AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 2001
REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ALLIANCE IMAGING, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 8071 33-0239910
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
--------------------------
1065 PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CA 92806
(714) 688-7100
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive office)
--------------------------
RUSSELL D. PHILLIPS, JR.
GENERAL COUNSEL AND SECRETARY
ALLIANCE IMAGING, INC.
1065 PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CA 92806
(714) 688-7100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
JAMES BEAUBIEN
LATHAM & WATKINS
633 WEST 5TH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration number for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE NOTE(1) PRICE(1) REGISTRATION FEE(2)
10 3/8% Senior Subordinated Notes due
2011.................................. $260,000,000 100% $260,000,000 $65,000
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Computed in accordance with Section 6(b) of the Securities Act by
multiplying 0.00025 by the proposed maximum aggregate offering price. The
Registrant is applying fees which were previously paid in connection with
the filing of its Registration Statement Nos. 333-56398 (filed on March 1,
2001) and 333-56108 (filed on February 23, 2001), which statements were
withdrawn, in full satisfaction of the fee payable hereunder.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED MAY 10, 2001
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL OR OFFER THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE
ITS 10 3/8% SENIOR SUBORDINATED NOTES DUE 2011,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
FOR ANY AND ALL OF ITS OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2011
-------------
THE EXCHANGE NOTES
- The terms of the notes we are issuing will be substantially identical to
the outstanding notes that we issued on April 10, 2001, except for the
elimination of some transfer restrictions, registration rights and
liquidated damages provisions relating to the outstanding notes.
- The notes will bear interest at the rate of 10 3/8% per year. Interest on
the notes is payable on April 15 and October 15 of each year, beginning on
October 15, 2001. The notes will mature on April 15, 2011.
- The notes are subject to redemption under the circumstances and at the
prices described in this prospectus.
- The notes will be unsecured senior subordinated obligations and will be
subordinated in right of payment to all our existing and future senior
debt, including our bank debt.
MATERIAL TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on
, 2001, unless extended.
- Our completion of the exchange offer is subject to customary conditions,
which we may waive.
- Upon our completion of the exchange offer, all outstanding notes that are
validly tendered and not withdrawn will be exchanged for an equal
principal amount of notes that are registered under the Securities Act of
1933.
- Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- The exchange of registered notes for outstanding notes will not be a
taxable exchange for U.S. Federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
--------------
FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER BEFORE PARTICIPATING IN
THIS EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------
THE DATE OF THIS PROSPECTUS IS , 2001.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. YOU MUST NOT RELY UPON ANY INFORMATION OR REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS AS IF WE HAD AUTHORIZED IT. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, NOR DOES
THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
Available Information....................................... ii
Summary..................................................... 1
Risk Factors................................................ 9
Forward Looking Statements.................................. 19
Ratio of Earnings to Fixed Charges.......................... 20
Use of Proceeds............................................. 20
Capitalization.............................................. 21
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 32
Management.................................................. 46
Certain Transactions........................................ 54
Principal Stockholders...................................... 56
Description of Certain Other Indebtedness................... 58
The Exchange Offer.......................................... 61
Description of the Exchange Notes........................... 72
Material United States Income Tax Considerations............ 119
Plan of Distribution........................................ 124
Legal Matters............................................... 125
Experts..................................................... 125
Change of Accountants....................................... 125
Index to Consolidated Financial Statements.................. F-1
i
AVAILABLE INFORMATION
This prospectus is part of a registration statement on Form S-4 that we have
filed with the Securities Exchange Commission under the Securities Act. This
prospectus does not contain all of the information set forth in the registration
statement. For further information about us and the notes, you should refer to
the registration statement. This prospectus summarizes material provisions of
contracts and other documents to which we refer you. Since this prospectus may
not contain all of the information that you may find important, you should
review the full text of these documents. We have filed these documents as
exhibits to our registration statement.
We are subject to the informational reporting requirements of the Securities
Exchange Act of 1934, as amended, and file reports and other information with
the Commission. You may read and copy any reports and information statements and
other information we file at the public reference facilities of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as at the following Regional Offices: 7 World Trade Center, 14th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may obtain copies of such material from the Commission by mail at
prescribed rates. You should direct requests to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a website
(http:/www.sec.gov) that contains the reports and other information filed by the
us. In addition, for so long as any of the notes remain outstanding, we have
agreed to make available to any prospective purchaser of the notes or beneficial
owner of the notes in connection with any sale thereof the information required
by Rule 144A(d)(4) under the Securities Act.
ii
SUMMARY
THE FOLLOWING SUMMARIZES INFORMATION IN OTHER SECTIONS OF THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS, THE NOTES TO THOSE FINANCIAL STATEMENTS AND
THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU
SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY. THE TERM "OLD NOTES" AS USED IN
THIS PROSPECTUS REFERS TO OUR OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE
2011 THAT WE ISSUED ON APRIL 10, 2001 AND THAT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT. THE TERM "EXCHANGE NOTES" REFERS TO THE 10 3/8% SENIOR
SUBORDINATED NOTES DUE 2011 OFFERED PURSUANT TO THIS PROSPECTUS. THE TERM
"NOTES" REFERS TO THE OLD NOTES AND THE EXCHANGE NOTES COLLECTIVELY.
OUR BUSINESS
We are a leading national provider of outsourced diagnostic imaging
services, with 91% of our 2000 revenues derived from magnetic resonance imaging,
or MRI. We provide imaging and therapeutic services primarily to hospitals and
other healthcare providers on a mobile, shared-service basis. Our mobile,
shared-service systems are located in trailers which we move among our clients'
locations. We also provide systems that are located full-time at particular
hospitals and clinics. Our services normally include the use of our imaging or
therapeutic systems, technologists to operate the systems, equipment maintenance
and upgrades and management of day-to-day operations. We had 381 diagnostic
imaging and therapeutic systems, including 319 MRI systems, and 1,177 clients in
43 states at December 31, 2000.
Our typical contract is a three-to-five year arrangement with a hospital or
other healthcare provider, under which fees are payable to us regardless of
reimbursement by health insurers or other third-party payors. Our clients
contract with us to use our outsourced imaging services in order to:
- avoid the capital investment and financial risk associated with the
purchase of their own systems;
- provide access to MRI and other services for their patients when the
demand for these services does not justify the purchase of a system;
- make use of our ancillary services which include marketing support,
education and training and billing assistance; and
- gain access to imaging services under our regulatory and licensing
approvals when they do not have these approvals.
Our MRI systems are among the most advanced in the industry. Our advanced
systems are able to perform high quality scans more rapidly and can be used for
a wider variety of imaging applications than less advanced systems. We are able
to upgrade most of our MRI systems through software and hardware enhancements,
which we believe reduces the potential for technological obsolescence.
OUR INDUSTRY
MRI services constituted $6.7 billion of the approximately $66 billion
diagnostic imaging industry in 1999. MRI's growth has been driven by its
recognition as a cost-effective, noninvasive diagnostic tool, increasing
physician acceptance and growth in the number of MRI applications. As a result,
we believe MRI will continue to capture a larger portion of the diagnostic
imaging market. The number of MRI scans grew at a compound annual rate of 10.5%
from 1990 to 2000 and is projected to grow at approximately this rate through
2006.
1
OUR COMPETITIVE STRENGTHS
We believe we benefit from the following competitive strengths:
- our position as the largest national provider of outsourced MRI services;
- exclusive, long-term contracts with limited customer concentration;
- reduced reimbursement risk because we generate 90% of our revenues by
billing hospitals and clinics rather than health insurers or other
third-party payors;
- our ability to provide comprehensive outsourcing solutions; and
- our experienced executive management team.
OUR GROWTH STRATEGY
We intend to capitalize upon these competitive strengths and grow our
business by:
- increasing the number of scans we perform for our existing clients;
- establishing new client relationships;
- improving efficiency by increasing the number of scans we perform each day
with our existing MRI systems;
- offering new MRI applications;
- offering new imaging services; and
- pursuing selected strategic acquisitions.
Despite the competitive strengths discussed above, we face a number of
challenges in growing our business. We currently have a substantial amount of
indebtedness, which places financial and other limitations on our business. Our
business is also subject to a number of other risks described in "Risk Factors."
------------------------
We are a Delaware corporation with our principal executive offices located
at 1065 PacifiCenter Drive, Suite 200, Anaheim, CA 92806. Our telephone number
at that location is (714) 688-7100.
2
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer............. We are offering to exchange $1,000 principal amount of our
exchange notes for each $1,000 principal amount of old notes. As
of the date of this prospectus, $260 million in aggregate
principal amount of old notes are outstanding.
We have registered the exchange notes under the Securities Act
and they are substantially identical to the old notes, except for
the elimination of some transfer restrictions, registration
rights and liquidated damages provisions relating to the old
notes.
Accrued Interest on the
Exchange Notes and the Old
Notes........................ Interest on the exchange notes will accrue from the date of
issuance of the old notes, which was on April 10, 2001. Holders
whose old notes are accepted for exchange will be deemed to have
waived the right to receive any interest accrued on the old
notes.
No Minimum Condition........... We are not conditioning the exchange offer on the tender of any
minimum principal amount of old notes.
Expiration Date................ The exchange offer will expire at 5:00 p.m., New York City time,
on , 2001, unless we decide to extend the exchange offer.
Withdrawal Rights.............. You may withdraw your tender at any time prior to 5:00 p.m., New
York City time, on the expiration date.
Conditions to the Exchange
Offer........................ The exchange offer is subject to customary conditions, which we
may waive. We currently anticipate that each of the conditions
will be satisfied and that we will not need to waive any
conditions. We reserve the right to terminate or amend the
exchange offer at any time before the expiration date if any such
condition occurs. For additional information, see "The Exchange
Offer--Certain Conditions to the Exchange Offer."
Procedures for Tendering Old
Notes........................ If you are a holder of old notes who wishes to accept the
exchange offer, you must:
complete, sign and date the accompanying letter of
transmittal, or a facsimile of the letter of transmittal,
and mail or otherwise deliver the letter of transmittal,
together with your old notes, to the exchange agent at the
address set forth under "The Exchange Offer--Exchange
Agent;" or
-
arrange for The Depository Trust Company to transmit certain
required information, including an agent's message forming
part of a book-entry transfer in which you agree to be bound
by the terms of the letter of transmittal, to the exchange
agent in connection with a book-entry transfer.
-
By tendering your old notes in either manner, you will be
representing among other things, that:
the exchange notes you receive pursuant to the exchange
offer are being acquired in the ordinary course of your
business;
-
you are not participating, do not intend to participate, and
have no arrangement or understanding with any person to
participate, in the distribution of the exchange notes
issued to you in the exchange offer; and
-
3
you are not an "affiliate" of ours.
-
Special Procedures for
Beneficial Owners............ If you beneficially own old notes registered in the name of a
broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your old notes in the exchange offer, you
should contact the registered holder promptly and instruct it to
tender on your behalf. If you wish to tender on your own behalf,
you must, prior to completing and executing the letter of
transmittal and delivering your old notes, either arrange to have
your old notes registered in your name or obtain a properly
completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery
Procedures................... If you wish to tender your old notes and time will not permit
your required documents to reach the exchange agent by the
expiration date, or the procedures for book-entry transfer cannot
be completed on time, you may tender your old notes according to
the guaranteed delivery procedures described in "The Exchange
Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes... We will accept for exchange all old notes which are properly
tendered in the exchange offer prior to 5:00 p.m., New York City
time, on the expiration date. The exchange notes issued in the
exchange offer will be delivered promptly following the
expiration date. For additional information, see "The Exchange
Offer--Acceptance of Old Notes for Exchange; Delivery of Exchange
Notes."
Use of Proceeds................ We will not receive any proceeds from the issuance of exchange
notes in the exchange offer. We will pay for our expenses
incident to the exchange offer.
Federal Income Tax
Consequences................. The exchange of exchange notes for old notes in the exchange
offer will not be a taxable event for federal income tax
purposes. For additional information, see "Material United States
Income Tax Considerations."
Effect on Holders of Old
Notes........................ As a result of this exchange offer, we will have fulfilled a
covenant contained in the registration rights agreement dated as
of April 10, 2001 among us and each of the initial purchasers
named in the agreement and, accordingly, there will be no
increase in the interest rate on the old notes. If you do not
tender your old notes in the exchange offer:
you will continue to hold the old notes and will be entitled
to all the rights and limitations applicable to the old
notes under the indenture governing the notes, except for
any rights under the registration rights agreement that
terminate as a result of the completion of the exchange
offer; and
-
you will not have any further registration or exchange
rights and your old notes will continue to be subject to
restrictions on transfer. Accordingly, the trading market
for untendered old notes could be adversely affected.
-
Exchange Agent................. The Bank of New York is serving as exchange agent in connection
with the exchange offer.
4
SUMMARY OF THE EXCHANGE NOTES
Securities Offered............. Up to $260,000,000 principal amount of 10 3/8% senior
subordinated notes due 2011 which have been registered under the
Securities Act.
Maturity Date.................. April 15, 2011.
Interest Payment Dates......... April 15 and October 15, commencing October 15, 2001.
On or after April 15, 2006, the exchange notes will be
Optional Redemption............ redeemable, in whole or in part, at the redemption prices set
forth under the heading "Description of the Exchange
Notes--Optional Redemption," together with accrued and unpaid
interest, if any, to the date of redemption. In addition, at any
time on or prior to April 15, 2004, we may redeem up to 40% of
the original aggregate principal amount of the exchange notes
with the net proceeds of one or more equity offerings, at a
redemption price equal to 110.375% of the aggregate principal
amount to be redeemed, together with accrued and unpaid interest,
if any, to the date of redemption; provided that at least 60% of
the original aggregate principal amount of the exchange notes
remains outstanding immediately after each redemption. See
"Description of the Exchange Notes--Optional Redemption."
Upon the occurrence of a change of control, we will have the
Change of Control.............. option, at any time prior to April 15, 2006, to redeem the
exchange notes, in whole but not in part, at a redemption price
equal to 100% of the aggregate principal amount of the exchange
notes plus the applicable premium, together with accrued and
unpaid interest, if any, to the date of redemption. Upon the
occurrence of a change of control, if we do not elect to redeem
the exchange notes, we will be required to make an offer to
purchase the exchange notes at a price equal to 101% of the
aggregate principal amount of the exchange notes, together with
accrued and unpaid interest, if any, to the date of repurchase.
See "Description of the Exchange Notes--Repurchase at the Option
of Holders--Change of Control."
Ranking........................ The exchange notes will be:
- unsecured senior subordinated obligations;
- subordinated in right of payment to all existing and future
senior debt, including our bank debt;
- effectively subordinated to all obligations of our
subsidiaries;
- equal in rank with any future senior subordinated debt; and
- senior to any future junior subordinated debt.
As of December 31, 2000, on a pro forma basis after giving effect
to the offering of the old notes, we would have had approximately
$508 million of indebtedness which would have been senior to the
notes. We have no material indebtedness PARI PASSU with or junior
to the notes. Of this amount, our subsidiaries had total
liabilities of $11 million which are structurally senior to the
exchange notes. See "Selected Consolidated Financial Data," "Risk
Factors--Risks Related to Our Indebtedness," and "Description of
the Exchange Notes--Subordination."
5
Certain Covenants.............. The indenture under which the notes will be issued contains
covenants that will, subject to certain exceptions, limit, among
other things, our and our restricted subsidiaries' ability to:
- pay dividends or make certain other restricted payments or
investments;
- incur additional indebtedness and issue disqualified stock;
- create liens on assets;
- merge, consolidate, or sell all or substantially all of our
and our restricted subsidiaries' assets;
- enter into certain transactions with affiliates;
- create restrictions on dividends or other payments by our
restricted subsidiaries;
- create guarantees of indebtedness by restricted
subsidiaries; and
- incur subordinated indebtedness that is senior to the notes.
See "Description of the Exchange Notes--Certain Covenants."
Trustee........................ The Bank of New York.
Use of Proceeds................ We will not receive any cash proceeds from the exchange offer.
6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary historical consolidated financial information with
respect to each year in the three-year period ended December 31, 2000 is derived
from our consolidated financial statements. The summary historical consolidated
financial information provided below should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ 243,297 $ 318,106 $ 345,287
Costs and expenses:
Operating expenses, excluding depreciation................ 111,875 143,238 151,722
Depreciation expense...................................... 33,493 47,055 54,924
Selling, general and administrative expenses.............. 24,446 31,097 38,338
Amortization expense, primarily goodwill.................. 11,289 14,565 14,390
Termination and related costs............................. -- -- 4,573
Recapitalization, merger integration, and regulatory
costs................................................... 2,818 52,581 4,523
Interest expense, net..................................... 41,772 51,958 77,051
--------- --------- ---------
Total costs and expenses.................................. 225,693 340,494 345,521
--------- --------- ---------
Income (loss) before income taxes and extraordinary loss.... 17,604 (22,388) (234)
Provision for income taxes.................................. 8,736 3,297 1,969
--------- --------- ---------
Income (loss) before extraordinary loss..................... 8,868 (25,685) (2,203)
Extraordinary loss, net of taxes............................ (2,271) (17,766) --
--------- --------- ---------
Net income (loss)........................................... $ 6,597 $ (43,451) $ (2,203)
========= ========= =========
OTHER DATA:
Adjusted EBITDA(1).......................................... $ 107,076 $ 143,771 $ 155,560
Adjusted EBITDA margin(2)................................... 44.0% 45.2% 45.1%
Cash flows provided by (used in):
Operating activities...................................... 46,855 38,197 92,044
Investing activities...................................... (245,104) (104,072) (90,995)
Financing activities...................................... 189,077 67,596 7,118
Capital expenditures........................................ 72,321 95,914 101,554
Net debt to adjusted EBITDA(1)(3)........................... 4.8x 5.2x 4.8x
Adjusted EBITDA to interest expense, net(1)(4).............. 2.6x 2.8x 2.0x
Ratio of earnings to fixed charges(5)....................... 1.4x 0.6x 1.0x
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 3,083 $ 4,804 $ 12,971
Total assets................................................ 567,932 625,510 646,160
Long-term debt, including current maturities................ 518,423 751,849 758,989
Redeemable preferred stock.................................. 16,673 -- --
Stockholders' deficit....................................... (43,327) (201,899) (203,809)
------------------------------
(1) EBITDA represents earnings before interest expense, net, income taxes,
depreciation and amortization expense. Adjusted EBITDA represents EBITDA
adjusted for recapitalization costs, merger integration costs, regulatory
costs, termination and related costs, stock-based compensation, and
extraordinary items. EBITDA and adjusted EBITDA are not presentations made
in accordance with generally accepted accounting principles. EBITDA and
adjusted EBITDA should not be considered in isolation or as substitutes for
net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted
accounting principles or as measures of profitability or liquidity. EBITDA
and adjusted EBITDA are included in this offering memorandum to provide
additional information with respect to our ability to satisfy our debt
service, capital expenditure and working capital requirements and because
certain covenants in our debt instruments are based on similar measures.
While EBITDA and adjusted EBITDA are used as measures of operations and the
ability to meet debt service requirements, they are not necessarily
comparable to
7
other similarly titled captions of other companies due to differences in
methods of calculations. The calculations of EBITDA and adjusted EBITDA are
shown below:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Net income (loss)........................................... $ 6,597 $(43,451) $ (2,203)
Depreciation expense...................................... 33,493 47,055 54,924
Amortization expense, primarily goodwill.................. 11,289 14,565 14,390
Interest expense, net..................................... 41,772 51,958 77,051
Provision for income taxes................................ 8,736 3,297 1,969
-------- -------- --------
EBITDA...................................................... 101,887 73,424 146,131
Termination and related costs(a).......................... -- -- 4,573
Recapitalization, merger integration, and regulatory
costs(b)................................................ 2,818 52,581 4,523
Stock based compensation(c)............................... 100 -- 333
Extraordinary loss net of taxes........................... 2,271 17,766 --
-------- -------- --------
Adjusted EBITDA............................................. $107,076 $143,771 $155,560
======== ======== ========
----------------------------------
(a) Termination and related costs for the year ended December 31, 2000
represent $4,232 associated with termination costs and the cash-out of
stock options for an executive officer who resigned due to health-related
issues and $341 associated with the recruitment of his replacement.
(b) Recapitalization, merger integration and regulatory costs for the year
ended December 31, 2000, represent $704 of professional fees paid in
connection with the KKR acquisition, $570 of compensatory costs related
to stock option buy-backs and severance payments resulting from change in
control provisions triggered by the KKR acquisition, $154 related to
additional severance for employees of SMT, $123 of integration costs to
migrate acquired entities to a common systems platform for direct patient
billing, and $850 for assessments and $2,122 for costs and related
professional fees to settle regulatory matters associated with the direct
patient billing process of one of our acquired entities.
Recapitalization, merger integration and regulatory costs for the year
ended December 31, 1999, represent $19,640 in professional fees paid in
connection with the KKR acquisition, $17,082 related to the purchase of
outstanding stock options in connection with the KKR acquisition, $6,003
in bonus payments paid in connection with the KKR acquisition, $1,088 in
provisions to conform the accounting policies with respect to accounts
receivable reserves, as well as employee vacation and sick pay reserves
in connection with the SMT merger, $2,164 in employee severance costs in
connection with the SMT merger, $3,075 in professional fees and other
merger integration costs associated with the SMT merger and other
acquired entities, and $3,529 for assessments to settle regulatory
matters associated with the direct patient billing process of one of our
acquired entities. Recapitalization, merger integration and regulatory
costs for the year ended December 31, 1998, represents $1,846 in special
non-recurring bonuses paid in connection with the MTI acquisition, $722
of professional fees associated with accounting and billing systems
conversions of acquired companies, and a $250 provision for doubtful
accounts conforming accounting adjustment made in connection with the
American Shared acquisition.
(c) Stock-based compensation of $333 for the year ended December 31, 2000,
represents $55 for options issued to certain employees at exercise prices
below the fair value of our common stock, $68 for shares of Phantom stock
issued to four non-employee directors below fair market value, and $210
for common stock issued to one of our executive officers at below fair
market value. Stock-based compensation of $100 for the year ended
December 31, 1998, represents options issued to certain employees at
exercise prices below the fair value of our common stock.
(2) Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by
revenues.
(3) For purposes of calculating net debt to adjusted EBITDA, net debt is defined
as long-term debt, including current maturities, less cash and cash
equivalents.
(4) For purposes of calculating adjusted EBITDA to interest expense, net,
interest expense, net, is defined as interest expense net of interest
income. Interest expense includes amortization of debt issuance costs.
(5) For the purpose of calculating the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes and extraordinary items, plus minority interest expense, plus
distributions from equity investees, plus fixed charges, less income from
equity investments. Fixed charges are the sum of interest on all
indebtedness, amortization of debt issuance costs, and estimated interest on
rental expense. Earnings were inadequate to cover fixed charges by
$21.4 million for the year ended December 31, 1999.
8
RISK FACTORS
AN INVESTMENT IN OUR NOTES INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES BEFORE MAKING AN
INVESTMENT IN OUR NOTES.
RISKS RELATED TO OUR INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS COULD RESTRICT OUR OPERATIONS AND MAKE US MORE
VULNERABLE TO ADVERSE ECONOMIC CONDITIONS.
We are a highly leveraged company and our liabilities exceed our assets by a
substantial amount. On December 31, 2000, after giving pro forma effect to the
offering of the old notes, we would have had $768.0 million of outstanding debt,
excluding letters of credit and guarantees, including $260.0 million of the
notes. Of our total debt, $493.0 million would have consisted of borrowings
under our credit facility, $260.0 million would have consisted of the notes, and
$15.0 million would have consisted of equipment debt and capitalized lease
obligations. In addition, for the year ended December 31, 2000, on the same pro
forma basis, our ratio of earnings to fixed charges would have been 0.977x,
resulting in a deficiency of $1,932,000.
Our substantial indebtedness could have important consequences for the
holders of the notes. For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and acquisitions and for other general corporate purposes;
- increase our vulnerability to economic downturns and competitive pressures
in our industry;
- increase our vulnerability to interest rate fluctuations because a
substantial amount of our debt is at variable interest rates; on
December 31, 2000, after giving pro forma effect to the offering of the
old notes, $493.0 million of our debt would have been at variable interest
rates;
- place us at a competitive disadvantage compared to our competitors that
have less debt in relation to cash flow; and
- limit our flexibility in planning for, or reacting to, changes in our
business and our industry.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE INDEBTEDNESS WHICH COULD INCREASE THE RISKS
DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture governing the notes will
permit us or our subsidiaries to incur additional indebtedness, subject to
certain restrictions. Further, the indenture allows for the incurrence of
indebtedness by our subsidiaries, all of which would be structurally senior to
the notes. In addition, as of May 10, 2001, our revolving credit facility
permits additional borrowings of up to approximately $107 million subject to the
covenants contained in the credit facility, and all of those borrowings would be
senior to the notes. If new debt is added to our and our subsidiaries' current
debt levels, the risks discussed above could intensify.
9
WE MAY BE UNABLE TO GENERATE OR BORROW SUFFICIENT CASH TO MAKE PAYMENTS ON OUR
INDEBTEDNESS, INCLUDING THE NOTES, OR TO REFINANCE OUR INDEBTEDNESS, INCLUDING
THE NOTES, ON ACCEPTABLE TERMS.
Our ability to make payments on our indebtedness will depend on our ability
to generate cash flow in the future which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. In addition, future borrowings may not be
available to us under our credit facility in an amount sufficient to enable us
to pay our indebtedness, including the notes, or to fund our other cash needs.
We may need to refinance all or a portion of our indebtedness, including the
notes, on or before maturity. We may not be able to refinance any of our
indebtedness, including our credit facility and the notes, on commercially
reasonable terms or at all. Any refinancing of our debt could be at higher
interest rates and may require us to comply with more onerous covenants which
could further restrict our business operations.
WE MAY NOT BE ABLE TO FINANCE FUTURE NEEDS OR ADAPT OUR BUSINESS PLAN TO CHANGES
BECAUSE OF RESTRICTIONS PLACED ON US BY OUR CREDIT FACILITY, THE INDENTURE AND
INSTRUMENTS GOVERNING OUR OTHER INDEBTEDNESS.
The indenture will, and our credit facility does, contain affirmative and
negative covenants which restrict, among other things, our ability to:
- incur additional debt;
- sell assets;
- create liens or other encumbrances;
- make certain payments and dividends; or
- merge or consolidate.
All of these restrictions could affect our ability to operate our business
and may limit our ability to take advantage of potential business opportunities
as they arise. A failure to comply with these covenants and restrictions would
permit the relevant creditors to declare all amounts borrowed under the relevant
facility, together with accrued interest and fees, to be immediately due and
payable. If the indebtedness under the credit facility or the notes is
accelerated, we may not have sufficient assets to repay amounts due under the
credit facility, the notes or on other indebtedness then outstanding. If we are
not able to refinance our debt, we could become subject to bankruptcy
proceedings, and you may lose all or a portion of your investment.
RISKS RELATED TO GOVERNMENT REGULATION OF OUR BUSINESS
COMPLYING WITH FEDERAL AND STATE REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES.
We are directly or indirectly through our clients subject to extensive
regulation by both the federal government and the states in which we conduct our
business.
If our operations are found to be in violation of any of the laws and
regulations to which we or our clients are subject, we may be subject to the
applicable penalty associated with the violation, including civil and criminal
penalties, damages, fines and the curtailment of our operations. Any penalties,
damages, fines or curtailment of our operations, individually or in the
aggregate, could adversely affect our ability to operate our business and our
financial results. The risk of our being found in violation of these laws and
regulations is increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of interpretations. Any action against us for violation of
these laws or regulations, even if we
10
successfully defend against it, could cause us to incur significant legal
expenses and divert our management's attention from the operation of our
business. For a more detailed discussion of the various state and federal
regulations to which we are subject see "Business--Regulation."
AN UNEXPECTED ADVERSE OUTCOME FROM ANY OF OUR ONGOING ADMINISTRATIVE PROCEEDINGS
COULD RESULT IN DAMAGES, FINES OR THE CURTAILMENT OF OUR OPERATIONS.
We currently have the following administrative proceedings pending:
- a review by the National Heritage Insurance Company, our Medicare Part B
contractor, of our Medicare billing claims in Massachusetts;
- an investigation by the Department of Justice relating to alleged
violations of the False Claims Act; and
- an action by MassPRO stemming from an audit of Medicaid claims submitted
by one of our wholly-owned subsidiaries.
Each of the proceedings listed above is described in greater detail in
"Business--Legal and Administrative Proceedings." We have accrued $4,350,000 for
probable settlement of all of these proceedings. While actual results could vary
from this estimate, we believe that the resolution of any deficient billing
process will not have a material adverse effect on our business. If this
assessment is incorrect, however, then additional amounts required to settle
these issues may have an adverse effect on our financial condition and our
operations.
HEALTHCARE REFORM LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR
SERVICES, WHICH WOULD REDUCE OUR REVENUES AND HARM OUR OPERATING RESULTS.
In addition to extensive existing government healthcare regulation, there
are numerous initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services,
including a number of proposals that would significantly limit reimbursement
under the Medicare and Medicaid Programs. Limitations on reimbursement amounts
and other cost containment pressures have in the past resulted in a decrease in
the revenue we receive for each scan we perform. It is not clear at this time
what proposals, if any, will be adopted or, if adopted, what effect these
proposals would have on our business. Aspects of certain of these healthcare
proposals, such as reductions in the Medicare and Medicaid Programs, containment
of healthcare costs on an interim basis by means that could include a short-term
freeze on prices charged by healthcare providers, and permitting greater state
flexibility in the administration of Medicaid, could limit the demand for our
services or affect the revenue per procedure that we can collect which would
harm our business and results of operations.
THE APPLICATION OR REPEAL OF STATE CERTIFICATE OF NEED REGULATIONS COULD HARM
OUR BUSINESS AND FINANCIAL RESULTS.
Some states require a certificate of need or similar regulatory approval
prior to the acquisition of high-cost capital items including diagnostic imaging
systems or provision of diagnostic imaging services by us or our clients.
Seventeen of the 43 states in which we operate require a certificate of need and
more states may adopt similar licensure frameworks in the future. In many cases,
a limited number of these certificates are available in a given state. If we are
unable to obtain the applicable certificate or approval or additional
certificates or approvals necessary to expand our operations, these regulations
may limit or preclude our operations in the relevant jurisdictions.
Conversely, states in which we have obtained a certificate of need may
repeal existing certificate of need regulations or liberalize exemptions from
the regulations. For example, Pennsylvania, Nebraska, New York, Ohio and
Tennessee have liberalized exemptions from certificate of need programs. The
11
repeal of certificate of need regulations in states in which we have obtained a
certificate of need or a certificate of need exemption would lower barriers to
entry for competition in those states and could adversely affect our business.
IF WE FAIL TO COMPLY WITH VARIOUS LICENSURE, CERTIFICATION AND ACCREDITATION
STANDARDS WE MAY BE SUBJECT TO LOSS OF LICENSURE, CERTIFICATION OR ACCREDITATION
WHICH WOULD ADVERSELY AFFECT OUR OPERATIONS.
All of the states in which we operate require that the imaging technologists
that operate our computed tomography, single photon emission computed
tomography, and positron emission tomography systems be licensed or certified.
Also, each of our retail sites must continue to meet various requirements in
order to receive payments from the Medicare Program. In addition, we are
currently accredited by the Joint Commission on Accreditation of Healthcare
Organizations, an independent, non-profit organization that accredits various
types of healthcare providers such as hospitals, nursing homes and providers of
diagnostic imaging services. In the healthcare industry, various types of
organizations are accredited to meet certain Medicare certification
requirements, expedite third-party payment, and fulfill state licensure
requirements. Some managed care providers prefer to contract with accredited
organizations. Any lapse in our licenses, certifications or accreditations, or
those of our technologists, or the failure of any of our retail sites to satisfy
the necessary requirements under Medicare could adversely affect our operations
and financial results.
RISKS RELATED TO OUR BUSINESS
CHANGES IN THE RATES OR METHODS OF THIRD-PARTY REIMBURSEMENTS FOR DIAGNOSTIC
IMAGING AND THERAPEUTIC SERVICES COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES
OR CREATE DOWNWARD PRICING PRESSURE, WHICH WOULD RESULT IN A DECLINE IN OUR
REVENUES AND HARM TO OUR FINANCIAL POSITION.
We derive a small portion of our revenues from direct billings to patients
and third-party payors such as Medicare, Medicaid or private health insurance
companies, and changes in the rates or methods of reimbursement for the services
we provide could have a significant negative impact on our revenues. Moreover,
our healthcare provider clients on whom we depend for the majority of our
revenues generally rely on reimbursement from third-party payors. In the past,
initiatives have been proposed which, if implemented, would have had the effect
of substantially decreasing reimbursement rates for diagnostic imaging services.
Similar initiatives enacted in the future may have an adverse impact on our
financial condition and our operations. Any change in the rates of or conditions
for reimbursement could substantially reduce the number of procedures for which
we or these healthcare providers can obtain reimbursement or the amounts
reimbursed to us or our clients for services provided by us. Because unfavorable
reimbursement policies have constricted and may continue to constrict the profit
margins of the hospitals and clinics we bill directly, we have and may continue
to need to lower our fees to retain existing clients and attract new ones. These
reductions could have a significant adverse effect on our revenues and financial
results by decreasing demand for our services or creating downward pricing
pressure.
Recently promulgated federal regulations affect the ability of a Medicare
provider such as a hospital to include a service or facility as provider-based,
as opposed to treating the service as if it were offered offsite from the
hospital, for purposes of Medicare reimbursement. Historically, provider-based
status has allowed a provider to obtain more favorable Medicare reimbursement
for services like the ones we provide. While the Medicare, Medicaid and SCHIP
Benefits and Improvement Act of 2000 offers some relief for facilities
recognized as provider-based on October 1, 2000, under these new regulations,
some of our clients may have difficulty qualifying our services for
provider-based status. If a client cannot obtain provider-based status for our
services, then the provider might decide not to contract with us, which would
result in a decline in our operating results.
12
OUR REVENUES MAY FLUCTUATE OR BE UNPREDICTABLE AND THIS MAY HARM OUR FINANCIAL
RESULTS.
The amount and timing of revenues that we may derive from our business will
fluctuate based on:
- variations in the rate at which clients renew their contracts;
- the extent to which our mobile shared-service clients become full-time
clients;
- changes in the number of days of service we can offer with respect to a
given diagnostic imaging or therapeutic system due to equipment
malfunctions or the seasonal factors discussed below; and
- the mix of wholesale and retail billing for our services.
In addition, we experience seasonality in the sale of our services. For
example, our sales typically decline from our third fiscal quarter to our fourth
fiscal quarter. First and fourth quarter revenues are typically lower than those
from the second and third quarters. First quarter revenue is affected primarily
by fewer calendar days and inclement weather, the results of which are fewer
patient scans during the period. Fourth quarter revenue is affected primarily by
holiday and client and patient vacation schedules and inclement weather, the
results of which are fewer patient scans during the period. We may not be able
to reduce our expenses, including our debt service obligations, quickly enough
to respond to these declines in revenue, which would make our business difficult
to operate and would harm our financial results. In addition, we may be unable
to adjust our expenditures if revenues in a particular period fail to meet our
expectations, which would harm our operating results for that period and could
affect our ability to pay interest on the notes.
WE MAY EXPERIENCE COMPETITION FROM OTHER MEDICAL DIAGNOSTIC COMPANIES AND THIS
COMPETITION COULD ADVERSELY AFFECT OUR REVENUES AND OUR BUSINESS.
The market for diagnostic imaging services and systems is competitive. Our
major competitors include Insight Health Services Corp., Medical
Resources, Inc., Shared Medical Services, Kings Medical Company Inc., Otter Tail
Power Company, U.S. Diagnostic Inc., and Syncor International Corporation. In
addition to direct competition from other mobile providers, we compete with
independent imaging centers and healthcare providers that have their own
diagnostic imaging systems as well as with equipment manufacturers that sell or
lease imaging systems to healthcare providers for full-time installation. Some
of our direct competitors which provide diagnostic imaging services may now or
in the future have access to greater financial resources than we do and may have
access to newer, more advanced equipment. In addition, some clients have in the
past elected to provide imaging services to their patients directly rather than
renewing their contacts with us. Finally, we face competition from providers of
competing technologies such as ultrasound and may face competition from
providers of new technologies in the future. If we are unable to successfully
compete, our client base would decline and our business and financial condition
would be harmed.
MANAGED CARE ORGANIZATIONS MAY PREVENT HEALTHCARE PROVIDERS FROM USING OUR
SERVICES WHICH WOULD CAUSE US TO LOSE CURRENT AND PROSPECTIVE CLIENTS.
Healthcare providers participating as providers under managed care plans may
be required to refer diagnostic imaging tests to specific imaging service
providers depending on the plan in which each covered patient is enrolled. These
requirements currently inhibit healthcare providers from using our diagnostic
imaging services in some cases. The proliferation of managed care may prevent an
increasing number of healthcare providers from using our services in the future
which would cause our revenues to decline.
13
TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES
AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.
Technological change in the MRI industry has been gradual since the last
major technological advancements were made in 1994. However, technological
changes in the MRI industry may accelerate in the future. The effect of
technological change could significantly impact our business. The development of
new scanning technology or new diagnostic applications for existing technology
may require us to adapt our existing technology or acquire new or
technologically improved systems in order to successfully compete. In the
future, however, we may not have the financial resources to do so, particularly
given our indebtedness. In addition, advancing technology may enable hospitals,
physicians or other diagnostic service providers to perform tests without the
assistance of diagnostic service providers such as ourselves. The development of
new technologies or refinements of existing ones might make our existing systems
technologically or economically obsolete, or cause a reduction in the value of,
or reduce the need for, our systems.
WE MAY BE UNABLE TO EFFECTIVELY MAINTAIN OUR IMAGING AND THERAPEUTIC SYSTEMS OR
GENERATE REVENUE WHEN OUR SYSTEMS ARE NOT WORKING.
Timely, effective service is essential to maintaining our reputation and
high utilization rates on our imaging systems. Repairs to one of our systems can
take up to two weeks and result in a loss of revenue. Our warranties and
maintenance contracts do not fully compensate us for loss of revenue when our
systems are not working. The principal components of our operating costs include
depreciation, salaries paid to technologists and drivers, annual system
maintenance costs, insurance and transportation costs. Because the majority of
these expenses is fixed, a reduction in the number of scans performed due to
out-of-service equipment will result in lower revenues and margins. Repairs of
our equipment are performed for us by the equipment manufacturers. These
manufacturers may not be able to perform repairs or supply needed parts in a
timely manner. Thus, if we experience greater than anticipated system
malfunctions or if we are unable to promptly obtain the service necessary to
keep our systems functioning effectively, our revenues could decline and our
ability to provide services would be harmed.
WE MAY BE UNABLE TO RENEW OR MAINTAIN OUR CLIENT CONTRACTS WHICH WOULD HARM OUR
BUSINESS AND FINANCIAL RESULTS.
Upon expiration of our clients' contracts, we are subject to the risk that
clients will cease using our imaging services and purchase or lease their own
imaging systems or use our competitors' imaging systems. Thirty-three percent of
our MRI contracts will expire in 2001 and an additional twenty-four percent will
expire in 2002. If these contracts are not renewed, it could result in a
significant negative impact on our business. In particular, renewal rates for
contracts inherited from our acquired companies have historically been lower
than those for our own contracts. For example, in 2000, the retention rate on
contracts originated by us was approximately 87% compared with an average
retention rate of approximately 83% for contracts originated by companies we
acquired in the last three years. It is not always possible to immediately
obtain replacement clients, and historically many replacement clients have been
smaller facilities which have a lower number of scans than lost clients.
WE MAY BE SUBJECT TO PROFESSIONAL LIABILITY RISKS WHICH COULD BE COSTLY AND
NEGATIVELY IMPACT OUR BUSINESS AND FINANCIAL RESULTS.
We may be subject to professional liability claims. Although there currently
are no known hazards associated with MRI or our other scanning technologies when
used properly, hazards may be discovered in the future. Furthermore, there is a
risk of harm to a patient during an MRI if the patient has certain types of
metal implants or cardiac pacemakers within his or her body. Patients are
carefully
14
screened to safeguard against this risk, but screening may nevertheless fail to
identify the hazard. To protect against possible professional liability, we
maintain professional liability insurance. However, if we are unable to maintain
insurance in the future at an acceptable cost or at all or if our insurance does
not fully cover us, and a successful claim was made against us, we could be
exposed. Any claim made against us not fully covered by insurance could be
costly to defend against, result in a substantial damage award against us and
divert the attention of our management from our operations, which could have an
adverse effect on our financial performance.
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGERS, TECHNOLOGISTS
AND SALES PERSONS COULD LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS.
We depend upon our management team to a substantial extent. In the past year
we have added 216 new employees. As we grow, we will increasingly require field
managers and sales persons with experience in our industry and skilled
technologists to operate our diagnostic equipment. It is impossible to predict
the availability of qualified field managers, sales persons and technologists or
the compensation levels that will be required to hire them. In particular, there
is a very high demand for qualified technologists who are necessary to operate
our systems. We may not be able to hire and retain a sufficient number of
technologists, and we may be required to pay bonuses and higher salaries to our
technologists, which would increase our expenses. The loss of the services of
any member of our senior management or our inability to hire qualified field
managers, sales persons and skilled technologists at economically reasonable
compensation levels could adversely affect our ability to operate and grow our
business.
OUR POSITRON EMISSION TOMOGRAPHY, OR PET, SERVICE AND SOME OF OUR OTHER IMAGING
SERVICES REQUIRE THE USE OF RADIOACTIVE MATERIALS, WHICH COULD SUBJECT US TO
REGULATION, RELATED COSTS AND DELAYS AND POTENTIAL LIABILITIES FOR INJURIES OR
VIOLATIONS OF ENVIRONMENTAL, HEALTH AND SAFETY LAWS.
Our PET service and some of our other imaging and therapeutic services
require radioactive materials. While this radioactive material has a short
half-life, meaning it quickly breaks down into inert, or non-radioactive
substances, storage, use and disposal of these materials presents the risk of
accidental environmental contamination and physical injury. We are subject to
federal, state and local regulations governing storage, handling and disposal of
these materials and waste products. Although we believe that our safety
procedures for storing, handling and disposing of these hazardous materials
comply with the standards prescribed by law and regulation, we cannot completely
eliminate the risk of accidental contamination or injury from those hazardous
materials. In the event of an accident, we could be held liable for any damages
that result, and any liability could exceed the limits or fall outside the
coverage of our insurance. We may not be able to maintain insurance on
acceptable terms, or at all. We could incur significant costs and the diversion
of our management's attention in order to comply with current or future
environmental, health and safety laws and regulations.
WE MAY NOT BE ABLE TO ACHIEVE THE EXPECTED BENEFITS FROM ANY PAST OR FUTURE
ACQUISITIONS WHICH WOULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS.
We have historically relied on acquisitions as a method of expanding our
business. In the past five years we have, directly or indirectly though our
subsidiaries, completed seven significant acquisitions. In addition, although we
have not presently identified any potential future acquisition candidates, we
will consider future acquisitions as opportunities arise. If we do not
successfully integrate acquisitions, we may not realize anticipated operating
advantages and cost savings. The integration of companies that have previously
operated separately involves a number of risks, including:
- demands on management related to the increase in our size after an
acquisition;
15
- the diversion of our management's attention from the management of daily
operations to the integration of operations;
- difficulties in the assimilation and retention of employees;
- potential adverse effects on operating results; and
- challenges in retaining clients.
With regard to the last item noted above, our client contract renewal rates
for contracts inherited from our acquired companies have historically been lower
than those for our own contracts. We may not be able to maintain the levels of
operating efficiency acquired companies will have achieved or might achieve
separately. Successful integration of each of their operations will depend upon
our ability to manage those operations and to eliminate redundant and excess
costs. Because of difficulties in combining operations, we may not be able to
achieve the cost savings and other size related benefits that we hoped to
achieve after these acquisitions which would harm our financial condition and
results.
RISKS RELATED TO THE NOTES
HOLDERS OF SENIOR INDEBTEDNESS WILL BE PAID BEFORE HOLDERS OF THE NOTES ARE
PAID.
The notes rank junior behind all of our existing indebtedness and all of our
future indebtedness unless that indebtedness expressly provides that it ranks
equal with, or is subordinate in right of payment to, the notes. As a result,
upon any distribution to our creditors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us or our property, the holders
of our senior debt will be entitled to be paid in full in cash before any
payment may be made with respect to these notes. In addition, all payments on
the notes will be blocked in the event of a payment default on senior debt and
may be blocked for up to 179 of 365 consecutive days in the event of certain
non-payment defaults on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us, holders of the notes and all other holders of our
subordinated indebtedness will participate in the assets remaining after we have
paid all of our senior debt. However, because the indenture requires that
amounts otherwise payable to holders of the notes in a bankruptcy or similar
proceeding be paid to holders of senior debt first, holders of the notes may
receive less, ratably, than holders of senior debt in any bankruptcy proceeding.
In any of these cases, we may not have sufficient funds to pay all of our
creditors. If no assets remain after payment to holders of senior debt, you will
lose all of your investment in the notes.
Assuming we had completed the offering of the old notes on December 31,
2000, the notes would have been subordinated to $508 million of senior debt, our
debt and other liabilities would have exceeded our assets by $206 million, and
approximately $123 million would have been available for borrowing as additional
senior debt under our revolving credit facility. We will be permitted to borrow
substantial additional indebtedness, including senior debt, in the future under
the terms of the credit facility and the indenture governing the notes.
WE HAVE RESTRICTED ACCESS TO THE CASH FLOWS AND ASSETS OF OUR SUBSIDIARIES WHICH
MAY PREVENT US FROM MAKING PRINCIPAL AND INTEREST PAYMENTS ON THE NOTES.
Although a substantial portion of our business is conducted through our
subsidiaries, none of our subsidiaries will have any obligation, contingent or
otherwise, to make any funds available to us for payment of the principal of,
and the interest on, the notes. Accordingly, our ability to pay the principal
of, and the interest on, the notes is dependent upon the earnings of our
subsidiaries and the distribution of funds from our subsidiaries. Furthermore,
our subsidiaries will be permitted under the
16
terms of the indenture to incur certain additional indebtedness that may
severely restrict or prohibit the making of distributions, the payment of
dividends or the making of loans by these subsidiaries to us.
There can be no assurance that our operations, independent of our
subsidiaries, will generate sufficient cash flow to support payment of principal
of, and interest on, the notes, or that dividends, distributions or loans will
be available from our subsidiaries to fund these payments.
THE NOTES WILL BE STRUCTURALLY SUBORDINATED TO THE DEBT OF OUR SUBSIDIARIES.
None of our subsidiaries has guaranteed our obligations to make payments on
the notes. In the event of a bankruptcy, liquidation or reorganization of any of
our subsidiaries, their creditors will generally be entitled to payment of their
claims from their assets before any assets are made available for a distribution
to us for any purpose, including payments on the notes. As a result, the notes
will be structurally subordinated to the debt of our subsidiaries, which totaled
$11.4 million outstanding as of December 31, 2000. Also in the event of a
bankruptcy, liquidation or reorganization of any of our subsidiaries, we and our
creditors, including the holders of the notes, will have no right to proceed
against the assets of our subsidiaries or to cause the liquidation or bankruptcy
of these subsidiaries under bankruptcy laws.
WE MAY NOT BE ABLE TO REPURCHASE NOTES UPON A CHANGE OF CONTROL, WHICH WOULD BE
AN EVENT OF DEFAULT UNDER THE INDENTURE.
Upon the occurrence of specific kinds of change of control events, we will
be required to offer to repurchase all of the outstanding notes. The terms of
the notes may not protect you if we undergo a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction that may adversely
affect you unless the transaction is included in the definition of a change of
control. Our credit facility restricts us from repurchasing the notes without
the approval of the lenders. In addition, it is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchase of notes or that other restrictions in our credit facility and the
notes will not allow these repurchases. This could constitute an event of
default under the credit facility, entitling the lenders to, among other things,
cause all indebtedness under the credit facility to become due and payable, and
proceed against their collateral. Our failure to repurchase the notes would
constitute an event of default under the indenture which would in turn result in
an event of default under our credit agreement, in which case the lenders under
our credit facility could cause all indebtedness under the credit facility to
become due and payable.
FEDERAL BANKRUPTCY LAWS AND STATE FRAUDULENT TRANSFER LAWS COULD ALLOW A FEDERAL
OR STATE COURT TO LIMIT PAYMENTS TO HOLDERS OF THE NOTES OR FURTHER SUBORDINATE
OUR OBLIGATIONS TO HOLDERS OF THE NOTES.
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, a federal
or state court could significantly limit our obligations to the holders of the
notes if the court determines we did either of the following when we issued the
notes:
- incurred the indebtedness associated with the notes to hinder, delay or
defraud our creditors; or
- received less than a reasonably equivalent value or fair consideration for
the notes and any of the following applied:
- we were insolvent at the time of incurring the indebtedness associated
with the notes,
- we were rendered insolvent by the incurrence of the notes indebtedness,
- we were engaged in a business or transaction in which our remaining
assets constituted unreasonably small capital to carry on our business,
or
17
- we intended to incur debts beyond our ability to pay our debts as they
matured.
If the court determined that the circumstances discussed above were present,
then the court could void, in whole or in part, our obligations to the holders
of the notes or subordinate our obligations to these holders to other of our
existing or future indebtedness.
WE ARE CONTROLLED BY A SINGLE STOCKHOLDER WHICH WILL BE ABLE TO EXERT
SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL, INCLUDING
CHANGE OF CONTROL TRANSACTIONS.
An affiliate of Kohlberg Kravis Roberts & Co., L.P., or KKR, owns
approximately 92% of our common equity. Accordingly, the KKR affiliate controls
us and has the power to elect all of our directors, appoint new management and
approve any action requiring the approval of the holders of shares of our common
stock, including adopting amendments to our certificate of incorporation and
approving mergers, consolidations or sales of all or substantially all of our
assets. This concentration of ownership will allow KKR to approve a change of
control transaction, which would require us to repurchase all of the notes. The
interests of KKR may conflict with the interests of the holders of the notes.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR THE EXCHANGE NOTES.
We are offering the exchange notes to the holders of the old notes. The old
notes were sold in April 2001 to a small number of institutional investors and
are eligible for trading in the Private Offerings, Resale and Trading through
Automatic Linkages (PORTAL) Market. To the extent that old notes are tendered
and accepted in the exchange offer, the trading market for untendered and
tendered but unaccepted old notes will be adversely affected. We cannot assure
you that this market will provide liquidity for you if you want to sell your old
notes.
We do not intend to apply for a listing of the exchange notes on a
securities exchange or on any automated dealer quotation system. The exchange
notes are new securities for which there is currently no market. We cannot
assure you as to the liquidity of markets that may develop for the exchange
notes, your ability to sell the exchange notes or the price at which you would
be able to sell the exchange notes. If such markets were to exist, the exchange
notes could trade at prices that may be lower than their principal amount or
purchase price depending on many factors, including prevailing interest rates
and the markets for similar securities. The initial purchasers of the old notes
have advised us that they currently intend to make a market with respect to the
exchange notes. However, they are not obligated to do so, and any market making
activities may be discontinued at any time without notice. In addition, such
market making activity may be limited during the pendency of the exchange offer.
The liquidity of, and trading market for, the exchange notes also may be
adversely affected by changes in the market for high yield securities and by
changes in our financial performance or prospects or in the prospects for
companies in our industry generally.
As a result, you cannot be sure that an active trading market will develop
for the exchange notes.
18
FORWARD LOOKING STATEMENTS
We have made statements under the captions "Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus that are
forward looking statements. In some cases you can identify these statements by
forward looking words such as "may", "will", "should", "expect", "plans",
"anticipate", "believe", "estimate", "predict", "seek", "intend" and "continue"
or similar words. Forward looking statements may also use different phrases.
Forward looking statements address, among other things our future expectations,
projections of our future results of operations or of our financial condition
and other forward looking information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or which we do not fully control that could cause actual results to
differ materially from those expressed or implied by our forward looking
statements, including:
- our high degree of leverage and our ability to service our debt;
- factors affecting our leverage, including, interest rates;
- our ability to incur more indebtedness;
- the effect of operating and financial restrictions in our debt agreements;
- our estimates regarding our capital requirements;
- intense levels of competition in the diagnostic imaging services and
imaging systems industry;
- changes in healthcare regulation, including changes in Medicare and
Medicaid reimbursement policies, adverse to our services;
- our ability to keep pace with technological developments within our
industry;
- the growth in the market for MRI and other services;
- our ability to successfully integrate any future acquisitions; and
- other factors discussed under "Risk Factors."
This prospectus contains statistical data that we obtained from public
industry publications. These publications generally indicate that they have
obtained their information from sources believed to be reliable, but do not
guarantee the accuracy and completeness of their information. Although we
believe that the publications are reliable, we have not independently verified
their data.
19
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges.......................... 2.0x 0.6x 1.4x 0.6x 1.0x
Earnings were inadequate to cover fixed charges by $4.2 million and
$21.4 million for the years ended December 31, 1997 and 1999, respectively.
For the purpose of computing the ratio of earnings to fixed charges,
earnings are defined as:
- income from continuing operations before income taxes and extraordinary
items;
- plus minority interest expense;
- plus distributions from equity investees;
- plus fixed charges;
- less income from equity investments.
Fixed charges are defined as the sum of the following:
- interest on all indebtedness;
- amortization of debt issuance costs; and
- estimated interest on rental expense.
USE OF PROCEEDS
We will not receive any proceeds from the exchange of the exchange notes for
the old notes pursuant to the exchange offer.
20
CAPITALIZATION
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes included elsewhere in this prospectus. The
following table describes our capitalization as of December 31, 2000:
- on an actual basis; and
- on an as adjusted basis to give effect to the offering of the old notes
and the borrowings under our credit facility made to pay the initial
purchasers' discounts and commissions and offering expenses incurred in
connection with the offering of the old notes.
DECEMBER 31, 2000
---------------------------------
AS ADJUSTED
THE OFFERING
ACTUAL OF THE OLD NOTES
----------- -------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash and cash equivalents................................... $ 12,971 $ 12,971
========= =================
Long-term debt, including current portion:
Term loan facility under our credit agreement............. $ 466,000 $ 466,000
Senior subordinated credit facility....................... 260,000 --
Revolving loan facility under our credit agreement........ 18,000 27,000
Equipment loans........................................... 14,989 14,989
10 3/8% senior subordinated notes due 2011................ -- 260,000
--------- -----------------
Total long-term debt.................................... 758,989 767,989
--------- -----------------
Stockholders' deficit:
Common stock, $0.01 par value: 10,000,000 shares
authorized, 3,806,836 shares issued and outstanding,
actual and as adjusted.................................. 38 38
Additional paid-in deficit................................ (137,232) (137,232)
Note receivable from officer.............................. (300) (300)
Accumulated deficit....................................... (66,315) (68,621)
--------- -----------------
Total stockholders' deficit................................. (203,809) (206,115)
--------- -----------------
Total capitalization.................................... $ 555,180 $ 561,874
========= =================
21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data shown below for, and as of the end of, each of
the years in the five-year period ended December 31, 2000, have been derived
from our financial statements. The income statement data for the years ended
December 31, 1998, 1999 and 2000 and the balance sheet data at December 31, 1999
and 2000 have been derived from financial statements, which have been audited
and which are included in this prospectus. The income statement data for the
years ended December 31, 1996 and 1997 and the balance sheet data at
December 31, 1996, 1997 and 1998 have been derived from our audited financial
statements, which are not included in this prospectus. The summary financial
data should be read in conjunction with "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included elsewhere in this
prospectus.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ 68,482 $ 86,474 $ 243,297 $ 318,106 $ 345,287
Costs and expenses:
Operating expenses, excluding depreciation................ 32,344 38,997 111,875 143,238 151,722
Depreciation expense...................................... 12,737 15,993 33,493 47,055 54,924
Selling, general and administrative expenses.............. 8,130 8,857 24,446 31,097 38,338
Amortization expense, primarily goodwill.................. 1,952 2,426 11,289 14,565 14,390
Termination and related costs............................. -- -- -- -- 4,573
Recapitalization, merger integration, and regulatory
costs................................................... -- 16,350 2,818 52,581 4,523
Interest expense, net..................................... 5,758 7,808 41,772 51,958 77,051
-------- -------- --------- --------- ---------
Total costs and expenses.................................. 60,921 90,431 225,693 340,494 345,521
-------- -------- --------- --------- ---------
Income (loss) before income taxes and extraordinary gain
(loss).................................................... 7,561 (3,957) 17,604 (22,388) (234)
Provision for income taxes.................................. 1,060 1,700 8,736 3,297 1,969
-------- -------- --------- --------- ---------
Income (loss) before extraordinary gain (loss).............. 6,501 (5,657) 8,868 (25,685) (2,203)
Extraordinary gain (loss), net of taxes..................... 6,300 1,849 (2,271) (17,766) --
-------- -------- --------- --------- ---------
Net income (loss)........................................... $ 12,801 $ (3,808) $ 6,597 $ (43,451) $ (2,203)
======== ======== ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 10,867 $ 12,255 $ 3,083 $ 4,804 $ 12,971
Total assets................................................ 128,510 284,815 567,932 625,510 646,160
Long-term debt, including current maturities................ 89,025 290,270 518,423 751,849 758,989
Redeemable preferred stock.................................. 4,694 14,487 16,673 -- --
Stockholders' equity (deficit).............................. 16,360 (47,904) (43,327) (201,899) (203,809)
OTHER DATA:
Adjusted EBITDA(1).......................................... $ 28,008 $ 38,620 $ 107,076 $ 143,771 $ 155,560
Adjusted EBITDA margin(2)................................... 40.9% 44.7% 44.0% 45.2% 45.1%
Cash flows provided by (used in):
Operating activities...................................... 21,731 12,864 46,855 38,197 92,044
Investing activities...................................... (27,936) (56,963) (245,104) (104,072) (90,995)
Financing activities...................................... 5,944 45,487 189,077 67,596 7,118
Capital expenditures........................................ 26,510 45,122 72,321 95,914 101,554
Net debt to adjusted EBITDA(1)(3)........................... 2.8x 7.2x 4.8x 5.2x 4.8x
Adjusted EBITDA to interest expense, net(1)(4) 4.9x 4.9x 2.6x 2.8x 2.0x
Ratio of earnings to fixed charges(5)....................... 2.0x 0.6x 1.4x 0.6x 1.0x
------------------------------
(1) EBITDA represents earnings before interest expense, net, income taxes,
depreciation and amortization expense. Adjusted EBITDA represents EBITDA
adjusted for recapitalization costs, merger integration costs, regulatory
costs, termination and related costs, stock-based compensation, and
extraordinary items. EBITDA and adjusted EBITDA are not presentations made
in accordance with generally accepted accounting principles. EBITDA and
adjusted EBITDA should not be considered in isolation or as substitutes for
net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted
accounting principles or as measures of profitability or liquidity. EBITDA
and adjusted EBITDA are included in this prospectus to provide additional
information with respect to our ability to satisfy our debt service, capital
expenditure and working capital requirements and because certain covenants
in our debt instruments are based on similar measures. While EBITDA and
adjusted EBITDA are used as measures of operations and the ability to meet
debt service requirements, they are not necessarily comparable to other
similarly titled captions of other
22
companies due to differences in methods of calculations. The calculations of
EBITDA and adjusted EBITDA are shown below:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
Net income (loss)........................................... $12,801 $(3,808) $ 6,597 $(43,451) $ (2,203)
Depreciation expense...................................... 12,737 15,993 33,493 47,055 54,924
Amortization expense, primarily goodwill.................. 1,952 2,426 11,289 14,565 14,390
Interest expense, net..................................... 5,758 7,808 41,772 51,958 77,051
Provision for income taxes................................ 1,060 1,700 8,736 3,297 1,969
------- ------- -------- -------- --------
EBITDA...................................................... 34,308 24,119 101,887 73,424 146,131
Termination and related costs(a).......................... -- -- -- -- 4,573
Recapitalization, merger integration, and regulatory
costs(b)................................................ -- 16,350 2,818 52,581 4,523
Stock based compensation(c)............................... -- -- 100 -- 333
Extraordinary (gain) loss net of taxes.................... (6,300) (1,849) 2,271 17,766 --
------- ------- -------- -------- --------
Adjusted EBITDA............................................. $28,008 $38,620 $107,076 $143,771 $155,560
======= ======= ======== ======== ========
----------------------------------
(a) Termination and related costs for the year ended December 31, 2000
represent $4,232 associated with termination costs and the cash-out of
stock options for an executive officer who resigned due to health-related
issues and $341 associated with the recruitment of his replacement.
(b) Recapitalization, merger integration and regulatory costs for the year
ended December 31, 2000, represent $704 of professional fees paid in
connection with the KKR acquisition, $570 of compensatory costs related
to stock option buy-backs and severance payments resulting from change in
control provisions triggered by the KKR acquisition, $154 related to
additional severance for employees of SMT, $123 of integration costs to
migrate acquired entities to a common systems platform for direct patient
billing, and $850 for assessments and $2,122 for costs and related
professional fees to settle regulatory matters associated with the direct
patient billing process of one of our acquired entities.
Recapitalization, merger integration and regulatory costs for the year
ended December 31, 1999, represent $19,640 in professional fees paid in
connection with the KKR acquisition, $17,082 related to the purchase of
outstanding stock options in connection with the KKR acquisition, $6,003
in bonus payments paid in connection with the KKR acquisition, $1,088 in
provisions to conform the accounting policies with respect to accounts
receivable reserves, as well as employee vacation and sick pay reserves
in connection with the SMT merger, $2,164 in employee severance costs in
connection with the SMT merger, $3,075 in professional fees and other
merger integration costs associated with the SMT merger and other
acquired entities, and $3,529 for assessments to settle regulatory
matters associated with the direct patient billing process of one of our
acquired entities. Recapitalization, merger integration and regulatory
costs for the year ended December 31, 1998, represents $1,846 in special
non-recurring bonuses paid in connection with the MTI acquisition, $722
of professional fees associated with accounting and billing systems
conversions of acquired companies, and a $250 provision for bad debt
conforming accounting adjustment made in connection with the American
Shared acquisition. Recapitalization, merger integration and regulatory
costs for the year ended December 31, 1997, represents $16,350 in
professional fees and other costs paid in connection with the acquisition
of substantially all of our company by Apollo Investment Fund III, L.P.
and its related entities.
(c) Stock-based compensation of $333 for the year ended December 31, 2000,
represents $55 for options issued to certain employees at exercise prices
below the fair value of our common stock, $68 for Phantom Shares issued
to four non-employee directors below fair market value, and $210 for
common stock issued to one of our executive officers at below fair market
value. Stock-based compensation of $100 for the year ended December 31,
1998, represents options issued to certain employees at exercise prices
below the fair value of our common stock.
(2) Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by
revenues.
(3) For purposes of calculating net debt to adjusted EBITDA, net debt is defined
as long-term debt, including current maturities, less cash and cash
equivalents.
(4) For purposes of calculating adjusted EBITDA to interest expense, net,
interest expense, net, is defined as interest expense net of interest
income. Interest expense includes amortization of debt issuance costs.
(5) For the purpose of calculating the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes and extraordinary items, plus minority interest expense, plus
distributions from equity investees, plus fixed charges, less income from
equity investments. Fixed charges are the sum of interest on all
indebtedness, amortization of debt issuance costs, and estimated interest on
rental expense. Earnings were inadequate to cover fixed charges by
$4.2 million and $21.4 million for the years ended December 31, 1997 and
1999, respectively.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading national provider of outsourced diagnostic imaging
services, with 91% of our 2000 revenues derived from MRI. We provide imaging and
therapeutic services primarily to hospitals and other healthcare providers on a
mobile, shared-service basis. Our services normally include the use of our
imaging or therapeutic systems, technologists to operate the systems, equipment
maintenance and upgrades and management of day-to-day operations. We had 381
diagnostic imaging and therapeutic systems, including 319 MRI systems, and 1,177
clients in 43 states at December 31, 2000.
Approximately 90% of our revenues for the year ended December 31, 2000 were
generated by providing services to hospitals and other healthcare providers,
which we refer to as wholesale revenues. Our wholesale revenues are typically
generated from contracts that require our clients to pay us based on the number
of scans we perform, although some pay us a flat fee for a period of time
regardless of the number of scans we perform. These payments are due to us
independent of our clients' receipt of reimbursement from third-party payors. We
typically deliver our services for a set number of days per week through
exclusive, long-term contracts with hospitals and other healthcare providers.
These contracts, which are usually three to five years in length, are typically
non-cancelable by our clients and often contain automatic renewal provisions. We
price our contracts based on the type of system used, the scan volume, and the
number of ancillary services provided.
Approximately 10% of our revenues for the year ended December 31, 2000 were
generated by providing services directly to patients from our sites located at
or near hospital or other healthcare provider facilities, which we refer to as
retail revenues. Our revenue from these sites is generated from direct billings
to patients or their third-party payors, which are recorded net of contractual
discounts and other arrangements for providing services at discounted prices. We
typically charge a higher price per scan under retail billing than we do under
wholesale billing.
The principal components of our operating costs, excluding depreciation, are
compensation paid to technologists and drivers, annual system maintenance costs,
transportation and travel costs, and system rental costs. Because a majority of
these expenses are fixed, increased revenue as a result of higher scan volumes
per system significantly improves our margins while lower scan volumes result in
lower margins.
The principal components of selling, general and administrative expenses are
sales force compensation, marketing costs, business development expenses,
corporate overhead costs and our provision for doubtful accounts. In addition,
charges for non-cash stock-based compensation are also included in selling,
general and administrative expenses. In 2000, we recorded $0.3 million in stock-
based compensation and will record an additional $3.3 million in charges over
the next eight years.
Over the past five years, we have increased revenue through acquisitions,
increased scan volumes at existing client sites, and added new clients. During
this same period, the growth rate of our adjusted EBITDA (income before income
taxes, depreciation, amortization, net interest expense, recapitalization costs,
merger integration costs, regulatory costs, termination and related costs,
stock-based compensation, and extraordinary items) has exceeded the growth rate
of revenue primarily as a result of spreading our fixed costs over a larger
revenue base, implementing cost reduction and containment measures, and
converting leased MRI systems obtained through acquisitions to owned MRI
systems. In the second half of 2000, we added a substantial amount of
infrastructure and upgraded our information systems in anticipation of
supporting our future growth rate which increased our selling, general and
administrative expenses as a percentage of revenue in the second half of 2000
compared to the first half of 2000.
24
We have historically focused on attempting to maximize cash flow and return
on invested capital nationwide and effectively deploying assets to maximize
utilization. In both 1999 and 2000, we made significant investments in adding to
and upgrading our MRI systems to improve service to our clients and add capacity
for future growth. These additions to our MRI systems had the effect of slowing
our growth rate in average daily scan volume per MRI system in 2000. Average
daily scan volume per MRI system increased by 0.5 and 0.1 scans per day in 1999
and 2000, as compared to each preceding year.
At December 31, 2000, we had $167.7 million of net operating losses
available for federal tax purposes to offset future taxable income, subject to
certain limitations. These net operating losses begin to expire in 2003.
SEASONALITY
We experience seasonality in the revenues and margins generated for our
services. First and fourth quarter revenues are typically lower than those from
the second and third quarters. First quarter revenue is affected primarily by
fewer calendar days and inclement weather, the results of which are fewer
patient scans during the period. Fourth quarter revenue is affected primarily by
holiday and client and patient vacation schedules and inclement weather, the
results of which are fewer patient scans during the period. The variability in
margins is higher than the variability in revenues due to the fixed nature of
our costs.
SIGNIFICANT ACQUISITIONS AND OTHER TRANSACTIONS
On November 1, 2000, we acquired all of the outstanding common stock of
Southeast Arizona, Inc. as well as a mobile MRI system from one of its
affiliates. The purchase price was $4.1 million. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of
Southeast Arizona have been included in our consolidated financial statements
from the date of acquisition.
On November 2, 1999, we merged with an affiliate of Kohlberg Kravis
Roberts & Co., L.P., or KKR, who acquired control of Alliance from existing
shareholders in a leveraged recapitalization transaction. The total value of the
transaction, including fees and expenses, was approximately $980 million. The
transaction was funded with senior secured credit facilities, a senior
subordinated credit facility, and common equity.
On May 13, 1999, we acquired all the outstanding common stock of Three
Rivers Holding Corp., the parent corporation of SMT Health Services, Inc., in a
stock-for-stock merger. We exchanged approximately 1.6 million shares of common
stock for all the outstanding common shares of Three Rivers. At the time of the
merger, Three Rivers was wholly owned by affiliates of Apollo Management, L.P.,
which held approximately 82.6% of our outstanding common stock. Accordingly, the
merger has been accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. As such, our accompanying
financial statements, footnotes, and management's discussion and analysis of
financial condition and results of operations have been restated to include the
assets, liabilities and operations of SMT from the date when both entities were
under Apollo's control, which was December 18, 1997.
On November 13, 1998, two of our wholly owned subsidiaries acquired all of
the outstanding common stock of CuraCare, Inc. and all of the partnership
interests in American Shared-CuraCare. The purchase price consisted of
approximately $13.4 million in cash plus the assumption of approximately
$12.2 million in financing arrangements. The transaction has been accounted for
as a purchase and, accordingly, the results of operations of CuraCare and
American Shared have been included in our consolidated financial statements from
the date of acquisition.
25
On August 17, 1998, SMT acquired all of the outstanding common stock of RIA
Management Services, Inc. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of RIA have been included in our
consolidated financial statements from the date of acquisition. The purchase
price consisted of approximately $2.1 million in cash plus the assumption of
approximately $1.1 million in financing arrangements.
On May 19, 1998, we acquired Medical Diagnostics, Inc., a subsidiary of U.S.
Diagnostic, Inc. The purchase price consisted of approximately $31.0 million
plus the assumption of approximately $7.4 million in financing arrangements. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Medical Diagnostics have been included in our consolidated
financial statements from the date of acquisition.
On March 12, 1998, we acquired Mobile Technology Inc., a provider of mobile
MRI services in the United States, in a transaction accounted for as a purchase.
We have included the operations of Mobile Technology in our consolidated
financial statements from the date of acquisition. The purchase price consisted
of $58.3 million for all of the equity interests in Mobile Technology plus
direct acquisition costs of approximately $2.0 million. In connection with the
acquisition, we also refinanced $37.4 million of Mobile Technology's outstanding
debt and paid Mobile Technology's direct transaction costs of $3.5 million.
On January 2, 1998, Canton Holding Corp., a wholly owned subsidiary of SMT,
acquired all of the outstanding common stock of Mid American Imaging, Inc. and
Dimensions Medical Group, Inc. The acquisition was accounted for as a purchase
and accordingly, the results of operations of Mid American Imaging and
Dimensions Medical Group have been included in our consolidated financial
statements from the date of acquisition. The purchase price consisted of
approximately $10.4 million in cash plus the assumption of approximately
$5.1 million in financing arrangements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue increased $27.2 million, or 8.6%, to $345.3 million in 2000 compared
to $318.1 million in 1999 primarily due to higher scan-based MRI revenue and
higher MRI revenue under fixed-fee contracts. Overall, scan-based MRI revenue in
2000 increased $18.7 million, or 6.8%, compared to 1999 primarily as a result of
an 11.5% increase in our MRI scan volume. We attribute this increase to the
increase in the number of scans for existing clients primarily as a result of
our continuing MRI systems upgrade program, and to additional scan-based systems
in operation. The average daily scan volume per MRI system increased to 9.4 in
2000 from an estimated 9.3 in 1999. The increase in scan-based revenue was
partially offset by a decrease in scan volume from clients who did not renew
their contracts and an estimated 4.3% decrease in average price per MRI scan.
The decrease in average price realized per scan is primarily the result of an
increase in wholesale revenue compared to retail revenue, which has a higher
per-scan price, as a percentage of total MRI revenue, granting price reductions
to certain clients, and clients achieving discounted price levels on incremental
scan volume. Fixed-fee MRI revenue increased $7.8 million, or 61.3%, due to an
increase in short and long-term fixed-fee system rental contracts. Additionally,
revenue associated with management agreements increased $1.6 million, or 23.8%,
and other revenue decreased $0.9 million, or 3.8%.
We had 319 MRI systems at December 31, 2000 compared to 283 MRI systems at
December 31, 1999. The increase was primarily a result of planned system
additions to satisfy client demand.
Operating expenses, excluding depreciation, increased $8.5 million, or 5.9%,
to $151.7 million in 2000 compared to $143.2 million in 1999. Payroll and
related employee expenses increased $8.2 million, or 13.0%, primarily as a
result of an increase in the number of employees necessary to support new
systems in operation and an increase in technologists' wages. Fuel expense
increased $1.1 million, or
26
36.6%, primarily as a result of an increase in fuel prices as well as an
increase in the number of shared use MRI systems in operation. System rental
expense decreased $2.3 million, or 20.3%, resulting from a lower number of
leased MRI systems in operation. Expenses incurred under management agreements
increased $1.1 million, or 29.7%. All other operating expenses, excluding
depreciation, increased $0.4 million. Operating expenses, excluding
depreciation, as a percentage of revenue, decreased from 45.0% in 1999 to 43.9%
in 2000 as a result of spreading our fixed costs over a larger revenue base and
a conversion of leased systems to owned systems upon the expiration of operating
leases.
Depreciation expense increased $7.8 million, or 16.6%, to $54.9 million in
2000 compared to $47.1 million in 1999 principally due to a higher amount of
depreciable assets associated with system additions and upgrades.
Selling, general and administrative expenses increased $7.2 million, or
23.2%, to $38.3 million in 2000 compared to $31.1 million in 1999. Payroll and
related employee related expenses increased $2.3 million, or 11.9%, primarily
due to increased staffing levels primarily in the areas of retail billing and
collections, information systems, corporate development and legal. Professional
service expenses increased $1.0 million, or 101%, primarily as a result of
increased information services costs associated with training for the
implementation of our retail billing system as well as increased costs incurred
to support our financial, marketing and operations functions. Marketing and
business development expenses increased $0.4 million, or 78.7%, primarily as a
result of our sales and marketing efforts associated with positron emission
tomography, or PET, services. The provision for doubtful accounts increased by
$1.5 million primarily as a result of the growth in revenue. Also, we recorded
$0.8 million in expenses associated with a compliance review and a $0.3 million
charge for stock-based compensation in 2000. All other selling, general and
administrative expenses increased $0.9 million. Selling, general and
administrative expenses as a percentage of revenue increased from 9.8% in 1999,
to 11.1% in 2000 as a result of the factors described above.
Amortization expense, primarily related to goodwill, totaled $14.4 million
in 2000 and $14.6 million in 1999.
Termination and related costs of $4.6 million for the year ended
December 31, 2000 represent $4.3 million associated with termination costs and
the repurchase of stock options for an executive officer who resigned his
management duties due to health-related issues and $0.3 million associated with
the recruitment of his replacement.
Recapitalization, merger integration and regulatory costs of $4.5 million
for the year ended December 31, 2000 represent $0.7 million of professional fees
paid in connection with the KKR acquisition, $0.6 million of compensatory costs
related to stock option buy-backs and severance payments resulting from change
in control provisions triggered by the KKR acquisition, $0.1 million related to
additional severance for employees of SMT, $0.1 million of integration costs to
migrate acquired entities to a common systems platform for direct patient
billing, and $0.9 million for assessments and $2.1 million for costs and related
professional fees to settle regulatory matters associated with the direct
patient billing process of one of our acquired entities.
Recapitalization, merger integration and regulatory costs of $52.6 million
for the year ended December 31, 1999 represent $19.6 million in professional
fees paid in connection with the KKR acquisition, $17.1 million related to the
purchase of outstanding stock options in connection with the KKR acquisition,
$6.0 million in bonus payments paid in connection with the KKR acquisition,
$1.1 million in provisions to conform the accounting policies with respect to
accounts receivable reserves, as well as employee vacation and sick pay reserves
in connection with the SMT Merger, $2.2 million in employee severance costs in
connection with the SMT Merger, $3.1 million in professional fees and other
merger integration costs associated with the SMT Merger and other acquired
entities, and $3.5 million for assessments to settle regulatory matters
associated with the direct patient billing process of one of the Company's
acquired entities.
27
Interest expense, net, increased $25.1 million, or 48.3%, to $77.1 million
in 2000 compared to $52.0 million in 1999, as a result of higher average
outstanding debt balances during 2000 as compared to 1999. This increase was
primarily related to debt incurred in connection with the KKR acquisition and
increases in average interest rates in 2000 compared to 1999. The interest rate
on substantially all of our long-term debt is variable.
Although we had a pre-tax loss in 2000, provision for income taxes in 2000
was $2.0 million, primarily as a result of non-deductible goodwill,
non-deductible KKR acquisition expenses and state income taxes. Although we had
a pre-tax loss in 1999, the provision for income taxes in 1999 was
$3.3 million, primarily as a result of non-deductible KKR acquisition expenses
and also non-deductible goodwill and state income taxes.
In 1999, we recorded a $17.8 million extraordinary loss on the early
extinguishment of debt related to the KKR acquisition and SMT debt refinancing.
We recorded a net loss in 2000 of $2.2 million, or $0.58 per share, compared
to a net loss in 1999 of $43.5 million, or $8.92 per share. The net loss per
common share calculation in 1999 reflects preferred stock dividends and
financing fee accretion of $2.1 million and excess of consideration paid over
carrying amount of preferred stock purchased of $2.8 million.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue increased $74.8 million, or 30.7%, to $318.1 million in 1999
compared to $243.3 million in 1998, primarily due to acquisitions. The remaining
increase was due to higher scan-based MRI revenue, higher fixed fee MRI revenue
and an increase in other revenue, including revenue for other imaging and
therapeutic services. Overall, scan-based MRI revenue increased $65.0 million,
or 31.1%, compared to 1998 primarily as a result of a 35.7% increase in our MRI
scan volume primarily related to acquisitions. We attribute the non-acquisition
MRI scan volume increase to the increase in the number of scans for existing
clients primarily as a result of our continuing MRI systems upgrade program. The
average daily scan volume per MRI system (adjusted to include acquisitions
periods) was an estimated 9.3 in 1999. We experienced an estimated 3.4% decrease
in the average revenue realized per MRI scan as compared to 1998. The decrease
in average revenue realized per scan is primarily the result of clients
achieving discount price levels on incremental scan volume and granting price
reductions to certain clients. Fixed fee MRI revenue increased $5.7 million, or
80.9%, in 1999 compared to 1998 due to an increase in short-and long-term fixed
fee system rental contracts. Other revenue increased $4.1 million, or 14.9%,
primarily due to an increase in revenues from all other imaging and therapeutic
services.
We had 283 MRI systems at December 31, 1999 compared to 273 MRI systems at
December 31, 1998. The increase was primarily a result of planned system
additions due to a growth in our client base.
Operating expenses, excluding depreciation, increased $31.3 million, or
28.0%, to $143.2 million in 1999 compared to $111.9 million in 1998. Payroll and
related employee expenses increased $15.7 million, or 33.7%, primarily as a
result of the American Shared, Mobile Technology, and Medical Diagnostics
acquisitions as well as an increase in the number of employees necessary to
support new MRI systems in operation and increased scans per MRI system. System
maintenance expense increased $6.3 million, or 31.1%, due to an increase in the
number of systems in service and the expiration of warranties on an increased
number of MRI systems. All other operating expenses, excluding depreciation,
increased $9.3 million, or 20.6%, primarily as a result of increased costs
associated with revenue growth. Operating expenses, excluding depreciation, as a
percentage of revenue, decreased from 46.0% in 1998 to 45.0% in 1999 as a result
of spreading costs over a larger revenue base and a conversion of leased systems
to owned systems upon the expiration of operating leases.
28
Depreciation expense increased $13.6 million, or 40.6%, to $47.1 million in
1999 compared to $33.5 million in 1998 principally due to a higher amount of
depreciable assets associated with system additions and upgrades and systems
acquired through acquisitions.
Selling, general and administrative expenses increased $6.7 million, or
27.5%, to $31.1 million in 1999 compared to $24.4 million in 1998. Payroll and
related expenses increased $4.3 million, or 32.7%, primarily as a result of
increased staffing levels necessary to support our increased level of operations
and increased employee compensation related to increased sales commissions. The
provision for doubtful accounts increased $0.4 million primarily as a result of
our growth in revenue. All other selling, general and administrative expenses
increased $2.0 million, or 26.4%, primarily as a result of increased costs
associated with revenue growth. Selling, general and administrative expenses, as
a percentage of revenue, decreased from 10.0% in 1998 to 9.8% in 1999.
Amortization expense, primarily related to goodwill, increased
$3.3 million, or 29.2%, to $14.6 million in 1999 compared to $11.3 million in
1998 as a result of acquisitions made during 1998.
Recapitalization, merger integration and regulatory costs of $52.6 million
for the year ended December 31, 1999 represents $19.6 million in professional
fees paid in connection with the KKR acquisition, $17.1 million related to the
purchase of outstanding stock options in connection with the KKR acquisition,
$6.0 million in bonus payments paid in connection with the KKR acquisition,
$1.1 million in provisions to conform the accounting policies with respect to
accounts receivable reserves, as well as employee vacation and sick pay reserves
in connection with the SMT Merger, $2.2 million in employee severance costs in
connection with the SMT Merger, $3.1 million in professional fees and other
merger integration costs associated with the SMT Merger and other acquired
entities, and $3.5 million for assessments to settle regulatory matters
associated with the direct patient billing process of one of the Company's
acquired entities.
Recapitalization, merger integration and regulatory costs of $2.8 million in
1998 represent $1.8 million in special non-recurring bonuses paid in connection
with the Mobile Technology acquisition, $0.7 million in professional fees
associated with accounting and billing systems conversions of acquired
companies, and a $0.3 million provision for doubtful accounts conforming
accounting adjustment made in connection with the American Shared acquisition.
Interest expense, net, increased $10.2 million, or 24.4%, to $52.0 million
in 1999 compared to $41.8 million in 1998. This increase was primarily related
to debt incurred in connection with the KKR acquisition merger as well as
acquisitions made during this period. The interest rate on substantially all of
our long-term debt as of December 31, 1999 was variable.
Although we had a pre-tax loss in 1999, provision for income taxes in 1999
was $3.3 million, primarily as a result of non-deductible KKR acquisition
expenses, and also non-deductible goodwill and state income taxes. Provision for
income taxes in 1998 was $8.7 million, resulting in an effective tax rate of
49.6% which differed from the statutory tax rate primarily as a result of
non-deductible goodwill.
In 1999, we recorded a $17.8 million extraordinary loss on the early
extinguishments of debt related to the KKR acquisition and acquisitions. In
1998, we recorded a $2.3 million extraordinary loss on early extinguishments of
debt related to acquisitions.
We recorded a net loss in 1999 of $43.5 million, or $8.92 per share,
compared to net income in 1998 of $6.6 million, or $0.77 per share. The net loss
per common share calculation in 1999 reflects preferred stock dividends and
financing fee accretion of $2.1 million and excess of consideration paid over
carrying amount of preferred stock purchased of $2.8 million. In 1998, the net
loss per common share calculation reflects preferred stock dividends and
financing fee accretion of $2.2 million.
29
LIQUIDITY AND CAPITAL RESOURCES
We generated cash of $92.0 million and $38.2 million from operating
activities in 2000 and 1999, respectively. We used cash of $91.0 million and
$104.1 million for investing activities in 2000 and 1999, respectively. We incur
capital expenditures for the purposes of:
- providing upgrades of our MRI systems and upgrading our corporate
infrastructure for future growth;
- purchasing systems upon termination of operating leases;
- replacing less advanced systems with new systems; and
- purchasing new systems.
Capital expenditures totaled $101.6 million during the year ended
December 31, 2000. Capital expenditures totaled $95.9 million during the year
ended December 31, 1999. During the year ended December 31, 2000, we purchased
55 MRI systems, including replacement systems. Our decision to purchase a new
system is typically predicated on obtaining new or extending existing client
contracts, which serve as the basis of demand for the new system. We expect to
purchase additional systems in 2001 and finance substantially all of these
purchases with our available cash, cash from operating activities and our
revolving line of credit. We expect capital expenditures to total approximately
$75 million in 2001, which expenditures shall consist primarily of equipment
purchases and upgrades.
In connection with the KKR acquisition, we entered into a $616.0 million
credit agreement and also entered into a $260.0 million senior subordinated
credit facility agreement with KKR. The credit agreement contains restrictive
covenants which, among other things, limit the incurrence of additional
indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances, capital
expenditures and prepayments of other indebtedness. Additionally, the credit
agreement contains financial covenants which require a minimum interest coverage
ratio of 1.5 to 1.0 as well as a maximum leverage ratio of 6.0 to 1.0. As of
December 31, 2000, we are in compliance with all of the material covenants
contained in our credit agreement and other indebtedness.
We used the aggregate proceeds from the offering of the old notes to repay
our senior subordinated credit facility.
The maturities of our existing long-term debt total $15.9 million in 2001,
$18.0 million in 2002, $28.4 million in 2003, $28.8 million in 2004 and
$35.6 million in 2005.
We believe that, based on current levels of operations and anticipated
growth, our cash from operations, together with other available sources of
liquidity, including borrowings available under our revolving loan facility,
will be sufficient over the next year to fund anticipated capital expenditures
and make required payments of principal and interest on our debt, including
payments due under our credit agreement. Neither the KKR acquisition nor our
current level of debt has altered our practice of making capital expenditures.
Our expansion and acquisition strategy may require substantial capital, and
no assurance can be given that we will be able to raise any necessary additional
funds through bank financing or the issuance of equity or debt securities on
terms acceptable to us, if at all.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We sell our services exclusively in the United States and receive payment
for our services exclusively in United States dollars. As a result, our
financial results are unlikely to be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
30
Our interest expense is sensitive to changes in the general level of
interest rates in the United States, particularly because the majority of our
indebtedness has interest rates which are variable. The recorded carrying amount
of our long-term debt approximates fair value as these borrowings have variable
rates that reflect currently available terms and conditions for similar debt.
Our interest income is sensitive to changes in the general level of interest
rates in the United States, particularly because the majority of our investments
are in short-term instruments.
The recorded carrying amounts of cash and cash equivalents approximate fair
value due to their short-term maturities.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The adoption
of SAB 101 had no impact on our results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation". FIN 44 clarifies the application of Accounting Principles
Board ("APB") Opinion No. 25 regarding (a) the definition of employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a stock option plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occurred after either
December 15, 1998, or January 12, 2000. We believe that the adoption of FIN 44
will not have a material effect on our consolidated results of operations or
financial position.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities", as
amended. This statement establishes a new model for accounting for derivatives
and hedging activities. Under SFAS 133, all derivatives must be recognized as
assets and liabilities and measured at fair value. We currently do not have any
derivative instruments, which require fair value measurement under SFAS 133 and,
accordingly, the effect of the adoption will not have a material impact on our
results of operations or financial position.
31
BUSINESS
We are a leading national provider of outsourced diagnostic imaging
services, with 91% of our 2000 revenues derived from MRI. We provide imaging and
therapeutic services primarily to hospitals and other healthcare providers on a
mobile, shared-service basis. Our services normally include the use of our
imaging or therapeutic systems, technologists to operate the systems, equipment
maintenance and upgrades and management of day-to-day operations. We also offer
ancillary services including marketing support, education and training and
billing assistance. We had 381 diagnostic imaging and therapeutic systems,
including 319 MRI systems, and 1,177 clients in 43 states at December 31, 2000.
We typically deliver our services through exclusive, long-term contracts
with hospitals and other healthcare providers which generally require them to
pay us monthly, based on the number of scans we perform. These contracts are
usually three to five years in length, are typically non-cancelable by our
clients and often contain automatic renewal provisions. For the year ended
December 31, 2000, we received approximately 90% of our revenues from direct
billing of our clients.
Our clients, primarily small-to-mid-sized hospitals, contract with us to
provide outsourced diagnostic imaging systems and therapeutic services in order
to:
- avoid capital investment and financial risk associated with the purchase
of their own systems;
- provide access to MRI and other services for their patients when the
demand for these services does not justify the purchase of a system;
- benefit from upgraded imaging systems without direct capital expenditures;
- eliminate the need to recruit, train and manage qualified technologists;
- make use of our ancillary services; and
- gain access to services under our regulatory and licensing approvals when
they do not have these approvals.
On November 2, 1999, we merged with an affiliate of Kohlberg Kravis
Roberts & Co., L.P., or KKR, who acquired control of Alliance from existing
shareholders in a leveraged recapitalization transaction. We refer to this
transaction as the KKR acquisition throughout this prospectus. The total value
of the transaction, including fees and expenses, was approximately
$980 million. The transaction was funded with senior secured credit facilities,
a senior subordinated credit facility, and common equity. The KKR acquisition
did not result in any material changes in the nature of our business other than
the before-mentioned increase in our indebtedness.
INDUSTRY OVERVIEW
Diagnostic imaging services are noninvasive procedures that generate
representations of the internal anatomy and convert them to film or digital
media. Diagnostic imaging systems facilitate the early diagnosis of diseases and
disorders, often minimizing the cost and amount of care required and reducing
the need for costly and invasive diagnostic procedures. The market for
diagnostic imaging services in the United States was estimated to be
approximately $66 billion in 1999.
MRI
The market for MRI services in the United States was estimated to be
$6.7 billion in 1999. Of the approximately 14.6 million MRI scans in 2000, 44%
were performed by hospitals with their own equipment, 33% were performed by
independent imaging centers and 23% were performed by mobile MRI providers.
32
MRI involves the use of high-strength magnetic fields to produce
computer-processed cross-sectional images of the body. Due to its superior image
quality, MRI is the preferred imaging technology for evaluating soft tissue and
organs, including the brain, spinal cord and other internal anatomy. With
advances in MRI technology, MRI is increasingly being used for new applications
such as imaging of the heart, chest and abdomen. Conditions that can be detected
by MRI include multiple sclerosis, tumors, strokes, infections, and injuries to
the spine, joints, ligaments, and tendons. Unlike x-rays and computed
tomography, which are other diagnostic imaging technologies, MRI does not expose
patients to potentially harmful radiation.
MRI technology was first patented in 1974, and MRI systems first became
commercially available in 1983. Since then, manufacturers have offered
increasingly sophisticated MRI systems and related software to increase the
speed of each scan and improve image quality. Magnet strengths are measured in
tesla, and MRI systems typically use magnets with strengths ranging from 0.2 to
1.5 tesla. The 1.0 and 1.5 tesla strengths are generally considered optimal
because they are strong enough to produce relatively fast scans but are not so
strong as to create discomfort for most patients. Manufacturers have worked to
gradually enhance other components of the machines to make them more versatile.
Many of the hardware and software systems in recently manufactured machines are
modular and can be upgraded for much lower costs than purchasing new systems.
MRI has gradually captured a larger portion of the diagnostic imaging
market. The total number of MRI scans has increased at an estimated compound
annual growth rate of 10.5% from 5.4 million in 1990 to approximately
14.6 million in 2000. The number of MRI scans is projected to grow at
approximately the same rate through 2006.
The MRI industry has experienced growth as a result of:
- recognition of MRI as a cost-effective, noninvasive diagnostic tool;
- superior soft-tissue image quality of MRI versus that of other diagnostic
imaging technologies;
- wider physician acceptance and availability of MRI technology;
- growth in the number of MRI applications;
- MRI's safety when compared to other diagnostic imaging technologies,
because it does not use potentially harmful radiation; and
- increased overall demand for healthcare services, including diagnostic
services, for the aging population.
OTHER DIAGNOSTIC IMAGING SERVICES
- POSITRON EMISSION TOMOGRAPHY, OR PET. PET is a nuclear medicine procedure
that produces pictures of the body's metabolic and biologic functions. PET
can provide earlier detection of certain cancers, coronary diseases or
neurologic problems than other diagnostic imaging systems. It is also
useful for the monitoring of these conditions.
- COMPUTED TOMOGRAPHY, OR CT. In CT imaging, a computer analyzes the
information received from an x-ray beam to produce multiple
cross-sectional images of a particular organ or area of the body. CT
imaging is used to detect tumors and other conditions affecting bones and
internal organs.
- OTHER SERVICES. Other diagnostic imaging technologies include x-ray,
single photon emission computed tomography, and ultrasound.
33
IMAGING SETTINGS
MRI and other imaging services are typically provided in one of the
following settings:
- HOSPITALS AND CLINICS. Imaging systems are located in and owned and
operated by a hospital or clinic. These systems are primarily used by
patients of the hospital or clinic, and the hospital or clinic bills
third-party payors, such as health insurers, Medicare or Medicaid.
- INDEPENDENT IMAGING CENTERS. Imaging systems are located in permanent
facilities not generally owned by hospitals or clinics. These centers
depend upon physician referrals for their patients and generally do not
maintain dedicated, contractual relationships with hospitals or clinics.
In fact, these centers may compete with hospitals or clinics that have
their own systems to provide imaging services to these patients. Like
hospitals and clinics, these centers bill third-party payors for their
services.
- OUTSOURCED. Imaging systems, largely located in mobile trailers but also
provided in fixed facilities, provide services to a hospital or clinic on
a shared-service or full-time basis. Generally, the hospital or clinic
contracts with the imaging service provider to perform scans of its
patients, and the imaging service provider is paid directly by that
hospital or clinic instead of by a third-party payor.
OUR COMPETITIVE STRENGTHS
LARGEST NATIONAL PROVIDER OF OUTSOURCED MRI SERVICES
We believe we are the largest national provider of outsourced MRI services,
based on systems deployed, with 319 MRI systems in operation in 42 states at
December 31, 2000. We believe our size allows us to achieve operating,
purchasing and administrative efficiencies, including:
- the ability to maximize equipment utilization through efficient deployment
of our mobile systems;
- equipment purchasing savings from equipment manufacturers;
- favorable service and maintenance contracts from equipment manufacturers;
and
- the ability to minimize the time our systems are unavailable to our
clients as a result of our flexibility in system deployment.
We also believe our size has enabled us to establish a well-recognized brand
name and an experienced management team with a detailed knowledge of the
competitive and regulatory environments within the diagnostic imaging services
industry.
EXCLUSIVE, LONG-TERM CONTRACTS WITH A DIVERSE CLIENT BASE
We generate substantially all of our revenues from exclusive, long-term
contracts with hospitals and other healthcare providers. These contracts are
usually three to five years in length, are typically non-cancelable by our
clients and often have automatic renewal provisions. We believe we have
developed strong relationships with our clients, as evidenced by our contract
renewal rate of 85% in 2000. During 2000, no single client accounted for more
than 3% of our revenue.
REDUCED REIMBURSEMENT RISK
Generally, hospitals, clinics and independent imaging centers bill patients
or third-party payors, such as health insurers, for their imaging services. In
contrast, for the year ended December 31, 2000, approximately 90% of our
revenues were generated by providing services to hospitals and clinics that are
obligated to pay us regardless of their receipt of reimbursement from
third-party payors.
34
Accordingly, our exposure to uncollectible patient receivables is minimized, as
evidenced by our bad debt expense of only 1.6% of net revenues for the year
ended December 31, 2000. In addition, we believe that the number of days
outstanding for our receivables, which averaged 55 days for the year ended
December 31, 2000, is among the most favorable in the healthcare services
industry.
COMPREHENSIVE OUTSOURCING SOLUTION
We offer our clients a comprehensive outsourcing solution which includes our
imaging services and ancillary services, such as marketing support, education
and training and billing assistance. In some cases, we provide services under
our regulatory and licensing approvals for clients when they do not have these
approvals. We believe that a comprehensive outsourcing solution is an important
factor when potential clients select an outsourcing provider. We also believe
that some clients recognize the benefits of our solution and will continue to
contract for our outsourcing services even if their scan volume may justify the
purchase of their own imaging system.
ADVANCED MRI SYSTEMS
Our MRI systems are among the newest and most advanced in the industry due
to the significant resources we have invested over the last three years to
replace and upgrade existing systems and to purchase new systems. Our
technologically advanced systems can perform high quality scans more rapidly and
can be used for a wider variety of imaging applications than less advanced
systems. Approximately 58% of our MRI systems have been purchased in the last
three years and approximately 88% of our MRI systems are equipped with
high-strength magnets that allow high-speed imaging. Moreover, technological
change in this field is gradual and most of our systems can be upgraded with
software and hardware enhancements, which should allow us to continue to provide
advanced technology without purchasing entire new systems.
EXPERIENCED EXECUTIVE MANAGEMENT TEAM
We have an experienced team of executives who have worked in the healthcare
industry an average of 19 years. Our executive management team currently owns
approximately 8% of our common equity on a fully diluted basis.
OUR GROWTH STRATEGIES
INCREASE THE NUMBER OF SCANS AT EXISTING CLIENTS
We intend to continue to increase the overall number of scans we perform for
our existing clients. We have invested in advanced MRI systems which are faster
and capable of scanning for a broad range and increasing number of medical
conditions. We believe these capabilities will result in an increase in the
number of scans performed for our clients. Furthermore, we attempt to educate
physicians about the advantages of MRI and new imaging procedures and
applications, which we believe will also lead to increased number of scans.
ESTABLISH NEW CLIENT RELATIONSHIPS
We primarily target small-to-mid-sized hospitals and other healthcare
providers as potential new clients for our services. As of December 31, 1999,
the small-to-mid-sized hospital market was estimated to include 4,956 hospitals.
Additionally, we intend to pursue relationships with physician groups, clinics
and other healthcare providers that could benefit from our shared-service
outsourcing solution. Providers in these markets are under increasing pressure
to offer a full range of services and must remain technologically competitive.
Because of this pressure, we believe this market represents an attractive target
for our outsourcing services. Additionally, we believe new client growth will
continue to come from healthcare providers requesting our other outsourced
imaging services.
35
INCREASE MRI SYSTEM UTILIZATION
The average number of scans performed for each of our MRI systems on a given
day was 9.4 in 2000. We believe we can increase this figure through efficient
deployment of our mobile MRI systems to existing and new clients. We believe we
can further improve utilization of our systems by working with our clients to
improve patient scheduling and ensure patient presence at these appointments. We
also believe that our size and geographic diversity positions us to benefit from
increased demand for MRI services.
EXPAND MRI APPLICATIONS
We intend to use our existing national presence and client service
capabilities to introduce new MRI applications, including cardiac evaluation and
advanced chest and abdomen imaging. Most of these applications can be performed
by existing MRI systems, which may require some upgraded software and hardware
enhancements.
OFFER NEW IMAGING SERVICES
We also intend to use our existing nationwide sales and operational
infrastructure and our client relationships to expand our outsourcing services
to include other imaging services. For example, we recently began expanding our
offering of positron emission tomography, or PET, services which are utilized in
the detection of certain cancers, coronary diseases or neurologic problems. Due
to recent approval of reimbursement for selected PET procedures by the Health
Care Financing Administration, we believe PET services present growth
opportunities.
PURSUE SELECTED STRATEGIC ACQUISITIONS
We have been an active acquirer of imaging businesses, having acquired 141
MRI systems in five separate acquisitions since 1997. We believe our scale and
geographic diversity allows us to realize synergies from the acquisition of
imaging providers. We expect to continue to identify and evaluate opportunities
for acquisitions within our industry, although currently there are no agreements
or negotiations with respect to any specific transaction.
OUR SERVICES
As of December 31, 2000, we provided our outsourcing services on the
following bases:
- SHARED SERVICE. We offered 77% of our diagnostic imaging systems on a
part-time basis. These systems are located in mobile trailers which are
transported to our clients' locations. We schedule deployment of these
mobile systems so that multiple clients can share use of the same system.
The typical shared-service contract is three to five years in length.
- FULL-TIME SERVICE. We offered 17% of our diagnostic imaging systems on a
full-time, long-term basis. These systems are located in either mobile
units or buildings located at or near a hospital or clinic. Full-time
service systems are provided for the exclusive use of a particular
hospital or clinic. We typically offer full-time services under contracts
that range from five to ten years in length. Our relationships with our
higher-volume shared-service clients have, from time to time, evolved into
full-time arrangements.
- INTERIM AND RENTAL SERVICES. We offered 6% of our diagnostic imaging
systems to clients on a full-time, temporary basis. These systems are
located in mobile trailers which are transported to our clients'
locations. These clients may be unable to maintain the extra capacity to
accommodate periods of peak demand for imaging services or may require
temporary assistance until they can develop permanent imaging service
centers at or near their facilities. Generally, we do not provide
technologists to operate our systems in these arrangements.
36
CONTRACTS AND PAYMENT
Our typical contract is exclusive, three to five years in length,
non-cancelable by our clients and often subject to automatic renewal. Most of
our contracts require a fee for each scan we perform. With other contracts,
clients are billed on a fixed-fee basis for a period of time, regardless of the
number of scans performed. These fee levels are affected primarily by the number
of scans performed, the type of imaging system provided and the length of the
contract. To a lesser extent, our revenues are generated from direct billings to
patients or their medical payors. We typically reserve the right to reduce a
client's number of service days or terminate an unprofitable contract. In
addition, our sales representatives have been successful in renewing and
extending contracts prior to expiration, achieving an 85% contract renewal rate
in 2000.
IMAGING SYSTEMS
We currently operate 374 diagnostic imaging systems, comprising 326 MRI
systems, 26 computed tomography systems, six positron emission tomography
systems and 16 other systems, substantially all of which we own. We have made
significant investments in our systems in an effort to ensure that we maintain
the newest, most advanced imaging systems that meet our clients' needs. As of
December 31, 2000, over 58% of our MRI systems had been purchased in the last
three years. Moreover, because we can upgrade most of our current MRI systems,
we believe we have reduced the potential for technological obsolescence.
We purchase our imaging systems from major medical equipment manufacturers,
primarily General Electric Medical Systems, Siemens Medical Systems and Philips
Medical Systems. Generally, we contract with clients for new or expanded
services prior to ordering new imaging systems in order to reduce our system
utilization risk. As one of the largest commercial purchasers of MRI systems in
the world, we believe we receive relatively attractive pricing for equipment and
service contracts from these equipment manufacturers.
THERAPEUTIC SERVICES
In addition to diagnostic imaging, we also offer our clients therapeutic
services including lithotripsy and brachytherapy. Lithotripsy is a minimally
invasive therapeutic procedure for the treatment of kidney stones, typically
performed on an outpatient basis. Brachytherapy is a localized radiation
treatment for cancer. We currently own 18 therapeutic systems.
SYSTEM MANAGEMENT AND MAINTENANCE
We have divided the country into nine geographic regions. We have a local
presence in each region, none of which accounts for more than 17% of our
revenues. We believe we benefit from our regional managers' direct contact with
and knowledge of the markets we serve, which allows us to address the specific
needs of each local operating environment. Each region markets, manages, and
staffs the operation of its imaging systems and is run as a separate profit
center responsible for its own revenues, expenses and overhead. To complement
this regional arrangement, we have developed standardized contracts, operating
policies, and other procedures, which are implemented nationwide in an effort to
ensure quality, consistency and efficiency across all regions.
We actively manage deployment of our imaging systems to increase their
utilization through the coordinated transportation of our mobile systems using
238 tractors. We examine client requirements, route patterns, travel times, fuel
costs and system availability in our deployment process. Our mobile
shared-service MRI systems are currently scheduled for as little as one-half day
and up to seven days per week at any particular client, with an average usage of
1.7 days per week per client. Drivers typically move the systems at night and
activate them upon arrival at each client location so that the systems are
operational when our technologists arrive.
37
Timely, effective maintenance is essential for achieving high utilization
rates of our MRI systems. We contract with the original equipment manufacturers
for comprehensive maintenance programs on our systems to minimize the period of
time the equipment is unavailable. System repair typically takes less than one
day but could take longer, depending upon the nature of the repair. During the
warranty period and maintenance contract term, we receive guarantees related to
equipment operation and availability.
SALES AND MARKETING
Our national sales force consists of 26 members who identify and contact
potential clients. We also have 55 marketing representatives who are focused on
increasing the number of scans performed with our systems by educating
physicians about our new imaging applications and service capabilities. The
sales force is organized regionally under the oversight of regional vice
presidents and senior management. Furthermore, certain of our executive officers
and regional vice presidents also spend a portion of their time participating in
contract negotiations.
COMPETITION
The market for diagnostic imaging services is highly fragmented and has few
national imaging service providers. We believe that the key competitive factors
affecting our business include:
- the quality and reliability of service;
- the quality and type of equipment available;
- the availability of types of imaging and ancillary services;
- the availability of imaging center locations and flexibility of
scheduling;
- pricing;
- the knowledge and service quality of technologists;
- the ability to obtain regulatory approvals; and
- the ability to establish and maintain relationships with healthcare
providers and referring physicians.
We are, and expect to continue to be, subject to competition in our targeted
markets from businesses offering diagnostic imaging services, including existing
and developing technologies. There are many companies engaged in this market,
including one national competitor and many smaller regional competitors. Some of
our competitors may now or in the future have access to greater resources than
we do. We compete with other mobile providers, independent imaging centers,
physicians, hospitals, and other healthcare providers that have their own
diagnostic imaging systems, and equipment manufacturers that sell or lease
imaging systems to healthcare providers for mobile or full-time use. We may also
experience greater competition in states that currently have certificates of
need laws should these laws be repealed, thereby reducing barriers to entry in
that state.
EMPLOYEES
As of December 31, 2000, we had 1,948 employees, of whom approximately 1,230
were trained diagnostic imaging technologists, patient coordinators or other
technical support staff. None of our employees are represented by a labor
organization and we are not aware of any activity seeking such organization. We
believe we have good relationships with our employees.
38
PROPERTIES
We lease approximately 43,400 square feet of space in four office buildings
in Anaheim, California for our executive and principal administrative offices.
We also lease a 15,600 square foot operations warehouse in Orange, California
and a 9,000 square foot operations warehouse in Childs, Pennsylvania, as well as
space for our regional offices.
REGULATION
Our business is subject to extensive federal and state government
regulation. Although we believe that our operations comply with the laws
governing our industry, it is possible that new laws or interpretations of
existing laws will adversely affect our financial performance.
FRAUD AND ABUSE LAWS; PHYSICIAN REFERRAL PROHIBITIONS
The healthcare industry is subject to extensive federal and state regulation
relating to licensure, conduct of operations, ownership of facilities, addition
of facilities and services and payment for services.
In particular, the federal Anti-Kickback Law prohibits persons from
knowingly and willfully soliciting, receiving, offering or providing
remuneration, directly or indirectly, to induce either the referral of an
individual, or the furnishing, recommending, or arranging for a good or service,
for which payment may be made under a federal healthcare program such as the
Medicare and Medicaid Programs. The definition of "remuneration" has been
broadly interpreted to include anything of value, including for example gifts,
discounts, the furnishing of supplies or equipment, credit arrangements,
payments of cash, waivers of payments, ownership interests, and providing
anything at less than its fair market value. In addition, there is no one
generally accepted definition of intent for purposes of finding a violation of
the Anti-Kickback Law. For instance, one court has stated that an arrangement
will violate the Anti-Kickback Law where any party has the intent to unlawfully
induce referrals. In contrast, another court has opined that a party must engage
in the proscribed conduct with the specific intent to disobey the law in order
to be found in violation of the Anti-Kickback Law. The lack of uniform
interpretation of the Anti-Kickback Law makes compliance with the law difficult.
The penalties for violating the Anti-Kickback Law can be severe. These sanctions
include criminal penalties and civil sanctions, including fines, imprisonment
and possible exclusion from the Medicare and Medicaid programs.
The Anti-Kickback Law is broad, and it prohibits many arrangements and
practices that are lawful in businesses outside of the healthcare industry.
Recognizing that the Anti-Kickback Law is broad and may technically prohibit
many innocuous or beneficial arrangements within the healthcare industry, the
U.S. Department of Health and Human Services issued regulations in July of 1991,
which the Department has referred to as "safe harbors." These safe harbor
regulations set forth certain provisions which, if met, will assure healthcare
providers and other parties that they will not be prosecuted under the federal
Anti-Kickback Law. Additional safe harbor provisions providing similar
protections have been published intermittently since 1991. Our arrangements with
physicians, physician practice groups, hospitals, and other persons or entities
who are in a position to refer may not fully meet the stringent criteria
specified in the various safe harbors. Although full compliance with these
provisions ensures against prosecution under the federal Anti-Kickback Law, the
failure of a transaction or arrangement to fit within a specific safe harbor
does not necessarily mean that the transaction or arrangement is illegal or that
prosecution under the federal Anti-Kickback Law will be pursued. Although our
arrangements may not fall within a safe harbor, we believe that our business
arrangements do not violate the Anti-Kickback Law because we are careful to
structure our arrangements to reflect fair market value and ensure that the
reasons underlying our decision to enter into a business arrangement comport
with the Anti-Kickback Law. However, even though we continuously strive to
comply with the
39
requirements of the Anti-Kickback Law, liability under the Anti-Kickback Law may
still arise because of the intentions of the parties with whom we do business.
In addition, we may have Anti-Kickback Law liability based on arrangements
established by the entities we have acquired if any of those arrangements
involved an intention to exchange remuneration for referrals covered by the
Anti-Kickback Law. While we are not aware of any such intentions, we have only
limited knowledge regarding the intentions underlying those arrangements.
Conduct and business arrangements that do not fully satisfy one of these safe
harbor provisions may result in increased scrutiny by government enforcement
authorities such as the Office of the Inspector General of the U.S. Department
of Health and Human Services, or OIG.
Many states have adopted laws similar to the federal Anti-Kickback Law. Some
of these state prohibitions apply to referral of patients for healthcare
services reimbursed by any source, not only the Medicare and Medicaid Programs.
Although we believe that we comply with both federal and state anti-kickback
laws, any finding of a violation of these laws could subject us to criminal and
civil penalties or possible exclusion from federal or state healthcare programs.
Such penalties would adversely affect our financial performance and our ability
to operate our business.
In addition, the Ethics in Patient Referral Act of 1989, commonly referred
to as the federal physician self-referral prohibition or Stark Law, prohibits
physician referrals of Medicare and Medicaid patients to an entity providing
certain designated health services (including MRI and other diagnostic imaging
services) if the physician or an immediate family member has any financial
arrangement with the entity and no statutory or regulatory exception applies.
The Stark Law also prohibits the entity from billing for any such prohibited
referral. Initially, the Stark Law applied only to clinical laboratory services
and regulations applicable to clinical laboratory services were issued in 1995.
Earlier that same year, the Stark Law's self-referral prohibition expanded to
additional goods and services, including MRI and other imaging services. In
1998, the Health Care Financing Administration, or HCFA, published proposed
rules for the remaining designated health services, including MRI and other
imaging services, and in January of 2001, HCFA published a final rule which it
characterized as the first phase of what will be a two-phase final rule.
Although HCFA has stated that it intends to publish phase two shortly, it is
unclear when this will occur. Based on HCFA commentary and recent presidential
action, phase one of these final Stark Law regulations will likely become
effective in early 2002.
A person who engages in a scheme to circumvent the Stark Law's referral
prohibition may be fined up to $100,000 for each such arrangement or scheme. In
addition, any person who presents or causes to be presented a claim to the
Medicare or Medicaid Program in violation of the Stark Law is subject to civil
monetary penalties of up to $15,000 per bill submission, an assessment of up to
three times the amount claimed, and possible exclusion from participation in
federal healthcare programs. Bills submitted in violation of the Stark Law may
not be paid by Medicare or Medicaid, and any person collecting any amounts with
respect to any such prohibited bill is obligated to refund such amounts.
Several states in which we operate have enacted or are considering
legislation that prohibits physician self-referral arrangements or requires
physicians to disclose any financial interest they may have with a healthcare
provider to their patients when referring patients to that provider. Possible
sanctions for violating these state law physician self-referral and disclosure
requirements include loss of license and civil and criminal sanctions. State
laws vary from jurisdiction to jurisdiction and have been interpreted by the
courts or regulatory agencies infrequently.
We believe our operations comply with these federal and state physician
self-referral prohibition laws. We do not believe we or anyone else has
established any arrangements or schemes involving any service of ours which
would violate the Stark Law prohibition against schemes designed to circumvent
the Stark Law, or any similar state law prohibitions. Because we have financial
arrangements with physicians and possibly their immediate family members, and
because we may not be aware of all those
40
financial arrangements, we rely on physicians and their immediate family members
to avoid making referrals to us in violation of the Stark law and similar state
laws. If we receive such a prohibited referral which is not covered by
exceptions under the Stark law and applicable state law, our submission of a
bill for the referral could subject us to sanctions under the Stark law and
applicable state law. Any sanctions imposed on us under the Stark Law or any
similar state laws could adversely affect our financial results and our ability
to operate our business.
The Health Insurance Portability and Accountability Act of 1996 created two
new federal crimes: healthcare fraud and false statements relating to healthcare
matters. The healthcare fraud statute prohibits knowingly and willfully
executing a scheme to defraud any healthcare benefit program, including private
payors. A violation of this statute is a felony and may result in fines,
imprisonment or exclusion from government sponsored programs such as the
Medicare and Medicaid Programs. The false statements statute prohibits knowingly
and willfully falsifying, concealing or covering up a material fact or making
any materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services. A violation
of this statute is a felony and may result in fines or imprisonment. The Health
Insurance Portability and Accountability Act of 1996 also will require us to
follow federal privacy standards for individually identifiable health
information and computer security standards for all health information. The
government recently published regulations to implement the privacy standards
under the Act. We are beginning to address compliance with the Act and
applicable regulations. At this time we have not projected the financial impact
of compliance, which may be significant. A violation of the Act's health fraud,
privacy or security provisions may result in criminal and civil penalties, which
may adversely affect our financial performance and our ability to operate our
business.
Both federal and state government agencies are continuing heightened and
coordinated civil and criminal enforcement efforts. As part of announced
enforcement agency work plans, the federal government will continue to
scrutinize, among other things, the billing practices of hospitals and other
providers of healthcare services. The federal government also has increased
funding to fight healthcare fraud, and it is coordinating its enforcement
efforts among various agencies, such as the U.S. Department of Justice, the U.S.
Department of Health and Human Services Office of Inspector General, and state
Medicaid fraud control units. We believe that the healthcare industry will
continue to be subject to increased government scrutiny and investigations.
FEDERAL FALSE CLAIMS ACT
Another trend affecting the healthcare industry is the increased use of the
federal False Claims Act and, in particular, actions under the False Claims
Act's "whistleblower" provisions. Those provisions allow a private individual to
bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. After the individual has initiated the
lawsuit, the government must decide whether to intervene in the lawsuit and to
become the primary prosecutor. If the government declines to join the lawsuit,
then the individual may choose to pursue the case alone, in which case the
individual's counsel will have primary control over the prosecution, although
the government must be kept apprised of the progress of the lawsuit. Whether or
not the federal government intervenes in the case, it will receive the majority
of any recovery. If the litigation is successful, the individual is entitled to
no less than 15%, but no more than 30%, of whatever amount the government
recovers. The percentage of the individual's recovery varies, depending on
whether the government intervened in the case and other factors. Recently, the
number of suits brought against healthcare providers by private individuals has
increased dramatically. In addition, various states are considering or have
enacted laws modeled after the federal False Claims Act. Even in instances when
a whistleblower action is dismissed with no judgment or settlement, we may incur
substantial legal fees and other costs relating to an investigation. We are
currently subject to a whistleblower action. See "Business--Legal and
Administrative Proceedings." Future actions under the False Claims Act may
41
result in significant fines and legal fees, which would adversely affect our
financial performance and our ability to operate our business.
When an entity is determined to have violated the federal False Claims Act,
it must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,000 to $10,000 for each separate false
claim. Liability arises, primarily, when an entity knowingly submits a false
claim for reimbursement to the federal government. Simple negligence should not
give rise to liability, but submitting a claim with reckless disregard of its
truth or falsity could result in substantial civil liability.
Although simple negligence should not give rise to liability, the government
or a whistleblower may attempt and could succeed in imposing liability on us for
a variety of previous or current failures, including for example:
- Failure to comply with the many technical billing requirements applicable
to our Medicare and Medicaid business.
- Failure to comply with Medicare requirements concerning the circumstances
in which a hospital, rather than we, must bill Medicare for diagnostic
imaging services we provide to outpatients treated by the hospital.
- Failure of our hospital clients to accurately identify and report our
reimbursable and allowable services to Medicare.
- Failure to comply with the prohibition against billing for services
ordered or supervised by a physician who is excluded from any federal
healthcare programs, or the prohibition against employing or contracting
with any person or entity excluded from any federal healthcare programs.
- Failure to comply with the Medicare physician supervision requirements for
the services we provide, or the Medicare documentation requirements
concerning such physician supervision.
- The past conduct of the companies we have acquired.
We strive to ensure that we meet applicable billing requirements. However,
the costs of defending claims under the False Claims Act, as well as sanctions
imposed under the Act, could significantly affect our financial performance.
UNLAWFUL PRACTICE OF MEDICINE AND FEE SPLITTING
The marketing and operation of our diagnostic imaging and therapeutic
systems are subject to state laws prohibiting the practice of medicine by
non-physicians. We believe that our operations do not involve the practice of
medicine because all professional medical services relating to our operations,
including the interpretation of scans and related diagnoses, are separately
provided by licensed physicians not employed by us. Some states have laws that
prohibit any fee-splitting arrangement between a physician and a referring
person or entity that would provide for remuneration paid to the referral source
on the basis of revenues generated from referrals by the referral source. We
believe that our operations do not violate these state laws with respect to fee
splitting.
CERTIFICATE OF NEED LAWS
In some states, a certificate of need or similar regulatory approval is
required prior to the acquisition of high-cost capital items or services,
including diagnostic imaging systems or provision of diagnostic imaging services
by us or our clients. Certificate of need regulations may limit or preclude us
from providing diagnostic imaging services or systems. At present, 17 states in
which we operate have certificate of need laws that restrict the supply of MRI
machines and other types of advanced medical
42
equipment to certain incumbent providers. Revenue from states with certificate
of need regulations represents approximately 50% of our total revenue in 2000.
Certificate of need laws were enacted to contain rising healthcare costs,
prevent the unnecessary duplication of health resources, and increase patient
access for health services. In practice, certificate of need laws have prevented
hospitals and other providers who have been unable to obtain a certificate of
need from acquiring new machines or offering new services. In the past
17 years, some states have liberalized exemptions from certificate of need laws,
including, for example, Pennsylvania, Nebraska, New York, Ohio and Tennessee.
However, this liberalization of certificate of need restrictions has had little
impact on our performance. Our current contracts will remain in effect even if
the certificate-of-need states in which we operate modify their certificate of
need programs. However, a significant increase in the number of states
regulating our business through certificate of need or similar programs could
adversely affect us. Conversely, repeal of existing certificate of need
regulations in jurisdictions where we have obtained a certificate of need, or
certificate of need exemption, also could adversely affect us by allowing
competitors to enter our markets. Certificate of need laws are the subject of
continuing legislative activity.
REIMBURSEMENT
We derive most of our revenues directly from healthcare providers rather
than third-party payors, including government programs such as the Medicare
Program. We derive a small percentage of our revenues from direct billings to
patients or their third-party payors. Services for which we submit direct
billings for Medicare and Medicaid patients typically are reimbursed by
contractors on a fee schedule basis. Net revenues from direct patient billing
amounted to approximately 10% of our revenue in 2000.
As a result of federal cost-containment legislation currently in effect,
Medicare generally pays for inpatient services under a prospective payment
system based upon a fixed amount for each Medicare patient discharge. Each
discharge is classified into one of many diagnosis related groups, or DRGs. A
pre-determined amount covers all inpatient operating costs, regardless of the
services actually provided or the length of the patient's stay. Because Medicare
reimburses a hospital for all services rendered to a Medicare patient on the
basis of a pre-determined amount based on the DRG, a hospital or free-standing
facility cannot be separately reimbursed for an MRI scan or other procedure
performed on the hospital inpatient. Many state Medicaid Programs have adopted
comparable payment policies.
On August 1, 2000, the Health Care Financing Administration implemented a
Medicare outpatient prospective payment system under which services and items
furnished in hospital outpatient departments are reimbursed using a
pre-determined amount for each ambulatory payment classification, or APC. Each
APC is based on the specific procedures performed and items furnished during a
patient visit. Certain items and services are paid on a fee schedule, and for
certain drugs, biologics and new technologies, hospitals are reimbursed
additional amounts. This new development in reimbursement may significantly
affect our financial performance.
In order for our hospital customers to receive payment from Medicare with
respect to our services, our services must be furnished in a "provider-based"
department or be a covered service furnished "under arrangements." On April 7,
2000, Medicare published new rules establishing criteria for being a
"provider-based" department. Our services to hospitals possibly may not meet
Medicare's new standards for being a "provider-based" service, although that is
uncertain because at this time very little guidance exists regarding the proper
interpretation of this new Medicare regulation. If our services to hospital
customers are not furnished in a "provider-based" setting, the services would
not be covered by Medicare unless they are found to be a service furnished
"under arrangements" to a hospital. The extent to which "under arrangements"
services may be covered by Medicare when they do not meet the "provider-based"
standards is unclear. In the Benefits Improvement and Protection Act of 2000,
Congress postponed the effective date of the new regulations until October 1,
2002. In addition,
43
Congress "grandfathered" until October 1, 2002 all sites that were paid as
provider-based sites as of October 1, 2000. As the Medicare rules are clarified
and as October 1, 2002 approaches, it may be necessary for us to modify the
contracts we have with hospital customers or to take other steps that may affect
our cost for our wholesale business or the manner in which we furnish wholesale
services to hospital customers.
Payments to us by third-party payors depend substantially upon each payor's
reimbursement policies. Third-party payors may impose limits on reimbursement
for diagnostic imaging services or deny reimbursement for tests that do not
follow recommended diagnostic procedures. Because unfavorable reimbursement
policies have and may continue to constrict the profit margins of the hospitals
and clinics we bill directly, we have and may continue to need to lower our fees
to retain existing clients and attract new ones. Alternatively, at lower
reimbursement rates, a healthcare provider might find it financially
unattractive to own an MRI or other diagnostic imaging system, but could benefit
from purchasing our services. It is possible that third-party reimbursement
policies will affect the need or price for our services in the future, which
could significantly affect our financial performance and our ability to conduct
our business.
ENVIRONMENTAL, HEALTH AND SAFETY LAWS
Our PET service and some of our other imaging and therapeutic services
require the use of radioactive materials. While this material has a short
half-life, meaning it quickly breaks down into inert, or non-radioactive
substances, using such materials presents the risk of accidental environmental
contamination and physical injury. We are subject to federal, state and local
regulations governing the storage, use and disposal of materials and waste
products. Although we believe that our safety procedures for storing, handling
and disposing of these hazardous materials comply with the standards prescribed
by law and regulation, we cannot completely eliminate the risk of accidental
contamination or injury from those hazardous materials. In the event of an
accident, we could be held liable for any damages that result, and any liability
could exceed the limits or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could incur
significant costs and the diversion of our management's attention in order to
comply with current or future environmental laws and regulations. We have not
had material expenses related to environmental, health and safety laws or
regulations to date.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
In late 1999, we identified through a self-audit possible errors in billing
Medicare claims in Massachusetts and with the assistance of outside law firms
and an outside accounting firm, we conducted a Medicare claims audit of our
Massachusetts retail billing operations for the preceding five-year period. Upon
completion of that audit and in the first part of 2000, we disclosed the audit
results to our Medicare Part B contractor, National Heritage Insurance Company,
or NHIC. NHIC reviewed the Medicare audit results and also reviewed claims
information with respect to a random sample of 30 claims that were supplied to
them in November 2000. On March 2, 2001, the Medicare carrier sent a letter to
us indicating its completion of its assessment and verification of our
comprehensive review of Medicare claims in Massachusetts. The letter assessed an
overpayment of $2.2 million and advised us of administrative appeals procedures
applicable to this overpayment. Also, related to the NHIC Audit, we expect to
pay approximately $713,000 to the Massachusetts MassHealth Program,
approximately $35,000 to the federal Department of Defense TRICARE Program, and
approximately $475,000 pertaining to coinsurance payments from patients. These
amounts have been accrued and are reflected in our statements of operations
presented in this prospectus.
In August of 2000, we received notice that the U.S. Department of Justice
was investigating allegations that we had violated the federal False Claims Act
by submitting false claims to federal health care insurance programs. These
allegations are based on information furnished to the
44
government by a person claiming familiarity with our business. Because this
matter arises under the False Claims Act, our potential liability includes three
times the damages actually sustained by the government and civil penalties of up
to $10,000 per claim. We are cooperating fully with the ongoing U.S. Department
of Justice investigation. We retained both a law firm and an accounting firm to
conduct an independent investigation of the issues identified to us by the U.S.
Department of Justice, and presented the results of that investigation to the
U.S. Department of Justice in December 2000. Based on the results of our
independent investigation, as well as discussions with a U.S. Department of
Justice attorney involved in the matter, we do not believe that the U.S.
Department of Justice has a strong basis to pursue its investigation.
An administrative action is pending, stemming from an audit of Medicaid
claims by MassPRO for outpatient MRI services provided during a twelve-month
period ending January 31, 1999. MassPRO is a Massachusetts not-for-profit
organization that has contracted with the Massachusetts Division of Medical
Assistance and the Massachusetts Medicaid Fraud Control Unit to oversee
utilization management and billing compliance for the State's Medicaid Program,
which is part of a Massachusetts program called MassHealth. The Division of
Medical Assistance is the agency responsible for implementing the State's
MassHealth Program and the Massachusetts Medical Fraud Control Unit is the
agency responsible for ensuring legal compliance with the Massachusetts Medicaid
Program. The case involves an audit of Greater Boston MRI, a limited partnership
wholly owned by us. MassPRO alleged deficiencies in documentation and billing
requirements for MRI claims made by Greater Boston MRI. The Massachusetts
Division of Medical Assistance has revised its initial determination by lowering
the amount to be recovered in this matter based on our administrative appeal;
the Massachusetts Division of Medical Assistance is now seeking approximately a
$212,000 recovery related to the alleged deficiencies in this case. Based on the
audit, the Massachusetts Division of Medical Assistance also sent a notice of
proposed suspension from the program. At the present time, Massachusetts is not
seeking suspension of Greater Boston MRI, but may require post-settlement
reporting by the provider for some period of time to ensure compliance with the
Massachusetts MassHealth Program. This matter is in the final stages of
administrative settlement.
We have accrued $4,350,000 for probable settlement of all of these issues.
While actual results could vary from this estimate, we believe that the
resolution of any deficient billing process will not have a material adverse
effect on our business.
From time to time we are involved in routine litigation incidental to the
conduct of our business. We believe that none of this litigation pending against
us will have a material adverse effect on our business.
45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages and positions, are as
follows:
NAME AGE POSITION
---- -------- --------------------------------------------------------
Richard N. Zehner......................... 48 Chairman of the Board of Directors and Chief Executive
Officer
Jamie E. Hopping.......................... 47 Director, President and Chief Operating Officer
Kenneth S. Ord............................ 55 Executive Vice President and Chief Financial Officer
Cheryl A. Ford............................ 45 Executive Vice President
Terry A. Andrues.......................... 49 Executive Vice President
Jay A. Mericle............................ 46 Executive Vice President
Russell D. Phillips, Jr................... 38 General Counsel and Secretary
Howard K. Aihara.......................... 37 Vice President and Corporate Controller
Henry R. Kravis........................... 57 Director
Michael W. Michelson...................... 49 Director
George R. Roberts......................... 57 Director
David H.S. Chung.......................... 33 Director
RICHARD N. ZEHNER has served as our chairman and chief executive officer
since November 1988. Mr. Zehner was our founder and also served as our president
from 1983 through February 1998. He has served as a director since 1987. Prior
to founding the company, Mr. Zehner managed the diagnostic shared-services
division of National Medical Enterprises, the predecessor of Tenet Corporation,
a nationwide provider of healthcare services. Mr. Zehner began his career as an
x-ray technician and subsequently became a radiology department manager.
JAMIE E. HOPPING has served as our president and chief operating officer
since November 2000 and has been a director since November 2000. Prior to
joining us, Ms. Hopping was an independent consultant to various healthcare
providers including Catholic Health East and Quorum Health from 1997 to 1999.
She was employed by Columbia/HCA Healthcare Corporation as the Western Group
president from 1996 to 1997, president of the South Florida Division from 1994
to 1996, chief operating officer of South Florida Division from 1993 to 1994 and
chief executive officer of Deering Hospital and Grant Center from 1990 to 1993.
KENNETH S. ORD has served as our executive vice president and chief
financial officer since November 1998. From January 1998 to November 1998, he
served as our senior vice president, chief financial officer and secretary. From
February 1997 to September 1997 he served as executive vice president and chief
financial officer of Talbert Medical Management Corporation and from
February 1994 to February 1997 he served as senior vice president and chief
financial officer of FHP International Corporation, a publicly traded health
maintenance organization.
CHERYL A. FORD has served as our executive vice president, Eastern United
States since November 1998. She is responsible for managing the Eastern,
Mid-Atlantic, New England and Southern regions. From February 1995 to
November 1998, she was our senior vice president, Eastern Region.
TERRY A. ANDRUES has served as our executive vice president, Western United
States since November 1998. He is responsible for managing the Pacific,
Northwestern, Western, Central and Great Lakes regions. From 1991 to
November 1998, he served as our senior vice president of the Central and Pacific
Regions and from May 1987 to November 1991, he was our customer support manager
with responsibilities in technical education and marketing. Prior to joining us,
Mr. Andrues worked as a technologist at Pasadena's Huntington Medical Research
Institute, site of the nation's first clinical MRI system. Mr. Andrues maintains
his credential as a registered MRI technologist.
46
JAY A. MERICLE has served as our executive vice president, equipment and
services since February 1999. Mr. Mericle was our senior vice president from
1991 to 1999 and our vice president of operations from 1988 to 1991.
RUSSELL D. PHILLIPS, JR. has served as our general counsel and secretary
since March 1998. Prior to joining us, Mr. Phillips served as chief legal
officer of Talbert Medical Management Corporation, a publicly traded physician
practice management corporation from May 1997 to September 1997, and corporate
counsel to FHP International Corporation, a publicly traded health maintenance
organization from June 1992 to April 1997. Mr. Phillips was an associate with
Skadden, Arps, Slate, Meagher & Flom, LLP from 1987 through 1992.
HOWARD K. AIHARA has served as our vice president, corporate controller
since September 2000. From 1997 until September 2000, Mr. Aihara was vice
president, finance, for UniMed Management Company, a physician practice
management company in Burbank, California. From 1995 through 1997, he was
executive director and corporate controller for AHI Healthcare Systems, Inc. of
Downey, California. AHI was a publicly traded physician practice management
company.
HENRY R. KRAVIS has been a director since November 1999. Mr. Kravis has been
a founding partner of Kohlberg Kravis Roberts & Co., L.P. since its inception in
1976, and is a managing member of the limited liability company which serves as
the general partner of Kohlberg Kravis Roberts & Co., L.P. Mr. Kravis is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds
Collection, Ltd., Evenflo Company Inc., The Gillette Company, IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Corporation, MedCath Inc.,
PRIMEDIA Inc., Regal Cinemas, Inc., Sotheby's Holdings, Inc., Spalding Holdings
Corporation and Trinity Acquisition plc (Willis Corroon). Messrs. Kravis and
Roberts are first cousins.
MICHAEL W. MICHELSON has been a director since November 1999. Mr. Michelson
is a member of the limited liability company which serves as the general partner
of Kohlberg Kravis Roberts & Co., L.P. Mr. Michelson is also a director of
Amphenol Corporation, AutoZone, Inc., Owens-Illinois, Inc., and KinderCare
Learning Centers, Inc.
GEORGE R. ROBERTS has been a director since November 1999. Mr. Roberts has
been a founding partner of Kohlberg Kravis Roberts & Co. L.P. since its
inception in 1976, and is a managing member of the limited liability company
which serves as the general partner of Kohlberg Kravis Roberts & Co., L.P.
Mr. Roberts is also a director of Accuride Corporation, Amphenol Corporation,
Borden, Inc., The Boyd Collection, Ltd., DPL Inc. (The Dayton Power & Light
Company), Evenflo Company Inc., IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Corporation, Owens-Illinois, Inc.,
PRIMEDIA, Inc., Safeway Inc., Spalding Holdings Corporation and Trinity
Acquisition plc (Willis Corroon). Messrs. Roberts and Kravis are first cousins.
DAVID H.S. CHUNG has been a director since November 1999. Mr. Chung has been
an executive of Kohlberg Kravis Roberts & Co. since 1995. From 1993 to 1995,
Mr. Chung was a management consultant at McKinsey & Co. Mr. Chung is also a
director of Centric Software, Inc., MedCath Inc. and WorldCrest Group, Inc.
BOARD COMMITTEES
We have an audit committee, a compensation committee and an executive
committee. The audit committee is responsible for recommending to the board of
directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by our
auditors. The compensation committee is responsible for reviewing and
recommending to the board of directors the amount and type of non-stock
compensation to be paid to senior management and establishing, reviewing general
policies relating to compensation and benefits of employees and administering
our stock option plan. No interlocking relationship will exist between any
member of our compensation committee and any member of any other company's board
of directors or compensation committee.
The executive committee exercises all powers and authority of the board of
directors with some exceptions as provided under Delaware law. The purpose of
the executive committee is to allow for decisions to be made on our behalf
between regular meetings of the board of directors.
47
DIRECTOR COMPENSATION
Our non-employee directors receive an annual fee of $25,000 and
reimbursement of travel expenses. Effective January 1, 2000, we established a
directors' deferred compensation plan for all non-employee directors. Each of
the four non-employee directors has elected to participate in the director plan
and have their annual fee of $25,000 deferred into a stock account and converted
quarterly into phantom shares. Upon retirement, separation from the board of
directors, or the occurrence of a change of control, each director has the
option of being paid cash or issued common stock for their phantom shares. Upon
issuance of the phantom shares, we recorded non-cash compensation of an
additional $68,000 for the difference between the fair market value and the
issuance price of the phantom shares.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned including salary,
bonuses, commissions, stock options and other compensation during the three
fiscal years ended December 31, 1998, 1999 and 2000 by our chief executive
officer and our four next most highly compensated executive officers, each of
whose total annual compensation exceeded $100,000 in 2000 and Mr. Vincent Pino,
who would have been of one of our most highly compensated executive officers for
the year ended December 31, 2000 but for his retirement earlier that year. We
refer to these officers as our named executive officers elsewhere in this
prospectus.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------------------------
------------------------------------------ SECURITIES
OTHER UNDERLYING
ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2) OPTIONS(3) PAYOUTS(4) COMPENSATION(5)
------------------ -------- -------- ---------- --------------- ---------- ---------- ---------------
Richard N. Zehner ............ 2000 $369,900 $ 160,624 -- -- -- $ 16,520
Chief Executive Officer, 1999 351,300 2,746,090(6) -- 124,750 -- 1,968,830
Chairman of the Board of 1998 350,000 727,738(7) -- 25,000 $31,250 755,978
Directors
Vincent S. Pino(8) ........... 2000 $315,100 $ 428,776(9) -- -- -- $ 22,174
Former President, Chief 1999 299,100 2,095,786(6) -- 114,800 -- 774,277
Operating Officer and 1998 275,000 537,435(7) -- 20,000 $25,000 451,776
Director
Kenneth S. Ord ............... 2000 $285,500 $ 212,561(9) -- -- -- $ 414
Executive Vice President and 1999 271,000 847,825(6) -- 83,850 -- 506,571
Chief Financial Officer 1998 247,981 179,875 -- 45,000 -- 320
Cheryl A. Ford ............... 2000 $173,200 $ 61,000 -- -- -- $ 3,999
Executive Vice President 1999 165,500 92,194 -- 30,000 -- 215,152
1998 145,000 70,035 -- 13,500 $12,500 3,595
Terry A. Andrues ............. 2000 $173,200 $ 60,292 -- -- -- $ 3,979
Executive Vice President 1999 165,500 87,244 -- 30,000 -- 215,271
1998 145,000 70,035 -- 13,500 $12,500 3,595
Jay A. Mericle ............... 2000 $163,800 $ 47,415 -- -- -- $ 7,146
Executive Vice President 1999 155,500 76,376 -- 30,000 -- 1,004,224
1998 145,000 70,035 -- 13,500 $12,500 6,191
------------------------------
(1) Rows specified "2000," "1999" and "1998" represent fiscal years ended
December 31, 2000, 1999 and 1998, respectively.
(2) With respect to each named officer for each fiscal year this table excludes
perquisites which did not exceed the lesser of $50,000 or 10% of the named
officer's salary and bonus for the fiscal year.
(3) Stock options were granted under our 1999 Equity Plan and 1997 Option Plan.
(4) We made our final payments made under our 1995 long-term executive
incentive plan in 1998.
(5) Includes:
- $736,525 and $426,900 in change in control payments which were paid in
1998 to Messrs. Zehner and Pino, respectively, pursuant to their prior
employment agreements.
- 401(k) matching contributions (for 2000, 1999 and 1998, respectively):
Mr. Zehner--$4,250, $4,443 and $3,330; Mr. Pino--$4,250, $4,522 and
$3,330; Ms. Ford--$3,777, $3,603 and $3,330; Mr. Andrues--$3,757,
$3,603, $3,330 and Mr. Mericle--$3,797, 3,576, and 3,330.
- Cash payments in lieu of accrued vacation (for 2000, 1999 and 1998,
respectively): Mr. Zehner--$0, $15,313 and $6,731; Mr. Pino--$17,510,
$11,462 and $21,154; and Mr. Mericle--$3,144, $2,981 and $2,596.
48
- Cash payments for options tendered pursuant to our recapitalization in
1999. Amounts paid in 1999 were as follows: Mr. Zehner--$1,930,196;
Mr. Pino--$757,621; Mr. Ord--$505,899, Ms. Ford--$211,353;
Mr. Andrues--$211,353 and Mr. Mericle--$997,448.
- The balance for each named officer represents life insurance premiums
paid by us.
(6) Includes $2,458,651, $1,900,000 and $700,000 in bonus payments paid to
Messrs. Zehner, Pino and Ord, respectively, upon closing of our
recapitalization in 1999.
(7) Includes $350,000 and $300,000 in bonus payments paid to Messrs. Zehner and
Pino, respectively, upon the closing of the Mobile Technology Inc.
acquisition in 1998.
(8) Mr. Pino retired in 2000.
(9) Includes $310,209 and $129,911 in bonus payments to Messrs. Pino and Ord in
2000, respectively, pursuant to retention bonus agreements.
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant stock options to the named executive officers during the
2000 fiscal year. No stock appreciation rights have ever been granted to the
named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents information with respect to options exercised
by each of the named executive officers in 2000 or cancelled in exchange for
payment in cash, as well as the unexercised options to purchase our common stock
granted under the 1999 Equity Plan and the 1997 Option Plan to the named
executive officers and held by them as of December 31, 2000.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE --------------------------- -----------------------------
NAME AND PRINCIPAL POSITION ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------- ----------- ---------- ----------- ------------- ------------- -------------
Richard N. Zehner ................. -- -- 114,552 112,275 $ 9,086,569 $ 4,406,794
Chief Executive Officer and
Chairman of the Board of
Directors
Vincent S. Pino ................... 85,350 $3,084,000(2) 11,480 103,320(3) 450,590 4,055,310
Former President, Chief Operating
Officer and Director
Kenneth S. Ord .................... 6,750 303,539(2) 24,135 86,715 1,655,576 3,909,476
Executive Vice President and
Chief Financial Officer
Cheryl A. Ford .................... -- -- 11,800 27,000 858,886 1,059,750
Executive Vice President
Terry A. Andrues .................. -- -- 11,800 27,000 858,886 1,059,750
Executive Vice President
Jay A. Mericle .................... -- -- 11,800 27,000 858,886 1,059,750
Executive Vice President
------------------------------
(1) There was no public trading market for our common stock as of December 31,
2000. Accordingly, these values have been calculated based on our board of
directors' determination of the fair market value of the underlying shares
as of December 31, 2000 of $95.22 per share, less the applicable exercise
price per share, multiplied by the number of underlying shares.
(2) Represents cash payments in exchange for cancellation of options.
(3) Unexercisable options were forfeited and cancelled as of January 1, 2001 by
mutual agreement between us and Mr. Pino.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into employment agreements with Mr. Zehner, Ms. Hopping and
Mr. Ord. Base compensation under the employment agreement for each of these
executives is subject to adjustment by the board of directors each year. In
addition, Mr. Zehner, Ms. Hopping and Mr. Ord are entitled to receive an annual
cash bonus based upon our achievement of certain operating and financial goals,
with an annual target bonus amount equal to a specified percentage of their
then-current annual base salary (75% in the case of Mr. Zehner, 70% in the case
of Ms. Hopping and 50% in the case of Mr. Ord). Ms. Hopping's cash bonus for
2001 will not be less than 46.2% of her base salary notwithstanding the
achievement of these goals. This bonus plan has been adopted and will be
administered by the compensation committee of the board of directors.
49
The employment agreements have terms of two years in the case of
Messrs. Zehner and Ord and one year in the case of Ms. Hopping. The terms of the
employment agreements of Mr. Zehner, Ms. Hopping and Mr. Ord automatically
extend by three months on the last day of each quarterly period and will
continue to be so extended unless either we or the executive give notice of a
desire to modify or terminate the agreement at least thirty days prior to the
quarterly extension date. We may terminate Mr. Zehner's, Ms. Hopping's or
Mr. Ord's employment at any time and for any reason and Mr. Zehner, Ms. Hopping
and Mr. Ord may resign at any time and for any reason. If we terminate the
employment of Mr. Zehner, Ms. Hopping or Mr. Ord without cause, or any of them
resigns with good cause, the employment agreements obligate us to:
- pay any earned but unpaid salary, benefits or bonuses, including a
prorated bonus for the year in which the severance occurred;
- continue to provide for periods of two years in the case of
Messrs. Zehner and Ord, and one year in the case of Ms. Hopping, benefits
at least equal to those received prior to severance; and
- provide the executive with outplacement services at a cost not to exceed
$25,000.
Additionally, each of Messrs. Zehner and Ord would receive, over time, an
amount equal to at least two times his combined then-current annual salary and
bonus for the prior year and Ms. Hopping would receive, over time, an amount
equal to her combined then-current annual salary and bonus for the prior year.
We have also entered into employment agreements with Ms. Ford and
Messrs. Andrues and Mericle. Each employment agreement remains in effect until
notice of termination is given by either party. Each contract provides that the
officer will continue to receive his or her base salary and be entitled to earn
bonuses and participate in all benefit plans and programs at levels and pursuant
to terms that are substantially consistent with current levels and terms,
subject to periodic review and possible increases by our board of directors or
compensation committee. In addition, each contract provides that if the officer
is terminated by us other than for just cause, as defined in the agreement, or
if the officer terminates his or her employment as a result of a constructive
discharge, as defined in the agreement, then the officer will be entitled to a
cash severance benefit equal to six months of salary at his or her then current
rate of salary, payment of a cash amount based on the officer's historical
incentive compensation, acceleration of the vesting of stock options and
extension of the officer's participation in our benefits plan and receipt of a
car allowance for six months. If severance were to occur within one year prior
to or following a change of control or the officer elects to terminate his or
her employment for any reason within one year after a change in control, then
each employment agreement provides for a doubled cash severance benefit and
further extension of the officer's benefits and car allowance. For the purposes
of these employment agreements, a change of control has occurred if:
- we transfer all or substantially all of our assets to any person or group;
- any person or group becomes the beneficial owner, directly or indirectly,
of 35% or more of the total voting power represented by all of our voting
stock; or
- any person or group obtains the right or power to elect or designate a
majority of our board of directors.
401(K) PLAN
We established a tax deferred 401(k) savings plan in January 1990. Effective
January 1, 2001, the 401(k) plan was amended and restated in its entirety.
Currently, all employees who are over 21 years of age are eligible to
participate after attaining three months of service. Employees may contribute
between 1% and 15% of their annual compensation. We match 50 cents for every
dollar of employee
50
contributions up to 5% of their compensation, subject to statutory limitations.
The rates of pre-tax and matching contributions may be reduced with respect to
highly compensated employees, as defined in the Internal Revenue Code of 1986,
as amended, so that the 401(k) plan will comply with Sections 401(k) and 401(m)
of the Code. Pre-tax and matching contributions are allocated to each employee's
individual account, which are invested in selected fixed income or stock managed
accounts according to the directions of the employee. An employee's pre-tax
contributions are fully vested and nonforfeitable at all times. Matching
contributions vest over four years of service. An employee may forfeit unvested
amounts upon termination of employment, unless the termination is because of
death, disability or retirement, in which case matching contributions vest in
their entirety.
Matching contributions made by us pursuant to the 401(k) plan to the named
executive officers for the 2000 fiscal year are included under "All Other
Compensation" in the Summary Compensation Table.
STOCK OPTION PLANS
We have issued stock option to our employees under the following three
plans:
- The 1999 Equity Plan for Employees of Alliance Imaging, Inc. and
Subsidiaries dated November 2, 1999, or the 1999 Equity Plan;
- The Alliance Imaging, Inc. 1997 Stock Option Plan dated December 18, 1997,
as amended, or the 1997 Option Plan; and
- The Three Rivers Holding Corp. 1997 Stock Option Plan dated October 14,
1997, as amended, or the Three Rivers Plan.
The 1999 Equity Plan, the 1997 Option Plan and the Three Rivers Plan are
collectively referred to in this registration statement as the plans. The plans
are designed to promote our interests by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in us as an incentive for them to remain in our service.
TYPES OF OPTIONS. The Three Rivers Plan provides for the grant of
options to our employees that are qualified as incentive stock options as
defined by Section 422 of the Internal Revenue Code. The 1997 Option Plan
provides for the grant of options to employees that are either incentive
stock options or non-qualified options. The 1999 Equity Plan provides for
the grant of options to employees, consultants or other persons with a
unique relationship to us or our subsidiaries, and that are non-qualified
options.
OPTIONS AVAILABLE AND OUTSTANDING. A total of 632,500 shares are
reserved for issuance under the 1999 Equity Plan, of which 468,900 are
currently subject to outstanding options. Currently there are options
outstanding to purchase 182,327 shares under the 1997 Option Plan and 46,182
shares under the Three Rivers Plan. The 1997 Option Plan and the Three
Rivers Plan were amended upon completion of the KKR acquisition to provide
that no further options would be granted under those plans after
November 2, 1999, and there are no additional shares reserved for issuance
under those plans. Options under the 1997 Option Plan and the Three Rivers
Plan that were not cancelled as part of the KKR acquisition remain
outstanding subject to the terms and conditions of the 1997 Option Plan, the
Three Rivers Plan and the option agreements under which they were granted,
as they have been amended. Upon completion of the KKR acquisition, most
options granted under the 1997 Option Plan and the Three Rivers Plan became
fully vested and exercisable. Certain individuals, including Messrs. Pino
and Ord, waived immediate vesting of their options under the 1997 Option
Plan upon completion of the KKR acquisition. Except for options for 11,250
shares issued under the 1997 Option Plan that will vest on December 31, 2001
according to the terms of that plan, all options issued under the 1997
Option Plan and the Three Rivers Plan are fully vested.
51
ADMINISTRATION. The compensation committee administers each of the
plans. The compensation committee has authority to select the employees,
consultants or others to whom options will be granted under the plans, the
number of shares to be subject to those options, and the terms and
conditions of the options. In addition, the compensation committee has the
authority to construe and interpret the plans and to adopt rules for the
administration, interpretation and application of the plans that are
consistent with the terms of the plans. Options granted under the 1999
Equity Plan become vested and exercisable as determined by the compensation
committee at the time of the grant, at a price determined by the committee.
However, options granted under the 1999 Equity Plan may not have an exercise
price less than 85% of the fair market value of a share of common stock on
the date of the grant.
STOCKHOLDERS' AGREEMENT. The options and shares acquired upon exercise
of the options are subject to the terms and conditions of stockholders'
agreements entered into by the option holders. The stockholders' agreements
provide that except for limited exceptions, the option holder may not
transfer, sell or otherwise dispose of any shares prior to the fifth
anniversary of the purchase date. The restricted period for options granted
under the 1997 Option Plan and the Three Rivers Plan that were not cancelled
upon completion of the KKR acquisition began on November 2, 1999.
AMENDMENT. The 1997 Stock Option Plan and the Three Rivers Plan may be
amended or modified by the board of directors. The 1999 Equity Plan may be
amended or modified by the compensation committee, and may be terminated by
the board of directors.
EXERCISE. Options granted under the plans may be exercised in cash or,
at the discretion of the compensation committee, through the delivery of
previously owned shares, through the surrender of shares which would
otherwise be issuable upon exercise of the option, or any combination of the
foregoing. In order to use previously owned shares to exercise an option
granted under the Three Rivers Plan, the option holder must have owned the
shares used for at least six months prior to the exercise of the option.
CHANGE OF CONTROL. Options granted under the 1997 Option Plan that have
not vested will become fully vested and exercisable upon a change of
control. A change of control is defined in the 1997 Option Plan as the
occurrence of any of the following:
- a sale to any person other than an affiliate of all our substantially
all of our assets;
- a sale by us of shares, by merger or otherwise, to a person other than
an affiliate which would result in the person owning more than 50% of
our outstanding capital stock; or
- a sale by one of our stockholders of shares to a person other than an
affiliate which would result in the person owning more than 50% of our
outstanding capital stock.
Under the 1999 Equity Plan, the compensation committee may, in its sole
discretion, provide that options granted under the plan cannot be exercised
after a change of control, in which case they will become fully vested and
exercisable prior to the completion of the change of control. The committee
may also provide that options remaining exercisable after the change of
control may only be exercised for the consideration received by stockholders
in the change of control, or its cash equivalent. A change of control is
defined in the 1999 Equity Plan as the:
- merger or consolidation of our corporation into another corporation;
- exchange of all or substantially all of our assets for the securities
of another corporation;
- acquisition by another corporation of 80% or more of our then
outstanding shares of voting stock; or
52
- recapitalization, reclassification, liquidation or dissolution of our
corporation, or other adjustment or event which results in shares of
our common stock being exchanged for or converted into cash, securities
or other property.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors and
executive officers for monetary damages for breach of their fiduciary duties to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to our company or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or
- any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as injunctive
relief or rescission.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity, regardless
of whether our bylaws would otherwise permit indemnification. We believe that
the indemnification provisions of our certificate of incorporation and bylaws
are necessary to attract and retain qualified persons as directors and officers.
We also maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of our company where
indemnification will be required or permitted. Nor are we aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
53
CERTAIN TRANSACTIONS
We believe that we have executed all of the transactions set forth below on
terms no less favorable to us than we could have obtained from unaffiliated
third parties. It is our intention to ensure that all future transactions,
including loans, between us and our officers, directors and principal
stockholders and their affiliates, are on terms no less favorable to us than
those that we could obtain from unaffiliated third parties.
On November 27, 2000 in connection with the purchase of 5,360 shares of our
common stock, Jamie E. Hopping, our president, chief operating officer and
director issued a full recourse promissory note to us in the amount of
approximately $300,000 plus interest at an annual rate of 6%. Payment of the
note is secured by the shares of common stock purchased. Principal in the amount
of $200,000 and the interest on that amount will be due upon the sale of
Ms. Hopping's Texas residence, and the remaining principal and interest will be
due upon the earlier of November 27, 2007 or Ms. Hopping's sale of the purchased
common stock.
On August 8, 2000, in connection with the termination of Vincent S. Pino,
our former president, chief operating officer and director, management duties,
we purchased all of his options under the 1997 Stock Option Plan at a price in
the aggregate of approximately $3.8 million.
On November 2, 1999, after obtaining the approval of our stockholders, we
were acquired by Kohlberg Kravis Roberts & Co., or KKR, in a leveraged
recapitalization merger transaction. As a result of the KKR acquisition, we
experienced an approximate 92% ownership change and Viewer Holdings LLC, which
was formed and is wholly owned by affiliates of KKR, obtained ownership of
approximately 92% of our outstanding common stock, and we refinanced
substantially all of our long-term debt. We paid $12,140,000 to KKR for
professional services rendered in connection with the KKR acquisition. In
addition, some of our executive officers agreed to indemnify us for breaches of
representations and warranties made on our behalf in the transaction
documentation.
In connection with the KKR acquisition, we entered into an agreement for a
$260 million senior subordinated facility with KKR. The aggregate proceeds of
the offering of the old notes were used to repay the senior subordinated credit
facility. Pursuant to an agreement that was entered into in connection with the
KKR acquisition, KKR provides management, consulting and financial services to
us, including its service on our board of directors, and we paid KKR an annual
fee of $650,000 in 2000, and $122,000 in 1999 in quarterly installments in
arrears at the end of each calendar quarter, for these services. In addition, we
reimburse KKR and its affiliates for all reasonable costs and expenses incurred
in connection with:
- the management, consulting and financial services provided by KKR; and
- the ownership of our shares of common stock by KKR's affiliates.
Pursuant to a purchase agreement dated as of September 1, 1999 with Alliance
Imaging Management, Inc., Acclaim Medical LLC and certain other individuals, we
completed the acquisition of Acclaim Medical LLC for the sum of $500,000 plus
warrants to purchase 20% of the equity interest in Acclaim Medical LLC as of
August 31, 2001. One of the former members of Acclaim Medical LLC is a child of
one of our named executive officers. One of the former members of Acclaim
Medical LLC is a child of one of our former executive officers.
In 1999 and 1998, we paid Apollo Management, L.P. $628,000 and $750,000,
respectively, which represented a pro rata portion of its annual management fee.
Additionally, in 1998 we paid Apollo fees of $1,000,000 and $460,000 as
consideration for services rendered in structuring and negotiating the
acquisition of Mobile Technology and American Shared, respectively, and also
reimbursed Apollo for expenses of approximately $275,000 associated with these
acquisitions.
54
On May 13, 1999, we acquired all the outstanding common stock of Three
Rivers Holding Corp., the parent corporation of SMT Health Services, Inc. in a
stock-for-stock merger. We exchanged approximately 1.6 million shares of common
stock for all the outstanding common shares of Three Rivers. At the time of the
merger, Three Rivers was wholly owned by affiliates of Apollo, which held
approximately 82.6% of our outstanding common stock.
Ten members of our current and former management have agreed to indemnify us
for designated costs, fees and expenses incurred by us in connection with
billing operations in Massachusetts as described in "Business--Legal and
Administration Proceedings."
From January 1998 to December 31, 2000, we have granted options to our
directors and current executive officers, including the named executive officers
as follows:
NAME NUMBER OF SHARES GRANT DATE EXERCISE PRICE
---- ---------------- ------------------ --------------
Richard N. Zehner........................... 25,000 February 6, 1998 $11.00
124,750 November 2, 1999 55.97
Jamie E. Hopping............................ 70,000 November 27, 2000 55.97
Vincent S. Pino............................. 20,000 February 6, 1998 11.00
114,800 November 2, 1999 55.97
Kenneth S. Ord.............................. 45,000 January 19, 1998 11.00
83,850 November 2, 1999 55.97
Cheryl A. Ford.............................. 13,500 January 2, 1998 11.00
30,000 November 2, 1999 55.97
Terry A. Andrues............................ 13,500 January 2, 1998 11.00
30,000 November 2, 1999 55.97
Jay A. Mericle.............................. 13,500 January 2, 1998 11.00
30,000 November 2, 1999 55.97
Russell D. Phillips, Jr..................... 5,000 April 28, 1998 16.50
5,000 March 1, 1999 22.00
5,500 November 2, 1999 55.97
Howard K. Aihara............................ 3,500 November 1, 2000 55.97
55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of the date hereof, 2001 by each person or
group that we are aware owns 5% or more of our common stock, each of our named
executive officers and directors and our executive officers and directors as a
group.
COMMON STOCK
OWNED PERCENTAGE OF SHARES
NAME BENEFICIALLY(1) BENEFICIALLY OWNED
---- --------------- --------------------
KKR 1996 GP L.L.C.(2)....................................... 3,461,740 90.9%
Strata L.L.C.(3)............................................ 52,717 1.4%
Apollo Capital Management II, Inc. related entities(4)...... 272,257 7.2%
Richard N. Zehner(5)........................................ 114,522 2.8%
Jamie E. Hopping............................................ 5,360 *
Vincent S. Pino(6).......................................... 11,480 *
Kenneth S. Ord(7)........................................... 24,135 *
Cheryl A. Ford(8)........................................... 11,800 *
Terry A. Andrues(9)......................................... 11,800 *
Jay A. Mericle(10).......................................... 11,800 *
Henry R. Kravis(2)(3)....................................... 3,514,457 92.3%
Michael W. Michelson(2)(3).................................. 3,514,457 92.3%
George R. Roberts(2)(3)..................................... 3,514,457 92.3%
David H.S. Chung(2)(3)...................................... -- --
All Present Executive Officers and Directors
(12 persons)(11).......................................... 3,705,354 92.7%
------------------------
* Less than 1%
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of common stock
shown as beneficially owned by them. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. The percentages are based upon
3,806,836 shares outstanding as of February 23, 2001, except for certain
parties who hold options that are presently exercisable or exercisable
within 60 days of February 23, 2001. The percentages for those parties who
hold options that are presently exercisable or exercisable within 60 days of
February 23, 2001 are based upon the sum of 3,806,836 shares outstanding
plus the number of shares subject to options that are presently exercisable
or exercisable within 60 days of February 23, 2001 held by them, as
indicated in the following notes.
(2) Shares of Common Stock shown as beneficially owned by KKR 1996 GP L.L.C.
are held by Viewer Holdings L.L.C. KKR 1996 GP L.L.C. is the sole general
partner of KKR Associates 1996 L.P., which is the sole general partner of
KKR 1996 Fund L.P. As of the date hereof, KKR 1996 Fund L.P. is the senior
member of Viewer Holdings L.L.C. KKR 1996 GP L.L.C. is a limited liability
company, the managing members of which are Messrs. Henry R. Kravis and
George R. Roberts, and the other members of which are Messrs. Paul E.
Raether, Michael W. Michelson, James H. Greene, Jr., Michael T. Tokarz,
Edward A. Gilhuly, Perry Golkin, Scott M. Stuart, Robert I. Macdonell,
Johannes Huth, Todd A. Fisher, Alexander Navab and Neil A. Richardson.
Messrs. Kravis, Roberts and Michelson are members of our board of directors.
Each of such individuals may be deemed to share beneficial ownership of any
shares beneficially owned by KKR 1996 GP L.L.C. Each of such individuals
disclaims beneficial ownership. Mr. Chung is a member of our board of
directors and is also an executive of KKR and a limited partner of KKR
Associates 1996 L.P. Mr. Chung disclaims that he is the beneficial owner of
any shares beneficially owned by KKR Associates 1996 L.P. The address of KKR
1996 GP L.L.C. and Messrs. Henry R.
56
Kravis, Michael W. Michelson and George R. Roberts is: c/o Kohlberg Kravis
Roberts & Co., 9 West 57 th Street, New York, NY 10019.
(3) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are
held by Viewer Holdings L.L.C. Strata L.L.C. is the sole general partner of
KKR Associates (Strata) L.P., which is a general partner of KKR Partners II
L.P. As of the date hereof, KKR Partners II L.P. is a member of Viewer
Holdings L.L.C. Strata L.L.C. is a limited liability company, the managing
members of which are Messrs. Henry R. Kravis and George R. Roberts, and the
other members of which are Messrs. Paul E. Raether, Michael W. Michelson,
James H. Greene, Jr., Michael T. Tokarz, Edward A. Gilhuly, Perry Golkin,
Scott M. Stuart and Robert I. Macdonell. Messrs. Kravis, Roberts and
Michelson are members of our board of directors. Each of such individuals
may be deemed to share beneficial ownership of any shares beneficially owned
by Strata L.L.C. Each of such individuals disclaims beneficial ownership.
Mr. Chung is a member of our board of directors and a limited partner of KKR
Associated (Strata) L.P. Mr. Chung disclaims that he is the beneficial owner
of any shares beneficially owned by Strata L.L.C.
(4) This amount includes 248,244 shares owned by Apollo Investment Fund III,
L.P., 14,838 shares owned by Apollo Overseas Partners III, L.P. and 9,175
shares owned by Apollo (U.K) Partners III, L.P. Apollo Capital Management
II, Inc., a Delaware Corporation, is the general partner of Apollo Advisor
II L.P., a Delaware limited partnership, which is the general partner of
Apollo Investment Fund III, L.P., and Apollo Overseas Partners III, L.P. and
Apollo (U.K.) Partners III, L.P. The address of Apollo Capital Management
II, Inc. related entities is: 1301 Avenue of the Americas, 38th Floor, New
York, New York 10019.
(5) This amount represents 114,522 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(6) This amount represents 11,480 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(7) This amount represents 24,135 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(8) This amount represents 11,800 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(9) This amount represents 11,800 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(10) This amount represents 11,800 shares issuable upon exercise of stock
options that are currently exercisable or exercisable within 60 days.
(11) This amount includes 150,337 shares issuable upon exercise of stock options
that are currently exercisable or exercisable within 60 days.
57
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
THE FOLLOWING SUMMARY OF OUR CREDIT FACILITY DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENTS DESCRIBED,
INCLUDING THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED IN THIS SECTION,
COPIES OF WHICH ARE AVAILABLE UPON REQUEST. ANY TERMS NOT DEFINED IN THIS
SECTION ARE DEFINED IN THE DOCUMENTATION FOR OUR CREDIT FACILITY. SEE "AVAILABLE
INFORMATION."
CREDIT AGREEMENT
GENERAL
Pursuant to a credit agreement dated as of November 2, 1999, as amended,
among Alliance, Bankers Trust Company, as administrative agent, and certain
other lenders, we received commitments for up to $616 million in financing. The
credit facility consists of:
- a $131 million seven-year Tranche A Term Loan facility;
- a $150 million eight-year Tranche B Term Loan facility;
- a $185 million nine-year Tranche C Term Loan facility; and
- a $150 million seven-year Revolving Loan facility including a $10 million
seven-year Swing Line facility.
AMORTIZATION
The following schedule of amortization for the term loans indicates: the
amounts to be paid at each installment for the Tranche A Term loan, Tranche B
Term loan and Tranche C Term loan, and the maturity date represented by the
number of years after the closing date upon which any principal amounts
remaining outstanding:
TERM LOAN TERM LOAN TRANCHE C
DATE TRANCHE A TRANCHE B TERM LOAN
---- ----------- ------------ ------------
November 2, 2001.................... $ 5,000,000 $ 1,500,000 $ 1,850,000
November 2, 2002.................... 10,000,000 1,500,000 1,850,000
November 2, 2003.................... 23,000,000 1,500,000 1,850,000
November 2, 2004.................... 25,000,000 1,500,000 1,850,000
November 2, 2005.................... 32,000,000 1,500,000 1,850,000
November 2, 2006.................... 36,000,000 1,500,000 1,850,000
November 2, 2007.................... -- 141,000,000 1,850,000
November 2, 2008.................... -- -- 172,050,000
PREPAYMENTS
Loans are required to be prepaid with:
- 100% of the net proceeds of all non-ordinary course asset sales or other
dispositions of the property by us and our subsidiaries which we have not
reinvested in our business within one year after receipt of the proceeds,
subject to limited exceptions;
- 50% of annual excess cash flow; and
- the amount by which the outstanding amounts under the revolving facility
exceed the total amount committed under the revolving facility.
58
INTEREST
The Tranche A Term loan and the revolving loan facilities will bear interest
through maturity: (1) if a Base Rate (as defined below) loan, then at the sum of
the Base Rate plus the Applicable Tranche A Base Rate Margin (as defined below),
or (2) if a LIBOR loan, then at the sum of LIBOR plus the Applicable Tranche A
LIBOR Margin (as defined below). The Swing Line Loan facility will bear interest
at the sum of the Base Rate plus the Applicable Tranche A Base Rate Margin minus
the Applicable Commitment Fee Percentage.
The Base Rate is the higher of: (1) the administrative agent's prime rate or
(2) the rate which is 0.5% in excess of the Federal Funds Effective Rate
(defined as a fluctuating interest rate equal for each day during any period to
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day by the Federal Reserve Bank of New York, or, if such rate
is not so published, the average of the quotations for such day on such
transactions received by the administrative agent from three Federal funds
brokers of recognized standing selected by the administrative agent).
The Tranche B Term Loan and the Tranche C Term Loan will bear interest
through maturity: (1) if a Base Rate loan, then at the sum of the Base Rate plus
the Applicable Tranche B Base Rate Margin or the Applicable Tranche C Base Rate
Margin (as defined below), as applicable, or (2) if a LIBOR loan, then at the
sum of LIBOR plus the Applicable Tranche B LIBOR Margin or the Applicable
Tranche C LIBOR Margin (as defined below), as applicable.
The Applicable Tranche A Base Rate Margin will range, based on the
Applicable Leverage Ratio, from 0.125% to 1.500%. The Applicable Tranche B Base
Rate Margin will range, based on the Applicable Leverage Ratio, from 1.500% to
2.000%. The Applicable Tranche C Base Rate Margin will range, based on the
Applicable Leverage Ratio, from 1.750% to 2.250%.
The Applicable Tranche A LIBOR Margin will range, based on the Applicable
Leverage Ratio, from 1.375% to 2.750%. The Applicable Tranche B LIBOR Margin
will range, based on the Applicable Leverage Ratio, from 2.750% to 3.250%. The
Applicable Tranche C LIBOR Margin will range, based on the Applicable Leverage
Ratio, from 3.000% to 3.500%.
COLLATERAL
The loans under the credit agreement are secured by a lien on substantially
all of our tangible and intangible property, including accounts receivable,
inventory, equipment and intellectual property, and by a pledge of all of the
shares of stock, partnership interests and limited liability company interests
of our direct and indirect domestic subsidiaries, of which we now own or later
acquire more than a 50% interest, except for subsidiaries which own assets or
have annual revenues of less than $100,000 individually and $1,000,000
collectively.
COVENANTS
In addition to certain customary covenants, the credit agreement restricts,
among other things, our ability and our subsidiaries' ability to:
- declare dividends or redeem or repurchase capital stock;
- prepay, redeem or purchase debt;
- incur liens and engage in sale-leaseback transactions;
- make loans and investments;
- incur additional indebtedness;
59
- amend or otherwise alter debt and other material agreements;
- make capital expenditures;
- engage in mergers, acquisitions and asset sales;
- transact with affiliates; and
- alter the business we conduct.
FINANCIAL COVENANTS
The credit facility contains financial covenants including a minimum ratio
of consolidated adjusted EBITDA to consolidated cash interest expense and a
maximum ratio of consolidated total debt to consolidated adjusted EBITDA.
EVENTS OF DEFAULT
Events of default under the credit agreement include:
- our failure to pay principal or interest when due;
- our material breach of any representation or warranty contained in the
loan documents;
- covenant defaults;
- events of bankruptcy; and
- a change of control.
60
THE EXCHANGE OFFER
GENERAL
As of the date of this prospectus, $260 million in principal amount of the
old notes is outstanding. This prospectus, together with the letter of
transmittal, is first being sent to holders on the date set forth at the bottom
of the cover page to this prospectus.
PURPOSE OF THE EXCHANGE OFFER
We issued the old notes on April 10, 2001 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the old notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the sale of the old notes, we entered into the
registration rights agreement, which requires us to:
- file a registration statement with the Commission relating to the exchange
offer not later than 120 days after the date of issuance of the old notes;
- use our best efforts to cause the registration statement relating to the
exchange offer to become effective under the Securities Act within
200 days after the date of issuance of the old notes;
- use our best efforts to complete the exchange offer within 230 days from
the original issuance of the old notes; and
- to file a shelf registration statement for the resale of the notes if we
cannot effect an exchange offer within the time periods listed above and
in certain other circumstances.
We have filed a copy of the registration rights agreement as an exhibit to
the registration statement of which this prospectus is a part. We are making the
exchange offer to satisfy our obligations under the registration rights
agreement. Other than pursuant to the registration rights agreement, we are not
required to file any registration statement to register any outstanding old
notes. Holders of old notes who do not tender their old notes or whose old notes
are tendered but not accepted in the exchange offer must rely on an exemption
from the registration requirements under the securities laws, including the
Securities Act, if they wish to sell their old notes.
TERMS OF THE EXCHANGE
We are offering to exchange, subject to the conditions described in this
prospectus and in the letter of transmittal accompanying this prospectus, $1,000
in principal amount of exchange notes for each $1,000 in principal amount of the
old notes. The terms of the exchange notes are identical in all material
respects to the terms of the old notes, except that the exchange notes will
generally be freely transferable by holders of the exchange notes and will not
be subject to the terms of the registration rights agreement. The exchange notes
will evidence the same indebtedness as the old notes and will be entitled to the
benefits of the indenture. For additional information, see "Description of the
Exchange Notes."
The exchange offer is not conditioned upon the tender of any minimum
principal amount of old notes.
We have not requested, and do not intend to request, an interpretation by
the staff of the Commission as to whether the exchange notes issued in exchange
for the old notes may be offered for sale, resold or otherwise transferred by
any holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Instead, based on an interpretation by the
staff of the Commission set forth in a series of no-action letters issued to
third parties, we believe that exchange notes issued in the exchange offer in
exchange for old notes may be offered for sale, resold
61
and otherwise transferred by any holder of exchange notes, other than any holder
that is a broker-dealer or is an "affiliate" of ours within the meaning of
Rule 405 under the Securities Act, without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that:
- the exchange notes are acquired in the ordinary course of the holder's
business;
- the holder has no arrangement or understanding with any person to
participate in the distribution of the exchange notes; and
- the holder is not engaged in, and does not intend to engage in a
distribution of the exchange notes.
Since the Commission has not considered the exchange offer in the context of
a no-action letter, we can provide no assurance that the staff of the Commission
would make a similar determination with respect to the exchange offer. Any
holder who is an affiliate of ours or who tenders old notes in the exchange
offer for the purpose of participating in a distribution of the exchange notes
cannot rely on the interpretation by the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of exchange notes. Each broker-dealer that receives
exchange notes for its own account in exchange for old notes, where the
broker-dealer acquired the old notes as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. For additional information,
see "Plan of Distribution."
The exchange notes will accrue interest from the date of issuance of the old
notes, which was on April 10, 2001. Holders whose old notes are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the old notes.
Tendering holders of the old notes will not be required to pay brokerage
commissions or fees or, transfer taxes, except as specified in the instructions
in the letter of transmittal, with respect to the exchange of the old notes in
the exchange offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The exchange offer will expire at 5:00 p.m., New York City time, on ,
2001, unless we, in our sole discretion, have extended the period of time for
which the exchange offer is open. The time and date, as it may be extended, is
referred to herein as the "expiration date." The expiration date will be at
least 20 business days after the commencement of the exchange offer in
accordance with Rule 14e-1(a) under the Exchange Act. We expressly reserve the
right, at any time or from time to time, to extend the period of time during
which the exchange offer is open, and thereby delay acceptance for exchange of
any old notes. We will extend the expiration date by giving oral or written
notice of the extension to the exchange agent and by timely public announcement
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. During the extension, all old notes
previously tendered will remain subject to the exchange offer unless properly
withdrawn.
We expressly reserve the right to:
- terminate or amend the exchange offer and not to accept for exchange any
old notes not previously accepted for exchange upon the occurrence of any
of the events specified below under "--Conditions to the Exchange Offer"
below which have not been waived by us; and
- amend the terms of the exchange offer in any manner which, in our good
faith judgment, is advantageous to the holders of the old notes, whether
before or after any tender of the old notes.
62
If any termination or amendment occurs, we will notify the exchange agent
and will either issue a press release or give oral or written notice to the
holders of the old notes as promptly as practicable.
For purposes of the exchange offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless we terminate
the exchange offer prior to 5:00 p.m., New York City time, on the expiration
date, we will exchange the exchange notes for the old notes promptly following
the expiration date.
PROCEDURES FOR TENDERING OLD NOTES
Our acceptance of old notes tendered by a holder will constitute a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions described in this prospectus and in the accompanying letter of
transmittal. All references in this prospectus to the letter of transmittal are
deemed to include a facsimile of the letter of transmittal.
A holder of old notes may tender the old notes by:
- properly completing and signing the letter of transmittal;
- properly completing any required signature guarantees;
- properly completing any other documents required by the letter of
transmittal; and
- delivering all of the above, together with the certificate or certificates
representing the old notes being tendered, to the exchange agent at its
address set forth below on or prior to the expiration date; or
- complying with the procedure for book-entry transfer described below; or
- complying with the guaranteed delivery procedures described below.
The method of delivery of old notes, letters of transmittal and all other
required documents is at the election and risk of the holders. If the delivery
is by mail, it is recommended that registered mail properly insured, with return
receipt requested, be used. In all cases, sufficient time should be allowed to
ensure timely delivery. Holders should not send old notes or letters of
transmittal to us.
The signature on the letter of transmittal need not be guaranteed if:
- tendered old notes are registered in the name of the signer of the letter
of transmittal; and
- the exchange notes to be issued in exchange for the old notes are to be
issued in the name of the holder; and
- any untendered old notes are to be reissued in the name of the holder.
In any other case, the tendered old notes must be:
- endorsed or accompanied by written instruments of transfer in form
satisfactory to us;
- duly executed by the holder; and
- the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution, each an "eligible institution" that
is a member of a recognized signature guarantee medallion program within
the meaning of Rule 17Ad-15 under the Exchange Act.
If the exchange notes and/or old notes not exchanged are to be delivered to
an address other than that of the registered holder appearing on the note
register for the old notes, the signature in the letter of transmittal must be
guaranteed by an eligible institution.
The exchange agent will make a request within two business days after the
date of receipt of this prospectus to establish accounts with respect to the old
notes at The Depository Trust Company, the
63
"book-entry transfer facility," for the purpose of facilitating the exchange
offer. We refer to the Depository Trust Company in this prospectus as "DTC."
Subject to establishing the accounts, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of old notes by causing the book-entry transfer facility to transfer
the old notes into the exchange agent's account with respect to the old notes in
accordance with the book-entry transfer facility's procedures for the transfer.
Although delivery of old notes may be effected through book-entry transfer into
the exchange agent's account at the book-entry transfer facility, an appropriate
letter of transmittal with any required signature guarantee and all other
required documents, or an agent's message, must in each case be properly
transmitted to and received or confirmed by the exchange agent at its address
set forth below prior to the expiration date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the DTC Automated Tender Offer Program. We refer to the Automated
Tender Offer Program in this prospectus as "ATOP". Accordingly, DTC participants
may, in lieu of physically completing and signing the letter of transmittal and
delivering it to the exchange agent, electronically transmit their acceptance of
the exchange offer by causing DTC to transfer old notes to the exchange agent in
accordance with DTC's ATOP procedures for transfer. DTC will then send an
agent's message.
The term "agent's message" means a message which:
- is transmitted by DTC;
- received by the exchange agent and forming part of the book-entry
transfer;
- states that DTC has received an express acknowledgment from a participant
in DTC that is tendering old notes which are the subject of the book-entry
transfer;
- states that the participant has received and agrees to be bound by all of
the terms of the letter of transmittal; and
- states that we may enforce the agreement against the participant.
If a holder desires to accept the exchange offer and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date or the procedure for book-entry transfer cannot be completed on
a timely basis, the holder may effect a tender if the exchange agent has
received at its address set forth below on or prior to the expiration date, a
letter, telegram or facsimile transmission, and an original delivered by
guaranteed overnight courier, from an eligible institution setting forth:
- the name and address of the tendering holder;
- the names in which the old notes are registered and, if possible, the
certificate numbers of the old notes to be tendered; and
- a statement that the tender is being made thereby and guaranteeing that
within three business days after the expiration date, the old notes in
proper form for transfer, or a confirmation of book-entry transfer of such
old notes into the exchange agent's account at the book-entry transfer
facility and an agent's message, will be delivered by the eligible
institution together with a properly completed and duly executed letter of
transmittal and any other required documents.
Unless old notes being tendered by the above-described method are deposited
with the exchange agent, a tender will be deemed to have been received as of the
date when:
- the tendering holder's properly completed and duly signed letter of
transmittal, or a properly transmitted agent's message, accompanied by the
old notes or a confirmation of book-entry transfer of the old notes into
the exchange agent's account at the book-entry transfer facility is
received by the exchange agent; or
64
- a notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect from an eligible institution is received by
the exchange agent.
Issuances of exchange notes in exchange for old notes tendered pursuant to a
notice of guaranteed delivery or letter, telegram or facsimile transmission to
similar effect by an eligible institution will be made only against deposit of
the letter of transmittal and any other required documents and the tendered old
notes or a confirmation of book-entry and an agent's message.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of old notes tendered for exchange will be determined by
us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all tenders of any old notes not
properly tendered or not to accept any old notes which acceptance might, in our
judgment or the judgment of our counsel, be unlawful. We also reserve the
absolute right to waive any defects or irregularities or conditions of the
exchange offer as to any old notes either before or after the expiration date,
including the right to waive the ineligibility of any holder who seeks to tender
old notes in the exchange offer. The interpretation of the terms and conditions
of the exchange offer including the letter of transmittal and the instructions
contained in the letter of transmittal, by us will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes for exchange must be cured within such reasonable period of time as
we determine. Neither we, the exchange agent nor any other person has any duty
to give notification of any defect or irregularity with respect to any tender of
old notes for exchange, nor will any of us incur any liability for failure to
give such notification.
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of old notes, the old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the old notes.
If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
us, such persons must submit proper evidence satisfactory to us of their
authority to so act.
By tendering, each holder represents to us that, among other things:
- the exchange notes acquired pursuant to the exchange offer are being
acquired in the ordinary course of business of the holder;
- the holder is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the exchange notes; and
- the holder is not an "affiliate," as defined under Rule 405 of the
Securities Act, of ours.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where the broker-dealer acquired the old notes as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of the exchange
notes. For additional information, see "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The party tendering old notes for exchange exchanges, assigns and transfers
the old notes to us and irrevocably constitutes and appoints the exchange agent
as his agent and attorney-in-fact to cause the old notes to be assigned,
transferred and exchanged. We refer to the party tendering notes herein as the
"transferor." The transferor represents and warrants that it has full power and
authority to
65
tender, exchange, assign and transfer the old notes and to acquire exchange
notes issuable upon the exchange of the tendered old notes, and that, when the
same are accepted for exchange, we will acquire good and unencumbered title to
the tendered old notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the exchange agent or us to be necessary or desirable to complete the
exchange, assignment and transfer of tendered old notes or transfer ownership of
such old notes on the account books maintained by a book-entry transfer
facility. The transferor further agrees that acceptance of any tendered old
notes by us and the issuance of exchange notes in exchange for old notes will
constitute performance in full by us of various of our obligations under the
registration rights agreement. All authority conferred by the transferor will
survive the death or incapacity of the transferor and every obligation of the
transferor will be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of the transferor.
The transferor certifies that it is not an "affiliate" of ours within the
meaning of Rule 405 under the Securities Act and that it is acquiring the
exchange notes offered hereby in the ordinary course of the transferor's
business and that the transferor has no arrangement with any person to
participate in the distribution of the exchange notes.
Each holder, other than a broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage in, a distribution of exchange notes.
Each transferor which is a broker-dealer receiving exchange notes for its own
account must acknowledge that it will deliver a prospectus in connection with
any resale of the exchange notes. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time prior to the expiration
date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission, with receipt confirmed by telephone, or letter
must be received by the exchange agent at the address set forth in this
prospectus prior to the expiration date. Any notice of withdrawal must:
- specify the name of the person having tendered the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of such old notes;
- specify the principal amount of old notes to be withdrawn;
- include a statement that the holder is withdrawing his election to have
the old notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered or as
otherwise described above, including any required signature guarantees, or
be accompanied by documents of transfer sufficient to have the trustee
under the indenture register the transfer of the old notes into the name
of the person withdrawing the tender; and
- specify the name in which any such old notes are to be registered, if
different from that of the person who tendered the old notes.
The exchange agent will return the properly withdrawn old notes promptly
following receipt of the notice of withdrawal. If old notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn old notes or otherwise comply with the
book-entry transfer facility procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by us and
our determination will be final and binding on all parties.
66
Any old notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the exchange offer. Any old notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder without cost to the holder. In the case of old notes
tendered by book-entry transfer into the exchange agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, the old notes will be credited to an account with the
book-entry transfer facility specified by the holder. In either case, the old
notes will be returned as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time prior to the expiration date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, on the expiration date, all old notes properly tendered and will
issue the exchange notes promptly after such acceptance. See "--Conditions to
the Exchange Offer" below for more detailed information. For purposes of the
exchange offer, we will be deemed to have accepted properly tendered old notes
for exchange when, and if, we have given oral or written notice of our
acceptance to the exchange agent.
For each old note accepted for exchange, the holder of the old note will
receive an exchange note having a principal amount equal to that of the
surrendered old note.
In all cases, issuance of exchange notes for old notes that are accepted for
exchange pursuant to the exchange offer will be made only after:
- timely receipt by the exchange agent of certificates for the old notes or
a timely book-entry confirmation of the old notes into the exchange
agent's account at the book-entry transfer facility;
- a properly completed and duly executed letter of transmittal, or a
properly transmitted agent's message; and
- timely receipt by the exchange agent of all other required documents.
If any tendered old notes are not accepted for any reason described in the
terms and conditions of the exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
nonexchanged old notes will be returned without expense to the tendering holder
of the old notes. In the case of old notes tendered by book-entry transfer into
the exchange agent's account at the book-entry transfer facility pursuant to the
book-entry transfer procedures described above, the non-exchanged old notes will
be credited to an account maintained with the book-entry transfer facility. In
either case, the old notes will be returned as promptly as practicable after the
expiration of the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to accept for exchange, or to
issue exchange notes in exchange for, any old notes and may terminate or amend
the exchange offer, by oral or written notice to the exchange agent or by a
timely press release, if at any time before the acceptance of the old notes for
exchange or the exchange of the exchange notes for such old notes, any of the
following conditions exist:
- any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the exchange offer which,
in our judgment would reasonably be expected to impair our ability to
proceed with the exchange offer; or
- the exchange offer, or the making of any exchange by a holder, violates
applicable law or any applicable interpretation of the staff of the
Commission.
67
Regardless of whether any of the conditions has occurred, we may amend the
exchange offer in any manner which, in our good faith judgment, is advantageous
to holders of the old notes.
The conditions described above are for our sole benefit and may be asserted
by us regardless of the circumstances giving rise to the condition or we may
waive any condition in whole or in part at any time and from time to time in our
sole discretion. Our failure at any time to exercise any of the rights described
above will not be deemed a waiver of the right and each right will be deemed an
ongoing right which we may assert at any time and from time to time.
If we waive or amend the conditions above, we will, if required by law,
extend the exchange offer for a minimum of five business days from the date that
we first give notice, by public announcement or otherwise, of the waiver or
amendment, if the exchange offer would otherwise expire within the five
business-day period. Any determination by us concerning the events described
above will be final and binding upon all parties.
The exchange offer is not conditioned upon any minimum principal amount of
old notes being tendered.
EXCHANGE AGENT
The Bank of New York has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at one of the addresses set forth below:
BY REGISTERED OR CERTIFIED MAIL: BY FACSIMILE: BY HAND OR OVERNIGHT COURIER:
The Bank of New York (212) 815-6339 The Bank of New York
Reorganization Unit Attn: Diane Amoroso 101 Barclay Street, Ground Floor
101 Barclay Street-7E Reorganization Department Corporate Trust Services Window
New York, New York 10286 New York, New York 10286
Attn: Diane Amoroso CONFIRM BY TELEPHONE: Attn: Diane Amoroso
Diane Amoroso Reorganization Department
(212) 815-3738
You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery to the exchange agent at the address
and telephone number set forth in the letter of transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET
FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID DELIVERY.
SOLICITATIONS OF TENDERS; FEES AND EXPENSES
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this and other
related documents to the beneficial owners of the old notes and in handling or
forwarding tenders for their customers.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer. We estimate the expenses to be approximately $300,000, which
includes fees and expenses of the exchange agent, trustee, registration fees,
accounting, legal, printing and related fees and expenses.
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those contained
in this prospectus. If given or made,
68
such information or representations should not be relied upon as having been
authorized by us. Neither the delivery of this prospectus nor any exchange made
pursuant to this prospectus, under any circumstances, create any implication
that there has been no change in our affairs since the respective dates as of
which information is given in this prospectus. The exchange offer is not being
made to, nor will tenders be accepted from or on behalf of, holders of old notes
in any jurisdiction in which the making of the exchange offer or the acceptance
of the exchange offer would not be in compliance with the laws of the
jurisdiction. However, we may, at our discretion, take such action as we may
deem necessary to make the exchange offer in the jurisdiction and extend the
exchange offer to holders of old notes in the jurisdiction. In any jurisdiction
in which the securities laws or blue sky laws of which require the exchange
offer to be made by a licensed broker or dealer, the exchange offer is being
made on our behalf by one or more registered brokers or dealers which are
licensed under the laws of the jurisdiction.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. However, the transfer taxes will be
payable by the tendering holder if:
- certificates representing exchange notes or old notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be issued in the name of, any person other than the registered
holder of the old notes tendered; or
- tendered old notes are registered in the name of any person other than the
person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes pursuant to the exchange offer.
We will bill the amount of the transfer taxes directly to the tendering
holder if satisfactory evidence of payment of the taxes or exemption therefrom
is not submitted with the letter of transmittal.
ACCOUNTING TREATMENT
For accounting purposes, we will not recognize gain or loss upon the
exchange of the exchange notes for old notes. We will amortize expenses incurred
in connection with the issuance of the exchange notes over the term of the
exchange notes.
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of the old notes as described in the legend on the old notes. Old
notes not exchanged pursuant to the exchange offer will continue to remain
outstanding in accordance with their terms. In general, the old notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not currently anticipate that we will
register the old notes under the Securities Act.
Participation in the exchange offer is voluntary, and holders of old notes
should carefully consider whether to participate. Holders of old notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered old notes pursuant to the terms of, this exchange offer, we
will have fulfilled a covenant contained in the registration rights agreement.
Holders of old notes who do not tender their old notes in the exchange offer
will continue to hold the old notes and will be entitled to all the rights and
limitations applicable to the old notes under the indenture, except for any
rights under the registration rights agreement that
69
by their terms terminate or cease to have further effectiveness as a result of
the making of this exchange offer. All untendered old notes will continue to be
subject to the restrictions on transfer described in the indenture. To the
extent that old notes are tendered and accepted in the exchange offer, the
trading market for untendered old notes could be adversely affected.
We may in the future seek to acquire, subject to the terms of the indenture,
untendered old notes in open market or privately negotiated transactions,
through subsequent exchange offers or otherwise. We have no present plan to
acquire any old notes which are not tendered in the exchange offer.
RESALE OF EXCHANGE NOTES
We are making the exchange offer in reliance on the position of the staff of
the Commission as set forth in interpretive letters addressed to third parties
in other transactions. However, we have not sought our own interpretive letter
and we can provide no assurance that the staff would make a similar
determination with respect to the exchange offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff, we
believe that the exchange notes issued pursuant to the exchange offer in
exchange for old notes may be offered for resale, resold and otherwise
transferred by a holder, other than any holder who is a broker-dealer or an
"affiliate" of ours within the meaning of Rule 405 of the Securities Act,
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that:
- the exchange notes are acquired in the ordinary course of the holder's
business; and
- the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution of the exchange notes.
However, any holder who is:
- an "affiliate" of ours;
- who has an arrangement or understanding with respect to the distribution
of the exchange notes to be acquired pursuant to the exchange offer; or
- any broker-dealer who purchased old notes from us to resell pursuant to
Rule 144A or any other available exemption under the Securities Act,
could not rely on the applicable interpretations of the staff and must comply
with the registration and prospectus delivery requirements of the Securities
Act. A broker-dealer who holds old notes that were acquired for its own account
as a result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of exchange notes. Each such broker-dealer that
receives exchange notes for its own account in exchange for old notes, where the
broker-dealer acquired the old notes as a result of market-making activities or
other trading activities, must acknowledge, as provided in the letter of
transmittal, that it will deliver a prospectus in connection with any resale of
such exchange notes. For more detailed information, see "Plan of Distribution."
In addition, to comply with the securities laws of various jurisdictions, if
applicable, the exchange notes may not be offered or sold unless they have been
registered or qualified for sale in the jurisdiction or an exemption from
registration or qualification is available and is complied with. We have agreed,
pursuant to the registration rights agreement and subject to specified
limitations therein, to register or qualify the exchange notes for offer or sale
under the securities or blue sky laws of the jurisdictions as any holder of the
exchange notes reasonably requests. The registration or qualification may
require the imposition of restrictions or conditions, including suitability
requirements for offerees or purchasers, in connection with the offer or sale of
any exchange notes.
70
SHELF REGISTRATION STATEMENT; LIQUIDATED DAMAGES
If:
- the exchange offer is not permitted by applicable law or applicable
interpretation of the staff of the Commission;
- any holder of old notes, other than a holder who has received the notes
pursuant to a Rule 144 sale, notifies us between 30 and 50 days after the
date that the exchange offer registration statement is declared effective
that any of the following apply:
- such holder was prohibited by law or Commission policy from
participating in the exchange offer;
- such holder is unable to resell the exchange notes to the public
without delivering a prospectus and the prospectus in the exchange
offer registration statement is not available;
- such holder is a broker-dealer under the Securities Exchange Act of
1934 and holds outstanding notes acquired directly from us or any of
our affiliates,
we will use our best efforts to cause the Commission to declare effective a
shelf registration statement with respect to the resale of the old notes and
keep the statement effective for up to two years after the effective date of the
shelf registration statement or such shorter period, which shall terminate when
all the old notes covered by the registration statement have been sold pursuant
to the registration statement.
If we fail to comply with specified obligations under the registration
rights agreement, we will be required to pay additional interest to holders of
the outstanding notes. Please see "Description of the Exchange
Notes--Registration Rights; Liquidated Damages" for more details regarding the
registration rights agreement.
71
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The old notes were issued and the exchange notes will be issued pursuant to
an indenture between Alliance and The Bank of New York, as trustee, in a private
transaction that was not subject to the registration requirements of the
Securities Act. Upon the issuance of the exchange notes, if any, or the
effectiveness of the shelf registration statement, the indenture will be subject
to and governed by The Trust Indenture Act of 1939, as amended. The terms of the
notes include those stated in the indenture and those made part of the indenture
by reference to the Trust Indenture Act. The notes are subject to all such
terms, and holders of notes are referred to the indenture and the Trust
Indenture Act for a statement thereof. The following summarizes the material
provisions of the indenture and is qualified in its entirety by reference to the
provisions of the indenture, including the definitions therein of certain terms
used below. The definitions of certain terms used in the following summary are
set forth below under "--Certain Definitions." For purposes of this summary, the
term "notes" refers to the old notes and the exchange notes, collectively. For
purposes of this summary, the term "ALLIANCE" refers only to Alliance
Imaging, Inc. and not to any of its Subsidiaries.
The old notes are, and the exchange notes will be, general unsecured
obligations of Alliance and are or will be subordinated in right of payment to
all existing and future Senior Indebtedness of Alliance, including Indebtedness
pursuant to the Credit Facility. As of December 31, 2000, after giving pro forma
effect to the Offering, the aggregate amount of Alliance's outstanding Senior
Indebtedness would have been approximately $508 million. In addition, Alliance
would have had additional borrowing availability of approximately $123 million
as of December 31, 2000, after giving pro forma effect to the Offering, subject
to certain limitations, and all of such additional borrowings may be senior to
the notes. The old notes also are, and the exchange notes will be, effectively
subordinated to all Indebtedness and other obligations (including trade
payables) of Alliance's Subsidiaries. Any right of Alliance to receive assets of
any of its Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the holders of the notes to participate in those assets)
will be effectively subordinated to the claims of that Subsidiary's creditors.
Also, a portion of the operations of Alliance is conducted through its
subsidiaries. Therefore, Alliance is partially dependent upon the cash flows of
its subsidiaries to meet its obligations, including obligations under the notes.
The indenture will permit Alliance to incur additional indebtedness, including
Senior Indebtedness, subject to certain limitations. See "Risk Factors--Risks
Related to Our Indebtedness" and "Risks Related to this Offering."
Under certain circumstances, Alliance will be able to designate Subsidiaries
as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
any of the restrictive covenants set forth in the indenture.
SUBORDINATION
The payment of the Subordinated Note Obligations will be subordinated in
right of payment, as set forth in the indenture, to the prior payment in full in
cash equivalents of all Senior Indebtedness, whether outstanding on the date of
the indenture or thereafter incurred. Upon any distribution to creditors of
Alliance in a liquidation or dissolution of Alliance or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to
Alliance or its property, an assignment for the benefit of creditors or any
marshalling of Alliance's assets and liabilities, the holders of Senior
Indebtedness will be entitled to receive payment in full in cash equivalents of
such Senior Indebtedness before the holders of notes will be entitled to receive
any payment with respect to the Subordinated Note Obligations, and until all
Senior Indebtedness is paid in full in cash equivalents, any distribution to
which the holders of notes would be entitled shall be made to the holders of
Senior Indebtedness (except that holders of notes may receive (a) shares of
stock and any debt securities that are subordinated at least to the same extent
as the notes to (1) Senior Indebtedness and (2) any securities
72
issued in exchange for Senior Indebtedness and (b) payments made from the trusts
described under "--Legal Defeasance and Covenant Defeasance").
Alliance also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in such subordinated securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if
- a default in the payment of the principal of, premium, if any, or interest
on, or of unreimbursed amounts under drawn letters of credit or in respect
of bankers' acceptances or fees relating to letters of credit or bankers'
acceptances constituting, Designated Senior Indebtedness occurs and is
continuing beyond any applicable period of grace (a "PAYMENT DEFAULT") or
- any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity
(a "NON-PAYMENT DEFAULT") and the trustee receives a notice of such
default (a "PAYMENT BLOCKAGE NOTICE") from a representative of holders of
such Designated Senior Indebtedness.
Payments on the notes, including any missed payments, may and shall be
resumed
- in the case of a payment default, upon the date on which such default is
cured or waived or shall have ceased to exist or such Designated Senior
Indebtedness shall have been discharged or paid in full in cash
equivalents and
- in case of a nonpayment default, the earlier of (x) the date on which such
nonpayment default is cured or waived, (y) 179 days after the date on
which the applicable Payment Blockage Notice is received (each such
period, the "PAYMENT BLOCKAGE PERIOD") or (z) the date such Payment
Blockage Period shall be terminated by written notice to the trustee from
the requisite holders of such Designated Senior Indebtedness necessary to
terminate such period or from their representative.
No new period of payment blockage may be commenced unless and until
365 days have elapsed since the effectiveness of the immediately preceding
Payment Blockage Notice. However, if any Payment Blockage Notice within such
365-day period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than the agent under the Credit Facility), the agent under
the Credit Facility may give another Payment Blockage Notice within such period.
In no event, however, may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any 365 consecutive day period. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the trustee
shall be or be made the basis for a subsequent Payment Blockage Notice unless
such default shall have been cured or waived for a period of not less than
90 days.
If Alliance fails to make any payment on the notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provision referred to above, such failure would constitute an event of default
under the indenture and would enable the holders of the notes to accelerate the
maturity thereof.
The indenture will further require that Alliance promptly notify holders of
Senior Indebtedness if payment of the notes is accelerated because of an event
of default under the indenture.
As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to Alliance, holders of notes may recover less ratably than
creditors of Alliance who are holders of Senior Indebtedness. At December 31,
2000, after giving pro forma effect to the Offering, Alliance would have had
approximately $508 million of Senior Indebtedness outstanding. In addition,
Alliance would have had additional borrowing availability of approximately
$123 million as of December 31, 2000, after giving
73
pro forma effect to the Offerings, subject to certain limitations. In addition,
the notes are structurally subordinated to the liabilities and trade payables
and obligations of subsidiaries of Alliance. Although the indenture contains
limitations on the amount of additional Indebtedness that Alliance and its
Subsidiaries may incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "--Certain Covenants--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock."
"DESIGNATED SENIOR INDEBTEDNESS" means (a) Senior Indebtedness under the
Credit Facility and (b) any other Senior Indebtedness permitted under the
indenture the principal amount of which is $50 million or more and that has been
designated by Alliance as Designated Senior Indebtedness.
"SENIOR INDEBTEDNESS" means (a) the Obligations under the Credit Facility
and (b) any other Indebtedness permitted to be incurred by Alliance under the
terms of the indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in right
of payment to the notes, including, with respect to (a) and (b), interest
accruing subsequent to the filing of, or which would have accrued but for the
filing of, a petition for bankruptcy, whether or not such interest is an
allowable claim in such bankruptcy proceeding. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include:
(1) any liability for federal, state, local or other taxes owed or owing
by Alliance,
(2) any obligation of Alliance to any of its Subsidiaries,
(3) any accounts payable or trade liabilities arising in the ordinary
course of business (including instruments evidencing such liabilities) other
than obligations in respect of bankers' acceptances and letters of credit
under the Credit Facility,
(4) any Indebtedness that is incurred in violation of the indenture,
(5) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to Alliance,
(6) any Indebtedness, guarantee or obligation of Alliance which is
subordinate or junior to any other Indebtedness, guarantee or obligation of
Alliance,
(7) Indebtedness evidenced by the notes and
(8) Capital Stock of Alliance.
"SUBORDINATED NOTE OBLIGATIONS" means any principal of, premium, if any, and
interest on the notes payable pursuant to the terms of the notes or upon
acceleration, together with and including any amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the notes or
amounts corresponding to such principal, premium, if any, or interest on the
notes.
The old notes rank, and the exchange notes will rank, senior in right of
payment to all Subordinated Indebtedness of Alliance. Currently, Alliance has no
Subordinated Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The notes will be limited in aggregate principal amount to $260 million and
will mature on April 15, 2011. Interest on the notes accrues at the rate of 10 3
8% per annum and is payable semi-annually in arrears on April 15 and October 15
to holders of record on the immediately preceding April 1 and October 1.
Interest on the notes accrues from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of original issuance.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal of, premium, if any, and interest on the notes is payable at
the office or agency of Alliance maintained for such purpose within
74
the City and State of New York or at such office or agency of Alliance as may be
maintained for such purpose or, at the option of Alliance, payment of Liquidated
Damages, if any, or of interest may be made by check mailed to the holders of
the notes at their respective addresses set forth in the register of holders of
notes; PROVIDED that all payments of principal, premium, if any, Liquidated
Damages, if any, and interest with respect to notes the holders of which have
given wire transfer instructions to Alliance will be required to be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof. Until otherwise designated by Alliance, Alliance's office or agency in
New York will be the office of the trustee maintained for such purpose. The
notes are issued in denominations of $1,000 and integral multiples thereof.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders,"
Alliance is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
OPTIONAL REDEMPTION
Except as described below, the notes will not be redeemable at Alliance's
option prior to April 15, 2006. From and after April 15, 2006, the notes will be
subject to redemption at any time at the option of Alliance, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on April 15 of each of the
years indicated below:
YEAR REDEMPTION PRICE
---- ----------------
2006........................................................ 105.188%
2007........................................................ 103.458%
2008........................................................ 101.729%
2009 and thereafter......................................... 100.000%
In addition, at any time or from time to time, on or prior to April 15,
2004, Alliance may, at its option, redeem up to 40% of the aggregate principal
amount of notes originally issued under the indenture on the Issuance Date at a
redemption price equal to 110.375% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the redemption date, with
the net cash proceeds of one or more Equity Offerings; PROVIDED that at least
60% of the aggregate principal amount of notes originally issued under the
indenture on the Issuance Date remains outstanding immediately after the
occurrence of each such redemption; PROVIDED FURTHER that each such redemption
occurs within 60 days of the date of closing of each such Equity Offering. The
trustee shall select the notes to be purchased in the manner described under
"Repurchase at the Option of Holders--Selection and Notice."
At any time on or prior to April 15, 2006, the notes may also be redeemed,
in whole but not in part, at the option of Alliance upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days prior notice (but
in no event more than 90 days after the occurrence of such Change of Control or
transfer event) mailed by first-class mail to each note holder's registered
address, at a redemption price equal to 100% of the principal amount thereof
plus the Applicable Premium as of, and accrued and unpaid interest and
Liquidated Damages, if any, to, the date of redemption (subject to the right of
holders of record on the relevant record date to receive interest due on the
notes on the relevant interest payment date).
"APPLICABLE PREMIUM" means, with respect to any note on any redemption date,
the greater of
(i) 1.0% of the principal amount of such note or (ii) the excess of (A) the
present value at such redemption date of (1) the redemption price of such note
at April 15, 2006 (such redemption price
75
being set forth in the table above) plus (2) all required interest payments due
on such note through April 15, 2006 (excluding accrued but unpaid interest),
computed using a discount rate equal to the Treasury Rate on such redemption
date plus 75 basis points over (B) the principal amount of such note.
"TREASURY RATE" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
business days prior to the redemption date (or, if such statistical release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to April 15, 2006; PROVIDED,
HOWEVER, that if the period from the redemption date to April 15, 2006 is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The indenture provides that, upon the occurrence of a Change of Control,
unless Alliance has elected to redeem the notes in connection with such Change
of Control, Alliance will make an offer to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of the notes pursuant to the offer
described below (the "CHANGE OF CONTROL OFFER") at a price in cash (the "CHANGE
OF CONTROL PAYMENT") equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase. The indenture provides that within 30 days following any Change of
Control, Alliance will mail a notice to each holder of notes issued under the
indenture, with a copy to the trustee, with the following information:
(a) a Change of Control Offer is being made pursuant to the covenant
entitled "Offer to Repurchase Upon Change of Control," and that all notes
properly tendered pursuant to such Change of Control Offer will be accepted
for payment;
(b) the purchase price and the purchase date, which will be no earlier
than 30 days nor later than 60 days from the date such notice is mailed,
except as may be otherwise required by applicable law (the "CHANGE OF
CONTROL PAYMENT DATE");
(c) any note not properly tendered will remain outstanding and continue
to accrue interest;
(d) unless Alliance defaults in the payment of the Change of Control
Payment, all notes accepted for payment pursuant to the Change of Control
Offer will cease to accrue interest on the Change of Control Payment Date;
(e) holders of notes electing to have any notes purchased pursuant to a
Change of Control Offer will be required to surrender the notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
notes completed, to the paying agent specified in the notice at the address
specified in the notice prior to the close of business on the third business
day preceding the Change of Control Payment Date;
(f) holders of notes will be entitled to withdraw their tendered notes
and their election to require Alliance to purchase such notes, PROVIDED that
the paying agent receives, not later than the close of business on the last
day of the offer period (as defined in the indenture), a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of notes tendered for purchase, and a statement that such
holder is withdrawing his tendered notes and his election to have such notes
purchased; and
76
(g) that holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of the
notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof.
The indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control,
Alliance will either repay all outstanding Senior Indebtedness or obtain the
requisite consents, if any, under any outstanding Senior Indebtedness to permit
the repurchase of the notes required by this covenant.
Alliance will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws or regulations are applicable in connection with the repurchase of the
notes pursuant to a Change of Control Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
indenture, Alliance will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the indenture by virtue thereof.
The indenture provides that on the Change of Control Payment Date, Alliance
will, to the extent permitted by law,
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
(2) deposit with the paying agent an amount equal to the aggregate
Change of Control Payment in respect of all notes or portions thereof so
tendered and
(3) deliver, or cause to be delivered, to the trustee for cancellation
the notes so accepted together with an Officers' Certificate stating that
such notes or portions thereof have been tendered to and purchased by
Alliance.
The indenture provides that the paying agent will promptly mail to each
holder of notes the Change of Control Payment for such notes, and the trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each holder a new note equal in principal amount to any unpurchased portion
of the notes surrendered, if any, PROVIDED, that each such new note will be in a
principal amount of $1,000 or an integral multiple thereof. Alliance will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Credit Facility prohibits, and future credit agreements or other
agreements relating to Senior Indebtedness to which Alliance becomes a party may
prohibit, Alliance from purchasing any notes as a result of a Change of Control
and/or provide that certain change of control events with respect to Alliance
would constitute a default thereunder. In the event a Change of Control occurs
at a time when Alliance is prohibited from purchasing the notes, Alliance could
seek the consent of its lenders to the purchase of the notes or could attempt to
refinance the borrowings that contain such prohibition. If Alliance does not
obtain such a consent or repay such borrowings, Alliance will remain prohibited
from purchasing the notes. In such case, Alliance's failure to purchase tendered
notes would constitute an event of default under the indenture. If, as a result
thereof, a default occurs with respect to any Senior Indebtedness, the
subordination provisions in the indenture would likely restrict payments to the
holders of the notes.
The existence of a holder's right to require Alliance to repurchase such
holder's notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire Alliance in a transaction that would constitute a
Change of Control.
77
ASSET SALES
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale,
unless
(a) Alliance, or its Restricted Subsidiaries, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value (as determined in good faith by Alliance) of the assets
sold or otherwise disposed of and
(b) at least 75% of the consideration therefor received by Alliance, or
such Restricted Subsidiary, as the case may be, is in the form of cash or
Cash Equivalents; provided that the amount of
(1) any liabilities (as shown on Alliance's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of
Alliance or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the notes), that are assumed by the
transferee of any such assets,
(2) any notes or other obligations received by Alliance or such
Restricted Subsidiary from such transferee that are converted by Alliance
or such Restricted Subsidiary into cash (to the extent of the cash
received) within 180 days following the closing of such Asset Sale and
(3) any Designated Noncash Consideration received by Alliance or any
of its Restricted Subsidiaries in such Asset Sale having an aggregate
fair market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (3) that is at that time
outstanding, not to exceed the greater of
(A) $50 million or
(B) 15% of Total Assets at the time of the receipt of such
Designated Noncash Consideration (with the fair market value of each
item of Designated Noncash Consideration being measured at the time
received and without giving effect to subsequent changes in value),
shall be deemed to be cash for purposes of this provision and for no
other purpose.
Within 365 days after Alliance's or any Restricted Subsidiary's receipt of
the Net Proceeds of any Asset Sale, Alliance or such Restricted Subsidiary may
apply the Net Proceeds from such Asset Sale, at its option,
(a) to permanently reduce Obligations under the Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Senior
Indebtedness or Pari Passu Indebtedness (PROVIDED that if Alliance shall so
reduce Obligations under Pari Passu Indebtedness, it will equally and
ratably reduce Obligations under the notes if the notes are then prepayable
or, if the notes may not be then prepaid, Alliance shall make an offer (in
accordance with the procedures set forth below for an Asset Sale Offer) to
all holders of notes to purchase at 100% of the principal amount thereof the
amount of notes that would otherwise be prepaid),
(b) to an investment in any one or more businesses, capital expenditures
or acquisitions of other assets in each case, used or useful in a Similar
Business and/or
(c) to make an investment in properties or assets that replace the
properties and assets that are the subject of such Asset Sale.
Pending the final application of any such Net Proceeds, Alliance or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents or Investment Grade Securities. The indenture provides that any Net
Proceeds from the Asset Sale that are not invested as provided and within the
time period set forth in
78
the first sentence of this paragraph will be deemed to constitute "EXCESS
PROCEEDS". When the aggregate amount of Excess Proceeds exceeds $15 million,
Alliance shall make an offer to all holders of notes (an "ASSET SALE OFFER") to
purchase the maximum principal amount of notes, that is an integral multiple of
$1,000, that may be purchased out of the Excess Proceeds at an offer price in
cash in an amount equal to 100% of the principal amount thereof, plus accrued
and unpaid interest to the date fixed for the closing of such offer, in
accordance with the procedures set forth in the indenture. Alliance will
commence an Asset Sale Offer with respect to Excess Proceeds within ten business
days after the date that Excess Proceeds exceeds $15 million by mailing the
notice required pursuant to the terms of the indenture, with a copy to the
trustee. To the extent that the aggregate amount of notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, Alliance may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of notes surrendered by holders thereof exceeds the amount of
Excess Proceeds, the trustee shall select the notes to be purchased in the
manner described under the caption "Selection and Notice" below. Upon completion
of any such Asset Sale Offer, the amount of Excess Proceeds shall be reset at
zero.
Alliance will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws or regulations are applicable in connection with the repurchase of the
notes pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the indenture,
Alliance will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the indenture
by virtue thereof.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time or if more
notes are tendered pursuant to an Asset Sale Offer than Alliance is required to
purchase, selection of such notes for redemption or purchase, as the case may
be, will be made by the trustee in compliance with the requirements of the
principal national securities exchange, if any, on which such notes are listed,
or, if such notes are not so listed, on a pro rata basis, by lot or by such
other method as the trustee shall deem fair and appropriate (and in such manner
as complies with applicable legal requirements); PROVIDED that no notes of
$1,000 or less shall be purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each holder of notes to be purchased or redeemed at such
holder's registered address. If any note is to be purchased or redeemed in part
only, any notice of purchase or redemption that relates to such note shall state
the portion of the principal amount thereof that has been or is to be purchased
or redeemed.
A new note in principal amount equal to the unpurchased or unredeemed
portion of any note purchased or redeemed in part will be issued in the name of
the holder thereof upon cancellation of the original note. On and after the
purchase or redemption date unless Alliance defaults in payment of the purchase
or redemption price, interest shall cease to accrue on notes or portions thereof
purchased or called for redemption.
79
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of
Alliance's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger
or consolidation (other than (1) dividends or distributions by Alliance
payable in Equity Interests (other than Disqualified Stock) of Alliance or
(2) dividends or distributions by a Restricted Subsidiary so long as, in the
case of any dividend or distribution payable on or in respect of any class
or series of securities issued by a Restricted Subsidiary other than a
Wholly Owned Subsidiary, Alliance or a Restricted Subsidiary receives at
least its pro rata share of such dividend or distribution in accordance with
its Equity Interests in such class or series of securities);
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Equity Interests of Alliance or any direct or indirect parent of
Alliance;
(c) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value in each case, prior to any scheduled
repayment, or maturity, any Subordinated Indebtedness (other than
Indebtedness permitted under clauses (g) and (i) of the covenant described
under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock"); or
(d) make any Restricted Investment;
(all such payments and other actions set forth in clauses (a) through (d) above
being collectively referred to as "RESTRICTED PAYMENTS"), unless, at the time of
such Restricted Payment:
(1) no default or event of default under the indenture shall have
occurred and be continuing or would occur as a consequence thereof;
(2) immediately before and immediately after giving effect to such
transaction on a pro forma basis, Alliance could incur $1.00 of additional
Indebtedness under the provisions of the first paragraph of "--Limitations
on Incurrence of Indebtedness and Issuance of Disqualified Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Alliance and its Restricted Subsidiaries
after the Issuance Date (including Restricted Payments permitted by clauses
(a), (e) (only to the extent that amounts paid pursuant to such clause are
greater than amounts that would have been paid pursuant to such clause if
$5 million and $10 million were substituted in such clause for $10 million
and $20 million, respectively), (f), (i) and (j) of the next succeeding
paragraph, but excluding all other Restricted Payments permitted by the next
succeeding paragraph), is less than the sum of
(A) 50% of the Consolidated Net Income of Alliance for the period
(taken as one accounting period) from the fiscal quarter that first
begins after the Issuance Date to the end of Alliance's most recently
ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, in the case such
Consolidated Net Income for such period is a deficit, minus 100% of such
deficit), PLUS
(B) 100% of the aggregate net cash proceeds and the fair market
value, as determined in good faith by the board of directors, of
marketable securities received by Alliance since immediately after the
Issuance Date from the issue or sale of Equity Interests of Alliance
(excluding Excluded Contributions) or debt securities issued or sold
after the Issuance Date of
80
Alliance that have been converted into such Equity Interests (including
Retired Capital Stock) of Alliance (other than Refunding Capital Stock
(as defined below) or Equity Interests or convertible debt securities of
Alliance sold to a Restricted Subsidiary of Alliance and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), PLUS
(C) the aggregate amount by which Indebtedness (other than
Subordinated Indebtedness) of Alliance or any Restricted Subsidiary is
reduced on Alliance's consolidated balance sheet on or after the Issuance
Date upon the conversion or exchange of any debt securities issued or
sold on or prior to the Issuance Date that is convertible into Equity
Interests of Alliance (other than Refunding Capital Stock (as defined
below) or Equity Interests or convertible debt securities of Alliance
sold to a Restricted Subsidiary of Alliance and other than Disqualified
Stock or debt securities that have been converted into Disqualified
Stock); PLUS
(D) 100% of the aggregate amount of cash and marketable securities
contributed to the capital of Alliance following the Issuance Date
(excluding Excluded Contributions), PLUS
(E) 100% of the aggregate amount received in cash and the fair market
value of marketable securities (other than Restricted Investments)
received from
(i) the sale or other disposition (other than to Alliance or a
Restricted Subsidiary) of Restricted Investments made by Alliance and
its Restricted Subsidiaries or
(ii) a dividend from, or the sale (other than to Alliance or a
Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary
(other than an Unrestricted Subsidiary the Investment in which was
made by Alliance or a Restricted Subsidiary pursuant to clause (g) or
(k) below).
The foregoing provisions will not prohibit:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the indenture;
(b) (1) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "RETIRED CAPITAL STOCK") or Subordinated
Indebtedness of Alliance in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
Equity Interests of Alliance (other than any Disqualified Stock) (the
"REFUNDING CAPITAL STOCK"), and (2) if immediately prior to the retirement
of such Retired Capital Stock, the declaration and payment of dividends
thereon was permitted under clause (f) of this paragraph, the declaration
and payment of dividends on such Refunding Capital Stock in an aggregate
amount per year no greater than the aggregate amount of dividends per annum
that was declarable and payable on such Retired Capital Stock immediately
prior to such retirement; PROVIDED, HOWEVER, that at the time of the
declaration of any such dividends, no default or event of default under the
indenture shall have occurred and be continuing or would occur as a
consequence thereof;
(c) distributions or payments of Receivables Fees;
(d) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of Alliance made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of
Alliance so long as
(1) the principal amount of such new Indebtedness does not exceed the
principal amount of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing
the Subordinated Indebtedness being so redeemed, repurchased, acquired or
81
retired, and fees and expenses payable in connection with such
redemption, repurchase, acquisition or retirement),
(2) such Indebtedness is subordinated to the Senior Indebtedness and
the notes at least to the same extent as such Subordinated Indebtedness
so purchased, exchanged, redeemed, repurchased, acquired or retired for
value,
(3) such Indebtedness has a final scheduled maturity date equal to or
later than the final scheduled maturity date of the Subordinated
Indebtedness being so redeemed, repurchased, acquired or retired and
(4) such Indebtedness has a Weighted Average Life to Maturity equal
to or greater than the remaining Weighted Average Life to Maturity of the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired;
(e) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of Alliance
held by any future, present or former employee, director or consultant of
Alliance or any Subsidiary pursuant to any management equity plan,
stockholder agreement or stock option plan or any other management or
employee benefit plan or agreement; PROVIDED, HOWEVER, that the aggregate
Restricted Payments made under this clause (e) does not exceed in any
calendar year $10 million (with unused amounts in any calendar year being
carried over to succeeding calendar years subject to a maximum (without
giving effect to the following proviso) of $20 million in any calendar
year); PROVIDED FURTHER that such amount in any calendar year may be
increased by an amount not to exceed
(1) the cash proceeds from the sale of Equity Interests of Alliance
to members of management, directors or consultants of Alliance and its
Subsidiaries that occurs after the Issuance Date (to the extent the cash
proceeds from the sale of such Equity Interests have not otherwise been
applied to the payment of Restricted Payments by virtue of the preceding
paragraph (3)) PLUS
(2) the cash proceeds of key man life insurance policies received by
Alliance and its Restricted Subsidiaries after the Issuance Date LESS
(3) the amount of any Restricted Payments previously made pursuant to
clauses (1) and (2) of this subparagraph (e);
and PROVIDED FURTHER that cancellation of Indebtedness owing to Alliance from
members of management of Alliance or any of its Restricted Subsidiaries in
connection with a repurchase of Equity Interests of Alliance will not be deemed
to constitute a Restricted Payment for purposes of this covenant or any other
provision of the indenture;
(f) the declaration and payment of dividends to holders of any class or
series of Designated Preferred Stock (other than Disqualified Stock) issued
after the Issuance Date (including, without limitation, the declaration and
payment of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (b)); PROVIDED, HOWEVER,
that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock, after giving effect to such
issuance on a pro forma basis, Alliance and its Restricted Subsidiaries
would have had a Fixed Charge Coverage Ratio of at least 1.75 to 1.00;
(g) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (g) that are at that time outstanding, not to exceed
$45 million at the time of such Investment (with the fair market value of
each Investment being measured at the time made and without giving effect to
subsequent changes in value);
82
(h) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(i) the payment of dividends on Alliance's common stock, following the
first public offering of Alliance's common stock on or after the Issuance
Date, of up to 6% per annum of the net proceeds received by Alliance in such
public offering, other than public offerings with respect to Alliance's
common stock registered on Form S-8;
(j) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests of Alliance which
are not held by KKR or any of its affiliates (including any Equity Interests
issued in respect of such Equity Interests as a result of a stock split,
recapitalization, merger, combination, consolidation or otherwise, but
excluding any management equity plan or stock option plan or similar
agreement), provided that the aggregate Restricted Payments made under this
clause (j) shall not exceed $50 million, PROVIDED FURTHER that prior to the
first anniversary of the Issuance Date, no Restricted Payments may be made
under this clause (j) and PROVIDED FURTHER that notwithstanding the
foregoing proviso, Alliance shall be permitted to make Restricted Payments
under this clause (j) only if after giving effect thereto, Alliance would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first sentence of the
covenant described under "--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock";
(k) Investments in Unrestricted Subsidiaries that are made with Excluded
Contributions;
(l) the payment of dividends on Disqualified Stock which is issued in
accordance with the covenant described under "--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock"; and
(m) other Restricted Payments in an aggregate amount not to exceed
$25 million;
PROVIDED, HOWEVER, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (d), (e), (f), (g), (h), (i),
(j), (k), (l) and (m), no default or event of default under the indenture
shall have occurred and be continuing or would occur as a consequence
thereof; and provided further that for purposes of determining the aggregate
amount expended for Restricted Payments in accordance with clause (3) of the
immediately preceding paragraph, only the amounts expended under clauses
(a), (e) (only to the extent that amounts paid pursuant to such clause are
greater than amounts that would have been paid pursuant to such clause if
$5 million and $10 million were substituted in such clause for $10 million
and $20 million, respectively), (f), (i) and (j) shall be included.
In the future, Alliance will not permit any Unrestricted Subsidiary to
become a Restricted Subsidiary except pursuant to the second to last sentence of
the definition of "UNRESTRICTED SUBSIDIARY." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by Alliance and its Restricted Subsidiaries (except to the extent repaid) in the
Subsidiary so designated will be deemed to be Restricted Payments in an amount
determined as set forth in the last sentence of the definition of "INVESTMENTS."
Such designation will only be permitted if a Restricted Payment in such amount
would be permitted at such time (whether pursuant to the first paragraph of this
covenant or under clause (g), (k) or (m)) and if such Subsidiary otherwise meets
the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not
be subject to any of the restrictive covenants set forth in the indenture.
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "INCUR" and
collectively, an
83
"INCURRENCE") any Indebtedness (including Acquired Indebtedness) and that
Alliance will not issue any shares of Disqualified Stock and will not permit any
of its Restricted Subsidiaries to issue any shares of preferred stock; PROVIDED,
HOWEVER, that Alliance may incur Indebtedness (including Acquired Indebtedness)
or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for
Alliance's and the Restricted Subsidiaries' most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been:
- if such incurrence occurs on or prior to April 15, 2003, at least 1.75 to
1.00; and
- if such incurrence occurs after April 15, 2003, at least 2.00 to 1.00,
in each case, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, and the
application of proceeds therefrom had occurred at the beginning of such
four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by Alliance or its Restricted Subsidiaries of
Indebtedness under Credit Facilities and the issuance and creation of
letters of credit and banker's acceptances thereunder (with letters of
credit and banker's acceptances being deemed to have a principal amount
equal to the face amount thereof) up to an aggregate principal amount of
$650 million outstanding at any one time;
(b) the incurrence by Alliance of Indebtedness represented by the notes;
(c) the Existing Indebtedness (other than Indebtedness described in
clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) incurred by
Alliance or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause (d) and including all Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (d), does not exceed the greater of
(1) $50 million or (2) 15% of Total Assets;
(e) Indebtedness incurred by Alliance or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(f) Indebtedness arising from agreements of Alliance or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that
(1) such Indebtedness is not reflected on the balance sheet of
Alliance or any Restricted Subsidiary (contingent obligations referred to
in a footnote to financial statements and not otherwise reflected on the
balance sheet will not be deemed to be reflected on such balance sheet
for purposes of this clause (1)) and
84
(2) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured
at the time received and without giving effect to any subsequent changes
in value) actually received by Alliance and its Restricted Subsidiaries
in connection with such disposition;
(g) Indebtedness of Alliance to a Restricted Subsidiary; PROVIDED that
any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the notes; PROVIDED FURTHER that any
subsequent issuance or transfer of any Capital Stock or any other event
which will result in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such
Indebtedness (except to Alliance or another Restricted Subsidiary) shall be
deemed, in each case to be an incurrence of such Indebtedness;
(h) shares of preferred stock of a Restricted Subsidiary issued to
Alliance or another Restricted Subsidiary; PROVIDED that any subsequent
issuance or transfer of any Capital Stock or any other event which results
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any other subsequent transfer of any such shares of preferred stock (except
to Alliance or another Restricted Subsidiary) shall be deemed, in each case
to be an issuance of shares of preferred stock;
(i) Indebtedness of a Restricted Subsidiary to Alliance or another
Restricted Subsidiary; provided that
(1) any such Indebtedness is made pursuant to an intercompany note
and
(2) if a Guarantor incurs such Indebtedness from a Restricted
Subsidiary that is not a Guarantor such Indebtedness is subordinated in
right of payment to the Guarantee of such Guarantor;
PROVIDED FURTHER that any subsequent transfer of any such Indebtedness
(except to Alliance or another Restricted Subsidiary) or any other event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary shall be deemed, in each case to be an incurrence of such
Indebtedness;
(j) Hedging Obligations that are incurred in the ordinary course of
business
(1) for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the
indenture to be outstanding or
(2) for the purpose of fixing or hedging currency exchange rate risk
with respect to any currency exchanges;
(k) obligations in respect of performance and surety bonds and
completion guarantees provided by Alliance or any Restricted Subsidiary in
the ordinary course of business;
(l) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(m) Indebtedness of Alliance and any of its Restricted Subsidiaries not
otherwise permitted hereunder in an aggregate principal amount, which when
aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (m), does not exceed
$150 million at any one time outstanding; PROVIDED, HOWEVER, that
Indebtedness of a Restricted Subsidiary organized under the laws of the
United States, any state thereof, the District of Columbia or any territory
thereof, which when aggregated with the principal amount of all other
Indebtedness of such Restricted Subsidiaries then outstanding and incurred
pursuant to this clause (m), does not exceed $60 million at any one time
outstanding;
85
(n) (1) any guarantee by Alliance of Indebtedness or other obligations
of any of its Restricted Subsidiaries so long as the incurrence of such
Indebtedness incurred by such Restricted Subsidiary is permitted under the
terms of the indenture and (2) any Excluded Guarantee (as defined below
under "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries") of a Restricted Subsidiary;
(o) the incurrence by Alliance or any of its Restricted Subsidiaries of
Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b), (c), (d) and (l) above or clause (p) below, or any
Indebtedness issued to so refund, refinance or restructure such Indebtedness
including additional Indebtedness incurred to pay premiums, expenses and
fees in connection therewith (the "REFINANCING INDEBTEDNESS") prior to its
respective maturity; PROVIDED, HOWEVER, that such Refinancing Indebtedness
(1) has a Weighted Average Life to Maturity at the time such
Refinancing Indebtedness is incurred which is not less than the remaining
Weighted Average Life to Maturity of Indebtedness being refunded or
refinanced,
(2) to the extent such Refinancing Indebtedness refinances
Indebtedness subordinated or PARI PASSU to the notes, such Refinancing
Indebtedness is subordinated or PARI PASSU to the notes at least to the
same extent as the Indebtedness being refinanced or refunded and
(3) shall not include
(x) Indebtedness of a Subsidiary that refinances Indebtedness of
Alliance or Indebtedness of a non-Guarantor that refinances
Indebtedness of a Guarantor; or
(y) Indebtedness of Alliance or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary;
and PROVIDED FURTHER that subclauses (1) and (2) of this clause (o) will not
apply to any refunding or refinancing of any Senior Indebtedness;
(p) Indebtedness or Disqualified Stock of persons that are acquired by
Alliance or any of its Restricted Subsidiaries or merged into a Restricted
Subsidiary in accordance with the terms of the indenture; PROVIDED that such
Indebtedness or Disqualified Stock is not incurred in contemplation of such
acquisition or merger; and PROVIDED FURTHER that after giving effect to such
acquisition or merger, either
(1) Alliance would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth
in the first sentence of this covenant or
(2) the Fixed Charge Coverage Ratio is greater than immediately prior
to such acquisition or merger; and
(q) guarantees by Alliance or its Restricted Subsidiaries of the
obligations of joint ventures of Alliance or its Restricted Subsidiaries;
PROVIDED that the maximum aggregate amount of all such guaranteed
obligations shall at no time exceed $25 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
permitted Indebtedness described in clauses (a) through (q) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, Alliance shall,
in its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest, the
86
accretion of accreted value and the payment of interest in the form of
additional Indebtedness will not be deemed to be an incurrence of Indebtedness
for purposes of this covenant.
LIENS
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly create, incur, assume or
suffer to exist any Lien that secures obligations under any Pari Passu
Indebtedness or Subordinated Indebtedness on any asset or property of Alliance
or such Restricted Subsidiary, or any income or profits therefrom, or assign or
convey any right to receive income therefrom, unless
- if such Lien secures Pari Passu Indebtedness, the notes are equally and
ratably secured with the obligations so secured or
- if such Lien secures Subordinated Indebtedness, the notes are secured by a
Lien on the same property, assets, income or profits which is senior to
such Lien to the same extent as the notes are senior to such Subordinated
Indebtedness,
in each case until such time as such obligations are no longer secured by a
Lien.
The indenture will provide that no Guarantor will directly or indirectly
create, incur, assume or suffer to exist any Lien that secures obligations under
any Pari Passu Indebtedness or Subordinated Indebtedness of such Guarantor on
any asset or property of such Guarantor or any income or profits therefrom, or
assign or convey any right to receive income therefrom, unless
- if such Lien secures Pari Passu Indebtedness, the Guarantee of such
Guarantor is equally and ratably secured with the obligations so secured
or
- if such Lien secures Subordinated Indebtedness, the Guarantee of such
Guarantor is secured by a Lien on the same property, assets, income or
profits which is senior to such Lien to the same extent as the Guarantee
of such Guarantor is senior to such Subordinated Indebtedness,
in each case until such time as such obligations are no longer secured by a
Lien.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The indenture provides that Alliance may not consolidate or merge with or
into or wind up into (whether or not Alliance is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to any Person unless
(a) Alliance is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than Alliance) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made is a corporation organized or existing under
the laws of the United States, any state thereof, the District of Columbia,
or any territory thereof (Alliance or such Person, as the case may be, being
herein called the "SUCCESSOR COMPANY");
(b) the Successor Company (if other than Alliance) expressly assumes all
the obligations of Alliance under the indenture and the notes pursuant to a
supplemental indenture or other documents or instruments in form reasonably
satisfactory to the trustee;
(c) immediately after such transaction no default or event of default
under the indenture shall have occurred and be continuing;
(d) immediately after giving pro forma effect to such transaction, as if
such transaction had occurred at the beginning of the applicable
four-quarter period,
87
(1) the Successor Company would be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first sentence of the covenant described under
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock" or
(2) the Fixed Charge Coverage Ratio for the Successor Company and its
Restricted Subsidiaries would be greater than such Ratio for Alliance and
its Restricted Subsidiaries immediately prior to such transaction;
(e) each Guarantor, if any, unless it is the other party to the
transactions described above, shall have by supplemental indenture confirmed
that its Guarantee shall apply to such Person's obligations under the
indenture and the notes; and
(f) Alliance shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
indenture.
The Successor Company will succeed to, and be substituted for, Alliance under
the indenture and the notes.
Notwithstanding the foregoing clause (d),
(1) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to Alliance and
(2) Alliance may merge with an Affiliate incorporated solely for the
purpose of reincorporating Alliance in another State of the United States
so long as the amount of Indebtedness of Alliance and its Restricted
Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and Alliance will not permit a Guarantor
to, consolidate or merge with or into or wind up into (whether or not such
Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless
(a) such Guarantor is the surviving corporation or the Person
formed by or surviving any such consolidation or merger (if other
than such Guarantor) or to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made is a
corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory
thereof (such Guarantor or such Person, as the case may be, being
herein called the "SUCCESSOR GUARANTOR");
(b) the Successor Guarantor (if other than such Guarantor)
expressly assumes all the obligations of such Guarantor under the
indenture and such Guarantor's Guarantee pursuant to a supplemental
indenture or other documents or instruments in form reasonably
satisfactory to the trustee;
(c) immediately after such transaction no default or event of
default under the indenture shall have occurred and be continuing;
and
(d) the Guarantor shall have delivered or caused to be delivered
to the trustee an Officers' Certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the indenture.
The Successor Guarantor will succeed to, and be substituted for, such Guarantor
under the indenture and such Guarantor's Guarantee.
88
TRANSACTIONS WITH AFFILIATES
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "AFFILIATE TRANSACTION")
involving aggregate consideration in excess of $5 million, unless
(a) such Affiliate Transaction is on terms that are not materially less
favorable to Alliance or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Alliance or such
Restricted Subsidiary with an unrelated Person; and
(b) Alliance delivers to the trustee with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $10 million, a resolution adopted by the majority
of the Board of Directors of Alliance approving such Affiliate Transaction
and set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (a) above.
The foregoing provisions will not apply to the following:
(1) transactions between or among Alliance and/or any of its
Restricted Subsidiaries;
(2) Restricted Payments permitted by the provisions of the indenture
described above under the covenant "--Limitation on Restricted Payments"
or Permitted Investments;
(3) the payment of customary annual management, consulting and
advisory fees and related expenses to KKR and its Affiliates;
(4) the payment of reasonable and customary fees paid to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of Alliance or any Restricted Subsidiary;
(5) payments by Alliance or any of its Restricted Subsidiaries to KKR
and its Affiliates made for any financial advisory, financing,
underwriting or placement services or in respect of other investment
banking activities, including, without limitation, in connection with
acquisitions or divestitures which payments are approved by a majority of
the Board of Directors of Alliance in good faith;
(6) transactions in which Alliance or any of its Restricted
Subsidiaries, as the case may be, delivers to the trustee a letter from
an Independent Financial Advisor stating that such transaction is fair to
Alliance or such Restricted Subsidiary from a financial point of view,
PROVIDED that such transaction also meets the requirements of clause (a)
of the preceding paragraph;
(7) payments or loans to employees or consultants which are approved
by a majority of the Board of Directors of Alliance in good faith;
(8) any agreement as in effect as of the Issuance Date or any
amendment thereto (so long as any such amendment is not disadvantageous
to the holders of the notes in any material respect) or any transaction
contemplated thereby;
(9) the existence of, or the performance by Alliance or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the
Issuance Date and any similar agreements which it may enter into
thereafter; PROVIDED, HOWEVER, that the existence of, or the performance
by Alliance or any of its Restricted
89
Subsidiaries of obligations under any future amendment to any such
existing agreement or under any similar agreement entered into after the
Issuance Date shall only be permitted by this clause (9) to the extent
that the terms of any such amendment or new agreement are not otherwise
disadvantageous to the holders of the notes in any material respect;
(10) transactions with customers, clients, suppliers, or purchasers or
sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the indenture,
which are fair to Alliance or its Restricted Subsidiaries, in the
reasonable determination of the Board of Directors of Alliance or the
senior management thereof, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party;
and
(11) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The indenture provides that Alliance will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to:
(a) (1) pay dividends or make any other distributions to Alliance or any
of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect
to any other interest or participation in, or measured by, its profits, or
(2) pay any Indebtedness owed to Alliance or any of its Restricted
Subsidiaries;
(b) make loans or advances to Alliance or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to Alliance
or any of its Restricted Subsidiaries;
except (in each case) for such encumbrances or restrictions existing under
or by reason of:
(1) contractual encumbrances or restrictions in effect on the
Issuance Date, including pursuant to the Credit Facility and its related
documentation;
(2) the indenture and the notes;
(3) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person acquired by
Alliance or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of
the Person, so acquired;
(6) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Subsidiary;
(7) secured Indebtedness otherwise permitted to be incurred pursuant
to the covenants described under "Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock" and "Liens" that limit
the right of the debtor to dispose of the assets securing such
Indebtedness;
90
(8) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(9) other Indebtedness of Restricted Subsidiaries permitted to be
incurred subsequent to the Issuance Date pursuant to the provisions of
the covenant described under "Limitations on Incurrence of Indebtedness
and Issuance of Disqualified Stock";
(10) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
(11) customary provisions contained in leases and other agreements
entered into in the ordinary course of business;
(12) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the Board of Directors of
Alliance, are necessary or advisable to effect such Receivables Facility;
or
(13) any encumbrances or restrictions of the type referred to in
clauses (a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements
or refinancings of the contracts, instruments or obligations referred to
in clauses (1) through (12) above, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment
of Alliance's Board of Directors, no more restrictive with respect to
such dividend and other payment restrictions than those contained in the
dividend or other payment restrictions prior to such amendment,
modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES
(a) The indenture provides that Alliance will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of Alliance or any
Indebtedness of any other Restricted Subsidiary unless
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a Guarantee of
payment of the notes by such Restricted Subsidiary except that
(A) if the notes are subordinated in right of payment to such
Indebtedness, the Guarantee under the supplemental indenture shall be
subordinated to such Restricted Subsidiary's guarantee with respect
to such Indebtedness substantially to the same extent as the notes
are subordinated to such Indebtedness under the indenture and
(B) if such Indebtedness is by its express terms subordinated in
right of payment to the notes, any such guarantee of such Restricted
Subsidiary with respect to such Indebtedness shall be subordinated in
right of payment to such Restricted Subsidiary's Guarantee with
respect to the notes substantially to the same extent as such
Indebtedness is subordinated to the notes;
(2) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
Alliance or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Guarantee; and
(3) such Restricted Subsidiary shall deliver to the trustee an
opinion of counsel to the effect that
(A) such Guarantee of the notes has been duly executed and
authorized and
91
(B) such Guarantee of the notes constitutes a valid, binding and
enforceable obligation of such Restricted Subsidiary, except insofar
as enforcement thereof may be limited by bankruptcy, insolvency or
similar laws (including, without limitation, all laws relating to
fraudulent transfers) and except insofar as enforcement thereof is
subject to general principles of equity;
PROVIDED that this paragraph (a) shall not be applicable to any guarantee of any
Restricted Subsidiary
(x) that (A) existed at the time such Person became a Restricted
Subsidiary of Alliance and (B) was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary of
Alliance or
(y) that guarantees the payment of Obligations of Alliance or any
Restricted Subsidiary under the Credit Facility or any other bank
facility which is designated as Senior Indebtedness and any refunding,
refinancing or replacement thereof, in whole or in part, PROVIDED that
such refunding, refinancing or replacement thereof constitutes Senior
Indebtedness and is not incurred pursuant to a registered offering of
securities under the Securities Act or a private placement of securities
(including under Rule 144A) pursuant to an exemption from the
registration requirements of the Securities Act, which private placement
provides for registration rights under the Securities Act (any guarantee
excluded by operations of this clause (y) being an "EXCLUDED GUARANTEE").
(b) Notwithstanding the foregoing and the other provisions of the
indenture, any Guarantee by a Restricted Subsidiary of the notes shall
provide by its terms that it shall be automatically and unconditionally
released and discharged upon
(1) any sale, exchange or transfer, to any Person not an Affiliate of
Alliance, of all of Alliance's Capital Stock in, or all or substantially
all the assets of, such Restricted Subsidiary (which sale, exchange or
transfer is not prohibited by the indenture) or
(2) the release or discharge of the guarantee which resulted in the
creation of such Guarantee, except a discharge or release by or as a
result of payment under such guarantee.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS
The indenture provides that Alliance will not, and will not permit any
Guarantor to, directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness) that is subordinate in right of payment to any Indebtedness of
Alliance or any Indebtedness of any Guarantor, as the case may be, unless such
Indebtedness is either
(a) PARI PASSU in right of payment with the notes or such Guarantor's
Guarantee, as the case may be or
(b) subordinate in right of payment to the notes, or such Guarantor's
Guarantee, as the case may be, in the same manner and at least to the same
extent as the notes are subordinate to Senior Indebtedness or such
Guarantor's Guarantee is subordinate to such Guarantor's Senior
Indebtedness, as the case may be.
92
REPORTS AND OTHER INFORMATION
The indenture provides that whether or not Alliance is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Alliance
shall file with the Commission and deliver to the trustee and to each holder of
notes and to prospective purchasers of notes, annual and quarterly reports and
such information, documents and other reports as are specified in Section 13 or
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
sections, such information, documents and reports to be so filed and delivered
at the times specified for the filing of such information, documents and reports
under such sections; PROVIDED, HOWEVER, that Alliance shall not be so obligated
to file such information, documents and reports with the Commission if the
Commission does not permit such filings.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute events of default under the indenture:
(a) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium on, if any, the notes
whether or not such payment shall be prohibited by the subordination
provisions relating to the notes;
(b) default for 30 days or more in the payment when due of interest with
respect to the notes whether or not such payment shall be prohibited by the
subordination provisions relating to the notes;
(c) failure by Alliance or any Guarantor for 30 days after receipt of
written notice given by the trustee or the holders of at least 30% in
principal amount of the notes then outstanding to comply with any of its
other agreements in the indenture or the notes;
(d) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by Alliance or any of its Restricted Subsidiaries or the
payment of which is guaranteed by Alliance or any of its Restricted
Subsidiaries (other than Indebtedness owed to Alliance or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both
(1) such default either
(A) results from the failure to pay any such Indebtedness at its
stated final maturity (after giving effect to any applicable grace
periods) or
(B) relates to an obligation other than the obligation to pay
principal of any such Indebtedness at its stated final maturity and
results in the holder or holders of such Indebtedness causing such
Indebtedness to become due prior to its stated maturity and
(2) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at stated final maturity (after giving effect to any
applicable grace periods), or the maturity of which has been so
accelerated, aggregate $20 million or more at any one time outstanding;
(e) failure by Alliance or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $20 million, which final judgments
remain unpaid, undischarged and unstayed for a period of more than 60 days
after such judgment becomes final, and in the event such judgment is covered
by insurance, an enforcement proceeding has been commenced by any creditor
upon such judgment or decree which is not promptly stayed;
(f) certain events of bankruptcy or insolvency with respect to Alliance
or any of its Significant Subsidiaries; or
93
(g) any Guarantee shall for any reason cease to be in full force and
effect or be declared null and void or any responsible officer of Alliance
or any Guarantor denies that it has any further liability under any
Guarantee or gives notice to such effect (other than by reason of the
termination of the indenture or the release of any such Guarantee in
accordance with the indenture).
If any event of default (other than of a type specified in clause (f) above)
occurs and is continuing under the indenture, the trustee or the holders of at
least 30% in principal amount of the then outstanding notes may declare the
principal, premium, if any, interest and any other monetary obligations on all
the then outstanding notes to be due and payable immediately; PROVIDED, HOWEVER
that, so long as any Indebtedness permitted to be incurred pursuant to the
Credit Facility shall be outstanding, no such acceleration shall be effective
until the earlier of (x) acceleration of any such Indebtedness under the Credit
Facility or (y) five business days after the giving of written notice to
Alliance and the administrative agent under the Credit Facility of such
acceleration. Upon the effectiveness of such declaration, such principal and
interest will be due and payable immediately. Notwithstanding the foregoing, in
the case of an event of default arising under clause (f) of the first paragraph
of this section with respect to the Company, all outstanding notes will become
due and payable without further action or notice. Holders of the notes may not
enforce the indenture or the notes except as provided in the indenture. Subject
to certain limitations, holders of a majority in principal amount of the then
outstanding notes may direct the trustee in its exercise of any trust or power.
The indenture will provide that the trustee may withhold from holders of notes
notice of any continuing default or event of default (except a default or event
of default relating to the payment of principal, premium, if any, or interest)
if it determines that withholding notice is in their interest.
The indenture provides that the holders of a majority in aggregate principal
amount of the then outstanding notes issued thereunder by notice to the trustee
may on behalf of the holders of all of such notes waive any existing default or
event of default and its consequences under the indenture except a continuing
default or event of default in the payment of interest on, premium, if any, or
the principal of any such note held by a non-consenting holder. In the event of
any event of default specified in clause (d) above, such event of default and
all consequences thereof (including without limitation any acceleration or
resulting payment default) shall be annulled, waived and rescinded,
automatically and without any action by the trustee or the holders of the notes,
if within 20 days after such event of default arose (x) the Indebtedness or
guarantee that is the basis for such event of default has been discharged, or
(y) the holders thereof have rescinded or waived the acceleration, notice or
action (as the case may be) giving rise to such event of default, or (z) if the
default that is the basis for such event of default has been cured.
The indenture provides that Alliance is required to deliver to the trustee
annually a statement regarding compliance with the indenture, and Alliance is
required, within five business days, upon becoming aware of any default or event
of default or any default under any document, instrument or agreement
representing Indebtedness of Alliance or any Guarantor, to deliver to the
trustee a statement specifying such default or event of default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Alliance or
any Guarantor, shall have any liability for any obligations of Alliance or the
Guarantors under the notes, the Guarantees or the indenture or for any claim
based on, in respect of, or by reason of such obligations or their creation.
Each holder of notes by accepting a note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
94
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of Alliance and the Guarantors, if any, under the indenture
will terminate (other than certain obligations) and will be released upon
payment in full of all of the notes. Alliance may, at its option and at any
time, elect to have all of its obligations discharged with respect to the
outstanding notes and have each Guarantor's obligation discharged with respect
to its Guarantee ("LEGAL DEFEASANCE") and cure all then existing events of
default under the indenture except for
(a) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest and on such notes
when such payments are due solely out of the trust created pursuant to the
indenture,
(b) Alliance's obligations with respect to notes concerning issuing
temporary notes, registration of such notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
(c) the rights, powers, trusts, duties and immunities of the trustee,
and Alliance's obligations in connection therewith and
(d) the Legal Defeasance provisions of the indenture.
In addition, Alliance may, at its option and at any time, elect to have the
obligations of Alliance and each Guarantor released with respect to certain
covenants that are described in the indenture ("COVENANT DEFEASANCE") and
thereafter any omission to comply with such obligations shall not constitute a
default or event of default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment on other
indebtedness, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an event of
default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the notes:
(a) Alliance must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest,
if any, due on the outstanding notes on the stated maturity date or on the
applicable redemption date, as the case may be, of such principal of, or
premium, if any, or interest on the outstanding notes;
(b) in the case of Legal Defeasance, Alliance shall have delivered to
the trustee an opinion of counsel in the United States reasonably acceptable
to the trustee confirming that, subject to customary assumptions and
exclusions,
(1) Alliance has received from, or there has been published by, the
United States Internal Revenue Service a ruling or
(2) since the Issuance Date, there has been a change in the
applicable U.S. federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel in the United States
shall confirm that, subject to customary assumptions and exclusions, the
holders of the outstanding notes will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such Legal Defeasance
and will be subject to U.S. federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, Alliance shall have delivered to
the trustee an opinion of counsel in the United States reasonably acceptable
to the trustee confirming that, subject to customary assumptions and
exclusions, the holders of the outstanding notes will not recognize income,
gain or loss for U.S. federal income tax purposes as a result of such
Covenant
95
Defeasance and will be subject to such tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(d) no default or event of default shall have occurred and be continuing
with respect to certain events of default under the indenture on the date of
such deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the indenture) to which, Alliance or any
Guarantor is a party or by which Alliance or any Guarantor is bound;
(f) Alliance shall have delivered to the trustee an opinion of counsel
to the effect that, as of the date of such opinion and subject to customary
assumptions and exclusions following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the trustee has a
perfected security interest in such trust funds for the ratable benefit of
the holders of notes;
(g) Alliance shall have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by Alliance with the
intent of defeating, hindering, delaying or defrauding any creditors of
Alliance or any Guarantor or others; and
(h) Alliance shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when
(a) either
(1) all such notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust and
thereafter repaid to Alliance) have been delivered to the trustee for
cancellation; or
(2) all such notes not theretofore delivered to such trustee for
cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise or will become due and payable within
one year and Alliance or any Guarantor has irrevocably deposited or
caused to be deposited with such trustee as trust funds in trust solely
for the benefit of the holders, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will
be sufficient without consideration of any reinvestment of interest, to
pay and discharge the entire indebtedness on such notes not theretofore
delivered to the trustee for cancellation for principal, premium, if any,
and accrued interest to the date of maturity or redemption;
(b) no default or event of default with respect to the indenture or the
notes shall have occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit will not result in
a breach or violation of, or constitute a default under, any other
instrument to which Alliance or any Guarantor is a party or by which
Alliance or any Guarantor is bound;
(c) Alliance or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
96
(d) Alliance has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, Alliance must deliver an Officers' Certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and Alliance may require
a holder to pay any taxes and fees required by law or permitted by the
indenture. Alliance is not required to transfer or exchange any note selected
for redemption. Also, Alliance is not required to transfer or exchange any note
for a period of 15 days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the indenture, any
Guarantee and the notes issued thereunder may be amended or supplemented with
the consent of the holders of at least a majority in principal amount of the
notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes),
and any existing default or compliance with any provision of the indenture or
the notes may be waived with the consent of the holders of a majority in
principal amount of the then outstanding notes (including consents obtained in
connection with a tender offer or exchange offer for notes).
The indenture provides that without the consent of each holder affected, an
amendment or waiver may not (with respect to any notes held by a non-consenting
holder of the notes):
(a) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver,
(b) reduce the principal of or change the fixed maturity of any such
note or alter or waive the provisions with respect to the redemption of the
notes (other than provisions relating to the covenants described above under
the caption "Repurchase at the Option of Holders"),
(c) reduce the rate of or change the time for payment of interest on any
note,
(d) waive a default or event of default in the payment of principal of
or premium, if any, or interest on the notes (except a rescission of
acceleration of the notes by the holders of at least a majority in aggregate
principal amount of such notes and a waiver of the payment default that
resulted from such acceleration), or in respect of a covenant or provision
contained in the indenture or any Guarantee which cannot be amended or
modified without the consent of all holders of notes,
(e) make any note payable in currency other than that stated in such
note,
(f) make any change in the provisions of the indenture relating to
waivers of past defaults or the rights of holders of notes to receive
payments of principal of or premium, if any, or interest on the notes,
(g) make any change in this paragraph,
97
(h) impair the right of any holder of the notes to receive payment of
principal of, or interest or Liquidated Damages on, such holder's notes on
or after the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such holder's notes, or
(i) make any change in the subordination provisions of the indenture
that would adversely affect the holders of the notes.
The indenture provides that, notwithstanding the foregoing, without the
consent of any holder of notes, Alliance, any Guarantor (with respect to a
Guarantee or the indenture to which it is a party) and the trustee may amend or
supplement the indenture, any Guarantee or the notes
(a) to cure any ambiguity, defect or inconsistency,
(b) to provide for uncertificated notes in addition to or in place of
certificated notes,
(c) to comply with the covenant relating to mergers, consolidations and
sales of assets to provide for the assumption of Alliance's or any
Guarantor's obligations to holders of such notes,
(d) to provide for the assumption of Alliance's or any Guarantor's
obligations to holders of such notes,
(e) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect the legal
rights under the indenture of any such holder,
(f) to add covenants for the benefit of the holders or to surrender any
right or power conferred upon Alliance,
(g) to comply with the requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust Indenture
Act,
(h) to evidence and provide for the acceptance of appointment under the
indenture by a successor trustee pursuant to the requirements thereof,
(i) to add a Guarantor under the indenture or release a Guarantor from
its Guarantee pursuant to the terms of the indenture, or
(j) to make any change to the subordination provisions of the indenture
that would limit or terminate the benefits available to any holder of Senior
Indebtedness under such provisions, PROVIDED that if the rights of the
holders of Senior Indebtedness are adversely affected, such holders of
Senior Indebtedness must consent thereto.
The consent of the holders of notes is not necessary under the indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
CONCERNING THE TRUSTEE
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of Alliance, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, or resign.
The indenture provides that the holders of a majority in principal amount of
the outstanding notes issued thereunder will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the trustee, subject to certain exceptions. The indenture will
provide that in case an event of default under the indenture shall occur (which
shall not be cured), the trustee will be required, in the exercise of its power,
to use the degree of care of a
98
prudent person in the conduct of his own affairs. Subject to such provisions,
the trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any holder of such notes, unless such
holder shall have offered to the trustee security and indemnity satisfactory to
it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture and
the registration rights agreement without charge by writing to Alliance
Imaging, Inc. at 1065 PacifiCenter Drive, Suite 200, Anaheim, CA 92806,
Attention: Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the notes will be issued in registered, global
form in minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof. The exchange notes initially will be in the form of one or more
registered global exchange notes without interest coupons (collectively, the
"GLOBAL EXCHANGE NOTES"). Upon issuance, the Global Exchange Notes will be
deposited with the trustee, as custodian for DTC, in New York, New York, and
registered in the name of DTC or its nominee (a "NOMINEE"), in each case, for
credit to an account of a direct or indirect participant in DTC as described
below
The Global Exchange Notes may be transferred, in whole and not in part, only
to another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Exchange Notes may be
exchanged for exchange notes in certificated form in certain limited
circumstances. See "--Transfer of Interests in Global Exchange Notes for
Certificated Exchange Notes."
Initially, the trustee will act as Paying Agent and Registrar. The exchange
notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised Alliance that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"DIRECT PARTICIPANTS") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, including Euroclear and Cedel. Access to DTC's
system is also available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a Direct Participant
(collectively, the "INDIRECT PARTICIPANTS"). DTC may hold securities
beneficially owned by other persons only through the Direct Participants or
Indirect Participants and such other persons' ownership interest and transfer of
ownership interest will be recorded only on the records of the Direct
Participant and/or Indirect Participant, and not on the records maintained by
DTC.
DTC has also advised Alliance that, pursuant to DTC's procedures,
(a) upon deposit of the Global Exchange Notes, DTC will credit the
accounts of the Direct Participants with portions of the principal amount of
the Global Exchange Notes allocated by the initial purchasers to such Direct
Participants, and
(b) DTC will maintain records of the ownership interests of such Direct
Participants in the Global Exchange Notes and the transfer of ownership
interests by and between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer of
ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the Global Exchange
99
Notes. Direct Participants and Indirect Participants must maintain their own
records of the ownership interests of, and the transfer of ownership interests
by and between, Indirect Participants and other owners of beneficial interests
in the Global Exchange Notes.
Investors in the Global Exchange Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. All ownership
interests in any Global Exchange Notes, including those of customers' securities
accounts held through Euroclear or CEDEL, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or CEDEL may also be
subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Exchange Note
to such persons. Because DTC can act only on behalf of Direct Participants,
which in turn act on behalf of Indirect Participants and others, the ability of
a person having a beneficial interest in a Global Exchange Note to pledge such
interest to persons or entities that are not Direct Participants in DTC, or to
otherwise take actions in respect of such interests, may be affected by the lack
of physical certificates evidencing such interests.
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES
FOR CERTIFICATED EXCHANGE NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL
EXCHANGE NOTES WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE
PHYSICAL DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the indenture, Alliance and the trustee will treat the
persons in whose names the exchange notes are registered (including exchange
notes represented by Global Exchange Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, and interest on Global Exchange
Notes registered in the name of DTC or its nominee will be payable by the
trustee to DTC or its nominee as the registered holder under the indenture.
Consequently, neither Alliance, the trustee nor any agent of Alliance or the
trustee has or will have any responsibility or liability for
(1) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Exchange Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in any Global Exchange Note or
(2) any other matter relating to the actions and practices of DTC or
any of its Direct Participants or Indirect Participants.
DTC has advised Alliance that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the
exchange notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Exchange Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the exchange notes will be governed by
standing instructions and customary practices between them and will not be the
responsibility of DTC, the trustee or Alliance. Neither Alliance nor the trustee
will be liable for any delay by DTC or its Direct Participants or Indirect
Participants in identifying the beneficial owners of the exchange notes, and
Alliance and the trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
exchange notes for all purposes.
Except for trades involving only Euroclear or CEDEL participants, interests
in the Global Exchange Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and,
100
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the exchange notes through Euroclear or CEDEL) who hold
an interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the exchange notes through Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the notes
herein, cross-market transfers between Direct Participants in DTC, on the one
hand, and Indirect Participants who hold interests in the exchange notes through
Euroclear or CEDEL, on the other hand, will be effected by Euroclear or CEDEL's
respective Nominee through DTC in accordance with DTC's rules on behalf of
Euroclear or CEDEL; however, delivery of instructions relating to cross-market
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL, as the case may be, and within their established deadlines (Brussels time
for Euroclear and UK time for CEDEL). Indirect Participants who hold interest in
the exchange notes through Euroclear and CEDEL may not deliver instructions
directly to Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the
transaction meets its settlement requirements, deliver instructions to its
respective Nominee to deliver or receive interests on Euroclear's or CEDEL's
behalf in the relevant Global Exchange Note in DTC, and make or receive payment
in accordance with normal procedures for same-day fund settlement applicable to
DTC.
Because of time zone differences, the securities account of an Indirect
Participant who holds an interest in the exchange notes through Euroclear or
CEDEL purchasing an interest in a Global Exchange Note from a Direct Participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL Direct Participant during the European business day
immediately following the settlement date of DTC in New York. Although recorded
in DTC's accounting records as of DTC's settlement date in New York, Euroclear
and CEDEL customers will not have access to the cash amount credited to their
accounts as a result of a sale of an interest in a Global Exchange Note to a DTC
Participant until the European business day for Euroclear or CEDEL immediately
following DTC's settlement date.
DTC has advised Alliance that it will take any action permitted to be taken
by a holder of exchange notes only at the direction of one or more Direct
Participants to whose account interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of the notes as to which such Direct Participant or Direct Participants has or
have given direction. However, if there is an event of default under the
exchange notes, DTC reserves the right to exchange Global Exchange Notes
(without the direction of one or more of its Direct Participants) for legended
notes in certificated form, and to distribute such certificated forms of
exchange notes to its Direct Participants. See "--Transfers of Interests in
Global Exchange Notes for Certificated Exchange Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Exchange Notes among Direct
Participants, Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither Alliance nor the trustee will have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective Direct and Indirect
Participants of their respective obligations under the rules and procedures
governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that Alliance believes
to be reliable, but Alliance takes no responsibility for the accuracy thereof.
101
TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR CERTIFICATED EXCHANGE NOTES
An entire Global Exchange Note may be exchanged for definitive exchange
notes in registered, certificated form without interest coupons ("CERTIFICATED
EXCHANGE NOTES") only if
(a) DTC (1) notifies Alliance that it is unwilling or unable to continue
as depositary for the Global Exchange Notes and Alliance thereupon fails to
appoint a successor depositary within 90 days or (2) has ceased to be a
clearing agency registered under the Exchange Act,
(b) Alliance, at its option, notifies the trustee in writing that it
elects to cause the issuance of Certificated Exchange Notes or
(c) there shall have occurred and be continuing a default or an event of
default with respect to the exchange notes.
In any such case, Alliance will notify the trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interest in such
Global Exchange Note, Certificated Exchange Notes will be issued to each person
that such Direct and Indirect Participants and DTC identify as being the
beneficial owner of the related notes.
Certificated Exchange Notes delivered in exchange for any beneficial
interest in any Global Exchange Note will be registered in the names, and issued
in any approved denominations, requested by DTC on behalf of such Direct or
Indirect Participants (in accordance with DTC's customary procedures).
Neither Alliance nor the trustee will be liable for any delay by the holder
of the Global Exchange Notes or the DTC in identifying the beneficial owners of
notes, and Alliance and the trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Exchange
Note or the DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the notes represented by
the Global Exchange Notes (including principal, premium, if any, and interest,
if any) be made by wire transfer of immediately available funds to the accounts
specified by the holder of such Global Exchange Note. With respect to
Certificated Exchange Notes, Alliance will make all payments of principal,
premium, and interest, if any, by wire transfer of immediately available funds
to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. Alliance
expects that secondary trading in the Certificated Exchange Notes will also be
settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the registration rights agreement, Alliance will agree to file
the exchange offer registration statement on the appropriate form under the
Securities Act with the Commission with respect to the exchange notes. Upon the
effectiveness of the exchange offer registration statement, Alliance will offer
to the holders of Transfer Restricted Securities (as defined) pursuant to the
exchange offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for exchange notes. If
(a) Alliance is not required to file the exchange offer registration
statement or permitted to consummate the exchange offer because the exchange
offer is not permitted by applicable law or Commission policy or
(b) any holder of Transfer Restricted Securities notifies Alliance prior
to the 20th day following consummation of the exchange offer that
102
(1) it is prohibited by law or Commission policy from participating
in the exchange offer or
(2) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is not
available for such resales or
(3) that it is a broker-dealer and owns outstanding notes acquired
directly from Alliance or an affiliate of Alliance,
Alliance will file with the Commission a shelf registration statement pursuant
to Rule 415 under the Securities Act to cover resales of the outstanding notes
by the holders thereof who satisfy certain conditions relating to the provision
of information in connection with the shelf registration statement. Alliance
will use its reasonable best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "TRANSFER RESTRICTED SECURITIES" means each old
note until the earliest to occur of
(a) the date on which such note is exchanged by a person other than a
broker-dealer in the exchange offer and entitled to be resold to the public
by the holder thereof without complying with the prospectus delivery
requirements of the Securities Act,
(b) following the exchange by a broker-dealer in the exchange offer of
such note for an exchange note, the date on which such exchange note is sold
to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the exchange offer
registration statement,
(c) the date on which such note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf registration
statement or
(d) the date on which such note is distributed to the public pursuant to
the "Plan of Distribution" contemplated by the exchange offer registration
statement, including the delivery of the prospectus contained therein.
The registration rights agreement provides that
(a) Alliance will file an exchange offer registration statement with the
Commission on or prior to 120 days after the Closing Date,
(b) Alliance will use its best efforts to have the exchange offer
registration statement declared effective by the Commission on or prior to
200 days after the Closing Date,
(c) unless the exchange offer would not be permitted by applicable law
or Commission policy, Alliance will commence the exchange offer and use its
best efforts to issue on or prior to 230 days after the Closing Date,
exchange notes in exchange for all outstanding notes tendered prior thereto
in the exchange offer and
(d) if obligated to file the shelf registration statement, Alliance will
file the shelf registration statement with the Commission on or prior to
30 days after such filing obligation arises and use its best efforts to
cause the shelf registration statement to be declared effective by the
Commission on or prior to 75 days after such filing.
If
(a) Alliance fails to file any of the registration statements required
by the registration rights agreement on or before the date specified for
such filing,
(b) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"EFFECTIVENESS TARGET DATE"),
103
(c) Alliance fails to consummate the exchange offer within 30 business
days of the Effectiveness Target Date with respect to the exchange offer
registration statement or
(d) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the periods specified in the registration rights agreement
(each such event referred to in clauses (a) through (d) above a "REGISTRATION
DEFAULT"), then Alliance will pay liquidated damages to each holder of old notes
("LIQUIDATED DAMAGES"). Liquidated Damages will accrue, at an annual rate of
0.25% of the aggregate principal amount of the old notes on the date of such
Registration Default, payable in cash semi-annually in arrears on each interest
payment date, commencing on the date of such Registration Default. All accrued
Liquidated Damages will be paid by Alliance on each interest payment date to the
global old note holder by wire transfer of immediately available funds and to
holders of certificated old notes by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts have
been specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of old notes will be required to make certain representations to
Alliance (as described in the registration rights agreement) in order to
participate in the exchange offer and will be required to deliver information to
be used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set forth
in the registration rights agreement in order to have their old notes included
in the shelf registration statement and benefit from the provisions regarding
Liquidated Damages set forth above.
The registration rights agreement provides that the Liquidated Damages
specified above will be the exclusive remedy available to holders of Transfer
Restricted Securities for any failure by Alliance to comply with the
registration requirements of the registration rights agreement.
The summary in this offering memorandum of certain provisions of the
registration rights agreement does not purport to be complete and is subject to,
and is qualified in its entirety by, all of the provisions of the registration
rights agreement.
GOVERNING LAW
The indenture, the notes and the Guarantees, if any, will be, subject to
certain exceptions, governed by and construed in accordance with the internal
laws of the State of New York, without regard to the choice of law rules
thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person,
(a) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or
into or becoming a Restricted Subsidiary of such specified Person, and
(b) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
104
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "CONTROL"
(including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY"
and "UNDER COMMON CONTROL WITH"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"ASSET SALE" means
(a) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of Alliance or any
Restricted Subsidiary (each referred to in this definition as a
"DISPOSITION"), or
(b) the issuance or sale of Equity Interests of any Restricted
Subsidiary (whether in a single transaction or a series of related
transactions),
in each case, other than:
(1) a disposition of Cash Equivalents or Investment Grade Securities
or obsolete equipment in the ordinary course of business;
(2) the disposition of all or substantially all of the assets of
Alliance in a manner permitted pursuant to the provisions described above
under "--Merger, Consolidation or Sale of All or Substantially All
Assets" or any disposition that constitutes a Change of Control pursuant
to the indenture;
(3) any Restricted Payment that is permitted to be made, and is made,
under the first paragraph of the covenant described above under
"Limitation on Restricted Payments";
(4) any disposition of assets with an aggregate fair market value of
less than $2 million;
(5) any disposition of property or assets by a Restricted Subsidiary
to Alliance or by Alliance or a Restricted Subsidiary to a Wholly Owned
Restricted Subsidiary;
(6) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar Business;
(7) any financing transaction with respect to property built or
acquired by Alliance or any Restricted Subsidiary after the Issuance Date
including, without limitation, sale-leasebacks and asset securitizations;
(8) foreclosures on assets;
(9) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility;
(10) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
(11) any sale of an imaging or therapeutic system to any original
manufacturer of imaging or therapeutic systems in exchange for a credit
from such manufacturer against the purchase of a replacement or alternate
imaging or therapeutic system; and
(12) any sale of an imaging or therapeutic system pursuant to an
arrangement with a client of Alliance or one of its Restricted
Subsidiaries; provided that (i) any such system was purchased by Alliance
or such Restricted Subsidiary within the 90 days prior to the date of
such sale and (ii) Alliance or such Restricted Subsidiary receives net
cash proceeds in
105
connection with the sale in an amount equal to or greater than the amount
it paid for such system.
"CAPITALIZED LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"CAPITAL STOCK" means
(a) in the case of a corporation, corporate stock,
(b) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock,
(c) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited) and
(d) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH EQUIVALENTS" means
(a) U.S. dollars,
(b) securities issued or directly and fully guaranteed or insured by the
U.S. Government or any agency or instrumentality thereof,
(c) certificates of deposit, time deposits and eurodollar time deposits
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any commercial bank having capital and surplus
in excess of $ 250.0 million,
(d) repurchase obligations for underlying securities of the types
described in clauses (b) and (c) entered into with any financial institution
meeting the qualifications specified in clause (c) above,
(e) commercial paper rated A-1 or the equivalent thereof by Moody's or
S&P and in each case maturing within one year after the date of acquisition,
(f) investment funds investing at least 95% of their assets in
securities of the types described in clauses (a)-(e) above,
(g) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from either Moody's or S&P and
(h) Indebtedness or preferred stock issued by Persons with a rating of
"A" or higher from S&P or "A2" or higher from Moody's.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(a) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of Alliance and its
Subsidiaries, taken as a whole; or
(b) Alliance becomes aware of (by way of a report or any other filing
pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice
or otherwise) the acquisition by any Person or group (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor
provision), including any group acting for the purpose of acquiring, holding
or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the
Exchange Act), other
106
than the Permitted Holders and their Related Parties, in a single
transaction or in a related series of transactions, by way of merger,
consolidation or other business combination or purchase of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any
successor provision) of 50% or more of the total voting power of the Voting
Stock of Alliance.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Alliance and its Subsidiaries (determined on a consolidated
basis). Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
Alliance to repurchase such notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Alliance and
its Subsidiaries taken as a whole to another Person or group may be uncertain.
"CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person and its Restricted Subsidiaries for such period on a
consolidated basis and otherwise determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum,
without duplication, of:
(a) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, to the extent such expense was deducted in
computing Consolidated Net Income (including amortization of original issue
discount, non-cash interest payments, the interest component of Capitalized
Lease Obligations, and net payments and receipts (if any) pursuant to
Hedging Obligations to the extent included in Consolidated Interest Expense,
excluding amortization of deferred financing fees); and
(b) consolidated capitalized interest of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued;
PROVIDED, HOWEVER, that Receivables Fees shall be deemed not to constitute
Consolidated Interest Expense.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income, of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; PROVIDED, HOWEVER, that
(a) any net after-tax extraordinary or nonrecurring gains or losses
(less all fees and expenses relating thereto) shall be excluded,
(b) the Net Income for such period shall not include the cumulative
effect of a change in accounting principles during such period,
(c) any net after-tax income (loss) from discontinued operations and any
net after-tax gains or losses on disposal of discontinued operations shall
be excluded,
(d) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the
ordinary course of business (as determined in good faith by the Board of
Directors of Alliance) shall be excluded,
(e) the Net Income for such period of any Person that is not a
Subsidiary, or is an Unrestricted Subsidiary, or that is accounted for by
the equity method of accounting, shall be included only to the extent of the
amount of dividends or distributions or other payments paid in cash (or to
the extent converted into cash) to the referent Person or a Wholly Owned
Restricted Subsidiary thereof in respect of such period,
107
(f) for purposes of the covenant described under "--Limitation on
Restricted Payments" only, the Net Income of any Person acquired in a
pooling of interests transaction shall not be included for any period prior
to the date of such acquisition and
(g) the Net Income for such period of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of its Net Income is not
at the date of determination permitted without any prior governmental
approval (which has not been obtained) or, directly or indirectly, by the
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule, or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, unless such
restriction with respect to the payment of dividends or in similar
distributions has been legally waived.
"CONTINGENT OBLIGATIONS" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("PRIMARY OBLIGATIONS") of any other Person (the
"PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(a) to purchase any such primary obligation or any property constituting
direct or indirect security therefor,
(b) to advance or supply funds
(1) for the purchase or payment of any such primary obligation or
(2) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, or
(c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation against
loss in respect thereof.
"CREDIT FACILITIES" means, with respect to Alliance, one or more debt
facilities (including, without limitation, the Credit Facility) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of noncash
consideration received by Alliance or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of Alliance, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"DESIGNATED PREFERRED STOCK" means preferred stock of Alliance (other than
Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of Alliance, on the issuance date thereof, the cash
proceeds of which are excluded from the calculation set forth in clause (3) of
the covenant described under "Limitation on Restricted Payments."
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is putable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to
108
a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, in each case prior to the date 91 days
after the maturity date of the notes; PROVIDED, HOWEVER, that if such Capital
Stock is issued to any employee or to any plan for the benefit of employees of
Alliance or its Subsidiaries or by any such plan to such employees, such Capital
Stock shall not constitute Disqualified Stock solely because it may be required
to be repurchased by Alliance in order to satisfy applicable statutory or
regulatory obligations, PROVIDED, FURTHER, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof (or of any
security into which it is convertible or for which it is exchangeable) have the
right to require the issuer to repurchase such Capital Stock (or such security
into which it is convertible or for which it is exchangeable) upon the
occurrence of any of the events constituting an Asset Sale or a Change of
Control shall not constitute Disqualified Stock if such Capital Stock (and all
such securities into which it is convertible or for which it is exchangeable)
provides that the issuer thereof will not repurchase or redeem any such Capital
Stock (or any such security into which it is convertible or for which it is
exchangeable) pursuant to such provisions prior to compliance by Alliance with
the provisions of the indenture described under the caption "Repurchase at the
Option of Holders--Change of Control" or "Repurchase at the Option of
Holders--Asset Sales," as the case may be.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period PLUS to the extent included in the
calculation of such Consolidated Net Income
(a) provision for taxes based on income or profits of such Person for
such period, PLUS
(b) Consolidated Interest Expense of such Person for such period and any
Receivables Fees paid by such Person or any of its Restricted Subsidiaries
during such period, PLUS
(c) Consolidated Depreciation and Amortization Expense of such Person
for such period, including amortization of deferred financing fees, PLUS
(d) any expenses or charges related to any Equity Offering, Permitted
Investment or Indebtedness permitted to be incurred by the indenture or any
costs incurred in the cancellation of stock options, PLUS
(e) the amount of any restructuring charge, PLUS
(f) without duplication, any other non-cash charges (excluding any such
charge which requires an accrual of a cash reserve for anticipated cash
charges for any future period), PLUS
(g) minority interest expense, LESS
(h) without duplication, non-cash items (excluding any items which
represent the reversal of any accrual of, or cash reserve for, anticipated
cash charges in any prior period).
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private sale of common stock or
preferred stock of Alliance (excluding Disqualified Stock), other than
(a) public offerings with respect to Alliance's common stock registered
on Form S-8 and
(b) any such public or private sale that constitutes an Excluded
Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXCLUDED CONTRIBUTIONS" means the net cash proceeds received by Alliance
after the Issuance Date from
109
(a) contributions to its equity capital other than contributions from
the issuance of Disqualified Stock and
(b) the sale (other than to a Subsidiary or to any Alliance or
Subsidiary management equity plan or stock option plan or any other
management or employee benefit plan or agreement) of Capital Stock (other
than Disqualified Stock) of Alliance,
in each case designated as Excluded Contributions pursuant to an Officers'
Certificate executed by the principal executive officer and the principal
financial officer of Alliance on the date such capital contributions are made or
the date such Equity Interests are sold, as the case may be, the cash proceeds
of which are excluded from the calculation set forth in paragraph (3) of the
"Limitation on Restricted Payments" covenant.
"EXISTING INDEBTEDNESS" means Indebtedness of Alliance or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the notes as described in
this offering memorandum.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that Alliance or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than in the case of (i) revolving credit borrowings, in which case
interest expense shall be computed based upon the average daily balance of such
Indebtedness during the applicable period and (ii) capitalized leases related to
imaging or therapeutic systems, in which case imputed interest expense shall be
computed from the date of such capitalized lease) or issues or redeems preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "CALCULATION DATE"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, plus the application of any proceeds
therefrom as if the same had occurred at the beginning of the applicable
four-quarter period. For purposes of making the computation referred to above,
Investments, acquisitions, dispositions, mergers, consolidations and
discontinued operations (as determined in accordance with GAAP) that have been
made by Alliance or any of its Restricted Subsidiaries during the four-quarter
reference period or subsequent to such reference period and on or prior to or
simultaneously with the Calculation Date shall be calculated on a pro forma
basis assuming that all such Investments, acquisitions, dispositions,
discontinued operations, mergers and consolidations (and the reduction of any
associated fixed charge obligations and the change in EBITDA resulting
therefrom) had occurred on the first day of the four-quarter reference period.
If since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into Alliance or any Restricted
Subsidiary since the beginning of such period) shall have made any Investment,
acquisition, disposition, discontinued operation, merger or consolidation that
would have required adjustment pursuant to this definition, then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect thereto for
such period as if such Investment, acquisition, disposition, discontinued
operation, merger or consolidation had occurred at the beginning of the
applicable four-quarter period. For purposes of this definition, whenever pro
forma effect is to be given to a transaction, the pro forma calculations shall
be made in good faith by a responsible financial or accounting officer of
Alliance. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest on such Indebtedness shall be calculated as
if the rate in effect on the Calculation Date had been the applicable rate for
the entire period (taking into account any Hedging Obligations applicable to
such Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed
to accrue at an interest rate reasonably determined by a responsible financial
or accounting officer of Alliance to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP. For purposes of making the
computation referred to above, interest on any Indebtedness under a revolving
credit facility computed on a pro
110
forma basis shall be computed based upon the average daily balance of such
Indebtedness during the applicable period. Interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as Alliance may designate. "Fixed Charges" means,
with respect to any Person for any period, the sum of (a) Consolidated Interest
Expense of such Person for such period and (b) all cash dividend payments
(excluding items eliminated in consolidation) on any series of preferred stock
of such Person.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date. For the purposes of the
indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary.
"GOVERNMENT SECURITIES" means securities that are
(a) direct obligations of the United States of America for the timely
payment of which its full faith and credit is pledged or
(b) obligations of a Person controlled or supervised by and acting as an
agency or instrumentality of the United States of America the timely payment
of which is unconditionally guaranteed as a full faith and credit obligation
by the United States of America,
which, in either case, are not callable or redeemable at the option of the
issuer thereof, and shall also include a depository receipt issued by a bank (as
defined in Section 3(a)(2) of the Securities Act), as custodian with respect to
any such Government Securities or a specific payment of principal of or interest
on any such Government Securities held by such custodian for the account of the
holder of such depository receipt; PROVIDED that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Securities or the specific payment of
principal of or interest on the Government Securities evidenced by such
depository receipt.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"GUARANTEE" means any guarantee of the obligations of Alliance under the
indenture and the notes by any Person in accordance with the provisions of the
indenture. When used as a verb, "Guarantee" shall have a corresponding meaning.
No Guarantees will be issued in connection with the initial offering and sale of
the old notes or will be issued in connection with the issuance of the exchange
notes.
"GUARANTOR" means any Person that incurs a Guarantee; PROVIDED that upon the
release and discharge of such Person from its Guarantee in accordance with the
indenture, such Person shall cease to be a Guarantor. No Guarantees will be
issued in connection with the initial offering and sale of the old notes or will
be issued in connection with the issuance of the exchange notes.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under
(a) currency exchange or interest rate swap agreements, currency
exchange or interest rate cap agreements and currency exchange or interest
rate collar agreements and
111
(b) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange or interest rates.
"INDEBTEDNESS" means, with respect to any Person,
(a) any indebtedness of such Person, whether or not contingent
(1) in respect of borrowed money,
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or bankers' acceptances (or, without double counting,
reimbursement agreements in respect thereof),
(3) representing the balance deferred and unpaid of the purchase
price of any property (including Capitalized Lease Obligations), except
any such balance that constitutes a trade payable or similar obligation
to a trade creditor, in each case accrued in the ordinary course of
business or
(4) representing any Hedging Obligations, if and to the extent of any
of the foregoing Indebtedness (other than letters of credit and Hedging
Obligations) that would appear as a liability upon a balance sheet
(excluding the footnotes thereto) of such Person prepared in accordance
with GAAP,
(b) to the extent not otherwise included, any obligation by such Person
to be liable for, or to pay, as obligor, guarantor or otherwise, on the
Indebtedness of another Person (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) and
(c) to the extent not otherwise included, Indebtedness of another Person
secured by a Lien on any asset owned by such Person (whether or not such
Indebtedness is assumed by such Person);
PROVIDED, HOWEVER, that Contingent Obligations incurred in the ordinary course
of business shall be deemed not to constitute Indebtedness and obligations under
or in respect of Receivables Facilities shall not be deemed to constitute
Indebtedness of a Person.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the judgment of Alliance's Board of
Directors, as evidenced by a board resolution, qualified to perform the task for
which it has been engaged, provided that such firm or consultant is not an
Affiliate of the Company.
"INVESTMENT GRADE SECURITIES" means
(a) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof (other
than Cash Equivalents),
(b) debt securities or debt instruments with a rating of BBB- or higher
by S&P or Baa3 or higher by Moody's or the equivalent of such rating by such
rating organization, or, if no rating of S&P or Moody's then exists, the
equivalent of such rating by any other nationally recognized securities
rating agency, but excluding any debt securities or instruments constituting
loans or advances among Alliance and its Subsidiaries, and
(c) investments in any fund that invests exclusively in investments of
the type described in clauses (a) and (b) which fund may also hold
immaterial amounts of cash pending investment and/or distribution.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees
112
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities issued by
any other Person and investments that are required by GAAP to be classified on
the balance sheet (excluding the footnotes thereto) of Alliance in the same
manner as the other investments included in this definition to the extent such
transactions involve the transfer of cash or other property. For purposes of the
definition of "Unrestricted Subsidiary" and the covenant described under
"--Certain Covenants--Limitation on Restricted Payments,"
(a) "INVESTMENTS" shall include the portion (proportionate to Alliance's
equity interest in such Subsidiary) of the fair market value of the net
assets of a Subsidiary of Alliance at the time that such Subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Alliance shall
be deemed to continue to have a permanent "INVESTMENT" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to
(1) Alliance's "INVESTMENT" in such Subsidiary at the time of such
redesignation less
(2) the portion (proportionate to Alliance's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary
at the time of such redesignation; and
(b) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"ISSUANCE DATE" means the closing date for the sale and original issuance of
the old notes under the indenture.
"KKR" means Kohlberg Kravis Roberts & Co., L.P., a Delaware limited
partnership.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
"MANAGEMENT GROUP" means the group consisting of the Officers of Alliance.
"MOODY'S" means Moody's Investors Service, Inc.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"NET PROCEEDS" means the aggregate cash proceeds received by Alliance or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
Designated Noncash Consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale and the sale or disposition of such Designated
Noncash Consideration (including, without limitation, legal, accounting and
investment banking fees, and brokerage and sales commissions), and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements related thereto), amounts required
to be applied to the repayment of principal, premium (if any) and interest on
Indebtedness required (other than required by clause (a) of the second paragraph
of "--Repurchase at the Option of Holders--Asset Sales") to be paid as a result
of such transaction and any deduction of appropriate amounts to be provided by
Alliance as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such
113
transaction and retained by Alliance after such sale or other disposition
thereof, including, without limitation, pension and other post-employment
benefit liabilities and liabilities related to environmental matters or against
any indemnification obligations associated with such transaction.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
"OFFERING" means the offering by Alliance of the notes pursuant to this
offering memorandum.
"OFFICER" means the Chairman of the Board, the President, any Executive Vice
President, Senior Vice President or Vice President, the Treasurer or the
Secretary of Alliance.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of Alliance by
two officers of Alliance, one of whom must be the principal executive officer,
the principal financial officer, the treasurer or the principal accounting
officer of Alliance that meets the requirements set forth in the indenture.
"PARI PASSU INDEBTEDNESS" means
(a) with respect to the notes, Indebtedness which ranks PARI PASSU in
right of payment to the notes and
(b) with respect to any Guarantee, Indebtedness which ranks PARI PASSU
in right of payment to such Guarantee.
"PERMITTED HOLDERS" means KKR and any of its Affiliates and the Management
Group.
"PERMITTED INVESTMENTS" means
(a) any Investment in Alliance or any Restricted Subsidiary;
(b) any Investment in cash and Cash Equivalents or Investment Grade
Securities;
(c) any Investment by Alliance or any Restricted Subsidiary of Alliance
in a Person that is a Similar Business if as a result of such Investment
(i) such Person becomes a Restricted Subsidiary or
(ii) such Person, in one transaction or a series of related
transactions, is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, Alliance or a Restricted Subsidiary.
(d) any Investment in securities or other assets not constituting cash
or Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "--Repurchase at the Option of Holders--Asset
Sales" or any other disposition of assets not constituting an Asset Sale;
(e) any Investment existing on the Issuance Date;
(f) advances to employees not in excess of $10 million outstanding at
any one time, in the aggregate;
(g) any Investment acquired by Alliance or any of its Restricted
Subsidiaries
(i) in exchange for any other Investment or accounts receivable held
by Alliance or any such Restricted Subsidiary in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization of
the issuer of such other Investment or accounts receivable or
114
(ii) as a result of a foreclosure by Alliance or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default; or
(iii) in connection with a transaction or series of transactions in
which the Person that owns the Investment becomes a Restricted Subsidiary
or is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into
Alliance or a Restricted Subsidiary; provided that such Investment was
not made in contemplation of such transaction of series of transactions.
(h) Hedging Obligations permitted under clause (j) of the "Limitation of
Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant;
(i) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar
expenses, in each case incurred in the ordinary course of business;
(j) any Investment in a Similar Business having an aggregate fair market
value, taken together with all other Investments made pursuant to this
clause (j) that are at that time outstanding, not to exceed the greater of
(x) $50 million or
(y) 15% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value);
(k) Investments the payment for which consists of Equity Interests of
Alliance (exclusive of Disqualified Stock); PROVIDED, HOWEVER, that such
Equity Interests will not increase the amount available for Restricted
Payments under clause (3) of the "Limitation on Restricted Payments"
covenant;
(l) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (l) that
are at that time outstanding, not to exceed the greater of
(x) $30 million or
(y) 10% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value);
(m) any transaction to the extent it constitutes an Investment that is
permitted by and made in accordance with the provisions of the second
paragraph of the covenant described under "--Certain Covenants--Transactions
with Affiliates" (except transactions described in clauses (2) and (6) of
such paragraph); and
(n) Investments relating to any special purpose Wholly Owned Subsidiary
of Alliance organized in connection with a Receivables Facility that, in the
good faith determination of the Board of Directors of Alliance, are
necessary or advisable to effect such Receivables Facility.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PREFERRED STOCK" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
115
"RECEIVABLES FACILITY" means one or more receivables financing facilities,
as amended from time to time, pursuant to which Alliance and/or any of its
Restricted Subsidiaries sells its accounts receivable to a Person that is not a
Restricted Subsidiary.
"RECEIVABLES FEES" means distributions or payments made directly or by means
of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"RELATED PARTIES" means any Person controlled by a Permitted Holder,
including any partnership of which a Permitted Holder or its Affiliates is the
general partner.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means, at any time, any direct or indirect
Subsidiary of Alliance that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon the occurrence of an Unrestricted Subsidiary ceasing to be an
Unrestricted Subsidiary, such Subsidiary shall be included in the definition of
"Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"SIMILAR BUSINESS" means a business the majority of whose revenues are
derived from the provision of diagnostic or therapeutic services or any business
or activity that is reasonably similar thereto or a reasonable extension,
development or expansion thereof or ancillary thereto as determined in good
faith by the board of directors of Alliance.
"SUBORDINATED INDEBTEDNESS" means
(a) with respect to the notes, any Indebtedness of Alliance which is by
its terms subordinated in right of payment to the notes and
(b) with respect to any Guarantee, any Indebtedness of the applicable
Guarantor which is by its terms subordinated in right of payment to such
Guarantee.
"SUBSIDIARY" means, with respect to any Person,
(a) any corporation, association, or other business entity (other than a
partnership) of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof is at the
time of determination owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a
combination thereof and
(b) any partnership, joint venture, limited liability company or similar
entity of which
(1) more than 50% of the capital accounts, distribution rights, total
equity and voting interests or general or limited partnership interests,
as applicable, are owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a
combination thereof whether in the form of membership, general, special
or limited partnership or otherwise and
(2) such Person or any Wholly Owned Restricted Subsidiary of such
Person is a controlling general partner or otherwise controls such
entity.
116
"TOTAL ASSETS" means the total consolidated assets of Alliance and its
Restricted Subsidiaries, as shown on the most recent balance sheet (excluding
the footnotes thereto) of Alliance.
"UNRESTRICTED SUBSIDIARY" means
(a) any Subsidiary of Alliance which at the time of determination is an
Unrestricted Subsidiary (as designated by the Board of Directors of
Alliance, as provided below);
(b) any Subsidiary of an Unrestricted Subsidiary; and
(c) (i) Alliance Imaging Financial Services, Inc.,
(ii) Alliance-Newport Harbor Radiology Group PET Services LLC,
(iii) Valley Imaging Partnership-Alliance PET Services LLC and
(iv) Alliance Diagnostics Venture, LLC.
The Board of Directors of Alliance may designate any Subsidiary of Alliance
(including any existing Subsidiary and any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Equity Interests of, or owns, or holds any Lien on,
any property of, Alliance or any Subsidiary of Alliance (other than any
Subsidiary of the Subsidiary to be so designated), PROVIDED that
(1) any Unrestricted Subsidiary must be an entity of which shares of
the capital stock or other equity interests (including partnership
interests) entitled to cast at least a majority of the votes that may be
cast by all shares or equity interests having ordinary voting power for
the election of directors or other governing body are owned, directly or
indirectly, by Alliance,
(2) Alliance certifies that such designation complies with the
covenants described under "--Certain Covenants--Limitation on Restricted
Payments" and
(3) each of
(A) the Subsidiary to be so designated and
(B) its Subsidiaries
has not at the time of designation, and does not thereafter, create,
incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the
lender has recourse to any of the assets of Alliance or any of its
Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary (including
any Unrestricted Subsidiary set forth in clause (c) of this definition) to be a
Restricted Subsidiary; provided that, immediately after giving effect to such
designation,
(x) Alliance could incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test described under
"--Certain Covenants--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock" or
(y) the Fixed Charge Coverage Ratio for Alliance and its Restricted
Subsidiaries would be greater than such ratio for Alliance and its
Restricted Subsidiaries immediately prior to such designation,
in each case on a pro forma basis taking into account such designation.
Any such designation by the Board of Directors shall be notified by Alliance
to the trustee by promptly filing with the trustee a copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
117
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing
(a) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Disqualified Stock multiplied by the amount of such payment, by
(b) the sum of all such payments.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
118
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
considerations relevant to the exchange of old notes for exchange notes and to
the ownership and disposition of the exchange notes, but does not purport to be
a complete analysis of all the potential tax considerations relating thereto.
This summary is based on laws, regulations, rulings and decisions now in effect,
all of which are subject to change or differing interpretation possibly with
retroactive effect. We have not sought any ruling from the Internal Revenue
Service (the "IRS") or an opinion of counsel with respect to the statements made
and the conclusions reached in the following summary, and there can be no
assurance that the IRS will agree with such statements and conclusions.
This discussion applies to you only if you hold the old notes and will hold
the exchange notes as capital assets. This discussion also does not address the
tax considerations arising under the laws of any foreign, state or local
jurisdiction. In addition, this discussion does not address tax considerations
applicable to your particular circumstances or if you are a taxpayer subject to
special tax rules, including, without limitation:
- a bank;
- a holder subject to the alternative minimum tax;
- a tax-exempt organization;
- an insurance company;
- a foreign person or entity (except to the extent specifically set forth
below);
- a dealer in securities or currencies;
- a person that holds old notes or will hold exchange notes as a position in
a hedging transaction, "straddle" or "conversion transaction" for tax
purposes; or
- a person deemed to sell notes under the constructive sale provisions of
the Internal Revenue Code.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF
THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL
AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR
UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR
UNDER ANY APPLICABLE TAX TREATY.
U.S. HOLDERS
For purposes of this summary, a "U.S. holder" means:
1. an individual citizen or resident of the United States;
2. a corporation (or an entity treated as a corporation) or partnership
created or organized in the United States or under the laws of the United
States, any state thereof, or the District of Columbia;
3. an estate, the income of which is subject to United States federal
income taxation regardless its source; or
4. a trust subject to the primary supervision of a United States court and
the control of one or more United States persons, or a trust in existence
on August 20, 1996 that has elected to continue to be treated as a United
States person.
119
In addition, if a holder is an entity treated as a partnership for United States
federal income tax purposes, the tax treatment of each partner of such
partnership will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner in a partnership which holds
notes or common stock, you should consult your tax advisor.
EXCHANGE OF OLD NOTES FOR EXCHANGE NOTES.
The exchange of the old notes for the exchange notes in the exchange offer
will not be treated as an "exchange" for federal income tax purposes, because
the old notes will not be considered to differ materially in kind or extent from
the exchange notes. A U.S. holder will have an initial tax basis in the exchange
notes equal to the basis of the old notes exchanged therefor, and the U.S.
holder's holding period for the exchange notes will include the period during
which the U.S. holder held the old notes.
TAXATION OF INTEREST.
You must include interest paid on the exchange notes as ordinary income at
the time it is received or accrued, in accordance with your regular method of
accounting for United States federal income tax purposes.
TAXATION OF MARKET DISCOUNT.
The market discount rules discussed below apply to any exchange note
purchased after original issue at a price less than its stated redemption price
at maturity.
If you purchase an exchange note at a market discount, you generally will be
required to treat any principal payments on, or any gain on the disposition on
maturity of, such note as ordinary income to the extent of the accrued market
discount (not previously included in income) at the time of such payment or
disposition. In general, subject to a DE MINIMIS exception, market discount is
the amount by which the note's stated redemption price at maturity exceeds your
basis in the note immediately after the note is acquired. A note is not treated
as purchased at a market discount, however, if the market discount is less than
0.25 percent of the stated redemption price at maturity of the note multiplied
by the number of complete years to maturity from the date when you acquired the
note. Market discount on a note will accrue on a straight-line basis, unless you
elect to accrue such discount on a constant yield to maturity basis. This
election is irrevocable and applies only to the note for which it is made. You
may also elect to include market discount in income currently as it accrues.
This election, once made, applies to all market discount obligations acquired on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the IRS. If you acquire a note at
a market discount and dispose of such note in any non-taxable transaction (other
than a nonrecognition transaction defined in section 1276(c) of the Internal
Revenue Code), accrued market discount will be includable as ordinary income to
you as if you had sold the note at its fair market value. You may be required to
defer until the maturity of the note or, in certain circumstances, its earlier
disposition the deduction of all or a portion of the interest expense
attributable to debt incurred or continued to purchase or carry a note with
market discount, unless the election to include the market discount in income on
a current basis is made.
TAXATION OF AMORTIZABLE BOND PREMIUM.
If you purchase an exchange note for an amount in excess of its stated
redemption price at maturity, you will generally be considered to have purchased
the note with "amortizable bond premium." The amount of amortizable bond premium
is computed based on the redemption price on an earlier call date if such
computation results in a smaller amortizable bond premium attributable to the
period of such earlier call date. You generally may elect to amortize such
premium using the constant yield to maturity method. The amount amortized in any
year will generally be treated as a
120
reduction of your interest income on the note. If the amortizable bond premium
allocable to a year exceeds the amount of interest allocable to that year, the
excess would be allowed as a deduction for that year but only to the extent of
your prior interest inclusions on the note. If you do not make such an election,
the premium on a note will decrease the gain or increase the loss otherwise
recognized on the sale, redemption, retirement or other disposition of the note.
The election to amortize the premium on a constant yield to maturity method,
once made, generally applies to all bonds held or subsequently acquired by you
on or after the first day of the first taxable year to which the election
applies. You may not revoke this election without the consent of the IRS.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES.
Upon the sale, exchange or redemption of an exchange note, you generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash proceeds and the fair market value of any property received on
the sale, exchange or redemption (except to the extent such amount is
attributable to accrued interest income not previously included in income, which
will be taxable as ordinary income, or is attributable to accrued interest that
was previously included in income, which amount may be received without
generating further income) and (ii) your adjusted tax basis in the note. Your
adjusted tax basis in a note generally will equal the cost of the note,
increased by market discount previously included in income, if any, and reduced
by any bond premium previously amortized. Subject to the market discount rules
discussed above, such capital gain or loss will be long-term capital gain or
loss if your holding period in the exchange note is more than one year at the
time of sale, exchange or redemption. Long-term capital gains recognized by
certain noncorporate U.S. holders, including individuals, will generally be
subject to a maximum tax rate of 20%. The deductibility of capital losses is
subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING.
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments pursuant to the terms of an exchange note if you are a U.S.
holder and not an "exempt recipient" and if you fail to provide certain
identifying information (such as your TIN) in the manner required. Generally,
individuals are not exempt recipients. Corporations are exempt recipients,
whereas other entities may be exempt recipients. Payments made in respect of an
exchange note must be reported to the IRS, unless you are an exempt recipient or
otherwise establish an exemption. Any amount withheld from a payment to you
under the backup withholding rules is allowable as a refund or credit against
your United States federal income tax, provided that the required information is
furnished to the IRS in a timely manner.
NON-U.S. HOLDERS
For purposes of this discussion, a "non-U.S. holder" means a holder that is
not a U.S. holder. In general, subject to the discussion below concerning backup
withholding:
EXCHANGE OF OLD NOTES FOR EXCHANGE NOTES.
The material federal income tax consequences to a non-U.S. holder of an
exchange of old notes for exchange notes will be the same as those described for
U.S. holders under "--U.S. Holders--Exchange of Old Notes for Exchange Notes."
121
TAXATION OF INTEREST.
Payments of principal or interest on the exchange notes by us or any paying
agent to a beneficial owner of a note that is a non-U.S. holder will not be
subject to United States withholding tax, provided that, in the case of
interest:
1. you do not own, actually or constructively, 10% or more of the total
combined voting power of all classes of our stock entitled to vote;
2. you are not a "controlled foreign corporation" with respect to which we
are a "related person;"
3. you are not a bank receiving interest pursuant to a loan agreement
entered into in the ordinary course of your trade or business; and
4. certain certification requirements are satisfied.
To satisfy the certification requirements referred to in (4) above, either
(i) the beneficial owner of a note must certify, under penalties of perjury, to
us or our paying agent, as the case may be, that such owner is a non-U.S. holder
and must-provide such owner's name and address, and United States taxpayer
identification number, if any, or (ii) a securities clearing organization, bank
or other financial institution that holds customer securities in the ordinary
course of its trade or business (a "Financial Institution") and holds the note
on behalf of the beneficial owner thereof must certify, under penalties of
perjury, to us or our paying agent, as the case may be, that such certificate
has been received from the beneficial owner and must furnish the payor with a
copy thereof. Such requirement will be fulfilled if the beneficial owner of a
note certifies on IRS Form W-8BEN or successor form, under penalties of perjury,
that it is a non-U.S. holder and provides its name and address or any Financial
Institution holding the note on behalf of the beneficial owner files a statement
with the withholding agent to the effect that it has received such a statement
from the beneficial owner (and furnishes the withholding agent with a copy
thereof). The applicable regulations generally also require, in the case of a
note held by a foreign partnership, that:
1. the certification described above be provided by the partners; and
2. the partnership provide certain information, including, under certain
circumstances, a United States taxpayer identification number.
Further, a look-through rule will apply in the case of tiered partnerships.
Prospective investors should consult their tax advisors regarding the
certification requirements for non-U.S. holders.
Interest on exchange notes not excluded from United States withholding tax
as described above generally will be subject to United States withholding tax at
a 30% rate, except where an applicable United States income tax treaty provides
for the reduction or elimination of such withholding tax (and you provide the
appropriate certification) or if interest on the notes is effectively connected
with your conduct of a trade or business in the United States, which is
described more fully below.
SALE, EXCHANGE OR REDEMPTION OF EXCHANGE NOTES.
You will not be required to pay United States federal income tax on gains
realized on the sale, exchange or redemption of an exchange note (except with
respect to accrued and unpaid interest, which would be taxable as described
above) unless:
1. you are an individual who is present in the United States for 183 days
or more in the taxable year of sale, exchange or other disposition, and
certain conditions are met;
122
2. such gain is effectively connected with your conduct of a trade or
business in the United States and, if certain United States income tax
treaties apply, is attributable to a United States permanent
establishment maintained by you; or
3. you are subject to Code provisions applicable to certain United States
expatriates.
INCOME OR GAINS EFFECTIVELY CONNECTED WITH A UNITED STATES TRADE OR BUSINESS.
If you are engaged in a trade or business in the United States and if
interest on the exchange notes or gain realized on the sale, exchange or other
disposition of an exchange note is effectively connected with the conduct of
such trade or business (and, if certain tax treaties apply, is attributable to a
United States permanent establishment maintained by you in the United States),
you, although exempt from United States withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be required to pay United States federal income tax on such interest
or gain on a net income basis in the same manner as if you were a U.S. holder.
In lieu of the certificate described above, you would be required, under
currently effective Treasury Regulations, to provide us with a properly executed
IRS Form W-8ECI or successor form in order to claim an exemption from United
States withholding tax. In addition, if you are a foreign corporation, you may
be subject to a branch profits tax equal to 30% (or such lower rate provided by
an applicable United States income tax treaty) of a portion of your effectively
connected earnings and profits for the taxable year.
UNITED STATES FEDERAL ESTATE TAX.
An exchange note held by an individual who at the time of death is not a
citizen or resident of the United States (as specially defined for United States
federal estate tax purposes) will not be subject to United States federal estate
tax if the individual did not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock and, at the time of the
individual's death, payments with respect to such note would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING.
You may have to comply with specific certification procedures to establish
that you are not a United States person in order to avoid backup withholding tax
requirements with respect to payments of principal and interest on the notes. In
addition, we may be required to report annually to the IRS and to you the amount
of, and the tax withheld respect to, any interest paid to you, regardless of
whether any tax was actually withheld. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement to
the tax authorities of the country in which the non-U.S. holder resides.
Any amounts withheld under the backup withholding rules from a payment to
you will be allowed as a refund or credit against your United States federal
income tax provided that the required information is furnished to the IRS in a
timely manner.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, YOU ARE URGED TO CONSULT YOUR TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF THE OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES,
INCLUDING THE EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, AS WELL AS THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
123
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented, may be used by a broker-dealer in connection with
resales of exchange notes received in exchange for outstanding notes only where
such outstanding notes were acquired as a result of market-making activities or
other trading activities. We have agreed that we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale for a period of 180 days from the date on which the
exchange offer is consummated, or such shorter period as will terminate when all
outstanding notes acquired by broker-dealers for their own accounts as a result
of market-making activities or other trading activities have been exchanged for
exchange notes and such exchange notes have been resold by such broker-dealers.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions:
- in the over-the-counter market;
- in negotiated transactions
- through the writing of options on the exchange notes; or
- through a combination of the above methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such exchange notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of exchange notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days from the date on which the exchange offer is
consummated, or such shorter period as will terminate when all outstanding notes
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for exchange notes
and such exchange notes have been resold by such broker-dealers, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer other than commissions or concessions of any brokers or dealers
and the fees of any counsel or other advisors or experts retained by the holders
of outstanding notes, except as expressly set forth in the registration rights
agreement, and will indemnify the holders of outstanding notes, including any
broker-dealers, against specified liabilities, including liabilities under the
Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer agrees to notify us before using
the prospectus in connection with the sale or transfer of exchange notes. The
broker-dealer further acknowledges and agrees that, upon receipt of notice from
us of the happening of any event which:
- makes any statement in the prospectus untrue in any material respect;
124
- requires the making of any changes in the prospectus to make the
statements in the prospectus not misleading; or
- may impose upon us disclosure obligations that my have a material adverse
effect on us,
which notice we agree to deliver promptly to the broker-dealer, the
broker-dealer will suspend use of the prospectus until we have notified the
broker-dealer that delivery of the prospectus may resume and have furnished
copies of any amendment or supplement to the prospectus to the broker-dealer.
LEGAL MATTERS
Latham & Watkins, Los Angeles, California, will pass upon various legal
matters for us in connection with the exchange notes offered hereby. Certain
partners of Latham & Watkins, members of their families and related persons
indirectly own less than 1% of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 2000 and 1999, and
for the years then ended, included in this prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule for the year ended December 31, 1998, as set
forth in their reports. We have included our financial statements and schedule
for this period in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
CHANGE OF ACCOUNTANTS
In November 1999, in connection with the KKR acquisition, our new board of
directors elected to change our independent auditors from Ernst & Young LLP to
Deloitte & Touche LLP. In connection with Ernst & Young LLP's audit of the
financial statements for the year ended December 31, 1998 and for the subsequent
unaudited six-month period ended June 30, 1999, there were no disagreements with
Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, nor any
reportable events. Ernst & Young LLP's reports on our financial statements for
the year ended December 31, 1998 contained no adverse opinions or disclaimers of
opinion and were not modified or qualified as to uncertainty, audit scope or
accounting principles. We have provided Ernst & Young LLP with a copy of the
disclosure contained in this section of the prospectus. Prior to retaining
Deloitte & Touche LLP, we did not consult with Deloitte & Touche LLP regarding
the application of accounting principles to a specified transaction or the type
of audit opinion that might be rendered on our financial statements.
125
ALLIANCE IMAGING, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report of Deloitte & Touche LLP....... F-2
Independent Auditors' Report of Ernst & Young LLP........... F-3
Consolidated Financial Statements
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Cash Flows..................... F-6
Consolidated Statements of Stockholders' Deficit.......... F-9
Notes to Consolidated Financial Statements................ F-10
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Alliance Imaging, Inc.
We have audited the accompanying consolidated balance sheets of Alliance
Imaging, Inc. and subsidiaries (the Company), as of December 31, 2000 and 1999,
and the related consolidated statements of operations, cash flows and
stockholders' deficit for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Alliance Imaging, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Costa Mesa, California
February 22, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Imaging, Inc.
We have audited the consolidated balance sheet (not separately presented herein)
of Alliance Imaging, Inc. as of December 31, 1998, and the related accompanying
restated consolidated statement of operations, stockholders' deficit and cash
flows for the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Alliance Imaging, Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Orange County, California
March 5, 1999, except for Note 1 -- Common Control Merger,
as to which the date is May 13, 1999
F-3
ALLIANCE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,804 $ 12,971
Accounts receivable, net of allowance for doubtful
accounts of $11,688 in 1999 and $15,570 in 2000......... 51,877 49,973
Deferred income taxes..................................... 8,369 3,085
Prepaid expenses.......................................... 2,574 1,874
Other receivables......................................... 4,001 4,189
--------- ---------
Total current assets........................................ 71,625 72,092
Equipment, at cost.......................................... 408,083 506,735
Less accumulated depreciation............................... (125,800) (176,939)
--------- ---------
282,283 329,796
Goodwill, net of accumulated amortization of $27,939 in 1999
and $35,600 in 2000....................................... 158,534 151,981
Other intangibles, net of accumulated amortization of $9,017
in 1999 and $14,570 in 2000............................... 74,724 69,450
Deferred financing costs, net of accumulated amortization of
$825 in 1999 and $3,095 in 2000........................... 16,324 14,104
Deposits and other assets................................... 22,020 8,737
--------- ---------
Total assets................................................ $ 625,510 $ 646,160
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 4,144 $ 11,980
Accrued compensation and related expenses................. 7,265 8,776
Accrued interest payable.................................. 5,892 14,412
Other accrued liabilities................................. 22,564 23,188
Current portion of long-term debt......................... 12,974 15,863
--------- ---------
Total current liabilities................................... 52,839 74,219
Long-term debt, net of current portion...................... 478,875 483,126
Senior subordinated credit facility due to affiliate........ 260,000 260,000
Minority interests.......................................... 459 702
Deferred income taxes....................................... 35,236 31,922
--------- ---------
Total liabilities........................................... 827,409 849,969
Commitments and contingencies (NOTE 8)
Stockholders' deficit:
Common stock, $.01 par value; 10,000,000 shares
authorized; shares issued and outstanding--3,798,858 in
1999 and 3,806,836 in 2000.............................. 38 38
Additional paid-in deficit................................ (137,825) (137,232)
Note receivable from officer.............................. -- (300)
Accumulated deficit....................................... (64,112) (66,315)
--------- ---------
Total stockholders' deficit................................. (201,899) (203,809)
--------- ---------
Total liabilities and stockholders' deficit................. $ 625,510 $ 646,160
========= =========
SEE ACCOMPANYING NOTES.
F-4
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues.................................................... $243,297 $318,106 $345,287
Costs and expenses:
Operating expenses, excluding depreciation................ 111,875 143,238 151,722
Depreciation expense...................................... 33,493 47,055 54,924
Selling, general and administrative expenses.............. 24,446 31,097 38,338
Amortization expense, primarily goodwill.................. 11,289 14,565 14,390
Termination and related costs............................. -- -- 4,573
Recapitalization, merger integration, and regulatory
costs................................................... 2,818 52,581 4,523
Interest expense, net of interest income of $513 in 1998,
$709 in 1999 and $770 in 2000........................... 41,772 51,958 77,051
-------- -------- --------
Total costs and expenses.................................... 225,693 340,494 345,521
-------- -------- --------
Income (loss) before income taxes and extraordinary loss.... 17,604 (22,388) (234)
Provision for income taxes.................................. 8,736 3,297 1,969
-------- -------- --------
Income (loss) before extraordinary loss..................... 8,868 (25,685) (2,203)
Extraordinary loss, net of taxes of $1,452 in 1998 and
$12,020 in 1999........................................... (2,271) (17,766) --
-------- -------- --------
Net income (loss)........................................... 6,597 (43,451) (2,203)
Less: Preferred stock dividends and financing fee
accretion................................................. (2,186) (2,081) --
Less: Excess of consideration paid over carrying amount of
preferred stock repurchased............................... -- (2,796) --
-------- -------- --------
Income (loss) applicable to common stock.................... $ 4,411 $(48,328) $ (2,203)
======== ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary loss................... $ 1.17 $ (5.64) $ (0.58)
Extraordinary loss, net of taxes.......................... (0.40) (3.28) --
-------- -------- --------
Net income (loss) per common share........................ $ 0.77 $ (8.92) $ (0.58)
======== ======== ========
Earnings (loss) per common share--assuming dilution:
Income (loss) before extraordinary loss................... $ 1.13 $ (5.64) $ (0.58)
Extraordinary loss, net of taxes.......................... (0.38) (3.28) --
-------- -------- --------
Net income (loss) per common share--assuming dilution..... $ 0.75 $ (8.92) $ (0.58)
======== ======== ========
Weighted average number of shares of common stock and common
stock equivalents:
Basic..................................................... 5,711 5,421 3,800
Diluted................................................... 5,921 5,421 3,800
SEE ACCOMPANYING NOTES.
F-5
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 6,597 $ (43,451) $ (2,203)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss, net of taxes.......................... 2,271 17,766 --
Provision for doubtful accounts........................... 4,651 4,580 5,450
Non-cash compensation..................................... 100 -- 333
Depreciation and amortization............................. 44,782 61,620 69,314
Amortization of deferred financing costs.................. 2,505 2,720 2,270
Distributions in excess of equity in undistributed income
of investee............................................. (652) (600) (538)
Increase in deferred income taxes......................... 8,517 2,948 1,970
Gain on sale of equipment................................. (267) (88) (254)
Changes in operating assets and liabilities:
Accounts receivable....................................... (14,159) (13,350) (3,546)
Prepaid expenses.......................................... 730 767 700
Other receivables......................................... 926 60 (188)
Other assets.............................................. (2,300) 544 (92)
Accounts payable, accrued compensation and other accrued
liabilities............................................. (2,816) 4,935 18,585
Minority interests and other liabilities.................. (4,030) (254) 243
--------- --------- ---------
Net cash provided by operating activities................... 46,855 38,197 92,044
INVESTING ACTIVITIES:
Equipment purchases......................................... (72,321) (95,914) (101,554)
Decrease (increase) in deposits on equipment................ (7,482) (8,058) 13,913
Purchase of common stock of Southeast Arizona, Inc.......... -- -- (4,063)
Purchase of all equity interests in Acclaim Medical LLC, net
of cash acquired.......................................... -- (493) --
Purchase of common stock of Mid American Imaging Inc.,
Dimensions Medical Group, Inc. and RIA Management
Services, Inc., net of cash acquired...................... (12,495) -- --
Purchase of common stock of Mobile Technology Inc., net of
cash acquired............................................. (94,147) -- --
Purchase of common stock of Medical Diagnostics, Inc., net
of cash acquired.......................................... (31,158) -- --
Purchase of all equity interests in two operating
subsidiaries of American Shared Hospital Services......... (29,845) (400) --
Proceeds from sale of equipment............................. 2,358 793 709
Other....................................................... (14) -- --
--------- --------- ---------
Net cash used in investing activities....................... (245,104) (104,072) (90,995)
F-6
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt........................ $ (15,757) $ (20,686) $ (13,298)
Proceeds from long-term debt................................ -- -- 2,438
Principal payments on term loan facility.................... (500) (320,655) --
Proceeds from term loan facility............................ 175,000 536,000 --
Principal payments on revolving loan facility............... (59,976) (68,835) (15,000)
Proceeds from revolving loan facility....................... 91,940 32,602 33,000
Principal payments on senior subordinated notes............. -- (185,000) --
Consent payments and fees to retire senior subordinated
notes..................................................... -- (16,131) --
Proceeds from senior subordinated credit facility........... -- 260,000 --
Refinance of short and long-term debt....................... (843) -- --
Repurchase of Series F preferred stock...................... -- (21,550) --
Repurchase of common stock and common stock warrants........ -- (302,553) --
Issuance of common stock.................................... -- 191,802 --
Payments of debt issuance costs............................. (853) (17,905) (50)
Proceeds from exercise of employee stock options............ 66 507 28
--------- --------- ---------
Net cash provided by financing activities................... 189,077 67,596 7,118
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (9,172) 1,721 8,167
Cash and cash equivalents, beginning of year................ 12,255 3,083 4,804
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 3,083 $ 4,804 $ 12,971
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 38,742 $ 46,653 $ 67,031
Income taxes paid........................................... 748 101 229
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Net book value of assets exchanged.......................... $ 454 $ 115 $ 3,319
Preferred stock dividend accrued and financing fee
accretion................................................. 2,186 2,081 --
Issuance of common stock to an officer in exchange for a
promissory note........................................... -- -- 300
F-7
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
In 1998, Canton Holding Corp., a wholly owned subsidiary of SMT, purchased
all of the common stock of Mid American Imaging, Inc. and Dimensions Medical
Group, Inc. and related assets for cash consideration of approximately $10,418.
In connection with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired............................. $ 16,282
Cash paid for equity interests............................ (10,418)
--------
Liabilities assumed....................................... $ 5,864
========
In 1998, the Company purchased all of the equity interests of MTI for cash
consideration of approximately $103,893. In connection with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired............................ $ 125,720
Cash paid for equity interests........................... (103,893)
---------
Liabilities assumed...................................... $ 21,827
=========
In 1998, the Company purchased all of the common stock of MDI for cash
consideration of approximately $31,166. In connection with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired............................. $ 40,076
Cash paid for common stock................................ (31,166)
--------
Liabilities assumed....................................... $ 8,910
========
In 1998, SMT purchased all of the common stock of RIA Management Services,
Inc. for cash consideration of approximately $2,135. In connection with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired.............................. $ 3,366
Cash paid for common stock................................. (2,135)
-------
Liabilities assumed........................................ $ 1,231
=======
In 1998, the Company purchased all of the equity interests in two operating
subsidiaries of American Shared Hospital Services for cash consideration of
approximately $29,967. In connection with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired............................. $ 46,706
Cash paid for equity interests............................ (29,967)
--------
Liabilities assumed....................................... $ 16,739
========
In 2000, the Company purchased all of the common stock of Southeast Arizona,
Inc. ("SEA") as well as a mobile MRI system from an affiliate of SEA for cash
consideration of $4,050. In connection with the acquisition, no liabilities were
assumed.
SEE ACCOMPANYING NOTES.
F-8
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
ADDITIONAL NOTE
COMMON STOCK PAID-IN RECEIVABLE TOTAL
--------------------- CAPITAL FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) OFFICER DEFICIT DEFICIT
---------- -------- ---------- ---------- ----------- -------------
Balance at December 31, 1997...... 5,698,549 $ 57 $ (24,970) $ -- $(22,991) $ (47,904)
Exercise of common stock
options....................... 18,500 -- 66 -- -- 66
Employee stock option rollover
value......................... -- -- 100 -- -- 100
Series F preferred stock
dividend accrued and
accretion..................... -- -- -- -- (2,186) (2,186)
Net income...................... -- -- -- -- 6,597 6,597
---------- ---- --------- ----- -------- ---------
Balance at December 31, 1998...... 5,717,049 57 (24,804) -- (18,580) (43,327)
Exercise of common stock
options....................... 60,594 1 506 -- -- 507
Repurchase of common stock...... (5,405,742) (54) (302,499) -- -- (302,553)
Issuance of common stock........ 3,426,957 34 191,768 -- -- 191,802
Series F preferred stock
dividend accrued and
accretion..................... -- -- -- -- (2,081) (2,081)
Repurchase of Series F preferred
stock......................... -- -- (2,796) -- -- (2,796)
Net loss........................ -- -- -- -- (43,451) (43,451)
---------- ---- --------- ----- -------- ---------
Balance at December 31, 1999...... 3,798,858 38 (137,825) -- (64,112) (201,899)
Exercise of common stock
options....................... 2,618 -- 28 -- -- 28
Issuance of common stock to an
executive officer............. 5,360 -- 300 (300) -- --
Non-cash stock based
compensation.................. -- -- 265 -- -- 265
Net loss........................ -- -- -- -- (2,203) (2,203)
---------- ---- --------- ----- -------- ---------
Balance at December 31, 2000...... 3,806,836 $ 38 $(137,232) $(300) $(66,315) $(203,809)
========== ==== ========= ===== ======== =========
SEE ACCOMPANYING NOTES.
F-9
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
DESCRIPTION OF THE COMPANY--Alliance Imaging, Inc. and its subsidiaries (the
"Company") provide diagnostic imaging and therapeutic systems and related
technical support services, as well as management services, to hospitals and
other health care providers. Diagnostic imaging services are provided on both a
mobile, shared-user basis as well as on a full-time basis to single customers.
The Company operates entirely within the United States and is one of the largest
outsourced providers of magnetic resonance imaging ("MRI") services in the
country.
PRINCIPLES OF CONSOLIDATION AND BASIS OF FINANCIAL STATEMENT
PRESENTATION--The accompanying consolidated financial statements of the Company
include the assets, liabilities, revenues and expenses of all majority owned
subsidiaries over which the Company exercises control, and for which control is
other than temporary. Significant intercompany transactions have been
eliminated. Investments in non-consolidated affiliates (20-50 percent owned
companies and majority owned entities over which the Company does not possess
control) are accounted for under the equity method. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America.
1999 RECAPITALIZATION MERGER--On November 2, 1999, after obtaining approval
of the stockholders, the Company completed a series of transactions contemplated
by an Agreement and Plan of Merger between Viewer Acquisition Corp. ("Viewer")
and the Company (the "1999 Recapitalization Merger") whereby the Company:
obtained proceeds from debt financing aggregating $726,000; issued 3,426,957
shares of its common stock in exchange for all of the outstanding stock of
Viewer and received net proceeds of $191,803; and converted all shares of its
common stock held by existing stockholders in excess of 284,412 shares that were
retained by an affiliate of Apollo Management, L.P., ("Apollo") into the right
to receive approximately $56 per share in cash. The Company used the cash
proceeds from these transactions to fund: the purchase of its common stock from
existing stockholders--$302,553; purchase of outstanding stock options--$17,082;
repayment of existing debt--$526,858; transaction costs charged to
expense--$25,423; deferred debt financing fees--$17,149; redemption of series F
preferred stock--$21,550; and an increase in the Company's cash balance of
$7,188.
As a result of these transactions, the Company experienced an approximate
92% ownership change. Viewer, which was formed and is wholly owned by certain
affiliates of Kohlberg Kravis Roberts & Co. ("KKR") obtained ownership of
approximately 92% of the Company's outstanding common stock, and the Company
refinanced substantially all of its long-term debt. The Company paid $12,140 to
KKR for professional services rendered in connection with the 1999
Recapitalization Merger. The 1999 Recapitalization Merger and related
transactions have been treated as a leveraged recapitalization in which the
issuance and retirement of debt have been accounted for as financing
transactions, the sale and purchases of the Company's stock have been accounted
for as capital transactions at amounts received from or paid to stockholders,
and no changes were made to the carrying values of the Company's assets and
liabilities that were not directly impacted by the transactions.
COMMON CONTROL MERGER--On May 13, 1999, the Company acquired all of the
outstanding common stock of Three Rivers Holding Corp. ("Three Rivers"), the
parent corporation of SMT Health Services, Inc. ("SMT"), in a stock-for-stock
merger (the "SMT Merger"). The Company exchanged
F-10
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
1,644,438 shares of common stock for all the outstanding common shares of Three
Rivers. At the time of the SMT Merger, Three Rivers was wholly owned by
affiliates of Apollo, which held approximately 82.6% of the Company's
outstanding common stock. Accordingly, the SMT Merger has been accounted for as
a reorganization of entities under common control in a manner similar to a
pooling of interests. As such, the accompanying financial statements and
footnotes have been restated to include the assets, liabilities and operations
of SMT from the date when both entities were under Apollo's control, which was
December 18, 1997.
In connection with the SMT Merger in 1999, the Company amended and restated
its previous credit agreement to add a new $70,000 tranche D term loan facility
which was used to fund: repayment of SMT's existing indebtedness--$62,044;
payment on the Company's previous revolving loan facility--$6,000; transaction
costs charged to expense--$851; deferred financing costs--$650; and an increase
in the Company's cash balance of $455. The Company recorded an extraordinary
loss of $2,240 (net of taxes of $1,515) associated with the write-off of
unamortized deferred financing costs of $1,753 on SMT's existing indebtedness
and $2,002 on Alliance's tranche C term loan facility under its previous credit
agreement.
Also in connection with the SMT Merger, the Company established a severance
accrual of $2,164, an office lease termination accrual of $230, and a fixed
asset disposal reserve of $241. All of the preceding amounts were charged to
transaction related costs. Of these amounts, $1,641 and zero were included in
other accrued liabilities as of December 31, 1999 and 2000, respectively.
TERMINATION AND RELATED COSTS--Termination and related costs for the year
ended December 31, 2000 represent $4,232 associated with termination costs and
the cash-out of stock options for an executive officer who resigned due to
health-related issues and $341 associated with the recruitment of his
replacement.
RECAPITALIZATION, MERGER INTEGRATION AND REGULATORY COSTS--Recapitalization,
merger integration and regulatory costs for the year ended December 31, 2000
represent $704 of professional fees paid in connection with the 1999
Recapitalization Merger, $570 of compensatory costs related to stock option
buy-backs and severance payments resulting from change in control provisions
triggered by the 1999 Recapitalization Merger, $154 related to additional
severance for employees of SMT, $123 of integration costs to migrate acquired
entities to a common systems platform for direct patient billing, and $850 for
assessments and $2,122 for costs and related professional fees to settle
regulatory matters associated with the direct patient billing process of one of
the Company's acquired entities.
Recapitalization, merger integration and regulatory costs for the year ended
December 31, 1999, represent $19,640 in professional fees paid in connection
with the 1999 Recapitalization Merger, $17,082 related to the purchase of
outstanding stock options in connection with the 1999 Recapitalization Merger,
$6,003 in bonus payments paid in connection with the 1999 Recapitalization
Merger, $1,088 in provisions to conform the accounting policies with respect to
accounts receivable reserves, as well as employee vacation and sick pay reserves
in connection with the SMT Merger, $2,164 in employee severance costs in
connection with the SMT Merger, $3,075 in professional fees and other merger
integration costs associated with the SMT Merger and other acquired entities,
and $3,529
F-11
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
for assessments to settle regulatory matters associated with the direct patient
billing process of one of the Company's acquired entities.
Recapitalization, merger integration and regulatory costs for the year ended
December 31, 1998 represents $1,846 in special non-recurring bonuses paid in
connection with the MTI acquisition, $722 in professional fees associated with
accounting and billing systems conversions of acquired companies, and $250 in a
provision for doubtful accounts conforming accounting adjustment made in
connection with the American Shared acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--The Company considers short-term investments with
original maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE--The Company provides shared and single-user diagnostic
imaging equipment and technical support services to the healthcare industry and
directly to patients on an outpatient basis. Substantially all of the Company's
accounts receivable are due from hospitals, other healthcare providers and
health insurance providers located throughout the United States. Services are
generally provided pursuant to long-term contracts with hospitals and other
healthcare providers or directly to patients, and generally collateral is not
required. Receivables generally are collected within industry norms for
third-party payors. Estimated credit losses are provided for in the consolidated
financial statements and losses experienced have been within management's
expectations.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to a concentration of credit risk principally consists of
cash, cash equivalents and trade receivables. The Company invests available cash
in money market securities of high-credit-quality financial institutions. At
December 31, 1999 and 2000, the Company's accounts receivable were primarily
from clients in the healthcare industry. To reduce credit risk, the Company
performs periodic credit evaluations of its clients, but does not generally
require advance payments or collateral. Credit losses to clients in the health
care industry have not been material.
EQUIPMENT--Equipment is stated at cost and is generally depreciated using
the straight-line method over an initial estimated life of three to eight years
to an estimated residual value, generally between five and twenty percent of
original cost. If the Company continues to operate the equipment beyond its
initial estimated life, the residual value is then depreciated to a nominal
salvage value over three years.
Routine maintenance and repairs are charged to expense as incurred. Major
repairs and purchased software and hardware upgrades, which extend the life of
or add value to the equipment, are capitalized and depreciated over the
remaining useful life.
With the exception of a small amount of office furniture, office equipment
and leasehold improvements, substantially all of the property owned by the
Company relates to diagnostic imaging equipment, tractors and trailers used in
the business.
F-12
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL, LONG-LIVED ASSETS, AND OTHER INTANGIBLES--The Company amortizes
goodwill and other intangibles using the straight-line method over a period of
four to twenty-five years. For acquired entities, the amortization period
selected is primarily based upon the estimated life of the customer contracts,
including expected renewals, and other related assets acquired, not to exceed
twenty years. The Company evaluates the potential impairment of goodwill and
other intangibles on an ongoing basis. Additionally, the Company reviews its
long-lived assets and related intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The recoverability test is performed at the lowest level at
which net cash flows can be directly attributable to long-lived assets and is
performed on an undiscounted basis. For any assets identified as impaired, the
Company measures the impairment as the amount by which the carrying value of the
asset exceeds the fair value of the asset. In estimating the fair value of the
asset, management utilizes a valuation technique based on the present value of
expected future cash flows.
REVENUE RECOGNITION--The majority of the Company's revenues are derived
directly from health care providers. To a lesser extent, revenues are generated
from direct billings to patients or their medical payors which are recorded net
of contractual discounts and other arrangements for providing services at less
than established patient billing rates. Revenues from direct patient billing
amounted to approximately 11%, 12% and 10% of revenues in the years ended
December 31, 1998, 1999, and 2000, respectively. No single customer accounted
for more than 3% or more of consolidated revenues in each of the three years in
the period ended December 31, 2000. All revenues are recognized at the time the
service is performed.
INCOME TAXES--The provision for income taxes is determined in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are determined based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities, applying enacted statutory tax rates in effect for the year in
which the differences are expected to reverse. Future tax benefits are
recognized only to the extent that the realization of such benefits is
considered to be more likely than not.
FAIR VALUES OF FINANCIAL INSTRUMENTS--The carrying amount reported in the
balance sheet for cash and cash equivalents approximates fair value based on the
short-term maturity of these instruments. The carrying amounts reported in the
balance sheet for accounts receivable and accounts payable approximate fair
value based on the short-term nature of these accounts. The carrying amount
reported in the balance sheet for long-term debt approximates fair value as
these borrowings have variable rates that reflect currently available terms and
conditions for similar debt.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
RECLASSIFICATIONS--Certain reclassifications have been made in the 1998 and
1999 financial statements to conform to the 2000 presentation.
F-13
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME--Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. For the
years ended December 31, 1998, 1999 and 2000, the Company did not have any
components of other comprehensive income as defined in SFAS 130. Therefore,
statements of comprehensive income have not been presented.
SEGMENT REPORTING--Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). Management reviews the
operating results of the Company's nine regional offices for the purpose of
making operating decisions and assessing performance. Based on the aggregation
criteria in SFAS 131, the Company has aggregated the results of its nine
regional offices into one reportable segment.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--Effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative and Hedging Activities", as amended ("SFAS 133").
This statement establishes a new model for accounting for derivatives and
hedging activities. Under SFAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company currently does not have
any derivative instruments which require fair value measurement under SFAS 133
and, accordingly, the effect of the adoption will not have a material impact on
its results of operations or financial position.
RECENT ACCOUNTING PRONOUNCEMENTS--In December 1999, the staff of the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. The adoption of SAB 101 had no
impact on the Company's results of operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation". FIN 44
clarifies the application of Accounting Principles Board ("APB") Opinion No. 25
regarding (a) the definition of employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a stock option plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occurred after either December 25, 1998, or January 12,
2000. The Company believes that the adoption of FIN 44 will not have a material
effect on its consolidated results of operations or financial position.
3. ACQUISITIONS
On November 1, 2000, the Company acquired all of the outstanding common
stock of Southeast Arizona, Inc. ("SEA") as well as a mobile MRI system from an
affiliate of SEA. The acquisition was accounted for as a purchase and
accordingly, the results of operations of SEA have been included in
F-14
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS (CONTINUED)
the Company's consolidated financial statements from the date of acquisition.
The purchase price consisted of $4,050 in cash plus direct acquisition costs of
$13. The acquisition was financed using the Company's available cash. The
goodwill recorded as a result of this acquisition was $2,563, which is being
amortized using the straight-line method over 20 years. The allocation of the
SEA purchase price is tentative pending the completion of fair value
determinations for the net assets acquired. The allocation may change with the
completion of these determinations.
On January 2, 1998, Canton Holding Corp., a wholly owned subsidiary of SMT,
acquired all of the outstanding common stock of Mid American Imaging, Inc.
("MAI") and Dimensions Medical Group, Inc. ("DMG"). The acquisition was
accounted for as a purchase and accordingly, the results of operations of MAI
and DMG have been included in the Company's consolidated financial statements
from the date of acquisition. The purchase price consisted of approximately
$10,400 in cash plus the assumption of approximately $5,100 in financing
arrangements. The acquisition was primarily funded by an $11,500 borrowing on
SMT's revolving loan facility that was also used to refinance $843 of existing
MAI and DMG indebtedness. The goodwill recorded as a result of this acquisition
was $10,620, which is being amortized using the straight-line method over
20 years.
On March 12, 1998, the Company acquired Mobile Technology Inc. ("MTI"). The
purchase price consisted of $58,300 for all of the equity interests in MTI, plus
direct acquisition costs of approximately $2,000. In connection with the
acquisition, the Company also refinanced $37,400 of MTI's outstanding debt and
paid MTI direct transaction costs of $3,500. The transaction has been accounted
for as a purchase and, accordingly, the results of operations of MTI have been
included in the Company's consolidated financial statements from the date of
acquisition. The goodwill recorded as a result of this acquisition was $29,974,
which is being amortized on a straight-line basis over 20 years. Additionally,
the Company assigned $67,200 of the purchase price to customer contracts and
$2,870 of the purchase price to assembled work force. The amounts are being
amortized on a straight-line basis over 20 and four years respectively. The
allocation of the intangible assets acquired was based on an independent
valuation study.
On May 19, 1998, the Company acquired Medical Diagnostics, Inc. ("MDI"), a
subsidiary of U. S. Diagnostic, Inc. The purchase price consisted of
approximately $31,000 plus the assumption of approximately $7,400 in financing
arrangements. The transaction has been accounted for as a purchase and,
accordingly, the results of operations of MDI have been included in the
Company's consolidated financial statements from the date of acquisition. The
goodwill recorded as a result of this acquisition was $17,776, which is being
amortized on a straight-line basis over 20 years. Additionally, the Company
assigned $8,300 of purchase price to customer contracts and $350 of purchase
price to assembled work force. The amounts are being amortized on a
straight-line basis over 20 and four years respectively. The allocation of the
intangibles assets acquired was based on an independent valuation study.
On August 17, 1998, SMT acquired all of the outstanding common stock of RIA
Management Services, Inc. ("RIA"). The acquisition was accounted for as a
purchase and, accordingly, the results of operations of RIA have been included
in the Company's consolidated financial statements from the date of acquisition.
The purchase price consisted of approximately $2,100 in cash plus the assumption
of approximately $1,100 in financing arrangements. The acquisition was primarily
funded from
F-15
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS (CONTINUED)
operating cash on hand and a $1,000 borrowing on SMT's revolving loan facility.
The goodwill recorded as a result of this acquisition was $1,920, which is being
amortized using the straight-line method over 20 years.
On November 13, 1998, two wholly owned subsidiaries of the Company acquired
all of the outstanding common stock of CuraCare, Inc. and all of the partnership
interests in American Shared-CuraCare (collectively, "American Shared"). The
purchase price consisted of $13,377 plus the assumption of $12,241 in financing
arrangements. In connection with the acquisition, the Company also refinanced
$13,130 of American Shared's outstanding debt. The transaction has been
accounted for as a purchase and, accordingly, the results of operations of
American Shared have been included in the Company's consolidated financial
statements from the date of acquisition. The goodwill recorded as a result of
this acquisition was $26,940 which is being amortized on a straight-line basis
over 20 years. Additionally, the Company assigned $3,300 of the purchase price
to customer contracts and $690 of the purchase price to assembled work force
which is being amortized on a straight-line basis over ten and four years
respectively. The allocation of the intangible assets acquired was based on an
independent valuation study.
The following unaudited pro forma information presents combined results of
operations as if the SEA acquisition had occurred at the beginning of 1999 and
2000. The unaudited pro forma information is not necessarily indicative of the
results of operations of the combined company had the acquisitions actually
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future results.
YEAR ENDED
DECEMBER 31,
-------------------
1999 2000
-------- --------
Revenues.................................................... $320,456 $347,859
Loss before extraordinary loss.............................. (25,331) (1,715)
Net loss.................................................... (43,097) (1,715)
Earnings (loss) per share:
Basic..................................................... $ (8.85) $ (0.45)
Diluted................................................... $ (8.85) $ (0.45)
F-16
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 consisted of the following:
1999 2000
-------- --------
Accrued systems rental and maintenance costs................ $ 4,245 $ 4,092
Accrued site rental fees.................................... 1,146 1,015
Accrued taxes payable....................................... 5,773 7,978
Accrued regulatory costs.................................... 3,500 4,350
Accrued severance and related costs......................... 1,641 1,116
Other accrued expenses...................................... 6,259 4,637
------- -------
Total....................................................... $22,564 $23,188
======= =======
5. LONG-TERM DEBT AND SENIOR SUBORDINATED CREDIT FACILITY
Long-term debt at December 31 consisted of the following:
1999 2000
-------- --------
Term loan facility under the 1999 Credit Agreement, due in
annual installments commencing 2001 through 2008, interest
payable as defined........................................ $466,000 $466,000
Senior subordinated credit facility......................... 260,000 260,000
Revolving loan facility under the 1999 Credit Agreement..... -- 18,000
Obligations to lending institutions, secured by equipment,
due in monthly installments through February 2005 with
weighted average interest rates of 9.29% and 9.33% at
December 31, 1999 and 2000, respectively.................. 25,849 14,989
-------- --------
751,849 758,989
Less current portion........................................ 12,974 15,863
-------- --------
$738,875 $743,126
======== ========
On March 12, 1998, the Company increased its term loan facility under the
1997 Credit Agreement by $70,000 by increasing its existing tranche A term loan
facility by $20,000 and establishing a new $50,000 tranche B term loan facility.
In connection with this transaction, the Company recorded an extraordinary loss
of $800, net of income tax benefit, on early extinguishment of debt. On
September 24, 1998, the Company completed a $90,000 expansion of its 1997 Credit
Agreement. The transaction added a new $85,000 tranche C term loan facility and
increased the revolving loan facility to $80,000. In connection with this
transaction, the Company recorded an extraordinary loss of $1,471, net of income
tax benefit, on early extinguishment of debt. On May 13, 1999, in connection
with the SMT Merger, the Company amended and restated its 1997 Credit Agreement
to add a new $70,000 tranche D term loan facility. In connection with this
transaction, the Company recorded an extraordinary loss of $2,240, net of income
tax benefit, on early extinguishment of debt.
On November 2, 1999, in connection with the 1999 Recapitalization Merger,
the Company entered into a new $616,000 Credit Agreement (the "1999 Credit
Agreement") consisting of a $131,000 Tranche A Term Loan Facility, a $150,000
Tranche B Term Loan Facility, a $185,000 Tranche C Term Loan
F-17
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. LONG-TERM DEBT AND SENIOR SUBORDINATED CREDIT FACILITY (CONTINUED)
Facility, and a $150,000 Revolving Loan Facility. The 1999 Credit Agreement
requires loans to be prepaid with 100% of the net proceeds of unreinvested asset
sales and 50% of annual consolidated excess cash flow. In addition, the 1999
Credit Agreement contains restrictive covenants which, among other things, limit
the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, liens and
encumbrances, capital expenditures and prepayments of other indebtedness. As of
December 31, 2000, the Company is in compliance with all covenants under the
1999 Credit Agreement. Voluntary prepayments are permitted in whole or in part
without premium or penalty. Interest under the term loan facility and revolving
loan facility is variable based on the Company's leverage ratio and changes in
specified published rates and the bank's prime lending rate. The interest rates
on the Tranche A, Tranche B, and Tranche C Term Loan Facilities at December 31,
2000 were 9.25%, 9.94%, and 10.19%, respectively. The weighted average interest
rate on the Revolving Loan Facility at December 31, 2000 was 9.15%. The Company
pays a commitment fee equal to 1/2 of 1% per annum on the undrawn portion
available under the Revolving Loan Facility subject to decreases in certain
circumstances. The Company also pays variable per annum fees in respect of
outstanding letters of credit. The 1999 Credit Agreement is collateralized by
the Company's equity interests in its majority owned subsidiaries, partnerships
and limited liability companies and its unencumbered assets, which include
accounts receivable, inventory, equipment, and intellectual property.
In connection with the 1999 Recapitalization Merger, the Company also
entered into a $260,000 Senior Subordinated Credit Facility with KKR. On May 2,
2001, any outstanding balance on the Senior Subordinated Credit Facility will
convert into senior subordinated term notes ("KKR Term Notes") maturing on
November 2, 2009. Voluntary prepayments are permitted in whole or in part
without premium or penalty. Interest under the Senior Subordinated Credit
Facility is at the greater of the three, six or twelve-month U.S. treasury
obligations plus 4% (payable quarterly, reset at twelve months). Interest under
the KKR Term Notes is at a variable rate, which is set annually, equal to the
U.S. treasury obligations maturing on November 2, 2009 plus 9% payable
semi-annually (not to exceed 17%). The interest rate on the Senior Subordinated
Credit Facility was 10.38% at December 31, 2000.
On November 2, 1999, the Company used a portion of the proceeds from the
1999 Credit Agreement and the Senior Subordinated Credit Facility to pay off its
term loan facility and revolving loan facility under its previous credit
agreement ("1997 Credit Agreement"), its senior subordinated notes, and its
subordinated term securities. In connection with this transaction, the Company
recorded an extraordinary loss of $15,526, net of income tax benefit, which
primarily consisted of consent payments and repurchase premiums on the senior
subordinated notes and subordinated term securities as well as writing off
existing unamortized deferred financing costs.
F-18
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. LONG-TERM DEBT AND SENIOR SUBORDINATED CREDIT FACILITY (CONTINUED)
The maturities of long-term debt as of December 31, 2000 are as follows:
TERM LOAN
--------------------------------- KKR FACILITY/ EQUIPMENT
TRANCHE A TRANCHE B TRANCHE C TERM NOTE REVOLVER OBLIGATIONS TOTAL
--------- --------- --------- ------------- -------- ----------- --------
Year ending December 31:
2001................. $ 5,000 $ 1,500 $ 1,850 $ -- $ -- $ 7,513 $ 15,863
2002................. 10,000 1,500 1,850 -- -- 4,667 18,017
2003................. 23,000 1,500 1,850 -- -- 2,069 28,419
2004................. 25,000 1,500 1,850 -- -- 444 28,794
2005................. 32,000 1,500 1,850 -- -- 296 35,646
Thereafter........... 36,000 142,500 175,750 260,000 18,000 -- 632,250
-------- -------- -------- -------- -------- -------- --------
$131,000 $150,000 $185,000 $260,000 $ 18,000 $ 14,989 $758,989
======== ======== ======== ======== ======== ======== ========
Of the Company's total indebtedness at December 31, 2000, $747,633 is an
obligation of the Company and $11,356 is an obligation of the Company's
consolidated subsidiaries.
6. PREFERRED STOCK
On December 18, 1997, the Company authorized 300,000 shares of a new
Series F redeemable preferred stock. The stock was recorded at $14,400
(liquidation value of $15,000 less a financing fee of $600). The financing fee
was being accreted on a straight-line basis over the ten-year term of the stock.
The holders of the Series F redeemable preferred stock were entitled to receive
cumulative dividends at the rate of 13.5% per annum of the stated liquidation
value. Unpaid dividends accumulated and were payable quarterly by the Company in
kind for the first five years after issuance, and thereafter in cash. In
connection with the 1999 Recapitalization Merger (SEE NOTE 1), the Company
repurchased all outstanding shares of Series F redeemable preferred stock at a
premium of $2,796 which was recorded to additional paid-in capital in
November 1999. The Company's amended and restated certificate of incorporation
no longer provides for the issuance of preferred stock.
F-19
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCKHOLDERS' DEFICIT
EARNINGS (LOSS) PER COMMON SHARE: The following table sets forth the
computation of basic and diluted earnings (loss) per share (amounts in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Numerator:
Income (loss) before extraordinary loss..................... $ 8,868 $(25,685) $(2,203)
Preferred stock dividends and financing fee accretion....... (2,186) (2,081) --
Excess of consideration paid over carrying amount of
preferred stock repurchased............................... -- (2,796) --
------- -------- -------
Numerator for basic and diluted earnings per share--income
(loss) available to common stockholders before
extraordinary loss........................................ $ 6,682 $(30,562) $(2,203)
======= ======== =======
Denominator:
Denominator for basic earnings per share--weighted-average
shares.................................................... 5,711 5,421 3,800
Effect of dilutive securities:
Employee stock options...................................... 210 -- --
------- -------- -------
Denominator for diluted earnings per share--adjusted
weighted-average shares................................... 5,921 5,421 3,800
======= ======== =======
Basic earnings (loss) per share before extraordinary loss... $ 1.17 $ (5.64) $ (0.58)
======= ======== =======
Diluted earnings (loss) per share before extraordinary
loss...................................................... $ 1.13 $ (5.64) $ (0.58)
======= ======== =======
The diluted share base for the years ended December 31, 1999 and 2000
excludes incremental shares of 267 and 272, respectively, related to employee
stock options. These shares are excluded due to their antidilutive effect as a
result of the Company's net loss for the years ended December 31, 1999 and 2000.
STOCK OPTIONS AND AWARDS--The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") requires use of option
valuation models that were not developed for use in valuing employee stock
options.
The Company's 1991 Stock Option Plan, which was terminated effective
November 2, 1999 in connection with the 1999 Recapitalization Merger, provided
that up to 2,000,000 shares may be granted to management and key employees.
Options were granted at their fair market value at the date of grant. All
options granted have 10-year terms and become fully exercisable at the end of 3
to 4 years of continued employment. No options granted pursuant to this 1991
Stock Option Plan were outstanding as of December 31, 1999 and 2000.
F-20
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
In December 1997, the Company adopted a new employee stock option plan
pursuant to which options with respect to a total of 468,545 shares of the
Company's common stock will be available for grant. Options are granted at their
fair value at the date of grant. All options have 10-year terms. Fifty percent
of the options vest in equal increments over four years and fifty percent vest
after seven and one-half years (subject to acceleration if certain per-share
equity targets are achieved).
In connection with the SMT Merger, outstanding employee stock options under
the 1997 Three Rivers Stock Option Plan were converted into options to acquire
shares of the Company's common stock. The Three Rivers stock option plan allows
for options with respect to a total of 282,520 shares of the Company's common
stock to be available for grant. Options are granted at their fair value at the
date of grant. All options have 10-year terms. Fifty percent of the options vest
in equal increments over four years and fifty percent vest after seven and
one-half years (subject to acceleration if certain per-share equity targets are
achieved).
In 1999, the Company adopted a new non-employee directors' stock option plan
pursuant to which options with respect to a total of 50,000 shares of the
Company's common stock will be available for grant. Options are granted at their
fair value at the date of grant. All options have 10-year terms. Ten percent of
the options vest upon grant, eighty percent of the options vest over four years
and the remaining ten percent vest in the fifth year. This plan was terminated
effective November 2, 1999 in connection with the 1999 Recapitalization Merger.
No options granted pursuant to this 1999 non-employee directors' stock option
plan were outstanding as of December 31, 1999 and 2000.
In connection with the 1999 Recapitalization Merger (SEE NOTE 1), the
Company adopted a new employee stock option plan pursuant to which options with
respect to a total of 632,500 shares of the Company's common stock will be
available for grant. Options are granted at their fair value at the date of
grant, except as noted below. All options have 10-year terms. Fifty percent of
the options vest in equal increments over five years and fifty percent vest
after eight years (subject to acceleration if certain per-share equity targets
are achieved). In November 2000, the Company granted 86,500 options to certain
employees at exercise prices below the fair value of the Company's common stock.
The exercise price of these options and the fair value of the Company's common
stock on the grant date was $56 and $95 per share, respectively. The
compensation expense of $3,395 is being recognized on a straight-line basis over
the vesting period of the options. For the year ended December 31, 2000, the
Company recorded non-cash compensation of $55 with an offset to additional
paid-in deficit.
F-21
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
The weighted average remaining contractual life of options outstanding as of
December 31, 1999 and 2000 is 9.12 and 8.45 years, respectively. The following
table summarizes the Company's stock option activity:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at December 31, 1997................... 539,810 $12.10
Granted.......................................... 255,724 14.25
Exercised........................................ (18,500) 3.56
Canceled......................................... (3,000) 16.50
--------
Outstanding at December 31, 1998................... 774,034 13.00
Granted.......................................... 534,300 53.93
Exercised........................................ (60,594) 8.36
Redeemed for cash................................ (403,166) 13.60
Canceled......................................... (14,203) 22.09
--------
Outstanding at December 31, 1999................... 830,371 39.23
Granted.......................................... 86,500 55.97
Exercised........................................ (2,618) 11.00
Redeemed for cash................................ (95,544) 11.45
Canceled......................................... (11,400) 55.97
--------
Outstanding at December 31, 2000................... 807,309 $44.17
========
Of the 807,309 options outstanding at December 31, 2000, 162,377 of these
options had an exercise price of $11.00; 12,950 had an exercise price of $16.50;
36,975 had an exercise price of $20.41; 9,000 had an exercise price of $22.00;
9,207 had an exercise price of $45.92; and 576,800 had an exercise price of
$55.97.
The number of options exercisable at December 31, 1998, 1999 and 2000 were
293,950, 306,171 and 268,289, respectively, at weighted average exercise prices
of $9.94, $13.88 and $22.35, respectively.
SFAS 123 requires presentation of pro forma information regarding net income
and earnings per share determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was estimated
as of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1998, 1999, and 2000, respectively:
risk-free interest rates of 5.23%, 6.13%, and 5.70%; no dividend yield;
volatility factors of the expected market price of the Company's common stock of
.83, zero, and zero; and a weighted average expected life of the options of
5.75, 6.44, and 6.50 years. Volatility of zero for 1999 and 2000 was used as the
Company ceased to be a public entity as a result of the 1999 Recapitalization
Merger. The weighted average fair value of options granted during 1998, 1999,
and 2000 is $10.26, $17.58, and $56.44, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option
F-22
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected vesting period. The
Company's pro forma information for the years ended December 31 are as follows:
1998 1999 2000
-------- -------- --------
Pro forma net income (loss)................................. $6,114 $(29,199) $(3,083)
Pro forma earnings (loss) per share......................... 0.69 (6.29) (0.81)
Pro forma earnings (loss) per share--assuming dilution...... 0.66 (6.29) (0.81)
DIRECTORS' DEFERRED COMPENSATION PLAN--Effective January 1, 2000, the
Company established a Directors' Deferred Compensation Plan (the "Director
Plan") for all non-employee directors. Each of the four non-employee directors
has elected to participate in the Director Plan and have their annual fee of $25
deferred into a stock account and converted quarterly into Phantom Shares. Upon
retirement, separation from the Board of Directors, or the occurrence of a
change of control, each director has the option of being paid cash or issued
common stock for their Phantom Shares. Upon issuance of the Phantom Shares, the
Company recorded non-cash compensation of $68 with an offset to other accrued
liabilities for the difference between the fair market value and the issuance
price of the Phantom Shares. At December 31, 2000, $168 was included in other
accrued liabilities relating to the Director Plan.
8. COMMITMENTS AND CONTINGENCIES
The Company has contracts with its equipment vendors for comprehensive
maintenance and cryogen coverage for its MRI and CT systems. The contracts are
between one and six years from inception and extend through the year 2004, but
may be canceled by the Company under certain circumstances. Contract payments
are approximately $28,186 per year. At December 31, 2000, the Company had
binding equipment purchase commitments totaling $18,036.
F-23
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases office and warehouse space and certain equipment under
non-cancelable operating leases. The office and warehouse leases generally call
for minimum monthly payments plus maintenance and inflationary increases. The
future minimum payments under such leases are as follows:
Year ending December 31:
2001...................................................... $ 6,464
2002...................................................... 4,439
2003...................................................... 3,593
2004...................................................... 2,275
2005...................................................... 780
Thereafter................................................ --
-------
$17,551
=======
The Company's total rental expense, which includes short-term equipment
rentals, for the years ended December 31, 1998, 1999 and 2000 was $15,530,
$16,075 and $14,723, respectively.
In late 1999, the Company identified potential deficiencies in certain
billing processes at one of its retail billing locations. In order to quantify
the effect of these deficiencies, the Company engaged a law firm to direct an
audit of the billing process for the preceding five-year period. In August 2000,
the U.S. Department of Justice (DOJ) opened an investigation into an allegation
that the Company violated the federal False Claims Act by submitting false
claims to federal health care insurance programs. The Company retained a law
firm and an accounting firm to conduct an independent investigation of the
issues identified by the DOJ. Such results were presented to the DOJ in December
2000. Based upon the results of the Company's independent investigation, as well
as discussions with a DOJ attorney involved in the matter, management does not
believe that the DOJ has a strong basis to pursue its investigation. However,
the investigation had not been closed as of February 2001. As a result of these
processes, the Company has accrued $4,350 for probable settlement of these
issues, which is included in other accrued liabilities at December 31, 2000.
While actual results could vary significantly from such estimate, management
believes that the resolution of any deficient billing processes will not have a
material adverse effect on the Company's results of operations or consolidated
financial position.
The Company from time to time is involved in routine litigation and
regulatory matters incidental to the conduct of its business. The Company
believes that resolution of such matters will not have a material adverse effect
on its results of operations or consolidated financial position.
9. 401(k) SAVINGS PLAN
The Company established a 401(k) Savings Plan (the "Plan") in January 1990.
Effective August 1, 1998, the Plan was amended and restated in its entirety.
Currently, all employees who are over 21 years of age are eligible to
participate after attaining three months of service. Employees may contribute
between 1% and 15% of their annual compensation. The Company matches 50 cents
for every dollar of
F-24
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. 401(k) SAVINGS PLAN (CONTINUED)
employee contributions up to 5% of their annual compensation, subject to the
limitations imposed by the Internal Revenue Code. The Company may also make
discretionary contributions depending on profitability. No discretionary
contributions were made in 1998, 1999, or 2000. The Company incurred and charged
to expense $608, $996 and $1,179 during 1998, 1999 and 2000, respectively,
related to the Plan.
10. INCOME TAXES
The provision for income taxes shown in the consolidated statements of
operations consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current:
Federal........................................... $ (234) $ (963) $ (100)
State............................................. 453 1,312 99
------ ------ ------
219 349 (1)
Deferred:
Federal........................................... 6,550 1,985 1,125
State............................................. 1,967 963 845
------ ------ ------
8,517 2,948 1,970
------ ------ ------
$8,736 $3,297 $1,969
====== ====== ======
F-25
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets
(liabilities) at December 31 are as follows:
1999 2000
-------- --------
Basis differences in fixed assets....................... $(46,658) $(61,555)
Basis differences in intangible assets.................. (29,394) (26,172)
Net operating losses.................................... 54,657 64,041
Accounts receivable..................................... 4,347 5,980
State taxes............................................. 3,041 2,899
Accruals not currently deductible for tax purposes...... 4,149 4,715
Basis differences associated with acquired
investments........................................... (122) (1,353)
Other................................................... 1,226 721
-------- --------
Total deferred taxes.................................. (8,754) (10,724)
Valuation allowance..................................... (18,113) (18,113)
-------- --------
Net deferred taxes.................................... $(26,867) $(28,837)
======== ========
Current deferred tax asset.............................. $ 8,369 $ 3,085
Noncurrent deferred tax liability....................... (35,236) (31,922)
-------- --------
Net deferred taxes.................................... $(26,867) $(28,837)
======== ========
A reconciliation of the expected total provision for income taxes, computed
using the federal statutory rate on income before extraordinary loss, is as
follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
U.S Federal statutory tax expense (benefit)........ $6,084 $(7,836) $ (82)
State income taxes, net of federal benefit......... 1,358 1,478 614
Amortization of non-deductible goodwill............ 1,713 975 975
Nondeductible recapitalization merger expenses..... -- 8,609 246
Other.............................................. (419) 71 216
------ ------- ------
$8,736 $ 3,297 $1,969
====== ======= ======
As of December 31, 2000, the Company had net operating loss carryforwards of
$167,666 and $88,093 for federal and state income tax purposes, respectively.
The utilization of the majority of these net operating loss carryforwards is
subject to limitation under Section 382 of the Internal Revenue Code. These loss
carryforwards will expire at various dates from 2003 through 2020. As of
December 31, 2000, the Company also had alternative minimum tax credit
carryforwards of $818 with no expiration date.
The Company maintains a valuation allowance to reduce certain deferred tax
assets to amounts that are in management's estimation more likely than not to be
realized. This allowance primarily relates to the deferred tax assets
established for certain state net operating loss carryforwards as well as
F-26
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. INCOME TAXES (CONTINUED)
net operating loss carryforwards from the acquisition of MTI which are subject
to limitation. Any reductions in the valuation allowance resulting from
realization of the MTI net operating loss carryforwards will result in a
reduction of goodwill.
11. RELATED-PARTY TRANSACTIONS
The Company paid KKR an annual management fee of $122 in 1999 and $650 in
2000, and will continue to receive financial advisory services from KKR on an
ongoing basis. In addition, the Company paid to KKR a fee of $12,140 in
connection with arranging the transactions associated with the 1999
Recapitalization Merger, including the financings thereof (SEE NOTE 1). In
connection with the 1999 Recapitalization Merger, the Company borrowed $260,000
under a Senior Subordinated Credit Facility with KKR (SEE NOTE 5).
The Company paid Apollo an annual management fee of $750 in 1998 and $628 in
1999. Additionally, in 1998, the Company paid to Apollo fees of $1,000 and $460
as consideration for services rendered in structuring and negotiating the
acquisition of MTI and American Shared, respectively, and also reimbursed Apollo
for expenses of approximately $275 associated with these acquisitions.
Revenue from management agreements with equity investees was $6,508, $6,308,
and $7,295, during 1998, 1999, and 2000, respectively.
On November 27, 2000, the Company issued 5,360 shares of common stock to an
officer of the Company in exchange for a $300 secured promissory note, bearing
interest at 6%. Upon issuance of these shares, the Company recorded non-cash
compensation of $210 with an offset to additional paid-in deficit for the
difference between the fair market value and the issuance price of the shares.
On September 1, 1999, the Company acquired Acclaim Medical LLC, a California
limited liability company ("Acclaim") from four individuals (the "Sellers") who
each held a 25% equity interest in Acclaim. Two of the Sellers were members of
the immediate family of two executive officers of the Company at the time of the
transaction. The purchase price consisted of $500 in cash ($125 per Seller) plus
warrants to purchase 20% (5% per Seller) of the equity interests in Acclaim as
of August 31, 2001.
F-27
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly unaudited financial data for the years ended
December 31, 1999 and 2000 is as follows:
THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
--------------- -------------- ------------------- ------------------
Revenues................................ $75,741 $80,306 $81,284 $80,775
Income (loss) before income taxes and
extraordinary loss.................... 5,699 4,920 9,578 (42,585)
Extraordinary loss, net of taxes........ -- (2,297) -- (15,469)
Net income (loss)....................... 2,904 480 5,124 (51,959)
Income (loss) before extraordinary loss
per common share...................... $ 0.40 $ 0.38 $ 0.78 $ (8.82)
Income (loss) before extraordinary loss
per common share--assuming dilution... $ 0.38 $ 0.36 $ 0.74 $ (8.82)
THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000
--------------- -------------- ------------------- ------------------
Revenues................................ $84,322 $86,899 $88,222 $85,844
Income (loss) before income taxes and
extraordinary loss.................... 2,847 2,841 (1,774) (4,148)
Net income (loss)....................... 1,424 1,420 (887) (4,160)
Income (loss) before extraordinary loss
per common share...................... $ 0.37 $ 0.37 $ (0.23) $ (1.09)
Income (loss) before extraordinary loss
per common share--assuming dilution... $ 0.36 $ 0.36 $ (0.23) $ (1.09)
The earnings (loss) per share amounts for the four quarters of 1999 do not
sum to the annual loss per share amount as a result of the significant decline
in shares outstanding that occurred in the fourth quarter in connection with the
1999 Recapitalization Merger.
In 1999, Company recorded extraordinary losses on the early extinguishments
of debt related to the KKR recapitalization and SMT debt refinancing.
F-28
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[LOGO]
OFFER TO EXCHANGE ITS
10 3/8% SENIOR SUBORDINATED NOTES DUE 2011, WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ANY
AND ALL OF ITS OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2011
------------------------
PROSPECTUS
------------------------
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. The registrant's certificate of incorporation and bylaws provide
for indemnification of its directors, officers, employees and other agents to
the extent permitted by the Delaware General Corporation Law. The registrant
carries policies of insurance which cover the individual directors and officers
of the registrant for legal liability and which would pay on behalf of the
registrant for expenses of indemnification of directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES.
(A) EXHIBITS.
EXHIBIT NO. DESCRIPTION
--------------------- -----------
3.1 Certificate of Incorporation of Alliance.
3.3 Amended and Restated By-laws of Alliance.
4.1 Indenture dated as of April 10, 2001 by and between the
Registrant and the Bank of New York with respect to
$260 million aggregate principal amount of 10 3/8% Senior
Subordinated Notes due 2011.
4.2 Registration Rights Agreement dated as of April 10, 2001 by
and among the Registrant and Salomon Smith Barney Inc.,
Chase Securities Inc., Deutsche Banc Alex. Brown Inc. and
UBS Warburg LLC.
4.3 Credit Agreement dated as of November 2, 1999, as amended.
4.4 Note Purchase Agreement dated November 2, 1999.
5.1 Opinion of Latham & Watkins as to the legality of the
securities being offered.
10.1 The 1999 Equity Plan for Employees of Alliance and
Subsidiaries.
10.2 The Alliance 1997 Stock Option Plan, including form of
option agreement used thereunder, as amended.(7)
10.3 The Three Rivers Holding Corp. 1997 Stock Option Plan, as
amended.
10.4 2001 Incentive Plan.(7)
10.5 Alliance Directors' Deferred Compensation Plan.
10.6 Employment Agreement dated as of July 23, 1997 between
Alliance and Richard N. Zehner.(2)
10.7 Agreement Not to Compete dated as of July 23, 1999 between
Alliance and Richard N. Zehner.(2)
10.8 Amendment to Employment Agreement dated as of July 23, 1997
between Alliance and Richard N. Zehner.(3)
10.9 Amendment to Employment Agreement dated as of December 31,
1997 between Alliance and Richard N. Zehner.(4)
10.10 Second Amendment to Employment Agreement dated as of
February 5, 1998 between Alliance and Richard N. Zehner.(4)
II-1
10.11 Employment Agreement dated as of January 19, 1998 between
Alliance and Kenneth S. Ord.(5)
10.12 Agreement Not to Compete dated as of January 19, 1998
between Alliance and Kenneth S. Ord.(5)
10.13 Employment Agreement dated September 9, 1993 between
Alliance and Terry A. Andrues.
10.14 Employment Agreement dated as of June 6, 1994 between
Alliance and Cheryl A. Ford.
10.15 Employment Agreement dated as of June 6, 1994 between
Alliance and Jay A. Mericle.
10.16 Employment Agreement dated as of November 27, 2000 between
Alliance and Jamie E. Hopping.
10.17 Agreement Not to Compete dated as of November 27, 2000
between Alliance and Jamie E. Hopping.
10.18 Repayment and Stock Pledge Agreement dated as of
November 27, 2000 between Alliance and Jamie E. Hopping.
10.19 Secured Promissory Note of Jamie E. Hopping dated as of
November 27, 2000.
10.20 Letter agreement dated as of August 8, 2000 between Alliance
and Vincent S. Pino, as amended.
10.21 Form of Stockholder's Agreement.
10.22 Agreement and Plan of Merger dated as of April 14, 1999
among Alliance and Three Rivers Holding Corp.(6)
10.23 Agreement and Plan of Merger dated September 13, 1999
between Alliance and Viewer Acquisition Corporation, as
amended.
10.24 Registration Rights Agreement dated as of November 2, 1999.
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Latham & Watkins (included in exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification on Form T-1 of
the Bank of New York as trustee of the 10 3/8% Senior
Subordinated Notes due 2011 of the Registrant.
99.1 Form of letter to DTC participants.
99.2 Form of letter to beneficial holders.
99.3 Form of Letter of Transmittal with respect to the Exchange
Offer.
99.4 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
99.5 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
------------------------
(1) Incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-1, No. 33-40805, initially filed on
May 24, 1991.
(2) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-2, No. 333-33817.
II-2
(3) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(4) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(5) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(6) Incorporated by reference to exhibits filed with Company's Report on
Form 8-K filed on April 14, 1999.
(7) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(B) FINANCIAL SCHEDULES.
PAGE
--------
(1) Independent Auditors' Report on Financial Statement
Schedule.................................................. S-1
(2) Report of Independent Auditors on Financial Statement
Schedule.................................................. S-2
(3) Schedule II--Valuation and Qualifying Accounts......... S-3
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"), may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in
II-3
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) of the Act if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Anaheim, State of
California, on May 10, 2001.
ALLIANCE IMAGING, INC.
By: /s/ RUSSELL D. PHILLIPS
-----------------------------------------
Russell D. Phillips
GENERAL COUNSEL
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Russell D. Phillips, Jr. and Kenneth S. Ord, and
each of them, with full power to act without the other, such person's true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, and any and all amendments
thereto (including post-effective amendments), and to file the same, with
exhibits and schedules thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RICHARD N. ZEHNER Chairman of the Board of Directors
--------------------------------------- and Chief Executive Officer May 10, 2001
Richard N. Zehner (Principal Executive Officer)
/s/ JAMIE E. HOPPING
--------------------------------------- President, Chief Operating Officer May 10, 2001
Jamie E. Hopping and Director
/s/ KENNETH S. ORD
--------------------------------------- Chief Financial Officer (Principal May 10, 2001
Kenneth S. Ord Financial Officer)
/s/ HOWARD K. AIHARA
--------------------------------------- Principal Accounting Officer May 10, 2001
Howard K. Aihara
/s/ HENRY R. KRAVIS
--------------------------------------- Director May 10, 2001
Henry R. Kravis
/s/ MICHAEL W. MICHELSON
--------------------------------------- Director May 10, 2001
Michael W. Michelson
/s/ GEORGE R. ROBERTS
--------------------------------------- Director May 10, 2001
George R. Roberts
/s/ DAVID H.S. CHUNG
--------------------------------------- Director May 10, 2001
David H.S. Chung
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of Alliance Imaging, Inc.:
We have audited the consolidated financial statements of Alliance
Imaging, Inc. and subsidiaries (the "Company"), as of December 31, 2000 and
1999, and for the years then ended, and have issued our report thereon dated
February 22, 2001 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule of Alliance
Imaging, Inc., listed in Item 21 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 22, 2001
S-1
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Alliance Imaging, Inc.
We have audited the consolidated financial statements of Alliance Imaging, Inc.
as of December 31, 1998, and for the year then ended, and have issued our report
thereon dated March 15, 1999, except for Note 1--Common Control Merger, as to
which the date is May 13, 1999 (included elsewhere in this Registration
Statement). Our audit also included the financial statement schedule for the
year ended December 31, 1998 listed in Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
March 5, 1999, except for Note 1 -- Common Control Merger
as to which the date is May 13, 1999
S-2
SCHEDULE II
ALLIANCE IMAGING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
DEDUCTIONS
(BAD DEBT
BALANCE AT ADDITIONS ADDITIONS WRITE-OFFS, BALANCE
BEGINNING CHARGED TO FROM ACQUIRED NET OF AT END
OF PERIOD EXPENSE COMPANIES RECOVERIES) OF PERIOD
---------- ---------- ------------- ----------- ---------
Year ended December 31, 2000
Allowance for Doubtful Accounts....... $11,688 $5,450 $ -- $(1,568) $15,570
======= ====== ====== ======= =======
Year ended December 31, 1999
Allowance for Doubtful Accounts....... $ 8,384 $4,580 $ -- $(1,276) $11,688
======= ====== ====== ======= =======
Year ended December 31, 1998
Allowance for Doubtful Accounts....... $ 750 $4,651 $5,096 $(2,113) $ 8,384
======= ====== ====== ======= =======
S-3
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of Alliance.
3.3 Amended and Restated By-laws of Alliance.
4.1 Indenture dated as of April 10, 2001 by and between the
Registrant and the Bank of New York with respect to
$260 million aggregate principal amount of 10 3/8% Senior
Subordinated Notes due 2011.
4.2 Registration Rights Agreement dated as of April 10, 2001 by
and among the Registrant and Salomon Smith Barney Inc.,
Chase Securities Inc., Deutsche Banc Alex. Brown Inc. and
UBS Warburg LLC.
4.3 Credit Agreement dated as of November 2, 1999, as amended.
4.4 Note Purchase Agreement dated November 2, 1999.
5.1 Opinion of Latham & Watkins as to the legality of the
securities being offered.
10.1 The 1999 Equity Plan for Employees of Alliance and
Subsidiaries.
10.2 The Alliance 1997 Stock Option Plan, including form of
option agreement used thereunder, as amended.(7)
10.3 The Three Rivers Holding Corp. 1997 Stock Option Plan, as
amended.
10.4 2001 Incentive Plan.(7)
10.5 Alliance Directors' Deferred Compensation Plan.
10.6 Employment Agreement dated as of July 23, 1997 between
Alliance and Richard N. Zehner.(2)
10.7 Agreement Not to Compete dated as of July 23, 1999 between
Alliance and Richard N. Zehner.(2)
10.8 Amendment to Employment Agreement dated as of July 23, 1997
between Alliance and Richard N. Zehner.(3)
10.9 Amendment to Employment Agreement dated as of December 31,
1997 between Alliance and Richard N. Zehner.(4)
10.10 Second Amendment to Employment Agreement dated as of
February 5, 1998 between Alliance and Richard N. Zehner.(4)
10.11 Employment Agreement dated as of January 19, 1998 between
Alliance and Kenneth S. Ord.(5)
10.12 Agreement Not to Compete dated as of January 19, 1998
between Alliance and Kenneth S. Ord.(5)
10.13 Employment Agreement dated September 9, 1993 between
Alliance and Terry A. Andrues.
10.14 Employment Agreement dated as of June 6, 1994 between
Alliance and Cheryl A. Ford.
10.15 Employment Agreement dated as of June 6, 1994 between
Alliance and Jay A. Mericle.
10.16 Employment Agreement dated as of November 27, 2000 between
Alliance and Jamie E. Hopping.
10.17 Agreement Not to Compete dated as of November 27, 2000
between Alliance and Jamie E. Hopping.
10.18 Repayment and Stock Pledge Agreement dated as of
November 27, 2000 between Alliance and Jamie E. Hopping.
10.19 Secured Promissory Note of Jamie E. Hopping dated as of
November 27, 2000.
10.20 Letter agreement dated as of August 8, 2000 between Alliance
and Vincent S. Pino, as amended.
10.21 Form of Stockholder's Agreement.
10.22 Agreement and Plan of Merger dated as of April 14, 1999
among Alliance and Three Rivers Holding Corp.(6)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.23 Agreement and Plan of Merger dated September 13, 1999
between Alliance and Viewer Acquisition Corporation, as
amended.
10.24 Registration Rights Agreement dated as of November 2, 1999.
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Latham & Watkins (included in exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification on Form T-1 of
the Bank of New York as trustee of the 10 3/8% Senior
Subordinated Notes due 2011 of the Registrant.
99.1 Form of letter to DTC participants.
99.2 Form of letter to beneficial holders.
99.3 Form of Letter of Transmittal with respect to the Exchange
Offer.
99.4 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
99.5 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
------------------------
(1) Incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-1, No. 33-40805, initially filed on
May 24, 1991.
(2) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-2, No. 333-33817.
(3) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(4) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(5) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(6) Incorporated by reference to exhibits filed with Company's Report on
Form 8-K filed on April 14, 1999.
(7) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.