or any part thereof, at public auction or by private sale or lease at such time or times and upon such terms as Lessor may determine, free and clear of any rights of Lessee and, if notice thereof is required by law, any notice in writing of such sale or lease by Lessor to Lessee not less than ten (10) days prior to the date thereof shall constitute reasonable notice thereof to Lessee. All proceeds of the sale or releasing, or both (less (i) all expenses incurred in retaking the Equipment, making necessary repairs to the Equipment and enforcing this Lease, (ii) all damages that Lessor shall have sustained by reason of Lessee's default, and (iii) reasonable attorney's fees)shall be credited against Lessee's liability hereunder as and when received by Lessor. Sums in excess of Lessee's liability shall belong to Lessee. The Lessee shall be liable for any deficiency. (d) The provisions of this Paragraph 24 shall not prejudice Lessor's right to recover or prove damages for unpaid rent accrued prior to default, or bar an action for a deficiency as herein provided, and the bringing of an action with an entry of judgment against Lessee shall not bar the Lessor's right to repossess any or all Items of Equipment. (e) Lessor's remedies shall be available to Lessor's successors and assigns, shall be in addition to all other remedies provided bylaw, and may be exercised concurrently or consecutively. LESSEE WAIVES ANY AND ALL RIGHTS TO NOTICE AND TO JUDICIAL HEARING WITH RESPECT TO THE REPOSSESSION OF THE EQUIPMENT BY LESSOR IN THE EVENT OF A DEFAULT HEREUNDER BY LESSEE. LESSEE HEREBY WAIVES ANY RIGHT TO DEMAND A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING INSTITUTED BY THE LESSOR OR THE LESSEE IN CONNECTION WITH THIS LEASE. 25. GOVERNING LAW AND CONSENT OF JURISDICTION. This Lease has been executed and delivered in the Commonwealth of Pennsylvania. The laws and decisions of said Commonwealth will govern and control the construction, enforceability, validity and interpretation of this Lease, and of all agreements, instruments and documents, heretofore, now or hereafter executed by Lessee and delivered to Lessor pertaining or relating to this Lease or the transactions contemplated herein. The parties agree that any action or proceeding arising out of or relating to this Lease may be commenced in the Court of Common Pleas of Allegheny County, Pennsylvania, or in the United States District Court for the Western District of Pennsylvania and Lessee agrees that, in addition to any other manner of service prescribed bylaw or rule of court, a summons and complaint commencing an action or proceeding in either such Court shall be properly served upon Lessee and shall confer personal jurisdiction if served personally or by United States registered mail, return receipt requested, to the Lessee at the address indicated below. 26. JUDGMENT BY CONFESSION. LESSEE HEREBY EMPOWERS THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF RECORD WITHIN THE UNITED STATES OR ELSEWHERE TO APPEAR FOR LESSEE AND, WITH OR WITHOUT ONE OR MORE DECLARATIONS FILED, ENTER A JUDGMENT OR JUDGMENTS AGAINST LESSEE IN FAVOR OF LESSOR, AS OF ANY TERM, FOR THE SUM THEN DUE AND PAYABLE UNDER THIS LEASE, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION OF 15%FOR COLLECTION; WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION, AND INQUISITION AND EXTENSION UPON ANY LEVY IS HEREBY WAIVED AND CONDEMNATION AGREED TO, AND THE EXEMPTION OF ALL PROPERTY FROM LEVY AND SALE ON ANY EXECUTION HEREON IS ALSO HEREBY EXPRESSLY WAIVED AND NO BENEFIT OF EXEMPTION SHALL BE CLAIMED UNDER OR BY VIRTUE OF ANY EXEMPTION LAW NOW IN FORCE OR WHICH MAY HEREAFTER BE ENACTED. 27. CONFLICT OF PROVISIONS. In the event of any conflict of provisions between any Schedule and any other document, the provisions of the Schedule shall control. 28. AMENDMENTS AND WAIVERS. This document, the Schedule(s) and Insurance Schedule(s) executed by Lessor and Lessee constitute the entire agreement between Lessor and Lessee with respect to the Equipment and the subject matter of this Lease. No term or provision of this Lease may be changed, waived, amended or terminated except by a written agreement signed by both Lessor and Lessee, except that Lessor may insert on the appropriate Schedule the serial number of any Item of Equipment after delivery thereof. No express or implied waiver by Lessor of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default whether similar in kind or otherwise. 29. NOTICES. Except as otherwise provided in Paragraph 28 above, service of all notices under this Lease shall be sufficient if given personally or mailed to the party involved at its respective address set forth in the most recent Schedule relating hereto, or at such address as such party may otherwise provide in writing from time to time. Any such notice mailed to such address shall be effective three(3) business days from the date of deposit in the United States mail, duly addressed with first class postage prepaid. 30. GENDER; NUMBER. Whenever the context of this Lease requires, the neuter gender includes the masculine and the feminine, and the singular number includes the plural. Whenever the word Lessor is used herein, it shall include all assignees of Lessor. If there is more than one Lessee named in this Lease, the liability of each shall be joint and several. 31. TITLES. The titles to the paragraphs of this Lease are solely for the convenience of the parties, and are not an aid in the interpretation of the instrument. 32. SEVERABILITY OF PROVISIONS. If any provision of this Lease is held invalid or unenforceable, the remaining provisions will not be affected thereby, and to this end the provisions of this Lease are declared severable. 33. LESSEE RIGHT TO SUBLEASE. Lessor acknowledges and agrees that Lessee will sublease the Equipment to SMT Mobile V Corp., or to any other wholly owned subsidiary of Lessee upon prior written notice to Lessor, for the purpose of providing magnetic resonance imaging services under certain Magnetic Resonance Imaging Service Agreements. Lessee shall execute and assign to Lessor such documents between Lessee and Sublessee as Lessor may reasonably request to protect Lessor's rights under this Lease. Lessee acknowledges and agrees that in no event shall any such sublease relieve Lessee from its obligations under this Lease. 34. ADDITIONAL SECURITY. Lessee covenants and agrees that on or before the commencement date of the rental term for the Equipment as designated in the Schedule, Lessee will provide or cause to be provided to Lessor, in form and substance satisfactory to Lessor an assignment of any and all Magnetic Resonance Imaging Service Agreements, or similar agreements, now existing or hereinafter acquired, to be serviced by the Equipment leased hereunder, and a first security interest in any and all payments due thereunder. Lessee will promptly provide written notice to Lessor of any additions, deletions, amendments, or substitutions to any such agreements. Lessee also covenants and agrees to provide, or cause to be provided to Lessor, upon Lessor's request, a Letter of Credit inform and substance satisfactory to Lessor. WITNESS the due execution hereof with the intent to be legally bound. ATTEST/WITNESS: LESSEE: SMT HEALTH SERVICES INC. ADDRESS: 10521 Perry Highway Wexford, PA 15090 By By /s/ David A. Zynn ----------------------- --------------------------------- Title Title CFO / Treasurer --------------------- ------------------------------ Accepted at Pittsburgh, Pennsylvania by: LAUREL CAPITAL CORPORATION By /s/ Bill Zopf --------------------------------- Title ------------------------------ LAUREL CAPITAL CORPORATION 3810 McKnight East Drive Pittsburgh, PA 15237 GUARANTY December 9, 1996 Dear Sirs: For value received, Undersigned jointly and severally unconditionally guarantee to you and become surety to you for the full and prompt performance by SMT Health Services Inc.; 10521 Perry Highway; Wexford, PA 15090; herein called "Obligor", of all obligations which Obligor presently or hereafter may have to you, and payment when due of all sums presently or hereafter owing by Obligor to you, and agree to indemnify you against any losses you may sustain and expenses you may incur in the enforcement of this agreement. For the purposes of this guaranty and indemnity, all sums owing to you by Obligor shall be deemed to have become immediately due and payable if (a) Obligor defaults in any of its obligations to you;(b) a petition under any provisions of the Bankruptcy Code, as amended, or for the appointment of a receiver of any part of the property of Obligor be filed against Obligor, and be not dismissed within thirty days; (c) such a petition is filed by Obligor; (d)Obligor make a general assignment for the benefit of creditors, suspends business or commits any act amounting to a business failure, or (e) an attachment be levied or tax lien be filed against any of Obligor's property. This shall be a continuing guaranty and indemnity and, irrespective of the lack of any notice to or consent of the Undersigned, their obligations hereunder shall not be impaired in any manner whatsoever by any (a) new agreements or obligations of Obligor with you; amendments, extensions, modifications, renewals or waivers of default as to any existing or future agreements or obligations of Obligor or third parties with or to you, or extensions of credit by you to Obligor; (b) adjustments, compromises or releases of any obligations of Obligor, Undersigned or other parties, or exchanges, releases or sales of any security of Obligor, Undersigned or other parties; (c) fictitiousness, incorrectness, invalidity or unenforce-ability, for any reason, of any instrument or writing, or acts of commission or omission by you or Obligor; (d) compositions, extensions, moratoria or other relief granted to Obligor pursuant to any statute presently in force or hereafter enacted, or (e) interruptions in the business relations between you and Obligor. Notice of your acceptance hereof, of default and non-payment by Obligor or any other parties, of presentment, protest and demand, and of all other matters of which Undersigned otherwise might be entitled, is waived. The obligations hereunder of Undersigned are both joint and several, and shall be binding upon their respective heirs and personal representatives. The failure of any person to sign this guaranty and indemnity shall not affect the liability hereunder of any signer thereof. The death or release from liability hereunder of any of Undersigned shall not relieve the others from liability hereunder. Each of Undersigned may terminate his obligations hereunder as to then future transactions between you and Obligor by registered mail notice to you at your above-stated address, provided, however, that such termination shall not affect either his liability hereunder with respect to any obligations of Obligor to you incurred prior to your receipt of such notice, or the continuing liability of such of the others of Undersigned as have not given such notice. This guaranty and indemnity is assignable, shall be construed liberally in your favor and shall inure to the benefit of your successors and assigns. If Obligor should default in the performance of any of Obligor's obligations to you, and if any third party makes any payment to you with respect thereto, such third party shall, to the extent thereof, be subrogated to all of your rights against Undersigned hereunder. Legal rights and obligations hereunder shall be determined in accordance with the laws of the Commonwealth of Pennsylvania. UNDERSIGNED HEREBY EMPOWER THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF RECORD WITHIN THE UNITED STATES OR ELSEWHERE TO APPEAR FOR THEM AND, WITH OR WITHOUT ONE OR MORE DECLARATIONS FILED, ENTER A JUDGMENT OR JUDGMENTS AGAINST THEM OR ANY OF THEM IN FAVOR OF YOU, AS OF ANY TERM, FOR THE SUM THEN DUE AND PAYABLE UNDER THIS AGREEMENT OF GUARANTY, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION OF 15% FOR COLLECTION; WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION, AND INQUISITION AND EXTENSION UPON ANY LEVY IS HEREBY WAIVED AND CONDEMNATION AGREED TO, AND THE EXEMPTION OF ALL PROPERTY FROM LEVY AND SALE ON ANY EXECUTION HEREON IS ALSO HEREBY EXPRESSLY WAIVED AND NO BENEFIT OF EXEMPTION SHALL BE CLAIMED UNDER OR BY VIRTUE OF ANY EXEMPTION LAW NOW IN FORCE OR WHICH MAY HEREAFTER BE ENACTED. This Guaranty has been executed and delivered in the Commonwealth of Pennsylvania. The laws and decisions of said Commonwealth will govern and control the construction, enforceability, validity and interpretation of this Guaranty, and of all agreements, instruments and documents, heretofore, now or hereafter executed by Undersigned and delivered to Lessor pertaining or relating to this Guaranty or the transactions contemplated herein. The parties agree that any action or proceeding arising out of or relating to this Guaranty may be commenced in the Court of Common Pleas of Allegheny County, Pennsylvania, or in the United States District Court for the Western District of Pennsylvania and Undersigned agrees that, in addition to any other manner of service prescribed by law or rule of court, a summons and complaint commencing an action or proceeding in either such Court shall be properly served upon Undersigned and shall confer personal jurisdiction if served personally or by United States registered mail, return receipt requested, to the Undersigned at the address indicated below. Very truly yours, CORPORATE GUARANTORS: SMT MOBILE V CORP. Attest: By By David A. Zynn - VP/Treas ------------------------- --------------------------------------- Title Title Address: 10521 Perry Highway ---------------------------- Wexford PA 15090 ---------------------------- (Corporate Seal) CONDITIONAL ASSIGNMENT AND SECURITY AGREEMENT - --------------------------------------------- This Conditional Assignment and Security Agreement ("Agreement") dated December 9 , 1996 is entered into between SMT Health Services Inc. ("Assignor"/"Lessee"/"Sublessor"), SMT Mobile V Corp. ("Sublessee") and Laurel Capital Corporation ("Assignee/Lessor"). This Agreement is entered into with reference to the following mutually agreed to facts: 1. WHEREAS, Assignor and Assignee have entered into that certain Master Equipment Lease ("Lease") dated December 9 , 1996 providing for the lease of the personal property described in the Lease ("Equipment"); 2. WHEREAS, Assignor desires to sublease the Equipment pursuant to the terms of a sublease dated December 9 , 1996 entered into between Assignor and Sublessee ("Sublease"). NOW, THEREFORE, FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the above parties, hereby agree to the following terms and conditions: 1. Consent to Sublease. Assignee hereby consents to Assignor's Sublease of -------------------- the Equipment to Sublessee under the terms and conditions as provided herein. 2. Conditional Assignment. Assignor hereby conditionally assigns and grants ----------------------- to Assignee a security interest in and all of its rights flowing from and under the Lease and Sublease including without limitation the Equipment; provided, -------- however, Assignee does not hereby assume duties, liabilities or obligations of - ------- Assignor under the Sublease. 3. Conditional Nature of Assignment. Assignee hereby acknowledges and agrees --------------------------------- that so long as there exists no default of any of the terms of the Lease and/or Sublease, Assignor shall have the right to enjoy all of the rights, benefits and privileges arising under the Sublease. 4. Default. Upon or at any time after the occurrence of a breach under any -------- of the terms, provisions or conditions as defined in the Lease and/or Sublease, Assignee may, at its election, exercise any and all rights under the Lease and/or Sublease, in addition to all of its rights under the Lease and/or Sublease, in addition to all of its rights and remedies as a Secured party under the Uniform Commercial Code. 5. Term. This Agreement shall remain in full force and effect so long as any ----- of the obligations, liabilities and debtness of Assignor to Assignee, whether arising under the Lease or otherwise, remain outstanding. 6. Assignment. Assignee shall have the right to assign all of its rights ----------- under this Agreement. Assignor and Sublessee shall not have any right to assign this Agreement without the prior written consent of Assignee. 7. Amendment of Sublease. The Sublease shall not be changed, altered or ----------------------- modified in any manner, except by the prior written consent of Assignee. 8. Subordination. Sublessee acknowledges that the Sublease is in all -------------- respects subject and subordinate to the Lease, including without limitation, the rights of Assignee to repossess the equipment and void the Sublease in the event of a default by Assignor under the Lease. 9. Amendment. This Agreement shall not be released, discharged, changed or ----------- modified in any manner, except by the prior written consent of Assignee. 10. Waiver. No waiver of any right hereunder shall be deemed a waiver or ------- forfeiture of such right as to future matters. 11. California Law. This Agreement shall be governed by and construed in --------------- accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. LAUREL CAPITAL CORPORATION SMT HEALTH SERVICES INC. "Assignee/Lessor" "Assignor/Lessee/Sublessor" By: /s/ Bill Zopf By: /s/ David A. Zynn -------------------------- -------------------------------- Title: Title: VP / Treas ----------------------- ---------------------------- - ------------------------------ ----------------------------------- (Print Name) (Print Name) SMT MOBILE V CORP. "Sublessee" By: /s/ Dan Dickman ------------------------------- Title: VP ---------------------------- ----------------------------------- (Print Name) LAUREL CAPITAL CORPORATION LESSOR SCHEDULE OF LEASED EQUIPMENT 3810 MCKNIGHT EAST DRIVE PITTSBURGH, PA 15237 SCHEDULE NO. 2205-1 ------ - ------------------------------------------------------------------------------- LESSEE (COMPLETE NAME AND ADDRESS) SUPPLIER (COMPLETE NAME AND ADDRESS) SMT Health Services Inc. 1) GE Medical Systems; P.O. Box 414 10521 Perry Highway Milwaukee, WI 53201 Wexford, PA 15090 2) Ellis & Watts P.O. Box 44010 Cincinnati, OH 45244 - ------------------------------------------------------------------------------- 1. This schedule of leased equipment ("Schedule") is hereby made a part of the lease between the undersigned Lessor and the undersigned Lessee dated December 9, 1996. All terms and conditions of said lease are incorporated ---------------- herein by reference. 2. The equipment subject to the to the lease is: - ------------------------------------------------------------------------------- QUANTITY DESCRIPTION AND SERIAL NUMBER PRICE - -------------------------------------------------------------------------------- See Attached Schedule of Equipment, Exhibit "A" Include all taxes levied at the time of sale, or include in block 4.E. below, whichever is appropriate in jurisdiction where equipment is located. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE TOTAL EQUIPMENT COST INCLUDING TAXES LEVIED AT THE TIME OF SALE IS: $1,399,125.69 - -------------------------------------------------------------------------------- 3. Equipment shall be located at See Attached Schedule of Location of ------------------------------------ Equipment, Exhibit "B" and shall not be removed therefrom without Lessor's ---------------------- prior written consent. 4. The original term of the lease as to the equipment described in this Schedule is 5 years commencing on December 15, 1996 and terminating on ----- ----------------- December 15, 2001 unless sooner terminated under the terms of the lease. As - ----------------- rent for the equipment, Lessee shall pay total rent of $1,773,330.00 as follows: -------------
- ---------------------------------------------------------------------------------------------------------------------- A B C D E F G Security Number and Date these Amt. of Tax on Total payment Date these Deposit type payments payment payment (D+E) payments (If any) of payments commence (if any) terminate - ---------------------------------------------------------------------------------------------------------------------- Monthly 60 12/15/96 29,555.50 0.00 29,555.50 10/15/2001 --------- ---------------- ---------------- ----------- --------------- ----------------- Quarterly ------- ---------------- ---------------- ----------- --------------- ----------------- Annually ------- ---------------- ---------------- ----------- --------------- ----------------- - ----------------------------------------------------------------------------------------------------------------------
5. Lessee may, pursuant to Section 22 Purchase Option of the Lease Agreement, purchase all but not less than all of the Items of Equipment listed hereon for $1.00 at the end of the rental term. 6. By executing and delivering to Lessor, the Lessee Acceptance form attached hereto, Lessee warrants, covenants and agrees that (a) Lessee has received all Equipment described in this Schedule at the location described in 3 hereof; (b) Lessee has duly inspected and accepts such Equipment without reservations; (c) Lessee is unconditionally bound to pay to Lessor the Total Rent and other payments due under the Lease, whether or not any Equipment described herein may now be or hereafter become unsatisfactory in any respect; and (d) Notwithstanding anything contained herein, Lessor and Lessee shall continue to have all rights which either of them might otherwise have with respect to Equipment described herein against any manufacturer or seller of said Equipment or any part thereof. - -------------------------------------------------------------------------------- ADDITIONAL REMARKS: Lessee paid the first and last monthly rental payments in advance. - -------------------------------------------------------------------------------- SIGNATURES - IN INK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Date ___ December 11 ________, 1996 Date ___ December 11 ________, 1996 Lessee: (Full legal name) Lessor: LAUREL CAPITAL CORPORATION SMT HEALTH SERVICES INC. By /s/ Bill Zopf By /s/ David A. Zynn -------------------------------- --------------------------------- - -------------------------------------------------------------------------------- EX-10.40 3 AGREEMENT OF PURCHASE AND SALE AGREEMENT OF PURCHASE AND SALE BETWEEN PALMETTO COMMUNITY HEALTH NETWORK as Seller AND SMT HEALTH SERVICES INC. as Buyer TABLE OF CONTENTS Section Page - ------- ---- 1. PURCHASE AND SALE OF ASSETS................................................1 --------------------------- 1.1 Transfer of Assets....................................................1 ------------------ 1.2 No Assumed Liabilities................................................1 ---------------------- 2. PURCHASE PRICE; ADDITIONAL PAYMENT; CLOSING AND DELIVERIES...............2 ------------------------------------------------------------ 2.1 Purchase Price........................................................2 -------------- 2.2 Closing and Closing Date..............................................2 ------------------------ 2.3 Deliveries of the Seller..............................................2 ------------------------ 2.4 Deliveries of Buyer...................................................2 ------------------- 3. REPRESENTATIONS AND WARRANTIES OF SELLER...................................3 ---------------------------------------- 3.1 Standing..............................................................3 -------- 3.2 Power; Authorization..................................................3 -------------------- 3.3 Validity; Binding Nature..............................................3 ------------------------ 3.4 Title to Assets and Certificates of Need..............................3 ---------------------------------------- 3.5 Effect of Agreement...................................................3 ------------------- 3.6 Contracts and Other Instruments.......................................4 ------------------------------- 3.7 Litigation............................................................4 ---------- 3.8 Equipment.............................................................4 --------- 3.9 Compliance with Applicable Law........................................4 ------------------------------ 3.10 Proprietary Rights...................................................4 ------------------ 3.11 Books and Records....................................................4 ----------------- 4. REPRESENTATIONS AND WARRANTIES OF BUYER....................................5 --------------------------------------- 4.1 Standing..............................................................5 -------- 4.2 Corporate Power; Authorization........................................5 ------------------------------ 4.3 Validity; Binding Nature..............................................5 ------------------------ 4.4 Effect of Agreement...................................................5 ------------------- 5. POST-CLOSING COVENANTS.....................................................5 ---------------------- 5.1 Allocation of Purchase Price..........................................5 ---------------------------- 5.2 Noncompetition........................................................6 -------------- 5.3 Delivery of Assets....................................................6 ------------------ 6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER...........................6 ------------------------------------------------ 6.1 Accuracy of Representations and Warranties............................6 ------------------------------------------ 6.2 Consents and Proceedings..............................................6 ------------------------ 6.3 Satisfaction of Obligations...........................................6 --------------------------- 7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION................7 ----------------------------------------------------------- 7.1 Survival of Representations and Warranties............................7 ------------------------------------------ 7.2 Indemnification.......................................................7 --------------- -i- TABLE OF CONTENTS Section Page - ------- ---- 7.3 Indemnification with Respect to Third-Party Claims....................7 -------------------------------------------------- 8. NOTICE.....................................................................7 ------ 9. LAWS GOVERNING; ARBITRATION................................................9 --------------------------- 10. MISCELLANEOUS..............................................................9 ------------- 10.1 Counterparts; Telecopy...............................................9 ---------------------- 10.2 Assignment...........................................................9 ---------- 10.3 Entire Agreement.....................................................9 ---------------- 10.4 Interpretation......................................................10 -------------- 10.5 Expenses............................................................10 -------- 10.6 No Presumption Against the Draftsman................................10 ------------------------------------ 10.7 Public Announcements................................................10 -------------------- 10.8 Waivers.............................................................10 ------- 10.9 Partial Invalidity..................................................11 ------------------ 10.10 Incorporation by Reference.........................................11 -------------------------- -ii- INDEX OF SCHEDULES Schedules 1.1 Assets 3.4 Exceptions to Title 3.6 Leases and Contracts 4.4 Consents Required for Buyer 5.1 Allocation of Purchase Price -iii- AGREEMENT OF PURCHASE AND SALE THIS AGREEMENT is dated as of the ____ day of October, 1996, between Palmetto Community Health Network, a South Carolina corporation ("Seller") and SMT Health Services Inc., a Delaware corporation ("Buyer"); RECITALS -------- WHEREAS, Seller owns and operates one (1) mobile Magnetic Resonance Imaging ("MRI") unit ("Mobile Unit") in South Carolina and desires to sell and transfer its Mobile Unit, including substantially all of the assets used in connection therewith, including those listed in Schedule 1.1 hereto (collectively, the "Assets"); and WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell and transfer to Buyer, on the terms and conditions hereinafter set forth, the Assets; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth and each act done pursuant hereto, the parties hereto, intending to be legally bound, do represent, warrant, covenant and agree as follows: 1. PURCHASE AND SALE OF ASSETS. --------------------------- 1.1 Transfer of Assets. ------------------ Upon satisfaction of all conditions to the obligations of the parties contained herein, Seller shall sell, convey, transfer and assign to Buyer, and Buyer shall purchase from Seller, at the Closing, the Assets, free and clear of all claims, liabilities, encumbrances and liens of any kind whatsoever. Schedule 1.1 sets forth a description of the Assets. 1.2 No Assumed Liabilities. ---------------------- The Buyer will not assume or become liable for any liabilities, debts, payables or other obligations of the Seller of any kind or nature, whether fixed or contingent and whether known or unknown, or any liabilities, debts, payables or other obligations of any kind or nature arising from or relating to any of the Assets, and the Seller hereby expressly agrees to disclaim and deny any such liability or responsibility of the Buyer and to indemnify the Buyer pursuant to Section 7.2 in respect of any such liabilities, debts, payables or other such obligations. 2. PURCHASE PRICE; ADDITIONAL PAYMENT; CLOSING AND DELIVERIES. ------------------------------------------------------------ 2.1 Purchase Price. -------------- At the Closing, Buyer shall acquire and accept the Assets from Seller and shall pay to Seller the amount of Three Hundred Ninety Thousand Dollars ($390,000) (the "Purchase Price"). 2.2 Closing and Closing Date. ------------------------ The consummation of the transfer and delivery of the Assets to Buyer and the receipt of the consideration therefor by Seller shall constitute the "Closing." Unless otherwise mutually agreed to by the parties in writing, the Closing shall take place at 10:00 a.m. on October ___, 1996. The date and time of the Closing shall constitute the "Closing Date." 2.3 Deliveries of the Seller. ------------------------ At Closing, the Seller will deliver the following to Buyer: (i) all bills of sale, deeds, assignments and other conveyance and transfer documentation reasonably required to transfer, free and clear of all mortgages, liens, pledges, security interests, encumbrances and claims of any type, all of Seller's legal title to the Assets, including, without limitation, the Mobile Unit; and (ii) any other documents reasonably requested by Buyer to confirm the accuracy of the representations and warranties and the performance of the agreements of the Seller hereunder. 2.4 Deliveries of Buyer. ------------------- At Closing, the Buyer will deliver the following to the Seller: (i) a wire transfer to Seller in the amount of the Purchase Price; and (ii) any other documents reasonably requested by the Seller to confirm the accuracy of the representations and warranties and the performance of the agreements of the Buyer hereunder. -2- 3. REPRESENTATIONS AND WARRANTIES OF SELLER. ---------------------------------------- Seller represents and warrants to Buyer as follows: 3.1 Standing. -------- Seller is a corporation duly organized, validly existing and in good standing under the laws of South Carolina and has all the requisite power and authority to carry on its business as now conducted and to own, lease and operate its properties and assets. 3.2 Power; Authorization. -------------------- The execution, delivery and performance by the Seller of this Agreement, and all instruments and documents to be delivered by the Seller hereunder: (a) are within the Seller's power and authority; (b) have been duly authorized by all necessary or proper action on the part of the Seller, including the requisite consent of the shareholders of Seller where required; (c) are not in contravention of any provision of the Seller's articles or certificate of incorporation; (d) to the best of Seller's knowledge, after due inquiry, do not violate or conflict with any law or regulation, or any order, award, judgment or decree of any court or governmental instrumentality applicable to the Seller; (e) do not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed or trust, lease, agreement or other instrument to which the Seller is a party or by which the Seller or the Assets are bound; (f) do not result in the creation or imposition of any pledge, lien, mortgage, security interest, claim or charge of any kind or nature ("Lien") upon the Assets and; (g) do not require the consent or approval of any governmental body, agency, authority or any other person other than those that have been obtained. 3.3 Validity; Binding Nature. ------------------------ This Agreement and all instruments and documents to be delivered by the Seller hereunder each have been or will be duly executed and delivered by the Seller, and each now, and thereupon, will constitute the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as the same may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium and other similar laws relating to or affecting the rights of creditors generally and principles of equity. 3.4 Title to Assets and Certificates of Need. ---------------------------------------- Except as set forth on Schedule 3.4 attached hereto, Seller has good ------------ and marketable title to all of the Assets free and clear of all mortgages, liens, pledges, security interests, encumbrances and claims of any type. 3.5 Effect of Agreement. ------------------- The execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby will not require the consent, approval or authorization of any governmental authority or third party. -3- 3.6 Contracts and Other Instruments. ------------------------------- The only contracts and other instruments by which Seller is bound, and pursuant to which it has any rights or obligations in connection with the Assets, are those contracts listed on the attached Schedule 3.6, copies of each ------------ of which have been delivered to the Buyer. To the best of Seller's knowledge, after due inquiry, neither Seller nor any other party is in default with respect to any such contract or instrument. 3.7 Litigation. ---------- There are no actions, suits or proceedings pending or, to the best of Seller's knowledge, after due inquiry, threatened against or affecting Seller at law or in equity, or before or by any governmental or nongovernmental commission, board, agency or other body, nor does Seller know of any facts which would provide a basis for any such action, suit or proceeding. 3.8 Equipment. --------- The Assets are in good repair and operating condition. To the best of Seller's knowledge, after due inquiry, there are no actions pending or threatened by any governmental regulatory agency with respect to the compliance of the Assets or said equipment with applicable ordinances or regulations. SELLER HEREBY DISCLAIMS ANY WARRANTY OR FITNESS FOR USE OR MERCHANTABILITY. Seller hereby further disclaims any and all warranties pertaining to the conditions of the Assets, other than as stated in and limited to the first sentence of this Section 3.8. Seller agrees to assist Buyer in enforcing any warranties made by the manufacturer of the Assets; provided, however, that Buyer will reimburse Seller with any third-party out-of-pocket costs incurred by Seller at Buyer's request in complying with this provision. 3.9 Compliance with Applicable Law. ------------------------------ The conduct of Seller's business does not violate or infringe any laws, statutes, ordinances or regulations in any material respect. 3.10 Proprietary Rights. ------------------ Seller has not received notice of, and it has no knowledge of, the infringement by it of any right or patent, trademark, trade name, copyright or other proprietary right of third parties relating to the Assets. 3.11 Books and Records. ----------------- The books, records and work papers of Seller with respect to the Assets are complete and correct in all material respects, have been maintained in accordance with good business practices and accurately reflect the basis for the financial condition and the results of operations of Seller. -4- 4. REPRESENTATIONS AND WARRANTIES OF BUYER. --------------------------------------- Buyer represents and warrants to Seller as follows: 4.1 Standing. -------- Buyer is a corporation duly organized, validly existing and in good standing under the laws of Pennsylvania and in good standing under the laws of South Carolina and has all the requisite power and authority to carry on its business as now conducted, to enter into this Agreement and to consummate the transactions contemplated hereby. 4.2 Corporate Power; Authorization. ------------------------------ The execution, delivery and performance by the Buyer of this Agreement, and all instruments and documents to be delivered by the Buyer hereunder: (i) are within the Buyer's corporate power and authority; (ii) have been duly authorized by all necessary or proper corporate and governmental action on the part of the Buyer; (iii) are not in contravention of any provision of the Buyer's articles or certificate of incorporation or bylaws; and (iv) do not violate or conflict with any law or regulation, or any order, award, judgment or decree of any court or governmental instrumentality applicable to the Buyer. 4.3 Validity; Binding Nature. ------------------------ This Agreement and all instruments and documents to be delivered by the Buyer hereunder have each been or will be duly executed and delivered by the Buyer, and each now, and thereupon, will constitute the legal, valid and binding obligation or the Buyer, enforceable against the Buyer in accordance with its terms, except as the same may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium and other similar laws relating to or affecting the rights of creditors generally and principles or equity. 4.4 Effect of Agreement. ------------------- The execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby will not require the consent, approval or authorization of any governmental authority or third party, except as set forth on Schedule 4.4 hereto. ------------ 5. POST-CLOSING COVENANTS. ---------------------- 5.1 Allocation of Purchase Price. ---------------------------- The Purchase Price shall be allocated among the Assets as set forth in Schedule 5.1 hereto. The Seller and Buyer shall file all tax returns and tax - ------------ reports in accordance with and based upon such allocation and shall take no position in any tax return, tax proceeding or tax audit which is inconsistent with such allocation. -5- 5.2 Noncompetition. -------------- For the "Resticted Period" (as hereinafter defined), neither the Seller nor any "affiliate of the Seller" will, directly or indirectly, build, acquire, invest in, assist in the development or manage any mobile MRI diagnostic program in the states of Georgia, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. At the Closing, the Seller will enter into a separate agreement to this effect with SMT. The term "Resticted Period shall mean the earlier of (a) the fifth (5th) anniversary of the date of this Agreement or (b) the date on which the Company is no longer providing service under any the ageements listed, from time to time, in Schedule A to the Support Services Agreement between the parties of even date herewith. "Affiliate of the Seller" shall mean any person controlling, controlled by or under common control with the Seller. Control shall mean the ability to direct the actions of a person. 5.3 Delivery of Assets. ------------------ The parties will cooperate in good faith to ensure the timely delivery on the Closing Date of the Assets of Buyer. The Assets will be delivered to Buyer. 6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER ------------------------------------------------ The obligations of Buyer hereunder shall be subject to the following conditions, any or all of which may be waived in writing by Buyer: 6.1 Accuracy of Representations and Warranties. ------------------------------------------ Each of the representations and warranties of the Seller contained herein and in any other document delivered to Buyer in connection with this transaction shall be true and correct in all respects (except where any such representation or warranty is unqualified in which case it shall be true and correct in all material respects) on and as of the Closing Date with the same effect as though made on and as of such date and Seller shall have performed and complied in all material respects with each of the agreements, covenants, stipulations, terms and conditions contained herein and required to be performed or complied with by them on or prior to the Closing Date. 6.2 Consents and Proceedings. ------------------------ The Seller shall have obtained all of the consents, authorizations, orders or approvals required in order to consummate the transactions contemplated hereby, including the consent of [insert name of lienholder on the Assets] (to the extent required to satisfy indebtedness owed to [insert name of lienholder on the Assets]). 6.3 Satisfaction of Obligations. --------------------------- The Seller shall have taken all necessary actions to deliver to Buyer title to the Assets, at Closing, free and clear of all mortgages, liens, pledges, security interests, encumbrances and -6- claims of any type, including, without limitation, all indebtedness owed to [insert name of lienholder on the Assets]. 7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION. ----------------------------------------------------------- 7.1 Survival of Representations and Warranties. ------------------------------------------ All representations, warranties, covenants, stipulations, certifications, indemnities and agreements contained herein shall survive the consummation of the transactions provided for in this Agreement. 7.2 Indemnification. --------------- (i) Seller shall defend, indemnify and hold Buyer harmless from and against any and all claims, liabilities, damages, losses and expenses, including reasonable attorneys' fees and expenses and costs of suit ("Losses"), arising out of or resulting from (i) any and all inaccurate representations or breaches of covenants and warranties and stipulations and agreements and certifications made by or on behalf of such Seller in this Agreement or in any document delivered hereunder; or (ii) any occurrence prior to the Closing Date and not disclosed herein or in documents delivered hereunder; or (iii) any use of the Assets on or prior to the Closing Date. (ii) Buyer shall defend, indemnify and hold Seller harmless from and against any and all Losses arising out of any and all inaccurate representations and warranties and out of any and all breaches of covenants, agreements and certifications made by or on behalf of Buyer in this Agreement or in any document delivered by Buyer hereunder or pursuant to this transaction. 7.3 Indemnification with Respect to Third-Party Claims. -------------------------------------------------- Seller shall have full responsibility and authority (including payment of legal fees) for the disposition of any action, suit or proceeding brought by a third party against Buyer for which Buyer is entitled to indemnification pursuant to Section 7.2(i). However, Buyer shall have the right, at the Buyer's sole expense, to be represented by counsel of its choosing and with whom counsel for Seller shall confer in connection with the defense of any such action, suit or proceeding. Seller and Buyer shall render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any such action, suit or proceeding. 8. NOTICE. ------ All notices and other communications hereunder shall be in writing and delivered by one of the following methods of delivery (i) personally, (ii) by registered or certified mail, return receipt requested, postage prepaid, (iii) by overnight courier (maintaining delivery records), or -7- (iv) by legible facsimile transmission (followed by overnight courier), in all cases addressed as follows: To Seller: ---------- Palmetto Community Health Network 900 C. Main Street Conway, SC 29526 Facsimile: 803-248-0342 Attn: Edward V. Schlaefer, FACHE Executive Director With a copy to: Gambrell & Stolz One Peachtree Center, Suite 4300 303 Peachtree Street, N.E. Atlanta, GA 30308 Facsimile: 404-221-6501 Attn: Tobin N. Watt, Esquire To Buyer: --------- SMT Health Services Inc. 10521 Perry Highway Wexford, PA 15090 Facsimile: 412-933-3311 Attn: David A. Zynn, Chief Financial Officer With a copy to: Buchanan Ingersoll Professional Corporation One Oxford Centre, 20th Floor 301 Grant Street Pittsburgh, PA 15219 Facsimile: (412) 562-1041 Attn: Ronald Basso, Esquire or to such address as such party may indicate by a notice delivered to the other parties hereto. Notice shall be deemed received the same day (when delivered personally), five (5) days after mailing (when sent by registered or certified mail), the next business day (when sent by facsimile transmission or when delivered by overnight courier). Any party to this Agreement may change its address to which all communications and notices may be sent hereunder by addressing notices of such change in the manner provided. -8- 9. LAWS GOVERNING; ARBITRATION. --------------------------- The construction, interpretation and enforcement of this Agreement and the rights of the parties hereunder shall be governed by the internal laws of the Commonwealth of Pennsylvania without regard to any jurisdiction's conflicts or choice of law provisions. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Pittsburgh, Pennsylvania, in accordance with the Rules of the American Arbitration Association for Commercial Arbitration, and the decision in such arbitration shall be final and conclusive on the parties and judgment upon such decision may be entered in any court having jurisdiction thereof. Seller and Buyer agree that such location is the most convenient forum for both parties. Buyer and Seller will share equally the total expense of such arbitration; but each party shall bear its own legal, accounting and other similar fees and expenses. The parties retain the right to seek and obtain interim relief from a court of competent jurisdiction pending receipt of an award in accordance with this Section 9, or temporary restraining orders or other emergency, temporary or preliminary equitable relief to preserve the status quo by enjoining or restraining a party hereto pending final and binding arbitration hereunder and the parties hereto acknowledge and agree to the right to seek such relief. 10. MISCELLANEOUS. ------------- 10.1 Counterparts; Telecopy. ---------------------- This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. Delivery of executed signature pages hereof by facsimile transmission shall constitute effective and binding execution and delivery hereof. 10.2 Assignment. ---------- This Agreement may not be assigned by either party hereto without the prior written consent of the other party. 10.3 Entire Agreement. ---------------- This Agreement and the documents referenced herein contain the entire agreement between the parties and wholly cancel, terminate and supersede any and all previous or contemporaneous oral agreements, negotiations, commitments and writings between the parties hereto with respect to such subject matter. No change, modification, termination, notice of termination, discharge or abandonment of this Agreement or any of the provisions hereof or thereof, nor any representation, promise or condition relating to this Agreement, shall be binding upon the parties hereto unless made in writing and signed by the parties hereto, except that termination or notices of termination which may be effected pursuant to the terms of this -9- Agreement by either party to this Agreement, shall be binding if made in writing and signed by the applicable party. 10.4 Interpretation. -------------- Articles, titles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of any of the provisions of this Agreement. All references to sections, subsections or schedules contained in this Agreement are references to the sections and subsections of this Agreement. All references to the word "including" shall have the meaning represented by the phrase "including without limitation." 10.5 Expenses. -------- Except as otherwise expressly provided herein, Seller and Buyer each will pay all costs and expenses, including any and all legal and accounting fees, of its performance and compliance with all agreements and conditions contained herein on its part to be performed or complied with. 10.6 No Presumption Against the Draftsman. ------------------------------------ There shall be no presumption against any party on the ground that such party was responsible for preparing this Agreement or any part hereof. 10.7 Public Announcements. -------------------- Neither Buyer nor Seller shall, without the approval of the other party (which may not be unreasonably withheld), make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that such party shall be so obligated by law (including any legal obligation imposed on Seller in connection with its status as a publicly-held corporation), in which case the other party shall be advised and Buyer and Seller shall use their reasonable efforts to cause a mutually agreeable release or announcement to be issued. 10.8 Waivers. ------- Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof, but any such waiver must be in writing and must comply with the notice provisions contained in Section 8. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. -10- 10.9 Partial Invalidity. ------------------ Wherever possible, each provision hereof shall be interpreted in such a manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause the completion of the transactions contemplated hereby to be unreasonable. 10.10 Incorporation by Reference. -------------------------- Any and all schedules referred to herein or attached hereto are incorporated herein by reference thereto as though fully set forth at the point referred to in this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written. SELLER: WITNESS: PALMETTO COMMUNITY HEALTH NETWORK By: /s/ Edward V. Schlaefer - --------------------------------- ---------------------------------------- Edward V. Schlaefer, FACHE Executive Director BUYER: WITNESS: SMT HEALTH SERVICES INC., By: /s/ David A. Zynn - --------------------------------- ---------------------------------------- Authorized Officer -11- EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE SMT EPS Calculation- Modified Treasury Stock Method Year Ended December 31, 1996
Exercise Assumed Tax Assumptions Shares Price Proceeds Benefit Net income $2,410,861 Common Shares Outstanding 3,232,505 20% of Common Shares Outstandi 646,501 Common Stock Equivalent (Aggregate): Warrants-IPO 1,683,950 $7.00 $11,787,650 Effect of 5% & 7% Dividend 207,968 Options- employees 1993 Grant 129,764 $3.09 $400,971 $134,890 1994 Grant 54 $1.27 $69 $91 1995 Grant 39,322 $2.29 $90,047 $51,885 1995 Grant- #2 160,500 $3.55 $569,775 $140,999 1996 Grant 42,479 $4.19 $177,987 $27,803 1996 Grant #2 267,500 $6.39 $1,709,325 ($30,896) Options- Directors: 1992 Grant 2,247 $2.99 $6,719 $2,414 1993 Grant 2,247 $1.66 $3,730 $3,460 1994 Grant 2,247 $2.05 $4,606 $3,154 1995 Grant 2,247 $4.07 $9,145 $1,565 1996 Grant 6,741 $7.91 $53,321 ($4,365) Warrants-Directors All 500,000 $3.88 $1,940,000 $381,500 Effect of 7% Dividend 35,000 Other 0 $4.01 $0 Warrants- Commonwealth 0 $4.47 $0 Underwriter options 0 $5.94 $0 Underwriter Warrants (Unit) 0 $7.00 $0 5% dividend on Warrants 0 Total CSE Aggregate 3,082,266 $16,753,345 $712,500 $17,465,845 Average and Quarter End Market Value: Average Closing Bid $6.06 Quarter End Closing Bid $7.94 Computation: Primary Fully Diluted ----------- ------------- Total Proceeds $17,465,845 $17,465,845 Application of assumed proceeds: Toward repurchase of o/s $3,917,796 $5,133,218 Toward Paydown of debt $13,548,049 $12,332,627 $17,465,845 $17,465,845 Adjustment to Net Income: Net income $2,410,861 $2,410,861 Interest expense reduction: Debt paydown * avg. int rate*tax eff $1,024,233 $932,347 Adjusted Net Income $3,435,094 $3,343,208 Adjustments to Shares Outstanding: Actual shares o/s 3,232,505 3,232,505 Net additional shares 2,435,765 2,435,765 Adjusted shares o/s 5,668,270 5,668,270 Earnings Per Share: Before adjustment $0.75 $0.75 After adjustment $0.61 $0.59
EX-21.1 5 LIST OF SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES OF SMT HEALTH SERVICES INC. (A Delaware Corporation) SMT Investment Inc. ................................... Delaware corporation SMT Management Corp. ............................. Pennsylvania corporation SMT Cardiac Corp. ................................ Pennsylvania corporation SMT Mobile I Corp. ............................... Pennsylvania corporation SMT Mobile III Corp. ............................. Pennsylvania corporation SMT Mobile IV Corp. .............................. Pennsylvania corporation SMT Mobile V Corp. ............................... Pennsylvania corporation SMT Mobile VI Corp. .............................. Pennsylvania corporation SMT Mobile VII Corp. ............................. Pennsylvania corporation SMT Mobile VIII Corp. ............................ Pennsylvania corporation SMT Mobile IX Corp. .............................. Pennsylvania corporation SMT Mobile X Corp. ............................... Pennsylvania corporation EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 Consent of Independent Auditors ------------------------------- The Board of Directors SMT Health Services Inc.: We consent to incorporation by reference in the registration statement (No. 33-44329) on Form S-3, registration statement (No. 33-61600) on Form S-8, registration statement (No. 33-61602) on Form S-8, registration statement (No. 33-86920) on Form S-3, and registration statement (No. 33-80571) on Form S-3 of SMT Health Services Inc. of our report dated January 31, 1997, except as to Note 18 which is as of March 4, 1997, relating to the consolidated balance sheets of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and the related schedule, which report appears in the December 31, 1996 annual report on Form 10-K of SMT Health Services Inc. Pittsburgh, Pennsylvania March 20, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1996 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 5,043,158 0 1,726,442 0 0 7,825,096 36,367,381 6,734,353 39,497,563 7,238,056 0 0 0 36,950 11,362,593 39,497,563 19,021,954 19,212,353 0 13,582,245 0 0 2,041,247 3,588,861 1,178,000 2,410,861 0 0 0 2,410,861 .61 .59
EX-99.1 8 PRESS RELEASE DATED MARCH 17, 1997 Exhibit 99.1 Contact: David Zynn, CFO James K. White, Managing Director SMT Health Services Inc. Kehoe, White, Savage & Company, Inc. (412) 933-3300 (310) 437-0655 http://www.smthealth.com SMT HEALTH SERVICES INC. ANNOUNCES 99.5% WARRANT CONVERSION Pittsburgh, PA, March 17, 1997--SMT Health Services Inc. (NASDAQ/NMS: SHED) today announced that 1,677,000, or 99.5%, of the publicly-traded warrants (SHEDW) were converted to Common Stock on or before March 4, 1997, the Warrant expiration date. As a result of the Warrant conversions, the Company issued 1,882,000 shares of Common Stock and received proceeds of approximately $11.7 million. The Company's total Common Shares outstanding as of the date of this announcement totaled approximately 5,685,000 and the Company maintained a total cash balance of approximately $18.0 million. SMT Health Services Inc., through its current fleet of eighteen mobile MRI units, provides diagnostic imaging services to healthcare providers in Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Ohio and Kentucky. # # # -----END PRIVACY-ENHANCED MESSAGE-----