EXHIBIT 10.4
MASTER SERVICE AGREEMENT ADDENDUM
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THIS MASTER SERVICE AGREEMENT ADDENDUM (this "Addendum") is entered into as
of ___________, 1996 by and among General Electric Company, a New York
corporation acting through GE Medical Systems ("GE Medical"), InSight Health
Services Corp., a Delaware corporation ("InSight"), American Health Services
Corp., a Delaware corporation ("AHS"), and Maxum Health Corp., a Delaware
corporation ("MHC").
Recitals
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1. InSight, AHS, MHC and GE Medical have entered into the Preferred Stock
Acquisition Agreement, dated as of February __, 1996 (the "PS Acquisition
Agreement"), pursuant to which GE Medical acquired from (i) AHS an aggregate of
1,000,000 shares of Series C Preferred Stock, par value $0.03 per share, of AHS
(the "AHS Shares") and (ii) MHC an aggregate of 15,000 shares of Series B
Preferred Stock, par value $0.01 per share, of MHC (the "Maxum Shares"), in
exchange for certain financial accommodations from General Electric Capital
Corporation ("GE Capital") and GE Medical contemplated by the Master Debt
Restructuring Agreement (the "Restructuring Agreement"), which agreement is
being executed and delivered simultaneously herewith by and among GE Medical, GE
Capital, InSight, AHS, MHC and certain subsidiaries of MHC.
2. Insight, AHS and MHC have entered into the Agreement and Plan of
Merger, dated as of February __, 1996 (the "Merger Agreement"), pursuant to
which two newly-formed wholly-owned subsidiaries of InSight were merged with and
into AHS and MHC (the "Merger"), respectively, and AHS and MHC became wholly-
owned subsidiaries of InSight. GE Medical is a primary supplier of equipment
and services to InSight's subsidiaries, AHS and MHC.
3. GE Medical has entered into (a) certain installment sales contracts,
lease agreements, financing agreements, service agreements, promissory notes and
installment notes with AHS (collectively, the "AHS Financing Agreements"),
including the Master Agreement Imaging Systems, dated as of March 30, 1992 (the
"AHS Master Agreement"), pertaining to GE Medical's services with respect to the
GE Diagnostic Imaging Systems of AHS, and (b) certain installment sales
contracts, lease agreements, financing agreements, service agreements,
promissory notes and installment notes with MHC (collectively, the "MHC
Financing Agreements"), including the Master MR Service Agreement, dated as of
July 1, 1994 (the "MHC Master Agreement"), pertaining to GE Medical's services
with respect to the GE MR Max and Signa Systems and Diasonic's MRT-35 MR Systems
of MHC.
4. AHS and MHC have been unable to perform all of their respective
obligations under the AHS Financing Agreements and the MHC Financing Agreements
and in light of the continued uncertainty over the ability of AHS and MHC to
perform such obligations, InSight, AHS and MHC have agreed to a reduction in the
aggregate amount of discounts currently in effect under the AHS Master Agreement
and the MHC Master Agreement, which amount is equal to approximately 15 percent
of GE Medical's current list price (collectively, the "Gross Discounts"), by
making premium payments, calculated as a percentage of its Pre-Distribution Net
Income (as such term is defined in Section 1 hereof), for the services performed
by GE Medical under the AHS Master Agreement and the MHC Master Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the terms
and conditions contained herein, the parties hereto hereby agree as follows:
Section 1. General Definitions. The following terms used in this Addendum
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have the following respective meanings:
(a) "Adjustment Amount" shall have the meaning set forth in Section
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3 hereof.
(b) "Adjustment Percentage" shall have the meaning set forth in
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Section 3 hereof.
(c) "AHS Master Agreement" shall have the meaning set forth in the
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Recitals hereof.
(d) "Business Day" shall mean any day except Saturday, Sunday or any
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day on which banks in New York, New York are required or authorized by law to be
closed.
(e) "Buyout Amount" shall have the meaning set forth in Section 3(e)
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hereof.
(f) "Confidential Information" shall have the meaning set forth in
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Section 9 hereof.
(g) "Consolidated Depreciation Expense" shall mean, for any period,
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the depreciation expense of InSight and the InSight Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
(h) "Consolidated Net Income" shall mean, for any period, the net
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income (or loss) of InSight and the InSight Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
(i) "Consolidated Tax Expense" shall mean, for any period, the
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income tax expense of InSight and the InSight Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
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(j) "Default Rate" shall mean the lower of (i) the rate per annum
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equal to the sum of the fluctuating interest rate, from time to time, for three-
year U.S. Treasury notes plus 8 percent or (ii) the highest rate permitted by
applicable law.
(k) "Distribution Note" shall have the meaning set forth in Section
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3(b) hereof.
(l) "First Installment" shall have the meaning set forth in Section
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3(a) hereof.
(m) "GAAP" shall mean generally accepted accounting principles
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applied on a consistent basis as in effect from time to time and practices which
are recognized as such by the American Institute of Certified Public Accountants
acting through its Accounting Principles Board or by the Financial Accounting
Standards Board or through other appropriate boards or committees thereof and
which are consistently applied for all periods after the date of this Addendum.
(n) "GE Medical's Accountant" shall have the meaning set forth in
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Section 4(a) hereof.
(o) "Indebtedness" shall mean, as applied to any Person, without
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duplication (i) all items, except items of capital stock or of surplus or of
general contingency or deferred tax reserves that would, in accordance with
GAAP, be required to be included as liabilities on a balance sheet of such
Person on the date as of which Indebtedness is to be determined, (ii) all
obligations secured by (or regarding which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien to which
any Property owned or held by such Person is subject, whether or not the
obligation secured thereby shall have been assumed and (iii) all obligations of
other Persons which such Person has guaranteed, including, without limitation,
all obligations of such Person consisting of recourse liabilities with respect
to accounts receivable sold or otherwise disposed of by such Person.
(p) "InSight Excess Cash Flow" shall mean, for any fiscal year of
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InSight, an amount equal to (i) the sum of the amounts for such fiscal year of
(A) Consolidated Net Income, (B) Consolidated Depreciation Expense, (C) non-cash
interest expense incurred by InSight and the InSight Subsidiaries during such
fiscal year, (D) the excess of (1) Consolidated Tax Expense over (2) income
taxes actually paid and (E) other non-cash items reducing Consolidated Net
Income, all as determined on a consolidated basis for InSight and the InSight
Subsidiaries in accordance with GAAP, minus (ii) the sum of the amounts for such
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fiscal year of (A) all principal payments made by InSight and the InSight
Subsidiaries on Indebtedness and (B) capital expenditures made by InSight and
the InSight Subsidiaries that would be capitalized on the consolidated balance
sheet of InSight, all as
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determined on a consolidated basis for InSight and the InSight Subsidiaries in
accordance with GAAP.
(q) "InSight Subsidiary" shall mean each of AHS, MHC and any other
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corporation of which 50 percent or more of the outstanding shares of each class
having voting power (other than shares having such power by reason of the
happening of a contingency) is owned or controlled, directly or indirectly, by
InSight.
(r) "Lien" shall mean (i) any mortgage or deed of trust, pledge,
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hypothecation, assignment, deposit arrangement, lien (including tax liens,
judgment liens, liens of mechanics, suppliers, and other Persons for the
provision of goods or services, and all other liens arising under statute,
common law or judicial interpretation), charge, claim, security interest,
capitalized lease obligation, easement, encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including any lease or title retention agreement or any financing
lease having substantially the same economic effect as any of the foregoing),
(ii) any arrangement, express or implied, under which any Property is
transferred, sequestered or otherwise identified for the purpose of subjecting
such Property to the payment of Indebtedness or performance of any other
obligation in priority to the payment of general, unsecured creditors, (iii) any
Indebtedness which is unpaid more than 45 days after such Indebtedness shall
have become due and payable and which if unpaid would by law (including but not
limited to bankruptcy and insolvency laws) or otherwise, be given any priority
whatsoever over general, unsecured creditors and (iv) the filing of, or
agreement to give, any financing statement perfecting a security interest under
the Uniform Commercial Code or comparable law of any jurisdiction.
(s) "Major Acquisition" shall mean any acquisition by InSight,
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directly or indirectly, of all of the outstanding capital stock or substantially
all of the assets of any Person, which Person had annual net revenues in excess
of $20,000,000 for such Person's most recent fiscal year, as determined in
accordance with GAAP.
(t) "MHC Master Agreement" shall have the meaning set forth in the
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Recitals hereof.
(u) "Person" shall mean any individual, corporation, partnership,
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trust, association or other entity or organization, including any government,
political subdivision, agency or instrumentality thereof.
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(v) "Pre-Distribution Net Income" shall mean, for any fiscal year of
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InSight, an amount equal to (i) the sum of the amounts for such fiscal year of
(A) Consolidated Net Income, (B) Consolidated Tax Expense and (C) any amount
which, in the determination of Consolidated Net Income for such fiscal year, has
been deducted for the sum of the excess of salary and other compensation and
benefits received by any officer or director of InSight or any InSight
Subsidiary during such fiscal year over (x) $400,000, for the chief executive
officer of InSight or such InSight Subsidiary, (y) $300,000, for any other
individual officer of InSight or such InSight Subsidiary and (z) $15,000, for
any director of InSight or such InSight Subsidiary, which amounts shall be
adjusted annually in proportion to the changes in the consumer price index in
such fiscal year, and (D) any other extraordinary item resulting in a decrease
in Consolidated Net Income during such fiscal year, all as determined on a
consolidated basis for InSight and the InSight Subsidiaries in accordance with
GAAP, minus (ii) any amount which, in the determination of Consolidated Net
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Income for such fiscal year, has been added for any extraordinary item resulting
in an increase in Consolidated Net Income during such fiscal year, all as
determined on a consolidated basis for InSight and the InSight Subsidiaries in
accordance with GAAP.
(w) "Property" shall mean any interest in any kind of property or
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asset, whether real, personal or mixed, or tangible or intangible.
(x) "Third Accountant" shall have the meaning set forth in Section
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4(b) hereof.
Section 2. Term; Scope. (a) This Addendum shall (i) be effective on
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____________, 1996 and remain in full force and effect until payment in full of
all obligations of InSight hereunder to GE Medical and (ii) apply to all
equipment and systems heretofore and hereafter installed and serviced by GE
Medical pursuant to the AHS Master Agreement.
(b) AHS acknowledges that the AHS Master Agreement is scheduled to
terminate on March 31, 2000, and MHC acknowledges that the MHC Master Agreement
is scheduled to terminate on June 30, 2000. Both of AHS and MHC acknowledge and
agree that nothing set forth in this Addendum, the AHS Master Agreement or the
MHC Master Agreement shall be deemed to authorize or imply an extension of the
termination date of the AHS Master Agreement or the MHC Master Agreement beyond
the current scheduled termination date thereof. Notwithstanding the expiration
of the AHS Master Agreement and the MHC Master Agreement on the current
scheduled dates or earlier pursuant to the terms thereof, the obligations of
InSight under this Addendum to pay the Adjustment Amount to GE Medical pursuant
to Section 3 hereof shall remain in full force and effect.
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Section 3. Adjustment Amount. For each fiscal year during 10 consecutive
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fiscal years of InSight from July 1, 1996 through June 30, 2006, InSight shall
pay to GE Medical an amount (the "Adjustment Amount") equal to 14 percent (the
"Adjustment Percentage") of the Pre-Distribution Net Income of Insight as
follows:
(a) As soon as possible but no later than 30 days after the delivery
to GE Medical of the audited annual consolidated financial statements of
InSight, which financial statements shall be so delivered not later than 105
days after the end of such fiscal year (together with a certificate of InSight's
chief financial officer showing in reasonable detail the calculation of the
Adjustment Amount), InSight shall make a cash payment to GE Medical in an amount
equal to 65 percent of the Adjustment Amount (the "First Installment").
(b) InSight shall pay an amount equal to the remaining 35 percent of
the Adjustment Amount for such fiscal year in 60 equal monthly installments,
payable on the last Business Day of each calendar month, commencing on the last
Business Day of the calendar month immediately following the calendar month in
which the First Installment was due and payable. InSight's obligations to pay
the remaining 35 percent of the Adjustment Amount for each fiscal year shall be
evidenced by a promissory note, in form satisfactory to GE Medical, made by
InSight in favor of GE Medical (the "Distribution Note"), under which interest
on the unpaid principal amount of each Distribution Note from the date of such
Distribution Note until such principal amount is paid in full shall accrue at
the rate per annum equal to the lower of (i) the interest rate for three-year
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U.S. Treasury notes quoted as of the date of such Distribution Note plus four
and three-quarters percent or (ii) the highest rate permitted by applicable law.
In the event the Total Balloon Payment Amount (as such term is defined in the
Restructuring Agreement) is paid in full pursuant to Section 4.1 of the
Restructuring Agreement, InSight Excess Cash Flow in an amount equal to the AHS
Prepayment Amount (as such term is defined in the Restructuring Agreement) shall
be applied as a prepayment of principal of the Distribution Notes, with each
such prepayment being applied to the monthly installments of principal of the
Distribution Note bearing the highest rate of interest as of the date such
application is made in the inverse order of their stated maturity. In the event
the monthly installments under the Distribution Notes include an interest
portion, the remaining monthly installments shall be re-amortized to reflect the
prepayment of principal.
(c) In the event InSight fails to (i) deliver its audited annual
consolidated financial statements to GE Medical on or before 105 days following
the close of the immediately preceding fiscal year or (ii) pay the First
Installment on or before 120 days following the close the immediately preceding
fiscal year, the outstanding principal amount of the First
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Installment for such fiscal year shall bear interest from the 120th day
following the close of the immediately preceding fiscal year until payment
thereof in full at the Default Rate, payable on the last Business Day of each
calendar month.
(d) Upon the occurrence of a Major Acquisition, the Adjustment
Percentage with respect to all fiscal years subsequent to the fiscal year of
such Major Acquisition shall decrease to a percentage which is the product of
(i) the Adjustment Percentage prior to consummation of the Major Acquisition
multiplied by (ii) a fraction (A) the numerator of which is the total number of
shares of capital stock of InSight outstanding on a fully-diluted basis prior to
consummation of the Major Acquisition and (B) the denominator of which is the
total number of shares of capital stock of InSight outstanding on a fully-
diluted basis after the Major Acquisition.
(e) Notwithstanding any other provision of this Section 3, InSight
may, at any time, terminate GE Medical's right to receive future Adjustment
Amounts by paying to GE Medical an amount (the "Buyout Amount") equal to (i)
$8,000,000 minus (ii) an amount equal to the aggregate discounted value of the
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Adjustment Amounts received by GE Medical from InSight prior to such payment of
the Buyout Amount, calculated at a discount rate of 15 percent per annum with
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respect to each such Adjustment Amount; provided, however, that the payment of
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the Buyout Amount shall not in any way affect the obligation of InSight to repay
the then-outstanding Distribution Notes in accordance with their respective
terms. For purposes of illustration only, an example of the calculation of the
Buyout Amount is set forth on Schedule 1 attached hereto.
Section 4. GE Medical's Right to Challenge. GE Medical shall have the
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right to, directly or through an agent, examine, audit, inspect and copy the
books, records and files kept and maintained by InSight, as well as any
underlying documentation reasonably necessary for GE Medical to confirm the
accuracy of InSight's determination of the Adjustment Amount under Section 3
hereof.
(a) In the event that any such audit or examination discloses any
discrepancies as reasonably determined by GE Medical, InSight and GE Medical
shall meet within 5 days to attempt to resolve such discrepancies.
Notwithstanding any provision to the contrary contained in this Addendum, in the
event that any discrepancy cannot be resolved by InSight and GE Medical within
20 days thereafter, a determination of the accuracy of the Adjustment Amount
shall be made by an independent certified public accountant selected by GE
Medical ("GE Medical's Accountant"); provided, however, that InSight reserves
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the right to protest findings made by GE Medical's Accountant if an additional
payment would be required to be made by InSight as a result of the determination
of GE Medical's Accountant, by providing written notice to GE Medical within 10
days following
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GE Medical's delivery of notice to InSight regarding the results of the audit
performed by GE Medical's Accountant. If the findings of GE Medical's Accountant
are not challenged by InSight within the time period specified above, then the
findings of such accountant shall be binding on InSight.
(b) In the event that InSight protests the findings made by GE
Medical under paragraph (a) above, then GE Medical and InSight shall select a
third accountant ("Third Accountant") to audit InSight's determination of the
Adjustment Amount, at InSight's sole cost and expense; provided, however, that
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the findings of such Third Accountant shall be binding on InSight and GE Medical
(if GE Medical and InSight cannot agree on who shall be the Third Accountant,
then the Third Accountant shall be selected by an arbitrator that is selected by
the Commercial Panel of the American Arbitration Association). If it is
determined by such Third Accountant that an additional payment by InSight is
required, then InSight shall make such additional payment to GE Medical within
five days of the receipt of the results of such Third Accountant's audit. If it
is determined by such Third Accountant that InSight has overpaid, then GE
Medical shall immediately apply such overpayment towards repayment of the
liabilities of InSight to GE Medical.
(c) The fees and expenses of GE Medical's Accountant shall be borne
by GE Medical, unless as a result of any such audit, it is determined that the
Adjustment Amount, as determined by GE Medical's Accountant, exceeds the amount
determined by InSight by at least $50,000, in which event the fees and expenses
of GE Medical's Accountant shall be borne by InSight.
Section 5. Amendments, etc. No amendment or waiver of any provision of
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this Addendum or consent to any departure by InSight herefrom shall in any event
be effective unless such amendment or waiver, as the case may be, is in writing
and signed by GE Medical. Such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
Section 6. Notices. Except as otherwise provided herein, whenever it is
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provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by another, or whenever any of the parties desires to give or serve upon
another any communication with respect to this Addendum, each such notice,
demand, request, consent, approval, declaration or other communication shall be
in writing and shall be delivered (a) in person with receipt acknowledged, (b)
by facsimile transmission, with receipt electronically confirmed during normal
business hours of recipient, and with confirmation by mailing of, no later than
one Business Day following such transmission, of a copy of such facsimile, by
registered or certified mail, return receipt requested, postage prepaid or by
overnight courier, (c) by registered or certified mail, return receipt
requested, postage prepaid or by overnight courier or (d) by Federal Express or
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similar reliable overnight delivery service, addressed as follows:
If to GE Medical, at:
General Electric Company, acting through
GE Medical Systems
20825 Swenson Drive, Suite 100
Waukesha, Wisconsin 53186
Attention: Investment Manager
Facsimile: (414) 798-4528
with a copy to:
McDermott, Will & Emery
2049 Century Park East, 34th Floor
Los Angeles, California 90067
Attention: Ira J. Rappeport, Esq.
Facsimile: (310) 277-4730
If to InSight, at:
InSight Health Services Corp.
________________________________
________________________________
Section 7. No Waiver; Remedies. No failure on the part of GE Medical to
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exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, and no single or partial exercise of any right hereunder shall
preclude any other or further exercise thereof or the exercise by GE Medical of
any other right. The remedies provided herein are cumulative and not exclusive
of any remedies provided by law.
Section 8. Governing Law. This Addendum shall be governed by, and
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construed in accordance with, the laws of the State of New York applicable to
contracts made and performed in such state, without regard to the principles
thereof regarding conflict of laws and any applicable laws of the United States
of America.
Section 9. Confidentiality. InSight hereby agrees that all of the
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information (the "Confidential Information") contained in the AHS Financing
Agreements and MHC Financing Agreements, including the AHS Master Agreement and
the MHC Master Agreement, and any related contract or correspondence, including
financial data, is proprietary to GE Medical. InSight agrees to maintain the
Confidential Information in strict confidence and InSight shall not publish or
disclose any of the Confidential Information to any third party, except with the
express written consent of GE Medical. In addition, InSight shall not disclose
any of the Confidential Information to any consultant (full or part time), nor
shall InSight disclose any of the Confidential Information to any employee who
is not an employee of InSight or an InSight
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Subsidiary without a need to know its contents. All of the employees of InSight
and InSight Subsidiaries who shall have access to the Confidential Information
shall be advised of the confidential nature of the AHS Financing Agreements and
the MHC Financing Agreements and instructed to keep them confidential as
required by this Section 9. In the event that InSight is required by law to make
any disclosure otherwise prohibited under this Section 9, InSight shall provide
to GE Medical advance written notice of such required disclosure (including with
such advance written notice the text of such required disclosure) at least two
Business Days prior to such required disclosure.
IN WITNESS WHEREOF, the parties hereto have entered into and executed this
Addendum as of the date first specified above.
GENERAL ELECTRIC COMPANY, acting
through GE Medical Systems
By: ______________________________
Title:
INSIGHT HEALTH SERVICES CORP.
By: ______________________________
Title:
AMERICAN HEALTH SERVICES CORP.
By: ______________________________
Title:
MAXUM HEALTH CORP.
By: ______________________________
Title:
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SCHEDULE 1
BUYOUT AMOUNT CALCULATION
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Buyout = $8,000,000 - Discounted value of Adjustment
Amount payments to date at the
time of the buyout (calculated at a
discount rate of 15% per annum)
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Illustration of Buyout Calculation
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T\\0\\ = 0 T\\1\\ = $800,000 T\\2\\ = $1,100,000
T\\3\\ = $1,500,000 T\\0\\ = Closing Date of Transaction
T\\3 + 1 Day\\ = Buyout Amount
Discounted Value of Adjustment Amount Payments at 15%
= $2,513,684
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Buyout Amount = $8,000,000 - $2,513,684
Buyout Amount = $5,486,316
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