<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1997
REGISTRATION NO. 333-33787
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 5 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ALLIANCE IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 8099 33-0239910
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
1065 NORTH PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CALIFORNIA 92806
(714) 688-7100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MR. RICHARD N. ZEHNER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
1065 NORTH PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CALIFORNIA 92806
(714) 688-7100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
WITH COPIES TO:
ANTHONY T. ILER, ESQ. JOHN J. SUYDAM, ESQ.
IRELL & MANELLA LLP O'SULLIVAN GRAEV & KARABELL, LLP
333 SOUTH HOPE STREET, SUITE 3300 30 ROCKEFELLER PLAZA
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10112
(213) 620-1555 (212) 408-2400
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
At the effective time of the Recapitalization (as defined herein), which shall
occur as soon as practicable after the effective date of this Registration
Statement and the satisfaction of all conditions to the closing thereof.
If any of 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. [_]
----------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
ALLIANCE IMAGING, INC.
1065 NORTH PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CALIFORNIA 92806
(714) 688-7100
November 26, 1997
Dear Fellow Stockholders:
You are invited to attend a special meeting of the stockholders of Alliance
Imaging, Inc. ("Alliance") to vote on the Agreement and Plan of Merger dated
as of July 23, 1997, between Alliance and Newport Investment LLC (the
"Investor"), a Delaware limited liability company formed and wholly owned by
certain affiliates of Apollo Management, L.P. (such affiliates and the
Investor are collectively referred to as "Apollo"), as amended by Amendment
No. 1 dated as of August 13, 1997, Amendment No. 2 dated as of October 13,
1997 and Amendment No. 3 dated as of November 10, 1997 (the "Recapitalization
Merger Agreement"). The Recapitalization Merger Agreement provides for, among
other things, (1) the merger of Newport Acquisition Corp. ("Newco"), a
corporation to be formed solely for the purpose of this transaction and wholly
owned by the Investor, with and into Alliance (the "Recapitalization"), as a
result of which the shares of common stock of Newco will be converted into
3,632,222 shares of common stock of Alliance (the "Alliance Common Stock"), an
aggregate of 411,358 shares of Alliance Common Stock will be retained by
Alliance's existing stockholders and the balance of the outstanding shares of
Alliance Common Stock (other than shares of Alliance Common Stock held by
Alliance's stockholders, if any, who dissent from the Recapitalization and
comply with all of the provisions of the Delaware General Corporation Law
concerning the right of stockholders to seek appraisal of their shares
("Dissenting Shares")) will be converted into the right to receive $11.00 per
share in cash, (2) the Investor to purchase 150,000 shares of Alliance's non-
voting redeemable Series F preferred stock (the "Series F Preferred Stock"),
(3) the Board of Directors of Newco to become the Board of Directors of
Alliance upon the consummation of the Recapitalization and (4) the amendment
and restatement of Alliance's Restated Certificate of Incorporation. A copy of
the Recapitalization Merger Agreement is attached as Annex A to the enclosed
Proxy Statement/Prospectus.
If the Recapitalization Merger Agreement is approved by holders of a
majority of the shares of Alliance Common Stock, then at the effective time of
the Recapitalization, the separate corporate existence of Newco will cease,
Alliance will continue as the surviving corporation, and 411,358 shares of
Alliance Common Stock, or approximately 3% of the presently issued and
outstanding shares of Alliance Common Stock (assuming conversion of all shares
of preferred stock of Alliance) will be retained by Alliance's existing
stockholders and the remainder, approximately 97% of the presently issued and
outstanding shares (assuming conversion of all shares of preferred stock of
Alliance and assuming there are no Dissenting Shares), will be converted into
the right to receive $11.00 per share in cash. If stockholders of Alliance
entitled to vote at the special meeting elect in the aggregate to retain more
or less than 411,358 shares of Alliance Common Stock, the number of shares to
be retained will be prorated among holders. Consequently, at the time
stockholders of Alliance vote in respect of the Recapitalization Merger
Agreement and decide whether to elect to retain shares of Alliance Common
Stock, they will not know if they will be entitled to retain all of the shares
they elect to retain or if they will be required to retain shares of Alliance
Common Stock which they do not elect to retain.
Pursuant to the Recapitalization Merger Agreement, Apollo will purchase a
total of 3,632,222 shares of Alliance Common Stock and 150,000 shares of
Series F Preferred Stock. Consequently, immediately after the Recapitalization
, Alliance will have 4,043,580 shares of common stock outstanding, of which
Apollo will own 3,632,222 shares (or approximately 90%) and Alliance's
existing stockholders will own 411,358 shares (or approximately 10%).
Immediately after consummation of the transactions, Apollo intends to sell
242,898 shares of Alliance Common Stock owned by Apollo to BT Capital
Corporation for $11.00 per share (or approximately $2.7 million in the
aggregate) in cash, the amount paid to Alliance's existing stockholders for
shares of Alliance
<PAGE>
Common Stock. In addition, options to acquire 524,545 shares of Alliance
Common Stock will be held by or issuable to management of Alliance after
consummation of the Recapitalization.
Pursuant to a stockholder agreement dated as of July 23, 1997 (the
"Stockholder Agreement"), among the Investor and stockholders (the "Principal
Stockholders") owning approximately 54.4% of the issued and outstanding shares
of Alliance Common Stock (approximately 66.0% assuming the conversion or
exercise by the Principal Stockholders of all of their securities which are
convertible into or exercisable for shares of Alliance Common Stock), Apollo
has the right to cause a majority of the outstanding shares of Alliance Common
Stock to be voted in favor of the Recapitalization Merger Agreement and has a
currently exercisable option to acquire all of such shares (which option
terminates, in general, on December 31, 1997 or earlier if the
Recapitalization Merger Agreement is terminated). Apollo intends to cause the
shares of common stock subject to the Stockholder Agreement to be voted in
favor of the Recapitalization Merger Agreement, thereby ensuring the approval
of the Recapitalization Merger Agreement without the vote of any additional
stockholders. The Principal Stockholders will be entitled to participate in
the proration of the retained shares in the same manner as Alliance's other
stockholders, unless the Investor exercises the option (in which case, the
Principal Stockholders would receive cash for their shares and would not be
subject to proration). The Investor has advised the Company that it does not
currently intend to exercise the option, and would do so only if a third party
sought to acquire Alliance prior to consummation of the Recapitalization or
the termination of the Recapitalization Merger Agreement. If the Investor does
exercise the option, all 411,358 of the retained shares would be prorated
among Alliance's existing public stockholders, who own approximately 34% of
the issued and outstanding shares of Alliance Common Stock (assuming the
conversion or exercise by the Principal Stockholders of all of their
securities which are convertible into or exercisable for shares of Alliance
Common Stock). Except as described in this paragraph, Apollo currently does
not have any interest in any shares of Alliance Common Stock.
The Recapitalization Merger Agreement contains various conditions, including
the receipt of the necessary stockholder approval and financing, the Investor
having received advice from Ernst & Young LLP that the Recapitalization
qualifies for recapitalization accounting treatment, Alliance having taken
appropriate steps to arrange the payment or prepayment of certain obligations,
the absence of any injunction or other legal restraint or prohibition
preventing the consummation of the Recapitalization and there not having
occurred any material adverse change in respect of Alliance. The
Recapitalization Merger Agreement also contains certain customary conditions
relating to the accuracy of the representations and warranties, the
performance of the covenants and agreements, consents having been obtained or
filings having been made and holders of less than 10% of the outstanding
shares of Alliance Common Stock having validly elected to demand appraisal of
their shares.
THE BOARD OF DIRECTORS OF ALLIANCE HAS UNANIMOUSLY APPROVED THE
RECAPITALIZATION MERGER AGREEMENT AND HAS DETERMINED, AMONG OTHER THINGS, THAT
THE RECAPITALIZATION MERGER AGREEMENT (INCLUDING THE RECAPITALIZATION) IS FAIR
TO AND IN THE BEST INTERESTS OF ALLIANCE'S STOCKHOLDERS, AND RECOMMENDS THAT
ALLIANCE'S STOCKHOLDERS APPROVE THE RECAPITALIZATION MERGER AGREEMENT.
THE BOARD OF DIRECTORS OF ALLIANCE HAS RECEIVED THE WRITTEN OPINION OF
SALOMON BROTHERS INC, DATED AS OF NOVEMBER 10, 1997, THAT, BASED UPON AND
SUBJECT TO THE MATTERS SET FORTH THEREIN, AS OF SUCH DATE, THE CONSIDERATION
TO BE RECEIVED AND RETAINED BY ALLIANCE'S STOCKHOLDERS PURSUANT TO THE
RECAPITALIZATION IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO SUCH
STOCKHOLDERS.
Yours very truly,
Richard N. Zehner
Chairman of the Board, President and
Chief Executive Officer
2
<PAGE>
ALLIANCE IMAGING, INC.
1065 NORTH PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CALIFORNIA 92806
(714) 688-7100
----------------
To the Stockholders of Alliance Imaging, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders (including
any adjournments or postponements thereof, the "Special Meeting") of Alliance
Imaging, Inc., a Delaware corporation ("Alliance"), will be held at the
offices of Alliance, 1065 North PacifiCenter Drive, Suite 200, Anaheim,
California 92806 on December 17, 1997, at 8:00 a.m., Pacific Time, for the
following purposes, all of which are more fully described in the accompanying
Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve the Agreement and Plan of
Merger dated as of July 23, 1997, between Alliance and Newport Investment LLC
(the "Investor"), a Delaware limited liability company formed and wholly owned
by certain affiliates of Apollo Management, L.P. (such affiliates and the
Investor are collectively referred to as "Apollo"), as amended by Amendment
No. 1 dated as of August 13, 1997, Amendment No. 2 dated as of October 13,
1997 and Amendment No. 3 dated as of November 10, 1997 (the "Recapitalization
Merger Agreement"). A copy of the Recapitalization Merger Agreement is
attached as Annex A to the accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the Special
Meeting.
The Recapitalization Merger Agreement provides for, among other things, (1)
the merger of Newport Acquisition Corp. ("Newco"), a Delaware corporation to
be formed and wholly owned by the Investor, with and into Alliance (the
"Recapitalization"), as a result of which the shares of common stock of Newco
will be converted into 3,632,222 shares of common stock of Alliance, an
aggregate of 411,358 shares of common stock of Alliance will be retained by
Alliance's existing shareholders and the balance of the outstanding shares of
common stock of Alliance (other than shares of common stock of Alliance held
by Alliance's stockholders, if any, who dissent from the Recapitalization and
comply with all of the provisions of the Delaware General Corporation Law
concerning the right of stockholders to seek appraisal of their shares) will
be converted into the right to receive $11.00 per share in cash, (2) the
Investor to purchase 150,000 shares of Alliance's non-voting redeemable Series
F preferred stock, (3) the Board of Directors of Newco to become the Board of
Directors of Alliance upon the consummation of the Recapitalization and (4)
the amendment and restatement of Alliance's Restated Certificate of
Incorporation.
The affirmative vote of the holders of a majority of the shares of common
stock of Alliance entitled to vote thereon is required to approve the
Recapitalization Merger Agreement. However, pursuant to a stockholder
agreement dated as of July 23, 1997 (the "Stockholder Agreement"), among the
Investor and stockholders (the "Principal Stockholders") owning approximately
54.4% of the issued and outstanding shares of common stock of Alliance
(approximately 66.0% assuming the conversion or exercise by the Principal
Stockholders of all of their securities which are convertible into or
exercisable for shares of common stock of Alliance), Apollo has the right to
cause a majority of the outstanding shares of common stock of Alliance to be
voted in favor of the Recapitalization Merger Agreement and has a currently
exercisable option to acquire all of such shares (which option terminates, in
general, on December 31, 1997 or earlier if the Recapitalization Merger
Agreement is terminated) and, therefore, beneficially owns such shares. Apollo
intends to cause the shares of common stock subject to the Stockholder
Agreement to be voted in favor of the Recapitalization Merger Agreement,
thereby ensuring the approval of the Recapitalization Merger Agreement without
the vote of any additional stockholders. The Principal Stockholders will be
entitled to participate in the proration of the retained shares in the same
manner
<PAGE>
as Alliance's other stockholders, unless the Investor exercises the option (in
which case, the Principal Stockholders would receive cash for their shares and
would not be subject to proration). The Investor has advised the Company that
it does not currently intend to exercise the option and would do so only if a
third party sought to acquire Alliance prior to consummation of the
Recapitalization or the termination of the Recapitalization Merger Agreement.
If the Investor does exercise the options, all 411,358 of the retained shares
would be prorated among Alliance's existing public stockholders, who own
approximately 34% of the issued and outstanding shares of common stock of
Alliance (assuming the conversion or exercise by the Principal Stockholders of
all of their securities which are convertible into or exercisable for shares
of common stock of Alliance). Except as described in this paragraph, Apollo
currently does not have any interest in any shares of common stock of
Alliance.
Only common stockholders of record on November 7, 1997 will be entitled to
notice of and to vote at the Special Meeting.
A list of Alliance's stockholders entitled to vote at the Special Meeting
will be available for examination by Alliance's stockholders, for proper
purposes, during normal business hours, at Alliance's corporate offices,
commencing two business days after the date of this Notice of Special Meeting
and continuing through the date of the Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Terrence M. White
Secretary
Anaheim, California
November 26, 1997
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF HOW MANY SHARES OF ALLIANCE COMMON
STOCK YOU OWN. REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL
MEETING, YOU ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED
PROXY WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY
REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE. IF YOU ARE
PRESENT AT THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND
VOTE PERSONALLY ON THE MATTERS PROPERLY BROUGHT BEFORE THE
SPECIAL MEETING.
----------------
STOCKHOLDERS ELECTING TO RETAIN SHARES OF ALLIANCE COMMON STOCK SHOULD
RETURN THE ENCLOSED ELECTION FORM, TOGETHER WITH DULY ENDORSED
CERTIFICATES REPRESENTING SHARES OF ALLIANCE COMMON STOCK AS INSTRUCTED
IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
EXCEPT FOR CERTIFICATES REPRESENTING ALLIANCE COMMON STOCK SURRENDERED WITH
AN ELECTION FORM AS DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS UNDER "THE SPECIAL MEETING--PROCEDURE FOR RETAINED
SHARE ELECTION," ALLIANCE'S STOCKHOLDERS SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE
LETTER OF TRANSMITTAL.
2
<PAGE>
ALLIANCE IMAGING, INC.
PROXY STATEMENT/PROSPECTUS
----------------
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to stockholders of Alliance Imaging, Inc., a Delaware corporation
("Alliance"), in connection with the solicitation of proxies by the Board of
Directors of Alliance (the "Board of Directors") for use at the Special
Meeting of Alliance's stockholders, including any adjournments or
postponements thereof, scheduled to be held on December 17, 1997 at 8:00 a.m.,
Pacific Time, at the offices of Alliance, 1065 North PacifiCenter Drive, Suite
200, Anaheim, California 92806 (the "Special Meeting"). This Proxy
Statement/Prospectus relates to the Agreement and Plan of Merger dated as of
July 23, 1997, between Alliance and Newport Investment LLC (the "Investor"), a
Delaware limited liability company, as amended by Amendment No. 1 dated as of
August 13, 1997, Amendment No. 2 dated as of October 13, 1997 and Amendment
No. 3 dated as of November 10, 1997 (the "Recapitalization Merger Agreement").
The Investor was formed and is wholly owned by Apollo Investment Fund III,
L.P., a Delaware limited partnership ("AIF III"), Apollo Overseas III, L.P., a
Delaware limited partnership ("Overseas Partners"), and Apollo (U.K.) Partners
III, L.P., a limited partnership organized under the laws of England ("UK
Partners," and together with AIF III, Overseas Partners and the Investor,
"Apollo"), in connection with the Recapitalization. For information concerning
Apollo, see "THE INVESTOR, NEWCO AND APOLLO."
The Recapitalization Merger Agreement provides for, among other things, (1)
the Merger of Newport Acquisition Corp., a corporation to be formed and wholly
owned by the Investor ("Newco"), with and into Alliance (the
"Recapitalization"), as a result of which the shares of common stock of Newco
will be converted into 3,632,222 shares of common stock of Alliance (the
"Alliance Common Stock"), an aggregate of 411,358 shares of Alliance Common
Stock will be retained by Alliance's existing stockholders and the balance of
the outstanding shares of Alliance Common Stock (other than shares of Alliance
Common Stock held by Alliance's stockholders, if any, who dissent from the
Recapitalization and comply with all of the provisions of the Delaware General
Corporation Law (the "DGCL") concerning the right of stockholders to seek
appraisal of their shares ("Dissenting Shares")) will be converted into the
right to receive $11.00 per share in cash (the "Cash Merger Price"), (2) the
Investor to purchase 150,000 shares of Alliance's non-voting redeemable Series
F preferred stock (the "Series F Preferred Stock"), (3) the Board of Directors
of Newco to become the Board of Directors of Alliance upon consummation of the
Recapitalization and (4) the amendment and restatement of Alliance's Restated
Certificate of Incorporation.
If the Recapitalization Merger Agreement is approved by holders of a
majority of the shares of Alliance Common Stock, then at the effective time of
the Recapitalization (the "Recapitalization Effective Time"), the separate
corporate existence of Newco will cease, Alliance will continue as the
surviving corporation, and 411,358 shares of Alliance Common Stock, or
approximately 3% of the presently issued and outstanding shares of Alliance
Common Stock (assuming conversion of all shares of preferred stock of
Alliance), will be retained by Alliance's existing stockholders and the
remainder, approximately 97% of the presently issued and outstanding shares of
Alliance Common Stock (assuming conversion of all shares of preferred stock of
Alliance and assuming there are no Dissenting Shares), will be converted into
the right to receive $11.00 per share in cash. Each stockholder of Alliance
entitled to vote at the Special Meeting may elect to retain shares of Alliance
Common Stock by following the procedures set forth in "THE RECAPITALIZATION--
Proration." If Alliance's stockholders elect to retain more or less than an
aggregate of 411,358 shares of Alliance Common Stock, the number of shares to
be retained will be prorated as described in "THE RECAPITALIZATION--
Proration." Consequently, at the time holders of shares of Alliance Common
Stock vote in respect of the Recapitalization Merger Agreement and decide
whether to elect to retain shares of Alliance Common Stock, they will not know
if they will be entitled to retain all of the shares they elect to retain or
if they will be required to retain shares of Alliance Common Stock which they
do not elect to retain.
Pursuant to the Recapitalization Merger Agreement, Apollo will purchase a
total of 3,632,222 shares of Alliance Common Stock and 150,000 shares of
Series F Preferred Stock. Consequently, immediately after the
Recapitalization, Alliance will have 4,043,580 shares of common stock
outstanding, of which Apollo will own
<PAGE>
3,632,222 shares (or approximately 90%) and Alliance's existing stockholders
will own 411,358 shares (or approximately 10%). Immediately after consummation
of the transactions, Apollo intends to sell 242,898 shares of Alliance Common
Stock owned by Apollo to BT Capital Corporation ("BT") for $11.00 per share
(or approximately $2.7 million in the aggregate) in cash, the per share amount
paid to Alliance's existing stockholders for shares of Alliance Common Stock.
The value and marketability of retained shares may change due to the inability
of the existing shareholders to receive a premium if the retained shares are
sold due to the concentration in ownership by Apollo. See "RISK FACTORS--
Possible Delisting; Loss of Liquidity" and "--Control by Apollo." Immediately
after consummation of the Transactions, Apollo also intends to sell to BT
9,000 shares ($0.9 million stated amount) of the Series F Preferred Stock
purchased by it for $0.9 million in cash. In addition, options to acquire
524,545 shares of Alliance Common Stock will be held by or issuable to
management of Alliance after consummation of the Recapitalization. See "THE
RECAPITALIZATION--Interests of Certain Persons in the Recapitalization,"
"CERTAIN RELATED AGREEMENTS--The New Option Plan."
The aggregate cash consideration to be received by Alliance's stockholders
in respect of shares of Alliance Common Stock (other than retained shares)
will be approximately $149.7 million. See "SOURCES AND AMOUNT OF FUNDS."
The affirmative vote of the holders of a majority of the shares of Alliance
Common Stock entitled to vote thereon is required to approve the
Recapitalization Merger Agreement. However, pursuant to a stockholder
agreement dated as of July 23, 1997 (the "Stockholder Agreement"), among the
Investor and stockholders (the "Principal Stockholders") owning approximately
54.4% of the issued and outstanding shares of Alliance Common Stock
(approximately 66.0% assuming the conversion or exercise by the Principal
Stockholders of all of their securities which are convertible into or
exercisable for shares of Alliance Common Stock), Apollo has the right to
cause a majority of the outstanding shares of Alliance Common Stock to be
voted in favor of the Recapitalization Merger Agreement and has a currently
exercisable option to acquire all of such shares (which option terminates, in
general, on December 31, 1997 or earlier if the Recapitalization Merger
Agreement is terminated) and, therefore, beneficially owns such shares. Apollo
intends to cause the shares of Alliance Common Stock subject to the
Stockholder Agreement to be voted in favor of the approval of the
Recapitalization Merger Agreement, thereby ensuring the approval of the
Recapitalization Merger Agreement without the vote of any additional
stockholders. See "THE SPECIAL MEETING--Required Vote." The Principal
Stockholders will be entitled to participate in the proration of the retained
shares in the same manner as Alliance's other stockholders, unless the
Investor exercises the option (in which case, the Principal Stockholders would
receive cash for their shares and would not be subject to proration). The
Investor has advised the Company that it does not currently intend to exercise
the option and would do so only if a third party sought to acquire Alliance
prior to consummation of the Recapitalization or the termination of the
Recapitalization Merger Agreement. If the Investor does exercise the option,
all 411,358 of the retained shares would be prorated among Alliance's existing
public stockholders, who own approximately 34% of the issued and outstanding
shares of Alliance Common Stock (assuming the conversion or exercise by the
Principal Stockholders of all of their securities which are convertible into
or exercisable for shares of Alliance Common Stock). Except as provided in
this paragraph, Apollo currently does not have any interest in any shares of
Alliance Common Stock.
As a result of the Stockholder Agreement, Alliance's stockholders lack the
ability to control whether the Recapitalization occurs. The holders of shares
of Alliance Common Stock will be entitled to appraisal rights under Delaware
law in connection with the Recapitalization as described herein. See
"DISSENTING STOCKHOLDERS' RIGHTS."
This Proxy Statement/Prospectus also constitutes a prospectus of Alliance
with respect to the shares of Alliance Common Stock to be retained by
stockholders in the Recapitalization.
THE BOARD OF DIRECTORS OF ALLIANCE HAS UNANIMOUSLY APPROVED THE
RECAPITALIZATION MERGER AGREEMENT AND HAS DETERMINED, AMONG OTHER THINGS, THAT
THE RECAPITALIZATION MERGER AGREEMENT (INCLUDING THE RECAPITALIZATION) IS FAIR
TO AND IN THE BEST INTERESTS OF ALLIANCE'S STOCKHOLDERS, AND RECOMMENDS THAT
ALLIANCE'S STOCKHOLDERS APPROVE THE RECAPITALIZATION MERGER AGREEMENT.
2
<PAGE>
IN CONSIDERING THE RECOMMENDATION OF THE BOARD OF DIRECTORS WITH RESPECT TO
THE RECAPITALIZATION MERGER AGREEMENT, STOCKHOLDERS SHOULD BE AWARE THAT
CERTAIN MEMBERS OF MANAGEMENT OF ALLIANCE AT THE TIME OF THE BOARD OF
DIRECTOR'S APPROVAL OF THE RECAPITALIZATION MERGER AGREEMENT HAD, AND
CURRENTLY HAVE, CERTAIN INTERESTS WHICH MAY PRESENT THEM WITH POTENTIAL
CONFLICTS OF INTEREST IN CONNECTION WITH THE RECAPITALIZATION. SEE "THE
RECAPITALIZATION--INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION."
THE BOARD OF DIRECTORS OF ALLIANCE HAS RECEIVED THE WRITTEN OPINION OF
SALOMON BROTHERS INC, DATED AS OF NOVEMBER 10, 1997, THAT, BASED UPON AND
SUBJECT TO THE MATTERS SET FORTH THEREIN, AS OF SUCH DATE, THE CONSIDERATION
TO BE RECEIVED AND RETAINED BY ALLIANCE'S STOCKHOLDERS PURSUANT TO THE
RECAPITALIZATION IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO SUCH
STOCKHOLDERS.
THE RECOMMENDATION BY THE BOARD OF DIRECTORS OF ALLIANCE THAT ALLIANCE'S
STOCKHOLDERS APPROVE THE RECAPITALIZATION MERGER AGREEMENT IS NOT A
RECOMMENDATION AS TO WHETHER STOCKHOLDERS SHOULD RETAIN SHARES OF ALLIANCE
COMMON STOCK.
Alliance Common Stock is listed for trading on the Nasdaq SmallCap Market
under the symbol "SCAN." On November 21, 1997, the last reported sale price of
Alliance Common Stock was $10.625 per share. On July 22, 1997, the last
trading day before public announcement of the execution of the
Recapitalization Merger Agreement, the last sale price of Alliance Common
Stock as reported on the Nasdaq SmallCap Market was $10.25 per share. See
"RISK FACTORS--Possible Delisting; Loss of Liquidity" and "RISK FACTORS--
Termination of SEC Reporting."
This Proxy Statement/Prospectus, the accompanying form of proxy (the
"Proxy"), the Election Form (as hereinafter defined) and the other enclosed
documents are dated and are first being mailed to Alliance's stockholders on
or about November 26, 1997.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF ALLIANCE COMMON STOCK IN
CONNECTION WITH THEIR CONSIDERATION OF THE RECAPITALIZATION.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
3
<PAGE>
AVAILABLE INFORMATION
Alliance is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by Alliance with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as
Alliance, which file electronically with the Commission. Such information is
available at the offices of the Nasdaq SmallCap Market, 1735 K Street, N.W.,
Washington, D.C., 20006.
This Proxy Statement/Prospectus also constitutes a prospectus of Alliance
filed as part of a Registration Statement on Form S-4 under the Securities Act
of 1933, as amended (the "Securities Act"). Alliance is registering the shares
of Alliance Common Stock that will be retained in connection with the
Recapitalization and is distributing this Proxy Statement/Prospectus in
connection therewith. Approval by the stockholders of Alliance of the
Recapitalization Merger Agreement and the election to retain shares constitute
investment decisions by such holders with respect to the 411,358 shares of
Alliance Common Stock to be retained by Alliance's stockholders in the
Recapitalization. This Proxy Statement/Prospectus omits certain information
contained in the Registration Statement and the exhibits thereto. Reference is
made to the Registration Statement and related exhibits for further
information with respect to Alliance and the Alliance Common Stock. Such
materials can be inspected and copied at the places and in the manner set
forth above. Any statement herein, or in any document incorporated herein by
reference, concerning any contract, agreement or other document is not
necessarily complete, and in each instance reference is made to the copy of
the document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
THE COMPANY, INCLUDING STATEMENTS UNDER THE CAPTIONS "UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS--
COMPETITIVE STRENGTHS." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS
AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE
REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE COMPANY'S
INDUSTRY INCREASES SIGNIFICANTLY; (2) COSTS OR DIFFICULTIES RELATED TO THE
INTEGRATION OF THE BUSINESSES OF ALLIANCE AND ANY BUSINESSES TO BE ACQUIRED
ARE GREATER THAN EXPECTED; (3) THE ABILITY TO RENEW OR EXTEND EXISTING
CONTRACTS AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN
EXPECTED. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE
FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS IS
INCLUDED IN THE SECTION HEREIN ENTITLED "RISK FACTORS."
4
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 4
SUMMARY................................................................... 7
The Company.............................................................. 7
The Special Meeting...................................................... 7
The Recapitalization..................................................... 9
Sources and Amount of Funds.............................................. 14
Risk Factors............................................................. 16
Recent Developments...................................................... 16
Summary Historical Financial Information................................. 17
Market For Alliance Common Stock......................................... 19
RISK FACTORS.............................................................. 20
Control by Apollo........................................................ 20
Possible Delisting; Loss of Liquidity.................................... 20
Termination of SEC Reporting............................................. 20
Substantial Leverage..................................................... 20
Restrictive Debt Covenants............................................... 21
Issuance of Series F Preferred Stock..................................... 22
Regulation............................................................... 22
Reimbursement of Health Care Costs; Cost Containment Pressures;
Contracts............................................................... 23
Acquisition Strategy..................................................... 23
Technological Change and Obsolescence.................................... 24
Fraudulent Transfer Considerations....................................... 24
Reliance on Key Personnel................................................ 24
Competition.............................................................. 25
Federal Income Tax Treatment............................................. 25
PRO FORMA CAPITALIZATION.................................................. 26
SOURCES AND AMOUNT OF FUNDS............................................... 27
Sources and Amount of Funds.............................................. 27
Credit Agreement......................................................... 27
Notes.................................................................... 29
THE SPECIAL MEETING....................................................... 31
Time and Place........................................................... 31
Record Date; Stock Entitled to Vote; Quorum.............................. 31
Matters to be Considered................................................. 31
Required Vote............................................................ 32
Voting; Revocation of Proxies............................................ 32
Dissenters' Rights....................................................... 33
Solicitation of Proxies.................................................. 33
THE RECAPITALIZATION...................................................... 34
Background of the Recapitalization....................................... 34
Recommendation of the Board of Directors; Reasons for the
Recapitalization........................................................ 38
Opinion of Financial Advisor............................................. 40
Interests of Certain Persons in the Recapitalization..................... 45
Effect of the Recapitalization........................................... 48
Procedure for Retained Share Election.................................... 49
Revocation of Retained Share Elections................................... 49
Role of the Exchange Agent............................................... 49
Proration................................................................ 50
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Effective Time of the Recapitalization................................... 52
Retention of Shares; Procedures for Exchanging Certificates.............. 52
Fractional Shares........................................................ 53
Conduct of Business Pending the Recapitalization......................... 53
Conditions to the Consummation of the Recapitalization................... 53
Anticipated Accounting Treatment......................................... 54
Effect on Warrants and Alliance Stock Options............................ 54
Effect on Preferred Stock................................................ 54
Possible Delisting; Termination of SEC Reporting......................... 55
Resale of Alliance Common Stock Following the Recapitalization........... 55
Conversion of Newco Stock................................................ 55
Certain Tax Consequences of the Recapitalization......................... 55
CERTAIN PROVISIONS OF THE RECAPITALIZATION MERGER AGREEMENT............... 60
CERTAIN RELATED AGREEMENTS................................................ 69
Stockholder Agreement.................................................... 69
Employment Agreements and Agreement Not to Compete....................... 69
The New Option Plan...................................................... 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 71
REGULATORY APPROVALS...................................................... 71
Antitrust................................................................ 71
Other.................................................................... 72
DISSENTING STOCKHOLDERS' RIGHTS........................................... 72
THE INVESTOR, NEWCO AND APOLLO............................................ 75
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................... 76
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF ALLIANCE........ 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 85
Overview................................................................. 85
Results of Operations.................................................... 86
Liquidity and Capital Resources.......................................... 90
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INDUSTRY................................................................... 92
BUSINESS................................................................... 94
General................................................................... 94
Competitive Strengths..................................................... 94
Business Strategy......................................................... 95
Operations................................................................ 96
Customer Support.......................................................... 98
Sales and Marketing....................................................... 98
Maintenance............................................................... 98
Reimbursement............................................................. 99
Regulation................................................................ 100
Liability Insurance....................................................... 101
Competition............................................................... 101
Employees................................................................. 101
Properties................................................................ 102
Legal Proceedings......................................................... 102
MANAGEMENT................................................................. 103
Executive Officers and Directors of the Company........................... 103
Executive Compensation.................................................... 104
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Summary Compensation Table................................................ 104
PRINCIPAL STOCKHOLDERS..................................................... 107
DESCRIPTION OF ALLIANCE CAPITAL STOCK...................................... 109
General................................................................... 109
Voting Rights............................................................. 109
Dividend Rights........................................................... 109
Liquidation Rights........................................................ 109
Amended and Restated Certificate of Incorporation......................... 109
Preferred Stock........................................................... 109
Series F Preferred Stock.................................................. 110
LEGAL MATTERS.............................................................. 110
EXPERTS.................................................................... 110
OTHER INFORMATION AND STOCKHOLDER PROPOSALS................................ 110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus or in the documents incorporated herein by
reference. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information contained elsewhere in this Proxy
Statement/Prospectus and in the documents incorporated by reference herein.
Unless the context otherwise requires, the terms "Alliance" and the "Company"
refer to Alliance Imaging, Inc. and its subsidiaries.
THE COMPANY
The Company is a leading nationwide provider of diagnostic imaging services
and the largest operator of state-of-the-art mobile diagnostic imaging systems
and related outsourced radiology services in the United States. The Company
primarily provides magnetic resonance imaging ("MRI") systems and services to
hospitals and other health care providers on a mobile, shared user basis. The
Company also provides dedicated, full-time MRI systems and services as well as
full-service management of imaging operations for selected hospitals. The
Company's services enable small to mid-size hospitals to gain access to
advanced diagnostic imaging technology and related value-added services without
making a substantial investment in equipment and personnel. The Company
operates a fleet of 98 MRI systems and services 356 MRI customers in 36 states
under exclusive contracts with an average remaining length of approximately 24
months as of September 30, 1997. Alliance is a Delaware corporation with its
principal executive offices located at 1065 North PacifiCenter Drive, Suite
200, Anaheim, California 92806. The telephone number of Alliance at such
offices is (714) 688-7100.
THE SPECIAL MEETING
Time and Place. The Special Meeting of Alliance's stockholders will be held
at the offices of Alliance, 1065 North PacifiCenter Drive, Suite 200, Anaheim,
California 92806, on December 17, 1997, beginning at 8:00 a.m., Pacific Time
(the "Special Meeting Date").
Record Date; Stock Entitled to Vote; Quorum. Only record holders of Alliance
Common Stock at the close of business on November 7, 1997 (the "Record Date")
will be entitled to receive notice of and to vote at the Special Meeting. The
presence, in person or by proxy, at the Special Meeting of at least a majority
of the votes entitled to be cast at the Special Meeting is necessary to
constitute a quorum for the transaction of business. Abstentions will be
counted as present for the purposes of determining whether a quorum is present
but will not be counted as votes cast in favor of the Recapitalization Merger
Agreement. See "THE SPECIAL MEETING--Record Date; Stock Entitled to Vote;
Quorum."
Matters to be Considered. The purpose of the Special Meeting is to vote on
the Recapitalization Merger Agreement. The Recapitalization Merger Agreement
provides for, among other things, (1) the Recapitalization, (2) the Investor to
purchase 150,000 shares of Series F Preferred Stock, (3) the Board of Directors
of Newco to become the Board of Directors of Alliance upon the consummation of
the Recapitalization and (4) the amendment and restatement of Alliance's
Restated Certificate of Incorporation. See "THE SPECIAL MEETING--Matters to be
Considered."
Required Vote. The affirmative vote of the holders of a majority of the
shares of Alliance Common Stock entitled to vote thereon is required to approve
the Recapitalization Merger Agreement. However, pursuant to the
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Stockholder Agreement, Apollo has the right to cause a majority of the
outstanding shares of Alliance Common Stock to be voted in favor of the
Recapitalization Merger Agreement and has an option to acquire all of such
shares. Apollo intends to cause the shares of Alliance Common Stock subject to
the Stockholder Agreement to be voted in favor of the approval of the
Recapitalization Merger Agreement, thereby ensuring the approval of the
Recapitalization Merger Agreement without the vote of any additional
stockholders. See "THE SPECIAL MEETING --Required Vote" and "CERTAIN RELATED
AGREEMENTS--Stockholder Agreement."
Voting; Revocation of Proxies. Shares of Alliance Common Stock represented by
all properly executed Proxies received in time for the Special Meeting (and not
properly revoked) will be voted in the manner specified in such Proxies.
Proxies that do not contain any instruction to vote for or against or to
abstain from voting on a particular matter will be voted in favor of such
matter.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by such Proxy are voted at
the Special Meeting by (1) attending and voting in person at the Special
Meeting, (2) giving notice of revocation of the Proxy at the Special Meeting or
(3) delivering to the Secretary of Alliance (a) a written notice of revocation
or (b) a duly executed Proxy relating to the same shares and matters to be
considered at the Special Meeting, bearing a date later than the Proxy
previously executed. Attendance at the Special Meeting will not in and of
itself constitute a revocation of a Proxy.
If the Special Meeting is adjourned, for whatever reason, the approval of the
matters to be considered at the Special Meeting shall be considered and voted
upon by stockholders at the subsequent, reconvened meeting, if any. See "THE
SPECIAL MEETING--Voting; Revocation of Proxies."
Solicitation of Proxies. The cost of soliciting Proxies will be borne by
Alliance. Alliance may solicit Proxies and Alliance's directors, officers and
employees may also solicit Proxies by telephone, telegram or personal
interview. These persons will receive no additional compensation for their
services. Arrangements will be made to furnish copies of proxy materials to
fiduciaries, custodians and brokerage houses for forwarding to beneficial
owners of Alliance Common Stock. Such persons will be reimbursed for reasonable
out-of-pocket expenses. See "THE SPECIAL MEETING--Solicitation of Proxies."
EXCEPT FOR CERTIFICATES REPRESENTING ALLIANCE COMMON STOCK SURRENDERED WITH AN
ELECTION FORM AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS UNDER
"THE SPECIAL MEETING--PROCEDURE FOR RETAINED SHARE ELECTION," ALLIANCE'S
STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL
THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
Dissenters' Rights. Under Section 262 of the DGCL, any stockholder of
Alliance may dissent from the Recapitalization and seek to obtain payment for
the fair value of such stockholder's shares of Alliance Common Stock. In order
to dissent, (i) the dissenting stockholder must deliver to Alliance, prior to
the vote being taken on the Recapitalization Merger Agreement and the
Recapitalization at the Special Meeting, a written demand for appraisal of such
stockholder's shares of Alliance Common Stock and (ii) the dissenting
stockholder must not vote in favor of the Recapitalization Merger Agreement.
See "DISSENTING STOCKHOLDERS' RIGHTS."
Recommendation of the Board of Directors. The Board of Directors of Alliance
has unanimously approved the Recapitalization Merger Agreement and has
determined, among other things, that the Recapitalization Merger Agreement is
fair to and in the best interests of Alliance's stockholders, and recommends
that Alliance's stockholders approve the Recapitalization Merger Agreement. See
"THE SPECIAL MEETING--Matters to be Considered" and "THE RECAPITALIZATION--
Recommendation of the Board of Directors; Reasons for the Recapitalization."
The recommendation by the Board of Directors of Alliance that Alliance's
stockholders approve the Recapitalization Merger Agreement is not a
recommendation as to whether stockholders should retain shares of Alliance
Common Stock.
Interests of Certain Persons in the Recapitalization. In considering the
recommendation of the Board of Directors with respect to the Recapitalization
Merger Agreement, stockholders should be aware that certain
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members of management of Alliance at the time of the Board of Director's
approval of the Recapitalization Merger Agreement had, and currently have,
certain interests which may present them with potential conflicts of interest
in connection with the Recapitalization. Although all Alliance stockholders
will participate in the Recapitalization on the same basis (assuming the option
granted pursuant to the Stockholder Agreement is not exercised), the
Recapitalization will cause the acceleration of substantially all of the
outstanding unvested stock options held by management and members of the Board
of Directors of Alliance. Certain members of management will retain certain
options to acquire 70,000 shares of Alliance Common Stock, which options have
an approximate aggregate value of $0.5 million. The Recapitalization will also
cause the acceleration of certain long-term incentive payments previously
earned by management in the approximate aggregate amount of $2.1 million, and
will trigger "change of control" payments of approximately $1.8 million
pursuant to the employment agreements with certain members of management. In
addition, Alliance has entered into employment agreements, each dated as of
July 23, 1997, with Richard N. Zehner to act as Chief Executive Officer and
with Vincent S. Pino to act as Chief Operating Officer (the "Employment
Agreements"), in each case, to be effective upon consummation of the
Recapitalization, and the Investor has entered into an agreement with Messrs.
Zehner and Pino that contains, among other things, covenants not to compete
with Alliance. The Board of Directors was aware of these interests and
considered them in addition to the other matters described under "THE
RECAPITALIZATION--Background of the Recapitalization" and "THE
RECAPITALIZATION--Recommendation of the Board of Directors; Reasons for the
Recapitalization." See "THE RECAPITALIZATION--Interests of Certain Persons in
the Recapitalization" and "CERTAIN RELATED AGREEMENTS--Employment Agreements
and Agreement Not to Compete."
Opinion of Financial Advisor. Salomon Brothers Inc ("Salomon Brothers") was
retained as financial advisor to Alliance and has delivered to the Board of
Directors its written opinion dated as of November 10, 1997, that, based upon
and subject to the matters set forth therein, as of such date, the
consideration to be received and retained by holders of shares of Alliance
Common Stock in the proposed Recapitalization is fair, from a financial point
of view, to such stockholders. Alliance will pay Salomon Brothers the following
fees for these services: (a) $100,000, which was earned upon Alliance's
execution of the Recapitalization Merger Agreement, plus (b) an additional fee
of $400,000, which was earned upon the initial submission of the Salomon
Brothers' fairness opinion to the Board of Directors of Alliance on July 22,
1997, plus (c) an additional fee of approximately $2.4 million, which is
contingent upon the consummation of the Recapitalization. See "THE
RECAPITALIZATION--Opinion of the Financial Advisor."
A copy of the opinion of Salomon Brothers, which sets forth the assumptions
made, procedures followed, matters considered and scope of review, is attached
to this Proxy Statement/Prospectus as Annex C and should be read carefully in
its entirety. See "THE RECAPITALIZATION--Opinion of Financial Advisor," which
contains a summary of the fairness opinion, the analyses underlying the
fairness opinion and a discussion of the fees to be paid to Salomon Brothers
and the conditions under which such fees are payable. The amount of
consideration payable in the Recapitalization was the result of arm's length
negotiations between the Investor and Alliance, in consultation with their
respective financial advisors and other representatives, and was not
established by Salomon Brothers. See "THE RECAPITALIZATION--Opinion of the
Financial Advisor."
THE RECAPITALIZATION
Reasons for the Recapitalization. The Board of Directors of Alliance has
unanimously approved the Recapitalization Merger Agreement and has determined,
among other things, that the Recapitalization Merger Agreement is fair to and
in the best interests of Alliance's stockholders, and recommends that
Alliance's stockholders approve the Recapitalization Merger Agreement, because
of, among other things, the following factors: a balancing of the risks and
benefits of the Recapitalization against the risks and benefits of the other
strategic alternatives available to Alliance, including continuing as an
independent entity; the consideration to be paid and retained in the
Recapitalization, valued at $11.00 per share of Alliance Common Stock,
represents a premium for Alliance Common Stock, compared to its historical
price levels; the written opinion of Salomon Brothers with respect to the
fairness of the consideration to be received and retained by Alliance's
stockholders
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in the Recapitalization; the terms and conditions of the Recapitalization
Merger Agreement; the fees and expenses to be paid to an affiliate of Apollo;
the terms and conditions of the Stockholder Agreement; and that the proposed
structure of the Recapitalization treats all stockholders equally by giving all
stockholders the opportunity to receive cash for their shares or to retain
shares of Alliance Common Stock (subject in each case to proration). See "THE
RECAPITALIZATION--Recommendation of the Board of Directors; Reasons for the
Recapitalization."
Effect of the Recapitalization. Pursuant to the Recapitalization Merger
Agreement, Newco will be merged with and into Alliance. At the Recapitalization
Effective Time, the separate corporate existence of Newco will cease, Alliance
will continue as the surviving corporation, the shares of common stock of Newco
will be converted into 3,632,222 shares of Alliance Common Stock, 411,358
shares of outstanding Alliance Common Stock will be retained by Alliance's
existing shareholders and the balance of the shares of Alliance Common Stock
issued and outstanding immediately prior to the Recapitalization Effective Time
(other than Dissenting Shares) will be converted into the right to receive
$11.00 in cash.
If the Recapitalization Merger Agreement is approved by holders of a majority
of the shares of Alliance Common Stock, then 411,358 shares of Alliance Common
Stock, or approximately 3% of the presently issued and outstanding shares of
Alliance Common Stock (assuming the conversion of all outstanding shares of
preferred stock of Alliance), will be retained by Alliance's existing
stockholders and the remainder, approximately 97% of the presently issued and
outstanding shares of Alliance Common Stock (assuming the conversion of all
outstanding shares of preferred stock of Alliance and assuming there are no
Dissenting Shares) will be converted into the right to receive $11.00 per share
in cash. Each stockholder of Alliance may elect to retain shares of Alliance
Common Stock by following the procedures set forth in "THE RECAPITALIZATION--
Proration." If Alliance's stockholders elect in the aggregate to retain more or
less than 411,358 shares of Alliance Common Stock, the number of shares to be
retained will be prorated as described in "THE RECAPITALIZATION--Proration."
Consequently, at the time holders of shares of Alliance Common Stock vote in
respect of the Recapitalization Merger Agreement and decide whether to elect to
retain shares of Alliance Common Stock, they will not know if they will be
entitled to retain all of the shares they elect to retain or if they will be
required to retain shares of Alliance Common Stock which they do not elect to
retain. The Principal Stockholders will be entitled to participate in the
proration of the retained shares in the same manner as Alliance's other
stockholders, unless the Investor exercises the option (in which case, the
Principal Stockholders would receive cash for their shares and would not be
subject to proration). The Investor has advised the Company that it does not
currently intend to exercise the option and would do so only if a third party
sought to acquire Alliance prior to consummation of the Recapitalization or the
termination of the Recapitalization Merger Agreement. If the Investor does
exercise the option, all 411,358 of the retained shares would be prorated among
Alliance's existing public stockholders, who own approximately 34% of the
issued and outstanding shares of Alliance Common Stock (assuming the conversion
or exercise by the Principal Stockholders of all of their securities which are
convertible into or exercisable for shares of Alliance Common Stock. See "THE
RECAPITALIZATION--Merger Consideration."
Pursuant to the Recapitalization Merger Agreement, Apollo will receive a
total of 3,632,222 shares of Alliance Common Stock and 150,000 shares of Series
F Preferred Stock. Consequently, immediately after the Recapitalization,
Alliance will have 4,043,580 common shares outstanding, of which Apollo will
own 3,632,222 shares (or approximately 90%) and Alliance's existing
stockholders will own 411,358 shares (or approximately 10%). Immediately after
consummation of the Recapitalization, Apollo intends to sell to BT (i) 242,898
shares of Alliance Common Stock owned by Apollo for $11.00 per share (or
approximately $2.7 million in the aggregate) in cash, the per share amount paid
to Alliance's existing stockholders for their shares of Alliance Common Stock
and (ii) 9,000 shares ($0.9 million stated amount) of the Series F Preferred
Stock purchased by Apollo for $0.9 million in cash. In addition, options to
acquire 524,545 shares of Alliance Common Stock will be held by or issuable to
management of Alliance after consummation of the Recapitalization. See "THE
RECAPITALIZATION--Interests of Certain Persons in the Recapitalization,"
"CERTAIN RELATED AGREEMENTS--The New Option Plan."
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There is no valuation difference between a share of Alliance Common Stock
that is to be converted into the right to receive the Cash Merger Price and a
share of Alliance Common Stock that is to be retained. As of the consummation
of the Recapitalization, each share of Alliance Common Stock has an implied
value of $11.00. However, following consummation of the Recapitalization, the
value of the retained shares will be subject to change and there can be no
assurance that the value of the retained shares will not materially decrease
following the consummation of the Recapitalization. See "RISK FACTORS--Possible
Delisting; Loss of Liquidity."
Procedure for Retained Share Election. Each person who is a record holder of
shares of Alliance Common Stock at the close of business on the Record Date
will be entitled, with respect to all or any portion of his or its shares of
Alliance Common Stock (the "Elected Retained Shares"), to make an election to
retain such shares as set forth herein, and subject to the provisions relating
to proration as set forth herein (the "Retained Share Election").
A Retained Share Election shall have been validly made only if American Stock
Transfer & Trust Company (the "Exchange Agent") shall have received, on or
prior to the Special Meeting Date, the form for making such election (the
"Election Form"), properly completed and signed in accordance with such rules
as the Exchange Agent may establish pursuant to the Recapitalization Merger
Agreement, and accompanied by either (i) certificates for the shares of
Alliance Common Stock to which such Election Form relates, duly endorsed in
blank or otherwise in form acceptable for transfer on the books of Alliance, or
(ii) an appropriate guarantee of delivery of such certificates as set forth in
such Election Form from a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or from a commercial bank or trust company having an office or correspondent in
the United States (a "Notice of Guaranteed Delivery"). See "THE
RECAPITALIZATION--Procedure for Retained Share Election."
Proration. Pursuant to the Recapitalization Merger Agreement, if the
aggregate number of Elected Retained Shares (the "Elected Retained Share
Number") exceeds 411,358 (the "Actual Retained Share Number"), then the number
of shares of Alliance Common Stock that will be retained will be reduced by
such excess number of shares (each such share included among such excess, a
"Non-Elected Cash Share"). In such event, each holder of Elected Retained
Shares shall be allocated Non-Elected Cash Shares in lieu of Elected Retained
Shares such that (after giving effect to adjustments for fractional shares)
each such holder shall be deemed to hold Non-Elected Cash Shares in an amount
equal to (x) the total number of Elected Retained Shares held by such holder
less (y) the product of (A) a fraction, the numerator of which is the Actual
Retained Share Number and the denominator of which is the Elected Retained
Share Number, multiplied by (B) the total number of Elected Retained Shares
held by such holder. For example, if Alliance's existing stockholders elected
in the aggregate to retain a number of shares of Alliance Common Stock which is
twice as great as the Actual Retained Share Number, each stockholder would be
allowed to retain only one-half of the number of shares of Alliance Common
Stock which such stockholder elected to retain.
Pursuant to the Recapitalization Merger Agreement, if the Actual Retained
Share Number is greater than the Elected Retained Share Number, then the
aggregate number of shares of Alliance Common Stock which shall be converted
into the right to receive cash shall be decreased by a number of shares equal
to the excess of the Actual Retained Share Number over the Elected Retained
Share Number (each share included among such excess, a "Non-Elected Retained
Share"). In such event, each holder of Elected Cash Shares (other than the
Investor) shall be allocated a portion of the Non-Elected Retained Shares in
lieu of Elected Cash Shares (after giving effect to adjustments for fractional
shares) equal to (i) the number of Elected Cash Shares held by such holder,
multiplied by (ii) a fraction, the numerator of which is the number of Non-
Elected Retained Shares and the denominator of which is the aggregate number of
Elected Cash Shares held by all holders (other than the Investor). For example,
if Alliance's existing stockholders elected in the aggregate to retain 311,358
shares of Alliance Common Stock (i.e., 100,000 less than the Actual Retained
Share Number), each stockholder would retain all of the shares of Alliance
Common Stock which such stockholder had elected to retain plus such
stockholder's portion of the 100,000 additional shares of Alliance Common Stock
required to be retained by Alliance's stockholders, which additional shares
would be allocated among stockholders in proportion to the
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number of shares of Alliance Common Stock each stockholder had requested be
converted into the right to receive cash. If none of Alliance's existing
stockholders made a Retained Share Election, a holder of 100 shares of Alliance
Common Stock would be entitled to receive $1,078 in cash (98 shares at $11.00
per share) and would retain 2 shares of Alliance Common Stock. See "THE
RECAPITALIZATION--Proration."
The Principal Stockholders will be entitled to participate in the proration
of the retained shares in the same manner as Alliance's other stockholders,
unless the Investor exercises the option (in which case, the Principal
Stockholders would receive cash for their shares and would not be subject to
proration). The Investor has advised the Company that it does not currently
intend to exercise the option and would do so only if a third party sought to
acquire Alliance prior to consummation of the Recapitalization or the
termination of the Recapitalization Merger Agreement. If the Investor does
exercise the option, all 411,358 of the retained shares would be prorated among
Alliance's existing public stockholders, who own approximately 34% of the
issued and outstanding shares of Alliance Common Stock (assuming the conversion
or exercise by the Principal Stockholders of all of their securities which are
convertible into or exercisable for shares of Alliance Common Stock).
Retention of Shares; Procedures for Exchanging Certificates. The retention of
shares of Alliance Common Stock or the conversion of shares of Alliance Common
Stock into the right to receive cash (other than shares as to which dissenters'
rights are properly exercised) pursuant to the Recapitalization will occur, in
each case, at the Recapitalization Effective Time.
As soon as practicable after the Recapitalization Effective Time, the
Exchange Agent will send a letter of transmittal to each holder of Alliance
Common Stock. The letter of transmittal will contain instructions with respect
to the surrender of certificates representing shares of Alliance Common Stock
in exchange for cash and, under certain circumstances, certificates
representing shares of Alliance Common Stock to be retained in the
Recapitalization and the amount of cash in lieu of any fractional interest in a
share of Alliance Common Stock for which the shares represented by the
certificates so surrendered are exchangeable pursuant to the Recapitalization
Merger Agreement.
As soon as practicable after the Recapitalization Effective Time, each holder
of an outstanding certificate or certificates at such time which prior thereto
represented shares of Alliance Common Stock shall, upon surrender to the
Exchange Agent of such certificate or certificates and acceptance thereof by
the Exchange Agent, be entitled to the amount of cash, if any, into which the
number of shares of Alliance Common Stock previously represented by such
certificate or certificates surrendered shall have been converted pursuant to
the Recapitalization Merger Agreement and a certificate or certificates
representing the number of full shares of Alliance Common Stock, if any, to be
retained by the holder thereof pursuant to the Recapitalization Merger
Agreement.
After the Recapitalization Effective Time, there will be no further transfer
on the records of Alliance or its transfer agent of certificates representing
shares of Alliance Common Stock which have been converted, in whole or in part,
pursuant to the Recapitalization Merger Agreement into the right to receive
cash, and if such certificates are presented to Alliance for transfer, they
will be canceled against delivery of cash and, if appropriate, certificates for
retained shares of Alliance Common Stock.
No dividends or other distributions with a record date after the
Recapitalization Effective Time will be paid with respect to any shares of
retained Alliance Common Stock represented by any unsurrendered certificate,
and no cash payment in lieu of fractional shares will be paid to any such
holder pursuant to the Recapitalization Merger Agreement, until the surrender
of such certificate in accordance with the Recapitalization Merger Agreement.
See "THE RECAPITALIZATION--Retention of Shares; Procedures for Exchanging
Certificates."
Conduct of Business Pending the Recapitalization. Pursuant to the
Recapitalization Merger Agreement, Alliance has agreed to carry on its business
and that of its subsidiaries prior to the Recapitalization Effective Time in
the ordinary course of business consistent with past practice. See "THE
RECAPITALIZATION--Conduct of Business Pending the Recapitalization."
12
<PAGE>
Conditions to the Consummation of the Recapitalization. The Recapitalization
Merger Agreement contains various conditions, including the receipt of the
necessary stockholder approval and financing, the Investor having received
advice from Ernst & Young LLP that the Recapitalization qualifies for
recapitalization accounting treatment, Alliance having taken appropriate steps
to arrange the payment or prepayment of certain obligations, the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), which waiting period has
expired, the absence of any injunction or other legal restraint or prohibition
preventing the consummation of the Recapitalization and there not having
occurred any material adverse change in respect of Alliance. The
Recapitalization Merger Agreement also contains certain customary conditions
relating to the accuracy of the representations and warranties, the performance
of the covenants and agreements, consents having been obtained or filings
having been made and holders of less than 10% of the outstanding shares of
Alliance Common Stock having validly elected to demand appraisal of their
shares. Subject to applicable law, each of the conditions, other than the
condition requiring stockholder approval, may be waived. Alliance does not
intend to resolicit a vote of its stockholders on the Recapitalization Merger
Agreement in the event any material conditions are waived, unless such waiver
results in a fundamental change in the Recapitalization (including a material
change in accounting or tax treatment), in which event Alliance has undertaken
to resolicit the vote of its shareholders and would amend this Proxy
Statement/Prospectus. However, the Investor has agreed, pursuant to the
Stockholder Agreement, not to waive any condition so as to reduce the value of
the consideration payable in the Recapitalization, materially adversely affect
the timing of the closing of the Recapitalization, reduce the Cash Merger Price
or otherwise adversely affect the interests of the Principal Stockholders. See
"THE RECAPITALIZATION--Conditions to the Consummation of the Recapitalization."
Possible Delisting; Termination of SEC Reporting. Following the consummation
of the Recapitalization, Alliance may be required to or may seek to have the
Alliance Common Stock, which is currently traded on the Nasdaq SmallCap Market,
delisted and may deregister under the Exchange Act. Any delisting of Alliance
Common Stock, together with the substantial decrease in the number of shares of
Alliance Common Stock to be held by holders thereof other than the Investor, is
expected to result in a substantial decrease in the liquidity of Alliance
Common Stock, even if the Company continues to be a reporting company under the
Exchange Act and continues to file the periodic reports (including annual and
quarterly reports) required to be filed thereunder. If the Company ceases to be
a reporting company under the Exchange Act, the Company does not plan to
provide any reports or information to public stockholders other than pursuant
to the right of such stockholders to inspect the books and records of the
Company as required by the DGCL. As a result, the information available to
stockholders on the business and financial condition of the Company would be
reduced, which could have a material adverse effect on the value of the
Alliance Common Stock. See "RISK FACTORS--Possible Delisting; Loss of
Liquidity" and "RISK FACTORS--Termination of SEC Reporting."
Resale of Alliance Common Stock following the Recapitalization. Alliance
Common Stock to be retained in connection with the Recapitalization will be
freely transferable, except that shares retained by any stockholder who is an
"affiliate" (as defined under the Securities Act and generally including,
without limitation, directors, executive officers and beneficial owners of 10%
or more of a class of capital stock) of Alliance for purposes of Rule 145 under
the Securities Act will not be transferable except pursuant to an effective
registration statement or an exemption from the registration requirements of
the Securities Act. This Proxy Statement/Prospectus does not cover sales of
Alliance Common Stock retained by any person who is an affiliate of Alliance.
See "THE RECAPITALIZATION--Resale of Alliance Common Stock Following the
Recapitalization."
Treatment of Alliance Stock Options and Warrants. Substantially all of the
options to purchase Alliance Common Stock under Alliance's 1991 Amended and
Restated Stock Option Plan shall vest and become exercisable as a result of the
Recapitalization. Except as noted below, all outstanding options and warrants
to purchase Alliance Common Stock shall be cancelled at the Recapitalization
Effective Time and Alliance shall pay the holder thereof an amount equal to the
number of shares of Alliance Common Stock subject to the option or warrant
times the excess of the Cash Merger Price over the exercise price of the
warrant or option. Such
13
<PAGE>
options are held by management and other Alliance employees, and substantially
all of such warrants are held by certain of Alliance's current and former
institutional lenders. The total value of the options and warrants to be paid
is approximately $9.9 million and $2.1 million, respectively. Notwithstanding
the foregoing, options to purchase 70,000 shares of Alliance Common Stock held
by members of Alliance's management will remain outstanding following the
Recapitalization Effective Time. See "THE RECAPITALIZATION--Interests of
Certain Persons in the Recapitalization"; "--Effect on Warrants and Alliance
Stock Options."
Certain Tax Consequences of the Recapitalization. For U.S. federal income tax
purposes, Newco will be disregarded as a transitory entity, and the merger of
Newco with and into Alliance will be treated, with respect to cash received in
exchange for shares of Alliance Common Stock, as a sale of a portion of such
Alliance Common Stock to the Investor and as a redemption of a portion of such
Alliance Common Stock by Alliance. There will be no gain or loss recognized for
U.S. federal income tax purposes with the respect to shares of Alliance Common
Stock retained by a stockholder. However, under certain circumstances, a
stockholder that actually retains some, but not all, of such stockholder's
shares of Alliance Common Stock may be required to treat the receipt of a
portion of the cash received in the Recapitalization as the receipt of a
dividend (rather than as the receipt of proceeds from the sale of the shares of
Alliance Common Stock, which would generally receive capital gain treatment).
Alliance has received an opinion from Irell & Manella LLP regarding certain
federal income tax consequences of the Recapitalization. See "THE
RECAPITALIZATION--Certain Tax Consequences of the Recapitalization."
Termination of the Recapitalization Merger Agreement. The Recapitalization
Merger Agreement provides that it may be terminated in certain circumstances at
any time prior to the Recapitalization Effective Time, whether before or after
approval of the Recapitalization Merger Agreement and the Recapitalization by
the stockholders of Alliance. See "CERTAIN PROVISIONS OF THE RECAPITALIZATION
MERGER AGREEMENT."
Certain Related Agreements. Agreements related to the Recapitalization
include, among other agreements, the Stockholder Agreement, two Employment
Agreements, Covenants Not to Compete and the New Option Plan (each as defined
herein). See "CERTAIN RELATED AGREEMENTS."
SOURCES AND AMOUNT OF FUNDS
Approximately $270 million will be required to finance the Recapitalization,
to refinance certain existing indebtedness of Alliance (the "Refinancings"), to
pay the fees and expenses in connection with the foregoing and to provide for
the Company's working capital.
In connection with the Recapitalization, the Refinancing and the payment of
related fees and expenses, the Company intends to (i) enter into an agreement
(the "Credit Agreement") consisting of a $75 million revolving loan facility
(the "Revolving Loan Facility") and a $50 million term loan facility (the "Term
Loan Facility"), pursuant to which it will borrow approximately $50 million and
(ii) issue approximately $165 million aggregate principal amount of its Senior
Subordinated Notes due 2005 (the "Notes") in a public offering registered under
the Securities Act (the "Offering"). Immediately following consummation of the
Recapitalization, it is expected that the Company will have approximately $75
million of availability under the Revolving Loan Facility, which will be
available for the Company's working capital requirements and to finance
acquisitions.
Apollo's investment (the "New Equity Investment") in Alliance after the
Recapitalization Effective Time will consist of a cash contribution to the
Investor in an aggregate amount of approximately $55.0 million, which the
Investor intends to contribute to the Company at the Recapitalization Effective
Time, at which time the New Equity Investment will be available to the Company.
The total investment in Alliance after the Recapitalization Effective Time will
be $60 million, consisting of (1) $40.5 million of Alliance Common Stock
(consisting of approximately $40.0 million contributed by Apollo and continuing
options held by Alliance management having
14
<PAGE>
a net option value of approximately $0.5 million), (2) $4.5 million implied
value of the shares of Alliance Common Stock to be retained by Alliance's
existing stockholders and (3) $15 million of Alliance's Series F Preferred
Stock. See "SOURCES AND AMOUNTS OF FUNDS." Immediately after consummation of
the Transactions, Apollo intends to sell to BT $0.9 million stated amount of
the Series F Preferred Stock purchased by it for $0.9 million in cash.
The Recapitalization, the Refinancings, the borrowings under the Credit
Agreement as of the Recapitalization Effective Time, the Offering and the New
Equity Investment are collectively referred to as the "Transactions."
Pursuant to the Recapitalization Merger Agreement, Apollo will receive a
total of 3,632,222 shares of Alliance Common Stock. Consequently, immediately
after the Recapitalization Alliance will have 4,043,580 shares of Alliance
Common Stock outstanding, of which Apollo will own 3,632,222 shares (or
approximately 90%) and Alliance's existing stockholders will own 411,358 shares
(or approximately 10%). Immediately after consummation of the Recapitalization,
Apollo intends to sell 242,898 shares of Alliance Common Stock owned by Apollo
to BT Capital Corporation for $11.00 per share (or approximately $2.7 million
in the aggregate) in cash, the amount paid to Alliance's existing stockholders
for their shares of Alliance Common Stock. In addition, options to acquire
524,545 shares of Alliance Common Stock will be held by or issuable to
management of Alliance after consummation of the Recapitalization. See "THE
RECAPITALIZATION--Interests of Certain Persons in the Recapitalization,"
"CERTAIN RELATED AGREEMENTS--The New Option Plan."
The consummation of the Transactions will be concurrent. The approximate
sources and amount of funds in connection with the Transactions are presented
in the following table, assuming the Transactions occurred as of September 30,
1997 (dollars in millions):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Term Loan Facility................................................. $ 50.0
Notes.............................................................. 165.0
Redeemable Preferred Stock......................................... 15.0
New Equity Investment(1)........................................... 40.0
------
Total Sources.................................................. $270.0
======
AMOUNT OF FUNDS:
Payment of cash consideration in Recapitalization(2)............... $165.6
Repay outstanding indebtedness, net(3)............................. 75.2
Increase in cash................................................... 7.9
Estimated fees and expenses........................................ 21.3
------
Total Uses..................................................... $270.0
======
</TABLE>
- --------
(1) Does not include $4.5 million of equity retained by existing stockholders
of the Company and the continuation by certain members of management of
existing options to purchase Alliance Common Stock having a value of
approximately $0.5 million.
(2) Comprised of (a) payment for shares of Alliance Common Stock (approximately
$149.7 million), (b) payments with respect to outstanding warrants and
options and change of control payments under employment agreements
(approximately $13.8 million) and (c) payments pursuant to Alliance's Long-
Term Incentive Plan (approximately $2.1 million).
(3) Net of approximately $1.1 million of net discounts on early payment of such
indebtedness to which the Company is contractually entitled.
It is a condition to the obligations of the parties to the Recapitalization
that sufficient funds have been received to pay the consideration in the
Recapitalization and to consummate the transactions contemplated by the
Recapitalization Merger Agreement. The parties to the Recapitalization Merger
Agreement have agreed to use all commercially reasonable efforts to satisfy the
conditions, including the financing condition, under the Recapitalization
Merger Agreement. However, there can be no assurance that sufficient funding
will be obtained. See "SOURCES AND AMOUNT OF FUNDS."
15
<PAGE>
RISK FACTORS
Alliance's stockholders should consider carefully the information set forth
under the caption "Risk Factors," and all other information set forth in this
Proxy Statement/Prospectus, in evaluating whether to retain shares of Alliance
Common Stock and/or vote in favor of the Recapitalization Merger Agreement and
the Recapitalization.
RECENT DEVELOPMENTS
On October 20, 1997, Alliance announced the execution of a definitive
agreement to acquire Medical Consultants Imaging Co. ("MCIC"), a Cleveland,
Ohio based provider of mobile MRI services, CT services and other outsourced
healthcare services. The acquisition also includes MCIC's one-half interest in
an operating joint venture in Michigan. The purchase price consists of $13
million in cash (subject to certain reductions) plus the assumption of
approximately $5 million in financing arrangements. MCIC operates 14 mobile MRI
systems and several other diagnostic imaging systems, primarily in Ohio,
Michigan, Indiana and Pennsylvania. The transaction was completed on November
21, 1997. In addition, Alliance is currently engaged in acquisition discussions
with other MRI service providers.
16
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary historical consolidated financial information of Alliance with
respect to each year in the three-year period ended December 31, 1996, is
derived from the consolidated financial statements of Alliance, which have been
audited by Ernst & Young LLP, independent auditors. The financial information
for the three and nine months ended September 30, 1996 and 1997 are unaudited,
but in the opinion of management, reflects all adjustments necessary for a fair
presentation of such information. Operating results for the three and nine
months ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1997. 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 Proxy Statement/Prospectus. See "INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS."
ALLIANCE IMAGING, INC.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------- ---------------------
1994 1995 1996 1996 1997 1996 1997
--------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues................ $ 57,875 $ 58,065 $ 68,482 $ 49,097 $ 62,285 $ 17,795 $ 22,374
Operating expenses,
excluding depreciation. 31,093 28,342 32,344 23,549 27,499 8,530 9,684
Selling, general and
administrative
expenses............... 6,284 6,294 8,130 4,879 6,251 1,719 2,261
Depreciation expense.... 13,424 12,202 12,737 9,170 11,222 3,122 4,078
Amortization expense,
primarily goodwill..... 943 1,345 1,952 1,309 1,767 564 602
Interest expense, net... 10,758 5,053 5,758 4,184 5,315 1,501 1,758
Net income (loss)(1).... (19,066) 4,102 12,801 5,051 8,083 1,949 2,636
Earnings (loss) per
common share:
Income before items
below................. $ (2.68) $ 0.28 $ 0.48 $ 0.38 $ 0.48 $ 0.15 $ 0.17
Excess of carrying
amount of preferred
stock repurchased over
consideration paid.... -- -- 0.15 -- 0.14 -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary gains... (2.68) 0.28 0.63 0.38 0.62 0.15 0.17
Extraordinary gains,
net of taxes.......... -- -- 0.55 -- 0.09 -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
applicable to common
stock................. $ (2.68) $ 0.28 $ 1.18 $ 0.38 $ 0.71 $ 0.15 $ 0.17
========= ========== ========== ========== ========== ========== ==========
Weighted average common
and common equivalent
shares outstanding.... 7,124,000 11,158,000 11,494,000 11,463,000 14,028,000 11,558,000 15,130,000
========= ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
-----------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments......................... $ 10,557 $ 18,427
Total assets............................................ 151,623 166,300
Total long-term debt, including current portion......... 83,073 221,884
Redeemable Preferred Stock.............................. -- 14,400
Stockholders' equity (deficit).......................... 43,825 (88,899)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------- ---------------
1994 1995 1996 1996 1997 1996 1997
------- ------- ------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3)............... $20,498 $23,429 $28,008 $20,669 $28,535 $7,546 $10,429
EBITDA margin(4)........ 35.4% 40.3% 40.9% 42.1% 45.8% 42.4% 46.6%
Pro forma interest
expense, net(2)........ -- -- $20,136 -- $15,102 -- $ 5,034
Cash flows provided by
(used in):
Operating activities... $12,784 $18,043 $21,731 $17,348 $22,090 $6,482 $ 8,397
Investing activities... (19,861) (7,789) (27,936) (21,865) (33,546) (7,418) (14,001)
Financing activities... 1,135 (1,604) 5,944 5,066 11,146 1,433 2,344
Capital expenditures(5). 22,361 11,383 34,376 24,705 34,175 6,762 13,842
Number of MRI systems at
end of period.......... 72 76 86 86 98 86 98
Comparable customer
revenue growth(6)...... (0.1)% 6.9% 8.8% 11.5% 25.9% 3.9% 18.1%
Average scans per MRI
system per day......... 5.8 5.8 6.7 6.7 7.2 7.0 7.5
Ratio of earnings to
fixed charges(7)....... -- 1.9x 2.1x 2.2x 2.7x 2.3x 3.0x
</TABLE>
(footnotes on following page)
17
<PAGE>
- --------
(1) Net income (loss) includes special charges of $13.3 million for the year
ended December 31, 1994 related to an equipment exchange transaction, the
impairment of certain equipment, debt restructuring and employee
severances; extraordinary gains (net of tax) of $6.3 million for the year
ended December 31, 1996 related to the early extinguishment of debt; and an
extraordinary gain (net of tax) of $1.3 million for the nine months ended
September 30, 1997 related to the early extinguishment of debt.
(2) As adjusted consolidated balance sheet data at September 30, 1997 reflects
the historical consolidated balance sheet of Alliance adjusted to give
effect to the Transactions as if they had occurred at September 30, 1997.
Pro forma interest expense, net, reflects net cash interest expense as
adjusted to give effect to the Transactions as if they had occurred as of
January 1, 1996 for the year ended December 31, 1996, and as of January 1,
1997 for the three and nine month periods ended September 30, 1997. See
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
(3) EBITDA is defined herein as income before income taxes, plus depreciation,
amortization, net interest expense and other non-recurring items
(principally noncash). EBITDA is presented because the Company believes it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(4) EBITDA margin is defined herein as EBITDA divided by revenues. The Company
believes EBITDA margin provides a comparative reference to measure EBITDA
performance from period to period and against comparable sized companies in
the industry and, as such, provides a supplemental mechanism to evaluate
efficiency and overall operating performance.
(5) The substantial majority of Alliance's historical capital expenditures have
related to either major upgrades to existing systems or the replacement of
older, less-advanced systems with new, state-of-the-art technologically
advanced systems. As a result of these historical investments, the Company
believes that it has upgraded substantially all of its systems and expects
most of its capital expenditures for at least the next three to five years
to relate to net fleet additions through new system purchases.
(6) Represents period over period revenue growth for customers that generated
revenues for the entire term of both periods.
(7) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and one-third of the rent expense from long-term equipment operating
leases, which management believes is a reasonable approximation of an
interest factor. Alliance's earnings were insufficient to cover fixed
charges by $18.0 million for the year ended December 31, 1994.
18
<PAGE>
MARKET FOR ALLIANCE COMMON STOCK
The Alliance Common Stock trades on the Nasdaq SmallCap Market under the
symbol SCAN. The high and low prices as reported on the Nasdaq SmallCap Market
are set forth below for the periods indicated. As of the Record Date, there
were 170 record holders and approximately 1,582 beneficial holders of Alliance
Common Stock.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter.............. 8 3/8 5 3/4 4 1/8 2 7/8 1 7/16 7/16
Second Quarter............. 10 5/8 6 5/8 6 1/8 3 13/16 2 1/2 1 1/4
Third Quarter.............. 11 1/8 10 6 3/8 3 7/8 3 1/8 2
Fourth Quarter(1).......... 11 3/16 10 1/2 5 15/16 4 5/8 3 3/8 2 3/8
</TABLE>
- --------
(1) Fourth Quarter 1997 reflects the high and low prices through November 21,
1997.
On July 22, 1997, the last trading day before public announcement of the
execution of the Recapitalization Merger Agreement, the last sale price of
Alliance Common Stock as reported on the Nasdaq SmallCap Market was $10.25 per
share. On November 21, 1997, the most recent practicable date prior to the
printing of this Proxy Statement/Prospectus, the last sale price of Alliance
Common Stock as reported on the Nasdaq SmallCap Market was $10.625 per share.
Alliance has never paid any cash dividends on shares of Alliance Common Stock
and does not intend to pay cash dividends on shares of Alliance Common Stock
following the consummation of the Recapitalization.
ALLIANCE'S STOCKHOLDERS SHOULD OBTAIN CURRENT MARKET QUOTATIONS FOR ALLIANCE
COMMON STOCK.
19
<PAGE>
RISK FACTORS
Alliance's stockholders should consider carefully the factors set forth
below as well as the other information set forth in this Proxy
Statement/Prospectus in evaluating whether to retain shares of Alliance Common
Stock and/or vote in favor of the Recapitalization Merger Agreement and the
Recapitalization.
CONTROL BY APOLLO; POTENTIAL FOR CONFLICTS OF INTEREST
Upon consummation of the Recapitalization, Apollo will own approximately 84%
of the outstanding shares of Alliance Common Stock (approximately 74% on a
fully diluted basis). Accordingly, Apollo and its general partner will control
the Company, have the ability to obtain a change-in-control premium on the
sale of its shares (which premium may not be available to Alliance's public
stockholders) and have the power to elect all of its directors, appoint new
management and approve any action requiring the approval of the holders of
shares of Alliance Common Stock, including adopting amendments to Alliance's
certificate of incorporation and approving mergers or sales of substantially
all of Alliance's assets. Apollo also holds a controlling interest in SMT
Health Services Inc. ("SMT"), a leading provider of mobile MRI services in the
Mid-Atlantic region of the United States and a competitor of the Company. If
acquisition or other opportunities in the MRI industry are presented to
Apollo, no assurance can be given that Apollo will offer such opportunities to
Alliance and not to SMT.
POSSIBLE DELISTING; LOSS OF LIQUIDITY
Following the consummation of the Recapitalization and depending on the
number of holders of shares of Alliance Common Stock remaining, Alliance
anticipates that it may be necessary and/or desirable to have Alliance's
Common Stock, which is currently traded on The Nasdaq SmallCap Market,
delisted. Any delisting of Alliance Common Stock, together with the
substantial decrease in the number of shares of Alliance Common Stock to be
held by holders thereof other than the Investor, is expected to result in a
substantial decrease in the liquidity of Alliance Common Stock, even if the
Company continues to be a reporting company under the Exchange Act and
continues to file the periodic reports (including annual and quarterly
reports) required to be filed thereunder. Upon any such delisting, shares of
Alliance Common Stock would trade only in the over-the-counter market.
Although prices in respect of trades would be published periodically by the
National Association of Securities Dealers, Inc. in the "pink sheets," quotes
for such shares may not be readily available. As a result, it is anticipated
that such shares would have a lower trading volume than the trading volume of
such shares prior to the Recapitalization.
TERMINATION OF SEC REPORTING
If, as a result of the Recapitalization, shares of Alliance Common Stock are
held by fewer than 300 stockholders of record the Company will deregister the
Alliance Common Stock under the Exchange Act. If the Alliance Common Stock is
so deregistered, the Company will not be required to comply with the proxy or
periodic reporting requirements of the Exchange Act and does not plan to
provide any reports or information to public stockholders other than pursuant
to the right of such stockholders to inspect the books and records of the
Company as required by the DGCL. As a result, the information available to
stockholders on the business and financial condition of the Company would be
reduced, which could have a material adverse effect on the value of the
Alliance Common Stock. The Company currently plans to file with the Commission
and distribute to holders of the Notes copies of the financial information
that would have been contained in annual reports and quarterly reports,
including management's discussion and analysis of financial condition and
results of operations, that the Company would have been required to file with
the Commission pursuant to the Exchange Act. However, the Company will remain
subject to such reporting obligations only until the Notes are repaid or, by
their terms, no longer require the Company to be subject to such reporting
obligations.
SUBSTANTIAL LEVERAGE
After giving effect to the Recapitalization, the Company's consolidated
indebtedness will be approximately $221.9 million. This high level of
indebtedness in comparison to historical indebtedness may reduce the
20
<PAGE>
flexibility of the Company to respond to changing business and economic
conditions, as well as limit capital expenditures of the Company. The Credit
Agreement and the Indenture (as defined in "SOURCES AND AMOUNT OF FUNDS--
Notes") will include significant operating and financial restrictions, such as
limits on the Company's ability to incur indebtedness. On a pro forma basis
after giving effect to the Transactions, the Company's earnings would have
been insufficient to cover fixed charges by $8.3 million for the year ended
December 31, 1996 and by $0.7 million for the nine months ended September 30,
1997.
The Company's high degree of leverage may have important consequences for
the Company, including: (i) the ability of the Company to obtain additional
financing for acquisitions, working capital, capital expenditures or other
purposes, if necessary, may be impaired or such financing may not be on terms
favorable to the Company; (ii) a substantial portion of the Company's cash
flow will be used to pay the Company's interest expense, which will reduce the
funds that would otherwise be available to the Company for its operations and
future business opportunities; (iii) a substantial decrease in net operating
cash flows or an increase in expenses of the Company could make it difficult
for the Company to meet its debt service requirements and force it to modify
its operations; (iv) the Company may be more highly leveraged than its
competitors which may place it at a competitive disadvantage; and (v) the
Company's high degree of leverage may make it more vulnerable to a downturn in
its business or the economy generally. Any inability of the Company to service
its indebtedness or obtain additional financing, as needed, would have a
material adverse effect on the Company. A significant portion of the
indebtedness to be incurred by the Company to finance the Recapitalization
will bear interest at variable rates. Any increase in the interest rates on
the Company's indebtedness will reduce funds available to the Company for its
operations and future business opportunities and will exacerbate the
consequences of the Company's leveraged capital structure. It is also expected
that the Company will have a substantial stockholders' deficit (approximately
$88.9 million on a pro forma basis at September 30, 1997) as a result of the
Recapitalization because the cash paid to stockholders, as well as all of the
expenses of the Recapitalization, will be charged to stockholders' equity. In
addition, the substantial leverage will have a negative effect on the
Company's net income.
RESTRICTIVE DEBT COVENANTS
The Credit Agreement is expected to contain a number of significant
covenants that, among other things, will restrict the ability of the Company
to (i) declare dividends or redeem or repurchase capital stock, (ii) prepay,
redeem or purchase debt, including the Notes, (iii) incur liens and engage in
sale-leaseback transactions, (iv) make loans and investments, (v) incur
additional indebtedness, (vi) amend or otherwise alter debt and other material
agreements, (vii) make capital expenditures, (viii) engage in mergers,
acquisitions and asset sales, (ix) enter into transactions with affiliates and
(x) alter the business it conducts. The indebtedness outstanding under the
Credit Agreement will be guaranteed by substantially all of the Company's
domestic subsidiaries and will be secured by a first priority lien on
substantially all of the properties and assets of the Company and its
subsidiaries, now owned or acquired later, including a pledge of all of the
shares of the Company's existing and future subsidiaries and up to 65% of the
shares of the Company's future foreign subsidiaries which are owned by the
Company or one of its subsidiaries. In addition, under the Credit Agreement,
the Company will also be required to comply with financial covenants with
respect to (i) a maximum leverage ratio; (ii) minimum consolidated EBITDA;
(iii) a minimum interest coverage ratio; and (iv) a minimum fixed charge
coverage ratio. If the Company were unable to borrow under the Credit
Agreement due to a default, it would be left without sufficient liquidity. See
"SOURCES AND AMOUNT OF FUNDS--Credit Agreement."
In addition, the indenture pursuant to which the Notes will be issued (the
"Indenture") will contain certain covenants that, among other things, limit
the ability of the Company and its Restricted Subsidiaries (as defined in the
Indenture) to (i) incur additional indebtedness, (ii) incur liens, (iii) pay
dividends or make certain other restricted payments, (iv) consummate certain
asset sales, (v) enter into certain transactions with affiliates, (vi) merge
or consolidate with any other person or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of the assets of the Company
and (vii) impose restrictions on the ability of certain subsidiaries to pay
certain dividends or make certain payments to the Company. See "SOURCES AND
AMOUNT OF FUNDS--Notes."
21
<PAGE>
ISSUANCE OF SERIES F PREFERRED STOCK
The Company will issue $15.0 million stated amount of Series F Preferred
Stock to Apollo and the BT Investor in connection with the Recapitalization.
The Series F Preferred Stock pays quarterly dividends at the rate of 13.5% per
annum, payable in kind for the first five years from the date of issuance, and
thereafter only in cash. The Series F Preferred Stock ranks senior to the
Alliance Common Stock and its liquidation preference entitles the holders,
upon any liquidation or sale of the Company (including a sale of assets, sale
of stock, merger or otherwise), to a distribution of the Company's assets
prior to any payment to any other equity holders of the Company, including the
holders of the shares of Alliance Common Stock to be retained in connection
with the Recapitalization. Furthermore, the Series F Preferred Stock is
required to be redeemed by the Company ten years after the issue date for its
aggregate accreted face value. The dividend and redemption provisions of the
Series F Preferred Stock will reduce the Company's cash available for
distributions to the holders of Alliance Common Stock.
REGULATION
Many aspects of the medical industry in the United States, including the
Company's business, are subject to extensive federal and state government
regulation. Although the Company believes that its operations comply with
applicable regulations, there can be no assurance that subsequent adoption of
laws or interpretations of existing laws will not regulate, restrict or
otherwise adversely affect the Company's business.
The marketing and operation of the Company's MRI and computed axial
tomography ("CT") systems are subject to state laws prohibiting the practice
of medicine by non-physicians. Management believes that its operations do not
involve the practice of medicine because all professional medical services
relating to its operations, such as the interpretation of the scans and
related diagnoses, are separately provided by licensed physicians not employed
by the Company. Further, the Company believes that its operations do not
violate state laws with respect to the rebate or division of fees.
The Company is subject to federal and state laws which govern financial and
other arrangements between health care providers. These include the federal
Medicare and Medicaid anti-kickback statutes which prohibit bribes, kickbacks,
rebates and any other direct or indirect remuneration in return for or to
induce the referral of an individual to a person for the furnishing, directing
or arranging of services, items or equipment for which payment may be made in
whole or in part under Medicare, Medicaid or other federal health care
programs. Violation of the anti-kickback statute may result in criminal
penalties and exclusion from the Medicare and other federal health care
programs. Many states have enacted similar statutes which are not necessarily
limited to items and services paid for under Medicare or a federally funded
health care program. In recent years, there has been increasing scrutiny by
law enforcement authorities, the U.S. Department of Health and Human Services
("HHS"), the courts and Congress of financial arrangements between health care
providers and potential sources of patient and similar referrals of business
to ensure that such arrangements are not designed as mechanisms to pay for
patient referrals. HHS interprets the anti-kickback statute broadly to apply
to distributions of partnership and corporate profits to investors who refer
federal health care program patients to a corporation or partnership in which
they have an ownership interest and to payments for service contracts and
equipment leases that are designed to provide direct or indirect remuneration
for patient referrals or similar opportunities to furnish reimbursable items
or services. In July 1991, HHS issued "safe harbor" regulations that set forth
certain provisions which, if met, will assure that health care providers and
other parties who refer patients or other business opportunities, or who
provide reimbursable items or services, will be deemed not to violate the
anti-kickback statute. The Company is also subject to separate laws governing
the submission of false claims. The Company is a party to a partnership for
provision of MRI services. The Company believes that the partnership is in
compliance with the anti-kickback statute. The Company believes that its other
operations likewise comply with the anti-kickback statutes.
A federal law, commonly known as the "Stark Law," also imposes civil
penalties and exclusions for referrals for "designated health services" by
physicians to certain entities with which they have a financial
22
<PAGE>
relationship (subject to certain exceptions). "Designated health services"
include, among other things, MRI services. While implementing regulations have
been issued relating to referrals for clinical laboratory services, no
implementing regulations have been issued regarding the other designated
health services, including MRI services. In addition, several states in which
the Company operates 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 health care provider to
their patients to whom they recommend that provider. Possible sanctions for
violating these provisions include loss of licensure and civil and criminal
sanctions. Such state laws vary from state to state and seldom have been
interpreted by the courts or regulatory agencies. Nonetheless, strict
enforcement of these requirements is likely. The Company believes its
operations comply with these federal and state physician self-referral laws.
In some states, a certificate of need ("CON") or similar regulatory approval
is required prior to the acquisition of high-cost capital items including
diagnostic imaging systems or provision of diagnostic imaging services by the
Company or its customers. CON regulations may limit or preclude the Company
from providing diagnostic imaging services or systems. A significant increase
in the number of states regulating the Company's business within the CON or
state licensure framework could adversely affect the Company. Conversely,
repeal of existing CON regulations in jurisdictions where the Company has
obtained or operates under a CON could also adversely affect the Company. This
is an area of continuing legislative activity, and there can be no assurance
that the Company will not be subject to CON and licensing statutes in other
states in which it operates or may operate in the future. See "BUSINESS--
Regulation."
REIMBURSEMENT OF HEALTH CARE COSTS; COST CONTAINMENT PRESSURES; CONTRACTS
The majority of payments to the Company are received directly from health
care providers, rather than from private insurers, other third party payors or
governmental entities. To a lesser extent, the Company's 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 discounted prices. Under current reimbursement regulations, the
Company is prohibited from billing the insurer or the patient directly for
services provided for hospital inpatients or outpatients. Payment to health
care providers by third party payors for the Company's diagnostic services
depends substantially upon such payors' reimbursement policies. Consequently,
those policies have a direct effect on health care providers' ability to pay
for the Company's services and an indirect effect on the Company's level of
charges. Ongoing concerns about rising health care costs may cause more
restrictive reimbursement policies to be implemented in the future.
Restrictions on reimbursements to health care providers may affect such
providers' ability to pay for the services offered by the Company and could
indirectly adversely affect the Company's financial performance. See
"BUSINESS--Reimbursement" and "BUSINESS--Regulation."
The current health care environment is characterized by cost containment
pressures which the Company believes have resulted in decreasing revenues per
scan. Although scan prices appear to have stabilized, the Company expects
modest continuing downward pressure on pricing levels. Although the Company
has experienced increased scan volumes in 1995, 1996 and 1997, it has also had
periods of declining volumes in prior years, and there can be no assurance
that the recent positive trends will continue. Among other things, the Company
is subject to the risk that customers will cease using the Company's MRI
services upon expiration of contracts and purchase or lease their own MRI
systems. In the past, when this has occurred, the Company has generally been
able to obtain replacement customers. However, it is not always possible to
immediately obtain replacement customers, and some replacement customers have
been smaller facilities and have had lower scan volumes.
ACQUISITION STRATEGY
The Company's expansion and acquisition strategy may require substantial
capital, and no assurance can be given that the Company will be able to raise
any necessary additional funds through bank financing or the issuance of
equity or debt securities. Sufficient funds may not be available on terms
acceptable to the Company, if at all. There can be no assurance that the
Company will be able to successfully integrate the operations of any future
acquisitions.
23
<PAGE>
TECHNOLOGICAL CHANGE AND OBSOLESCENCE
The Company's services require the use of state-of-the-art medical equipment
that has been characterized by rapid technological advances. Although the
Company believes that substantially all the MRI and CT systems it provides can
be upgraded to maintain their state-of-the-art character, the development of
new technologies or refinements of existing ones might make the Company's
existing systems technologically or economically obsolete, or cause a
reduction in the value of, or reduce the need for, the Company's systems. MRI
systems are currently manufactured by numerous companies. Competition among
manufacturers for a greater share of the MRI systems market may result in
technological advances in the capacity of these new systems. Consequently, the
obsolescence of the Company's systems may be accelerated. Although the Company
is aware of no substantial technological change, should such change occur,
there can be no assurance that the Company will be able to acquire the new or
improved systems which may be required to service its customers.
FRAUDULENT TRANSFER CONSIDERATIONS
The payment of the consideration in the Recapitalization to the stockholders
of Alliance and the related financing (including the issuance of the Notes and
the incurrence of the guarantees thereunder) may be subject to review under
federal or state fraudulent transfer laws. While the relevant laws may vary
from state to state, under such laws, if a court in a lawsuit by a creditor or
a representative of creditors of Alliance, such as a trustee in bankruptcy or
one of such entities as debtor-in-possession, were to find that, at the time
of or after and giving effect to the Transactions, Alliance (i) was insolvent
or rendered insolvent thereby, (ii) was engaged in a business or transaction
for which its remaining assets constituted unreasonably small capital, (iii)
intended to incur, or believed that it would incur, debts beyond its ability
to pay as they matured, or (iv) intended to hinder, delay or defraud creditors
and, in the case of clauses (i), (ii) and (iii), that Alliance did not receive
reasonably equivalent value or fair consideration in the Recapitalization,
such court could avoid all or a part of the payment of the consideration in
the Recapitalization and require that the stockholders, including stockholders
exercising appraisal rights, return such consideration to Alliance or to a
fund for the benefit of their respective creditors. In addition, if a court
were to find that Alliance came within any of clauses (i) through (iv) above,
Alliance, or its respective creditors or trustees in bankruptcy, could seek to
avoid the grant of security interests to the lenders under the Credit
Agreement or to subordinate or void altogether the Notes and the guarantees
thereunder. This would result in an event of default with respect to such
indebtedness which, under the terms of such indebtedness (subject to
applicable law), would allow the lenders to terminate their obligations
thereunder and to accelerate payment of such indebtedness.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. There can be no
certainty as to what law a court would apply pursuant to applicable choice of
law provisions, although it is likely that a court would apply the law of the
state of incorporation of Alliance, federal bankruptcy law, the law of the
jurisdiction in which the headquarters of Alliance is located or the law of
the jurisdiction in which the Recapitalization is deemed to have occurred.
Generally, however, a company would be considered insolvent for purposes of
the foregoing if the sum of such company's debts is greater than all such
company's property at a fair valuation, or if the present fair saleable value
of such company's assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and
matured. There can be no assurance, however, that a court would not determine
that Alliance was insolvent at the time of or after and giving effect to the
Recapitalization. In addition, there can be no assurance that a court would
not determine, regardless of whether Alliance was solvent, that the
Recapitalization constituted a fraudulent transfer on another of the grounds
listed above. Management believes that Alliance will be solvent following the
consummation of the Transactions.
RELIANCE ON KEY PERSONNEL
The Company's success depends in large part upon a number of key management
personnel, principally Messrs. Zehner and Pino. The loss of the service of one
or more of its executive officers or other key management personnel could have
a material adverse effect on the Company. Messrs. Zehner and Pino have entered
into the Employment Agreements with Alliance and an agreement not to compete
with Alliance which will become effective at the Recapitalization Effective
Time. See "MANAGEMENT."
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<PAGE>
COMPETITION
The market for diagnostic imaging services and imaging systems is highly
competitive. In addition to direct competition from other mobile providers,
the Company competes with free-standing imaging centers and health care
providers that have their own diagnostic imaging systems and with equipment
manufacturers that sell or lease imaging systems to health care providers for
full-time installation. Some of the Company's direct competitors that provide
contract MRI services may have access to greater financial resources than the
Company. In addition, some of the Company's customers are capable of providing
the same services to their patients directly, subject only to their decision
to acquire a high-cost diagnostic imaging system, assume the associated
financial risk, employ the necessary technologists and satisfy applicable
licensure and CON requirements, if any.
FEDERAL INCOME TAX TREATMENT
A stockholder that actually retains less than all of such stockholder's
Alliance Common Stock may, under certain circumstances, be required to treat
the receipt of a portion of any cash received in the Recapitalization as the
receipt of a dividend (rather than as the receipt of proceeds from the sale of
the Alliance Common Stock, which would generally receive capital gains
treatment). No such dividend treatment should be applicable to stockholders
who do not actually retain and are not deemed for tax purposes to retain any
shares of Alliance Common Stock and receive cash for all of their shares in
the Recapitalization. See "THE RECAPITALIZATION--Certain Tax Consequences of
the Recapitalization."
25
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company,
assuming the Transactions had occurred on September 30, 1997. This table
should be read in conjunction with the information contained in "SOURCE AND
AMOUNT OF FUNDS," "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION" and
the notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," as well as Alliance's consolidated
financial statements and the notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
PRO FORMA AT
SEPTEMBER 30,
1997
-------------
(IN MILLIONS)
<S> <C>
Cash and short-term investments............................. $ 18.4
======
Long-term debt, including current portion:
Term Loan Facility........................................ $ 50.0
Revolving Loan Facility(1)................................ --
Other debt(2)............................................. 6.9
Notes..................................................... 165.0
------
Total debt.............................................. 221.9
Redeemable Preferred Stock(3)............................... 14.4
Stockholders' equity (deficit):
Common stockholders' equity (deficit)..................... (57.2)
Accumulated deficit....................................... (31.7)
------
Total stockholders' equity (deficit).................... (88.9)
------
Total capitalization.................................. $147.4
======
</TABLE>
- --------
(1) The Revolving Loan Facility provides for borrowings of up to $75 million.
See "SOURCES AND AMOUNT OF FUNDS--Credit Agreement."
(2) Consists of capitalized lease obligations and purchase money obligations
secured by equipment.
(3) Presented net of $0.6 million of financing fees.
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<PAGE>
SOURCES AND AMOUNT OF FUNDS
The approximate sources and amount of funds in connection with the
Transactions are set forth in the following table, assuming the Transactions
occurred as of September 30, 1997.
SOURCES AND AMOUNT OF FUNDS
(IN MILLIONS)
SOURCES OF FUNDS
<TABLE>
<S> <C>
Term Loan Facility................................................ $ 50.0
Notes............................................................. 165.0
Redeemable Preferred Stock........................................ 15.0
Equity Investment(1).............................................. 40.0
------
Total Sources .................................................. $270.0
======
AMOUNT OF FUNDS
Payment of cash consideration in Recapitalization(2).............. $165.6
Repay outstanding indebtedness, net(3)............................ 75.2
Increase in cash.................................................. 7.9
Estimated fees and expenses....................................... 21.3
------
Total Uses...................................................... $270.0
======
</TABLE>
- --------
(1) Does not include $4.5 million of equity retained by existing stockholders
of the Company and the continuation by certain members of management of
existing options to purchase Alliance Common Stock having a value of
approximately $0.5 million.
(2) Comprised of (a) payment for shares of Alliance Common Stock
(approximately $149.7 million), (b) payments with respect to outstanding
warrants and options and change of control payments under employment
agreements (approximately $13.8 million) and (c) payments pursuant to
Alliance's Long Term Incentive Plan (approximately $2.1 million).
(3) Net of approximately $1.1 million of net discounts on early payment of
such indebtedness to which the Company is contractually entitled.
It is a condition to the obligations of the parties to the Recapitalization
that sufficient funds have been received to pay the consideration in the
Recapitalization and to consummate the Transactions contemplated by the
Recapitalization Merger Agreement.
Other than scheduled repayments of the Term Loan Facility and the Notes,
Alliance currently has no specific plans or arrangements for the repayment of
the funds borrowed under the Credit Agreement and the Notes, but expects to be
able to repay such borrowings out of internally generated funds of the
Company. See "RISK FACTORS--Substantial Leverage."
CREDIT AGREEMENT
General. Pursuant to a commitment letter dated as of November 10, 1997 from
Bankers Trust Company (the "Agent") to Apollo (the "Commitment Letter") and
subject to the negotiation, execution and delivery of definitive
documentation, the Agent has committed to lend to the Company (the "Loans"),
$50 million in the form of the Term Loan Facility and up to $75 million in the
form of the Revolving Loan Facility for an aggregate principal amount of up to
$125 million (the "Commitment").
Pursuant to the Commitment Letter, the Agent reserves the right to syndicate
all or a portion of the Commitment to one or more financial institutions
(including the Agent, each, a "Lender"), such institutions being subject to
the Company's approval. Upon the acceptance of the commitment of any Lender to
provide a portion of the Commitment, the Agent will be released from that
portion of the Commitment. In addition, the Agent agrees to serve as
administrative and syndication agent in connection with the Loans, as well as
fronting bank in connection with the letters of credit issued under the
Revolving Loan Facility.
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<PAGE>
The following terms and descriptions of the Loans are based upon the terms
set forth in the Commitment Letter and are subject to the final negotiation
and execution of the Credit Agreement and related documents. As a result, the
final terms of the Loans may vary from those set forth below.
Use of Proceeds; Maturity. The Loans are expected to be made available to
the Company to finance in part the Recapitalization and certain related costs
and expenses, and to refinance certain existing indebtedness of Alliance. The
full amount to be borrowed under the Term Loan Facility must be drawn in a
single drawing on the date the Term Loan Facility is closed, which is expected
to be the date on which the Transactions close (the "Closing Date"). The
Revolving Loan Facility is expected to be available at the Closing Date and
thereafter to finance (including through the making of revolving loans and the
issuance of letters of credit) working capital requirements and general
corporate purposes of the Company. The Term Loan Facility matures on the sixth
anniversary of the Closing Date. The Revolving Loan Facility will mature on
the fifth anniversary of the Closing Date. The Credit Agreement will require
the Company to reduce the commitments under the Revolving Loan Facility to
$37.5 million on the fourth anniversary of the Closing Date and to make annual
amortization payments of $0.5 million per year in the first five years and
$47.5 million in the sixth year.
Prepayments. Loans are required to be prepaid with (a) 100% of the net
proceeds of all non-ordinary-course asset sales or other dispositions of the
property by the Company and its subsidiaries, subject to limited exceptions,
(b) 100% of the net proceeds of issuances of debt obligations and certain
preferred stock by the Company and its subsidiaries, subject to limited
exceptions, (c) 50% of the net proceeds from common equity and certain
preferred stock issuances by the Company and its subsidiaries, subject to
limited exceptions, (d) 75% of annual excess cash flow and (e) 100% of certain
insurance proceeds, subject to limited exceptions. Such mandatory prepayments
will be allocated as follows: first, to the Term Loan Facility and second, to
the Revolving Loan Facility.
Voluntary prepayments will be permitted in whole or in part, at the option
of the Company, in minimum principal amounts to be agreed upon, without
premium or penalty, subject to reimbursement of the Lender's re-deployment
costs in the case of prepayment of Reserve Adjusted Eurodollar Loans (as
defined in the Commitment Letter) other than on the last day of the relevant
interest period.
Interest and Fees. The interest rates under the Loans will be as follows:
(a) Term Loan Facility: At the option of the Company, (i) 1.50% in excess of
the higher of (A) 1/2 of 1% in excess of the Federal Reserve reported
certificate of deposit rate and (B) the rate that the Agent announces from
time to time as its prime lending rate, as in effect from time to time, and
(ii) 2.50% in excess of the Reserve Adjusted Eurodollar Rate, in each case,
subject to decreases based upon the Company's leverage ratio.
(b) Revolving Loan Facility: At the option of the Company, (i) 1.25% in
excess of the higher of (A) 1/2 of 1% in excess of the Federal Reserve
reported certificate of deposit rate and (B) the rate that the Agent announces
from time to time as its prime lending rate, as in effect from time to time,
and (ii) 2.25% in excess of the Reserve Adjusted Eurodollar Rate, in each
case, subject to decreases based upon the Company's leverage ratio.
The Company may elect interest periods of 1, 2, 3 or 6 months for Reserve
Adjusted Eurodollar Loans. With respect to Reserve Adjusted Eurodollar Loans,
interest will be payable at the end of each interest period and, in any event,
at least every 3 months. With respect to Base Rate Loans (as defined in the
Commitment Letter), interest will be payable quarterly on the last business
day of each fiscal quarter. In each case, calculation of interest will be on
the basis of actual number of days elapsed in a year of 360 days.
The Commitment Letter provides for payment by the Company in respect of
outstanding letters of credit of (i) a per annum fee equal to the spread over
the Reserve Adjusted Eurodollar Rate for the Revolving Loan Facility from time
to time in effect, (ii) a fronting fee equal to 1/4 of 1% on the aggregate
outstanding stated
28
<PAGE>
amounts of such letters of credit, plus (iii) customary administrative
charges. The Company will also pay a commitment fee equal to 1/2 of 1% per
annum on the undrawn portion of the available Commitment, subject to decreases
based on the Company's leverage ratio.
Collateral and Guarantees. The Loans will be guaranteed by all of the
Company's existing and future direct and indirect wholly owned domestic
subsidiaries. The Loans will be secured by a first priority lien in
substantially all of the properties and assets of the Company and its direct
and indirect wholly owned domestic subsidiaries, now owned or acquired later,
including a pledge of all capital stock and notes owned by the Company and its
subsidiaries; provided that, in certain cases, no more than 65% of the stock
of foreign subsidiaries of the Company shall be required to be pledged.
Representations and Warranties and Covenants. The Commitment Letter provides
that the Credit Agreement documentation will contain certain customary
representations and warranties by the Company. In addition, the Credit
Agreement is expected to contain customary covenants restricting the ability
of the Company to, among others (i) declare dividends or redeem or repurchase
capital stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and
engage in sale-leaseback transactions; (iv) make loans and investments; (v)
incur additional indebtedness; (vi) amend or otherwise alter debt and other
material agreements; (vii) make capital expenditures; (viii) engage in
mergers, acquisitions and asset sales; (ix) transact with affiliates; and (x)
alter the business it conducts. It is also expected that the Company will be
required to indemnify the Agent and comply with specified financial covenants
and make certain customary affirmative covenants.
Events of Default. Events of default under the Credit Agreement are expected
to include (i) the Company's failure to pay principal or interest when due;
(ii) the Company's material breach of any representation or warranty contained
in the loan documents; (iii) covenant defaults; (iv) events of bankruptcy; and
(v) a change of control of the Company.
NOTES
Alliance has received a letter dated as of July 22, 1997 from BT Alex. Brown
Incorporated ("BT Alex. Brown"), and a letter dated as of July 16, 1997 from
Smith Barney Inc. (collectively, the "Highly Confident Letters") relating to
the offering of the Notes. Alliance currently contemplates offering the Notes
in connection with the Transactions. The Notes will be issued pursuant to an
indenture (the "Indenture") to be entered into by and among Alliance, certain
guarantors and an indenture trustee (the "Trustee").
Principal and Maturity. The Notes are expected to be limited in aggregate
principal amount to $270.0 million, of which $165.0 million will be issued in
the Offering, and will mature in 2005.
Use of Proceeds. The Company intends to use the net proceeds from the
Offering to partially fund the Transactions. See "SOURCES AND AMOUNT OF
FUNDS."
Ranking. The Notes are expected to be general unsecured obligations of the
Company, subordinated in right of payment to all existing and future senior
indebtedness of the Company, including the obligations of the Company under
the Credit Agreement, and are expected to be guaranteed by the Company's
principal domestic subsidiaries.
Change of Control. The Indenture is expected to provide that, upon the
occurrence of a Change of Control (as defined in the Indenture), each holder
will have the right to require that the Company purchase all or a portion of
such holder's Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued interest to the date of purchase.
29
<PAGE>
Covenants. The Indenture is expected to contain certain covenants that,
among other things, limit the ability of the Company and its subsidiaries to
incur additional indebtedness, incur liens, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company and impose restrictions on the
ability of a subsidiary to pay certain dividends or make certain payments to
the Company. The Indenture also is expected to subject the Company to certain
reporting requirements.
Events of Default. The Indenture is expected to contain events of default
relating to (i) the failure to pay interest on any Notes (subject to a 30-day
grace period), (ii) the failure to pay the principal of any Notes, (iii) a
default in the observance or performance of any other covenant or agreement
(subject to a 30-day grace period), (iv) the failure to pay principal of
certain other indebtedness or the acceleration of the maturity of such other
indebtedness, (v) judgments in an aggregate amount in excess of $5.0 million
(subject to a 60-day grace period for settlement of such judgment),
(vi) certain events of bankruptcy and (vii) guarantees from subsidiaries
ceasing to be in full force and effect, being declared null and void and
unenforceable or found to be invalid.
PREFERRED STOCK
In connection with the Transactions, the Investor will purchase $15 million
of the Company's Series F Preferred Stock. The Series F Preferred Stock will
have a dividend rate of 13.5% per annum, payable quarterly in arrears, will be
redeemable at the option of the Company at stated redemption premiums and will
mature in 2007. Dividends on the Series F Preferred Stock will be payable in
kind for the first five years and thereafter in cash, subject to compliance
with the Company's then-existing debt agreements. Apollo will receive a
financing fee equal to 4% of its investment in the Series F Preferred Stock.
Immediately after consummation of the Transactions, Apollo intends to sell to
BT $0.9 million stated amount of the Series F Preferred Stock purchased by it
for $0.9 million in cash. In connection with such sale, Apollo will pay to BT
$36,000 of the $600,000 financing fee which Apollo will earn upon issuance of
the Series F Preferred Stock.
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THE SPECIAL MEETING
TIME AND PLACE
The Special Meeting of Alliance's stockholders will be held at the offices
of Alliance, 1065 North PacifiCenter Drive, Suite 200, Anaheim, California
92806, on the Special Meeting Date.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only record holders of Alliance Common Stock at the close of business on the
Record Date will be entitled to receive notice of and to vote at the Special
Meeting. At the close of business on the Record Date, Alliance had 11,023,344
shares of Alliance Common Stock outstanding and entitled to vote. The
presence, in person or by proxy, at the Special Meeting of the holders of at
least a majority of the votes entitled to be cast at the Special Meeting is
necessary to constitute a quorum for the transaction of business. Shares of
Alliance Common Stock represented by Proxies which are marked "abstain" or
which are not marked as to any particular matter or matters will be counted as
shares present for purposes of determining the presence of a quorum on all
matters but will not be counted as votes cast in favor of the Recapitalization
Merger Agreement. Proxies relating to "street name" shares that are voted by
brokers will be counted as shares present for purposes of determining the
presence of a quorum on all matters, but will not be treated as shares having
voted at the Special Meeting as to any proposal as to which authority to vote
is withheld by the broker.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to vote on the Recapitalization Merger
Agreement. The Recapitalization Merger Agreement provides for, among other
things, (1) the Recapitalization, (2) the Investor to purchase 150,000 shares
of Series F Preferred Stock, (3) the resignation of members of Alliance's
current Board of Directors and the election of persons designated by the
Investor to Alliance's Board of Directors and (4) the amendment and
restatement of Alliance's Restated Certificate of Incorporation.
If the Recapitalization Merger Agreement is approved by holders of a
majority of the shares of Alliance Common Stock, then at the Recapitalization
Effective Time, the separate corporate existence of Newco will cease, the
Company will continue as the surviving corporation, the shares of common stock
of Newco will be converted into 3,632,222 shares of Alliance Common Stock,
411,358 shares of Alliance Common Stock will be retained by Alliance's
existing stockholders and the balance of the outstanding shares of Alliance
Common Stock (other than Dissenting Shares) will be converted into the right
to receive $11.00 per share in cash.
The Recapitalization Merger Agreement provides that an aggregate of 411,358
shares of Alliance Common Stock will be retained by Alliance's existing
stockholders. Each stockholder of Alliance may elect to retain shares of
Alliance Common Stock by following the procedures set forth in "THE
RECAPITALIZATION--Proration." If Alliance's stockholders elect to retain more
or less than 411,358 shares of Alliance Common Stock, the number of shares to
be retained will be prorated as described in "THE RECAPITALIZATION--
Proration." Consequently, at the time holders of shares of Alliance Common
Stock vote in respect of the Recapitalization Merger Agreement and decide
whether to elect to retain shares of Alliance Common Stock, they will not know
if they will be entitled to retain all of the shares they elect to retain or
if they will be required to retain shares of Alliance Common Stock which they
do not elect to retain. The Principal Stockholders will be entitled to
participate in the proration of the retained shares in the same manner as
Alliance's other stockholders, unless the Investor exercises the option (in
which case, the Principal Stockholders would receive cash for their shares and
would not be subject to proration). The Investor has advised the Company that
it does not currently intend to exercise the option and would do so only if a
third party sought to acquire Alliance prior to consummation of the
Recapitalization or the termination of the Recapitalization Merger Agreement.
If the Investor does exercise the options, all 411,358 of the retained shares
would be prorated among Alliance's existing public stockholders, who own
approximately 34% of the issued and outstanding shares of Alliance Common
Stock (assuming the conversion or exercise by the Principal Stockholders of
all of their securities which are convertible into or exercisable for shares
of Alliance Common Stock). See "THE RECAPITALIZATION--Proration."
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Pursuant to the Recapitalization Merger Agreement, Apollo will receive a
total of 3,632,222 shares of Alliance Common Stock. Consequently, immediately
after the Recapitalization, Alliance will have 4,043,580 common shares
outstanding, of which Apollo will own 3,632,222 shares (or approximately 90%)
and Alliance's existing stockholders will own 411,358 shares (or approximately
10%). Immediately after consummation of the Recapitalization, Apollo intends
to sell 242,898 shares of Alliance Common Stock owned by Apollo to BT for
$11.00 per share (or approximately $2.7 million in the aggregate) in cash, the
amount paid to Alliance's existing stockholders for their shares of Alliance
Common Stock. Immediately after consummation of the Transactions, Apollo also
intends to sell to BT 9,000 shares ($0.9 million stated amount) of the Series
F Preferred Stock purchased by it for $0.9 million in cash. In addition,
options to acquire 524,545 shares of Alliance Common Stock will be held by or
subject to issuance to management of Alliance after consummation of the
Recapitalization. See "THE RECAPITALIZATION--Interests of Certain Persons in
the Recapitalization," "CERTAIN RELATED AGREEMENTS--The New Option Plan."
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE RECAPITALIZATION MERGER
AGREEMENT AND HAS DETERMINED, AMONG OTHER THINGS, THAT THE RECAPITALIZATION
MERGER AGREEMENT IS FAIR TO AND IN THE BEST INTERESTS OF ALLIANCE'S
STOCKHOLDERS, AND RECOMMENDS THAT ALLIANCE'S STOCKHOLDERS APPROVE THE
RECAPITALIZATION MERGER AGREEMENT.
THE RECOMMENDATION BY THE BOARD OF DIRECTORS THAT ALLIANCE'S STOCKHOLDERS
APPROVE THE RECAPITALIZATION MERGER AGREEMENT IS NOT A RECOMMENDATION AS TO
WHETHER STOCKHOLDERS SHOULD RETAIN SHARES OF ALLIANCE COMMON STOCK.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of Alliance
Common Stock entitled to vote thereon is required to approve the
Recapitalization Merger Agreement. However, pursuant to the Stockholder
Agreement, Apollo has the right to cause a majority of the outstanding shares
of Alliance Common Stock to be voted in favor of the Recapitalization Merger
Agreement and has an option to acquire all of such shares. Apollo intends to
cause the shares of Alliance Common Stock subject to the Stockholder Agreement
to be voted in favor of the approval of the Recapitalization Merger Agreement,
thereby ensuring the approval of the Recapitalization Merger Agreement without
the vote of any additional stockholders. See "CERTAIN RELATED AGREEMENTS--
Stockholder Agreement."
VOTING; REVOCATION OF PROXIES
Shares of Alliance Common Stock represented by all properly executed Proxies
received in time for the Special Meeting (and not properly revoked) will be
voted in the manner specified in such Proxies. Proxies that do not contain any
instruction to vote for or against or to abstain from voting on a particular
matter will be voted in favor of such matter. It is not expected that any
matter other than those referred to herein will be brought before the
stockholders at the Special Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
best judgment with respect to such matters, unless authority to do so is
withheld in the Proxy. The persons appointed as proxies may not exercise their
discretionary voting authority to vote any such Proxy in favor of any
adjournments or postponements of the Special Meeting if instruction is given
to vote against the approval of the Recapitalization and any other proposals.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by such Proxy are voted at
the Special Meeting (1) by attending and voting in person at the Special
Meeting, (2) by giving notice of revocation of the Proxy at the Special
Meeting or (3) by delivering to the Secretary of Alliance (a) a written notice
of revocation or (b) a duly executed Proxy relating to the same shares and
matters to be considered at the Special Meeting, bearing a date later than the
Proxy previously executed. Attendance at the Special Meeting will not in and
of itself constitute a revocation of a Proxy. All written notices of
revocation and other communications with respect to revocation of proxies
should be addressed as follows: 1065 North PacifiCenter Drive, Suite 200,
Anaheim, California 92806, Attention: Secretary, and must be received before
the taking of the votes at the Special Meeting.
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If the Special Meeting is adjourned, for whatever reason, the approval of
the matters to be considered at the Special Meeting shall be considered and
voted upon by stockholders at the subsequent, reconvened meeting, if any.
DISSENTERS' RIGHTS
Under Section 262 of the DGCL, a stockholder of Alliance may dissent from
the Recapitalization and seek to obtain payment for the fair value of such
stockholder's shares of Alliance Common Stock. In order to dissent, (i) the
dissenting stockholder must deliver to Alliance, prior to the vote being taken
on the Recapitalization at the Special Meeting, a written demand for appraisal
of such stockholder's shares of Alliance Common Stock and (ii) the dissenting
stockholder must not vote in favor of the Recapitalization Merger Agreement.
See "DISSENTING STOCKHOLDERS' RIGHTS".
SOLICITATION OF PROXIES
The cost of soliciting Proxies will be borne by Alliance. Alliance may
solicit Proxies and Alliance's directors, officers and employees may also
solicit Proxies by telephone, telegram or personal interview. These persons
will receive no additional compensation for their services. Arrangements will
be made to furnish copies of proxy materials to fiduciaries, custodians and
brokerage houses for forwarding to beneficial owners of Alliance Common Stock.
Such persons will be reimbursed for their reasonable out-of-pocket expenses.
EXCEPT FOR CERTIFICATES REPRESENTING ALLIANCE COMMON STOCK SURRENDERED WITH AN
ELECTION FORM AS DESCRIBED BELOW UNDER "--PROCEDURE FOR RETAINED SHARE
ELECTION," ALLIANCE'S STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
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THE RECAPITALIZATION
BACKGROUND OF THE RECAPITALIZATION
In late June 1996, senior management and consultants of U.S. Diagnostics
Labs, Inc. ("USDL") contacted senior management of Alliance to discuss a
possible business combination. During the first two weeks of August 1996,
management of the respective companies attempted to negotiate the terms of a
transaction involving the issuance of USDL stock in exchange for shares of
outstanding Alliance Common Stock. The Board of Directors and the management
of Alliance were attracted to a possible transaction with USDL based on a
number of factors, including the rapid growth of USDL and the resulting
superior liquidity in its stock and the possibility for synergies in the
combination of the two companies' businesses. Among other things, the Board of
Directors and management perceived that a combination with USDL would provide
enhanced access to capital and a superior medium to make acquisitions, in the
form of USDL's stock, in order to take advantage of consolidation
opportunities.
Alliance engaged Salomon Brothers to assist it in connection with a possible
transaction with USDL pursuant to an engagement letter dated August 15, 1996.
On the same date, the Board of Directors of Alliance met to receive a report
by management on the terms of a proposed merger with USDL. On August 16, 1996,
based upon rumors in the marketplace concerning a possible sale of Alliance,
Alliance issued a press release indicating that it was in discussions for a
possible stock-for-stock merger with USDL in which shares of Alliance would be
valued at approximately $6.00-6.50 per share. The press release indicated that
the transaction was subject to a number of contingencies, including
satisfactory completion of due diligence by both companies and reaching
agreements with the holders of Alliance's senior notes, senior subordinated
debentures and Series A Preferred Stock with respect to the treatment of those
securities in the proposed transaction. Following additional due diligence and
negotiations and communications with the holders of those securities,
discussions between Alliance and USDL were terminated. On August 28, 1996,
Alliance issued a press release indicating that USDL informed Alliance that
the exchange ratio initially discussed by the parties could not be justified
by USDL and that USDL had been unsuccessful in reaching a mutually acceptable
agreement with the holders of certain of Alliance's senior notes, senior
subordinated debentures and Series A Preferred Stock.
Following the termination of discussions with USDL, Alliance continued to
consider means of improving its operating flexibility in order to permit it to
take advantage of opportunities in the MRI marketplace. Management of Alliance
determined that certain restrictive provisions of Alliance's senior notes and
senior subordinated debentures were prejudicing Alliance's ability to take
advantage of these opportunities. As a result, beginning in the third quarter
of 1996 and continuing through the first quarter of 1997, Alliance arranged
the sale of its outstanding senior notes by the holders thereof to General
Electric Company and DVI Financial Services, Inc. and made substantial
modification to the terms of such senior notes. In addition, Alliance
negotiated with General Electric Company for new financing to enable Alliance
to retire its senior subordinated debentures and a series of preferred stock
previously outstanding. These financing transactions were concluded in March
1997. As a result, Alliance significantly improved its operating flexibility
by achieving the elimination or substantial easing of various restrictive
covenants.
Beginning in the second quarter of 1997, Alliance, with the assistance of
Salomon Brothers, began to seek a strategic investment or relationship to
assist in taking advantage of consolidation opportunities in the MRI
marketplace. In addition, during the same period, Alliance engaged in
discussions with other MRI service providers regarding the potential
acquisition of such providers by Alliance. Such potential acquisitions were
identified by Alliance based on its knowledge of the MRI services industry.
Salomon Brothers identified several different potential investors based upon
Salomon Brothers' knowledge of the investors interested in the health care
services industry and the investment criteria typically utilized by such
investors. On behalf of Alliance, Salomon Brothers contacted a number of these
potential investors and arranged for the execution of confidentiality
agreements with three strategic and financial investors, each of which
conducted due diligence with respect to Alliance. In May 1997, senior
management of Alliance met with representatives of a financial investor, which
indicated that it was prepared, subject to certain conditions, to make
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a substantial minority investment in Alliance. Based upon discussions between
the financial investor and Salomon Brothers, Alliance believes that any
proposed transaction would have been for convertible debt or convertible
preferred stock having a per share value of $8.00 to $9.00 per share.
Discussions were not pursued with the financial investor because Alliance
management believed that the price discussed did not adequately reflect
Alliance's future growth prospects. On April 24, 1997, management of Alliance
met for the first time with representatives of Apollo and had subsequent
meetings with representatives of Apollo on April 30 and May 12. During this
period, Apollo conducted preliminary due diligence with respect to Alliance.
On June 3, 1997, Apollo's representatives preliminarily suggested the
possibility of a cash change of control transaction and provided to Alliance
management a worksheet which indicated a valuation of Alliance at
approximately $9.00 to $9.50 per share. The proposed Apollo transaction was
subject to a number of terms and conditions, including that management of
Alliance roll over approximately one-half of their personal holdings in
Alliance's stock. As a result, and based upon the proposed valuation, which
Alliance management believed did not adequately reflect Alliance's future
growth prospects, discussions were not continued at that time.
On May 20, 1997, management of Alliance first met with senior management of
a publicly-traded healthcare company (the "Healthcare Company"). According to
publicly available information, as of July 31, 1997, the Healthcare Company
had total assets of approximately $323 million, and a market capitalization of
approximately $311 million. Representatives of the Healthcare Company also
suggested a change of control transaction, but proposed a stock-for-stock
merger rather than a cash transaction. On June 4, 1997, the Board of Directors
met to receive a report from management on the meetings conducted to date
regarding significant transactions. In view of such meetings and the
possibility that a transaction might be proposed that would result in a change
of control of Alliance, the Board established a committee of its members to
oversee discussions and, possibly, negotiations for a transaction involving
either a strategic investment in or change of control of Alliance (the
"Special Committee"). Douglas Hayes and Robert Waley-Cohen, both non-
management directors of Alliance, were appointed to constitute the Special
Committee.
During the next week, management of Alliance continued discussions with
senior management of the Healthcare Company. As a result of substantial
progress in these discussions, a meeting of the Special Committee was convened
on June 11, 1997. Management indicated that the Healthcare Company transaction
was a stock-for-stock proposal at a fixed exchange ratio that would value
Alliance's Common Stock at approximately $11.00 per share, based upon the
current price of the Healthcare Company's stock. Accordingly, the value of the
stock-for-stock proposal would change with changes in the price of the
Healthcare Company's stock. Management explained to the members of the Special
Committee that the Healthcare Company requested a detailed letter of intent
but that, based upon the advice of Salomon Brothers and Alliance's outside
counsel, Irell & Manella LLP, Alliance had rejected that approach and instead
proposed moving directly to a definitive agreement, pending the completion of
due diligence by both parties and other prerequisites to signing. The
Healthcare Company thereupon requested an "exclusivity" agreement to ensure
that Alliance would not pursue discussions with other parties during a
relatively brief period of time to enable the parties to negotiate a
definitive agreement. The Special Committee authorized management to execute a
confidentiality agreement containing an exclusivity provision through June 27,
1997 to enable this process to continue.
On June 14, 1997, Richard N. Zehner, Alliance's Chairman, Chief Executive
Officer and president, was contacted by telephone by Joshua Harris of Apollo.
Mr. Harris indicated that Apollo would be interested in pursuing discussions
concerning a possible transaction if Alliance sought to do so. Mr. Zehner
responded that he was precluded pursuant to an agreement with a third party
from discussing any possible transaction with Apollo. Mr. Harris indicated
that Apollo's initial indication of value was not final, and that Mr. Harris
believed that the valuation of Alliance's common shares could likely be
improved. On June 16, 1997, Mr. Harris distributed by facsimile a letter to
Mr. Zehner with a copy to the Board of Directors indicating that Apollo
remained interested in making a proposal for a significant transaction
involving Alliance.
On June 16, 1997, the Board of Directors of Alliance met to receive a report
from management concerning progress in discussions with the Healthcare Company
and to consider the communications from Apollo. The Board of Directors was
informed, among other things, that the stock-for-stock transaction proposed by
the Healthcare Company was currently valued at approximately $11.00 per share
of Alliance Common Stock. The
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Board of Directors considered the advantages and disadvantages of a stock-for-
stock transaction versus a possible cash transaction. A principal advantage of
a stock-for-stock transaction was that stockholders could continue to
participate in any appreciation of the combined companies following the
transaction. An important disadvantage of the stock-for-stock proposal was
that it would not provide liquidity to all stockholders. In addition, the
proposal was conditioned on achieving pooling-of-interests accounting
treatment and tax-free treatment, which would require the holders of a large
percentage of Alliance's stock to provide representations as to a lack of
current intention to sell shares. The Board of Directors was aware that
certain of the Principal Stockholders might not be willing to provide such a
representation and that as a result, there was a material risk that such a
stock-for-stock transaction might not be completed. The advantages of a cash
transaction included the fact that it would provide liquidity for stockholders
as well as the lack of a necessity that a large percentage of Alliance's
stockholders provide representations as to a lack of current intention to sell
shares. In view of Apollo's communications, the Board of Directors determined
that Alliance should not execute a definitive agreement with the Healthcare
Company until first having had an opportunity to obtain additional details
concerning Apollo's communications. The Board of Directors instructed
management to continue to make as much progress as possible on the proposed
transaction with the Healthcare Company, but to inform that entity of the fact
that a communication had been received from Apollo.
On or about June 17, 1997, the Healthcare Company was contacted by Salomon
Brothers and advised that Alliance had received a communication from Apollo.
On June 20, 1997, the Healthcare Company released Alliance to provide
information to and engage in negotiations with Apollo through June 24, 1997.
During the period from June 20, 1997 through June 24, 1997, Alliance focused
on providing information to and conducting discussions with representatives of
Apollo. On June 24, 1997, Alliance received a written proposal from Apollo for
a recapitalization transaction involving a total consideration of $11.00 per
share, consisting of approximately $10.50 per share in cash and approximately
$0.50 per share in retained shares of Alliance.
On June 26, 1997, the Board of Directors of Alliance met to receive a report
from Salomon Brothers concerning the respective transactions proposed by the
Healthcare Company and Apollo. Representatives of Salomon Brothers summarized
for the Board of Directors the activities conducted on behalf of Alliance
during the preceding approximately six months, culminating in the two
competing proposals. Salomon Brothers then provided a comparative analysis of
the two proposals. Salomon Brothers indicated that the proposal from the
Healthcare Company was conditioned on achieving pooling-of-interests
accounting treatment and tax-free treatment, while Apollo's proposal was
conditioned on recapitalization accounting treatment and obtaining financing,
and summarized the resulting impact on the risk of either transaction not
being completed. The Board of Directors of Alliance took notice that the
stock-for-stock transaction would require a large percentage of Alliance's
stockholders to provide representations as to a lack of current intention to
sell shares, and that certain of the Principal Stockholders might not be
willing to provide such a representation. Salomon Brothers indicated that,
based upon the closing price of the Healthcare Company's stock on June 25,
1997, that entity's proposal was valued at approximately $11.00 per share of
Alliance Common Stock. Salomon Brothers further provided a valuation analysis
for the "stub" equity of Alliance in Apollo's proposal. A representative of
General Electric Company ("GE") who participated pursuant to GE's Board of
Directors' observation rights (provided to GE in the agreement pursuant to
which GE purchased its Series D Preferred Stock from Alliance), indicated to
the Board that GE generally favored the proposal presented by Apollo.
Based on all of the factors considered by the Board, including that the risk
of non-completion associated with the stock-for-stock proposal appeared to be
greater than that associated with the Apollo proposal, the Board of Directors
instructed management of Alliance to permit the existing exclusivity agreement
with the Healthcare Company to expire so that Alliance could engage in further
discussions with Apollo. The Board of Directors authorized management to enter
into an exclusivity agreement with Apollo which would expire not later than
July 17, 1997. In addition, the Board of Directors appointed James Buncher and
John Wallace to the Special Committee, so that the Special Committee thereupon
consisted of all four independent directors of Alliance.
On June 27, 1997, the exclusivity agreement with the Healthcare Company
expired and discussions with that company were not continued. On June 28,
1997, Alliance executed an exclusivity agreement with Apollo expiring at the
close of business on July 15, 1997.
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Beginning on June 28, 1997, and continuing for approximately two weeks,
representatives of Apollo and their legal, accounting and other advisors
conducted a detailed due diligence review of Alliance. During the same period,
Apollo and Alliance, through their respective counsel, exchanged numerous
iterations of a draft of the Recapitalization Merger Agreement. Apollo's
counsel also supplied a draft Stockholder Agreement, pursuant to which the
Principal Stockholders of Alliance would agree to vote their shares of
Alliance for the Recapitalization, against any alternative transaction and to
grant Apollo an option to acquire their shares. Related and ancillary
documentation, including the Employment Agreements and the principal terms of
the New Option Plan, was also prepared during this period.
On July 9, 1997, Alliance extended the exclusivity agreement to 11:59 p.m.,
on July 17, 1997. On July 14, 1997, the Board of Directors met to address
another requested extension, received from Apollo, of the exclusivity period.
Representatives of Salomon Brothers reported that substantial progress had
been made on the draft Recapitalization Merger Agreement. They also again
summarized the requirements to achieve recapitalization accounting. The Board
of Directors authorized management to extend the exclusivity period with
Apollo through July 22, 1997.
On July 16, 1997, representatives of Alliance, Apollo, their respective
counsel and Salomon Brothers met at Alliance's offices in Anaheim, California
in an attempt to resolve remaining open issues in the draft Recapitalization
Merger Agreement. On July 17, 1997, Alliance extended the exclusivity period
through 11:59 p.m. on July 22, 1997.
From July 17, 1997 through July 22, 1997, representatives of Alliance,
Salomon Brothers and Apollo contacted certain of Alliance's large,
institutional stockholders in order to apprise them of the terms of the
proposed transaction. Further, it was explained to the institutional
stockholders that Apollo had required, as a condition to executing the
Recapitalization Merger Agreement with Alliance, that at least a majority of
the outstanding Alliance Common Stock be subject to the Stockholder Agreement.
Representatives of the institutional holders and their counsel submitted
requests for a number of changes to the Stockholder Agreement, which was
finalized on July 23, 1997.
On July 22, 1997, the Board of Directors met to consider the proposed
Recapitalization Merger Agreement. Mr. Zehner and Mr. Pino summarized for the
Board of Directors the status of the Recapitalization Merger Agreement and the
Stockholder Agreement. Salomon Brothers then delivered its presentation (and
subsequently summarized the terms of the proposed financing and the pro forma
capital structure in connection with the Recapitalization), and Salomon
Brothers rendered its opinion that the consideration to be received and
retained by holders of Alliance Common Stock in the proposed Recapitalization
is fair, from a financial point of view, to such stockholders.
The Special Committee met separately to consider the proposed Employment
Agreements to be entered into by Alliance with each of Mr. Zehner and Mr. Pino
in connection with the execution of the Recapitalization Merger Agreement,
such agreements to become effective when and if the Recapitalization is
consummated. Representatives of Irell & Manella LLP indicated that such
Employment Agreements appeared to be customary in form and provided salary,
bonus and termination benefits consistent with past levels for the affected
executives. The Special Committee rejoined the full Board meeting and
unanimously determined to recommend the execution of the Recapitalization
Agreement and related definitive documentation to the Board of Directors. The
Board of Directors of Alliance thereupon unanimously approved the
Recapitalization Agreement in substantially the form summarized to the Board
of Directors and authorized management to execute it.
On July 23, 1997, Alliance extended the exclusivity period with Apollo
through 11:59 p.m. that day. On the same day, final points in the
Recapitalization Agreement and ancillary documents were resolved, and the
Recapitalization Merger Agreement was executed. Similarly, on that date Apollo
and the other parties to the Stockholder Agreement executed that agreement.
Later that day, Alliance and the Investor issued a press release announcing
the transaction.
Alliance and the Investor entered into Amendment No. 1 to the
Recapitalization Merger Agreement as of August 13, 1997.
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Amendment No. 2 to the Recapitalization Merger Agreement was entered into as
of October 13, 1997. The purpose of Amendment No. 2 was to amend the
Recapitalization Merger Agreement to reflect the retention of certain
outstanding stock options held by the officers of Alliance. See "THE
RECAPITALIZATION--Interests of Certain Persons in the Recapitalization."
The Recapitalization Merger Agreement, as executed on July 23, 1997,
contemplated that in connection with the Recapitalization, Alliance would
consummate the acquisition of all of the outstanding shares of Three Rivers
Holding Corp., a company wholly-owned by Apollo, which is the owner of all of
the outstanding shares of SMT (the "SMT Acquisition"). Early in November 1997
it became apparent that recapitalization accounting treatment would not be
available with respect to the Recapitalization if the SMT Acquisition were
consummated in connection with the Recapitalization.
Accordingly, Alliance engaged in discussions with Apollo, the underwriters
that had been consulted in connection with the issuance of the Notes and the
banks that had been contacted to provide the financing under the Credit
Agreement to determine how the Recapitalization could be accomplished without
also consummating the SMT Acquisition at the same time. The underwriters and
banks indicated to Alliance that if Alliance did not accomplish the SMT
Acquisition in connection with the Recapitalization, Alliance would need to
obtain additional equity financing in order to be able to obtain the debt
financing needed to accomplish the Recapitalization. Alliance and Apollo
discussed how such additional equity capital could be raised. Apollo indicated
that it would be willing to provide some additional equity (approximately $3
million) in exchange for additional Alliance Common Stock, but indicated that
the balance of the required additional equity would have to be in the form of
preferred stock. Accordingly, Alliance agreed to issue the Series F Preferred
Stock to Apollo because additional equity financing was required to consummate
the Recapitalization. Representatives of Alliance and Apollo engaged in
negotiations with respect to the terms of the Series F Preferred Stock as well
as the terms of Amendment No. 3 to the Recapitalization Merger Agreement,
which would amend the Recapitalization Agreement to reflect the proposed
changes in the structure of the Recapitalization.
On November 10, 1997, the Board of Directors met to consider Amendment No. 3
to the Recapitalization Merger Agreement, which provides that: (i) Alliance
would not consummate the SMT Acquisition in connection with the
Recapitalization; (ii) the Actual Retained Shares Number would be reduced from
727,273 to 411,358; and (iii) Apollo would purchase $15 million of a new issue
of Alliance's Series F Preferred Stock as part of the financing of the
Recapitalization. In connection with such meeting of the Board of Directors,
Salomon Brothers reconfirmed its opinion in writing that the Recapitalization
(taking into account the effect of Amendment No. 3 to the Recapitalization
Merger Agreement) is fair to holders of Alliance Common Stock from a financial
point of view. The Board of Directors unanimously approved Amendment No. 3 to
the Recapitalization Merger Agreement. Alliance and the Investor entered into
Amendment No. 3 as of November 10, 1997. The Board of Directors considered the
terms and preferences associated with the Series F Preferred Stock
(principally the effect of the issuance of the Series F Preferred Stock on the
value of the Alliance Common Stock to be retained by existing stockholders) in
reaching its decision to approve Amendment No. 3 to the Recapitalization
Merger Agreement. However, because the issuance of the Series F Preferred
Stock would not occur if the Recapitalization does not occur, the Board of
Directors did not evaluate the terms and preferences of the Series F Preferred
Stock independent of the Recapitalization.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE RECAPITALIZATION
At its meetings on July 22, 1997 and November 10, 1997, the Board of
Directors unanimously approved the Recapitalization Merger Agreement and
determined, among other things, that the Recapitalization Merger Agreement is
fair to and in the best interests of Alliance's stockholders and that
Alliance's stockholders approve the Recapitalization Merger Agreement. In
reaching these conclusions, the Board of Directors consulted with Salomon
Brothers and Alliance's legal counsel and considered, among other things, the
unanimous recommendation of the Special Committee that the Company execute the
Recapitalization Merger Agreement and the following factors:
(A) A balancing of the risks and benefits of the Recapitalization against the
risks and benefits of the other strategic alternatives available to
Alliance, including continuing as an independent entity. Of the strategic
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alternatives available to Alliance, the Recapitalization was determined by
the Board of Directors to be the alternative which would yield the best
results to the stockholders of Alliance from a financial point of view.
First, the Recapitalization was, on balance, the most favorable acquisition
proposal received by Alliance since it initiated a search for an
investor/partner to assist in taking advantage of consolidation
opportunities in the MRI marketplace. Second, the Recapitalization was
determined to be more favorable to stockholders than Alliance continuing as
an independent entity because Alliance's future growth prospects as an
independent entity could be limited inasmuch as Alliance did not have the
ability, as an independent entity, to fully take advantage of consolidation
opportunities in the MRI marketplace. See "--Background of the
Recapitalization." The Board of Directors also considered that a
substantially all cash transaction, such as the Apollo transaction,
provided superior liquidity to Alliance's stockholders.
(B) That the consideration to be paid and retained in the Recapitalization,
valued at $11.00 per share of Alliance Common Stock, represents a premium
for Alliance Common Stock of approximately 7.3% over the closing price of
$10.25 per share of Alliance Common Stock on July 22, 1997, the trading
day preceding the announcement of the proposed Recapitalization. The Board
of Directors considered the value of the "stub equity" to be retained by
stockholders of Alliance in determining the value of the consideration
provided by the Recapitalization, and considered the fact that the "stub
equity" to be retained would likely not be as marketable or liquid as
Alliance Common Stock prior to the Recapitalization; however, the Board
considered that this disadvantage was offset by the provision of a
substantial amount of liquidity in the closing of the Recapitalization.
The Board of Directors considered that shares of Alliance Common Stock
have traded as low as $2.00 per share within the last two years and as low
as $6 3/8 per share during the second quarter of 1997, meaning that the
Recapitalization offered a substantial premium to stockholders compared to
recent historical price levels of Alliance Common Stock.
(C) The written opinion of Salomon Brothers to the effect that, based upon and
subject to various considerations (and the analyses presented to the Board
of Directors of Alliance underlying such opinion) set forth in such
opinion, as of November 10, 1997, the consideration to be received and
retained by Alliance's stockholders in the Recapitalization is fair, from
a financial point of view, to such stockholders. See "--Opinion of
Financial Advisor."
(D) The terms and conditions of the Recapitalization Merger Agreement and
related matters, including closing conditions, terms of the Series F
Preferred Stock, termination rights, the requirement that Alliance pay
termination fees to the Investor under certain circumstances, the cash-out
of Alliance stock options and Alliance's and the Investor's
representations and warranties, all of which were the product of arm's
length negotiations in which Alliance was assisted by its financial
advisor, Salomon Brothers and its legal counsel, Irell & Manella LLP. See
"CERTAIN PROVISIONS OF THE RECAPITALIZATION MERGER AGREEMENT."
(E) The fees and expenses to be paid to an affiliate of Apollo in
consideration for (i) arranging the transactions contemplated by the
Recapitalization Agreement (including the financing thereof) and (ii) the
agreement of an affiliate of Apollo to provide financial advisory and
other management services after consummation of the Recapitalization,
which include, in addition to reimbursement of out-of-pocket expenses, a
fee of $2.5 million in connection with the Recapitalization and related
transactions, a financing fee of $0.6 million in connection with the
issuance of the Series F Preferred Stock and an annual fee of $0.5 million
for management and other financial advisory services to be provided to
Alliance after consummation of the Recapitalization.
(F) The terms and conditions of the Stockholder Agreement, pursuant to which,
among other things, the Principal Stockholders owning approximately 54.4%
of the issued and outstanding shares of Alliance Common Stock
(approximately 66.0% assuming the exercise by such Principal Stockholders
of all of their securities convertible into or exercisable for shares of
Alliance Common Stock) (i) have agreed to vote and have granted a related
proxy to vote their shares of Alliance Common Stock in favor of the
Recapitalization Merger Agreement, (ii) have granted to the Investor the
option to acquire all shares of Alliance Common Stock owned by such
stockholders at $11.00 per share in cash and (iii) have agreed to convert
or exercise all of their securities that are convertible into or
exercisable for shares of Alliance Common Stock to the
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extent that such Principal Stockholders receive notice of exercise of the
Option. The Board of Directors considered that the Stockholder Agreement
effectively provided the Investor with a "lock-up" of Alliance and weighed
that against the overall benefits of the Recapitalization.
(G) That the proposed structure of the Recapitalization treats all
stockholders equally by giving all stockholders the opportunity to receive
cash for their shares or to retain shares of Alliance Common Stock
(subject to proration).
The foregoing discussion of the information and factors considered by the
Board of Directors is not intended to be exhaustive, but includes all material
factors considered by the Board of Directors. In reaching its determination to
approve the Recapitalization Merger Agreement, and in view of the variety of
factors considered by the Board of Directors in connection with its evaluation
of the Recapitalization Merger Agreement, the Board of Directors did not
assign any relative or specific weights to the various factors considered by
it nor did it specifically characterize any factors as positive or negative
(except as described above). In addition, individual directors may have given
different weights to different factors and may have viewed certain factors
more positively or negatively than others.
The recommendation by the Board of Directors that Alliance's stockholders
approve the Recapitalization Merger Agreement is not a recommendation as to
whether stockholders should retain shares of Alliance Common Stock.
OPINION OF FINANCIAL ADVISOR
Alliance retained Salomon Brothers pursuant to a letter agreement dated June
6, 1997 (the "Engagement Letter") to act as its financial advisor in
connection with, among other things, a possible combination or sale
transaction involving Alliance. Pursuant to the Engagement Letter, Salomon
Brothers rendered financial advisory services relating to Alliance in
connection with the Recapitalization. Salomon Brothers rendered an opinion to
the Board of Directors on July 22, 1997, that the consideration to be received
and retained by the holders of Alliance Common Stock in the Recapitalization
(pursuant to the terms of the Recapitalization Merger Agreement as originally
executed, without reflecting the effect of any amendments thereto) is fair to
such holders from a financial point of view. Salomon Brothers' opinion was
reconfirmed in writing as of November 10, 1997.
The full text of the Salomon Brothers fairness opinion dated as of November
10, 1997, which sets forth the assumptions made, general procedures followed,
matters considered and limits on the review undertaken, is attached as Annex C
to this Proxy Statement/Prospectus. This opinion is substantially similar to
the opinion rendered on July 22, 1997, and Stockholders are urged to read this
opinion in its entirety. The Salomon Brothers opinion is directed only to the
fairness, from a financial point of view, to the holders of Alliance Common
Stock of the consideration to be received and retained by such holders in the
Recapitalization and does not address Alliance's underlying business decision
to effect the Recapitalization or constitute a recommendation to any holder of
Alliance Common Stock as to how such stockholder should vote with respect to
the Recapitalization Merger Agreement and the Recapitalization, or what
election such holder should make with respect to the retention of such
holder's shares of Alliance Common Stock. The summary of the Salomon Brothers
opinion set forth below is qualified in its entirety by reference to the full
text of such opinion attached as Annex C. STOCKHOLDERS ARE URGED TO READ THE
SALOMON BROTHERS OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed the following: (i) the Recapitalization Merger Agreement (including
the amendments thereto); (ii) certain publicly available information
concerning Alliance, including the Annual Reports on Form 10-K for each of the
years in the three-year period ended December 31, 1996 and the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997; (iii) certain
other internal information, primarily financial in nature concerning the
business and operations of Alliance furnished to it by Alliance for purposes
of its analysis; (iv) certain publicly available information concerning the
trading of, and the trading market for, the Alliance Common Stock; (v) certain
publicly available information with respect to certain other companies that
Salomon Brothers believed to be comparable to Alliance and the trading markets
for certain of such other companies' securities; and (vi) certain
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publicly available information concerning the nature and terms of certain
other transactions that Salomon Brothers considered relevant to its inquiry.
Salomon Brothers also considered such other information, financial studies,
analyses, investigations and financial, economic and market criteria that it
deemed relevant. Salomon Brothers also discussed the foregoing, as well as
other matters it believed relevant to its inquiry, with the management of
Alliance and officers of the Investor.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. Salomon Brothers did not conduct a physical
inspection of any of the properties or facilities of Alliance, nor did it make
or obtain or assume any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties or facilities. With
respect to projections, Salomon Brothers assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of Alliance and officers of the Investor as to the
future financial performance of Alliance. Salomon Brothers expressed no view
with respect to such projections or the assumptions on which they were based.
Salomon Brothers assumed that the conditions precedent to the Recapitalization
Merger contained in the Recapitalization Merger Agreement would be satisfied
and the Recapitalization would be consummated in accordance with the terms of
the Recapitalization Merger Agreement.
In conducting its analysis and arriving at its opinion as expressed herein,
Salomon Brothers considered such financial and other factors as it deemed
appropriate under the circumstances including, among others, the following:
(i) the historical and current financial position and results of operations of
Alliance; (ii) the business prospects of Alliance; (iii) the historical and
current market for the Alliance Common Stock and for the equity securities of
certain other companies that Salomon Brothers believed to be comparable to
Alliance; and (iv) the nature and terms of certain other acquisition
transactions that Salomon Brothers believed to be relevant. Salomon Brothers
also took into account its assessment of general economic, market and
financial conditions as well as its experience in connection with similar
transactions and securities valuation generally. Salomon Brothers also
considered the process that resulted in the negotiation of the
Recapitalization Merger Agreement, including discussions with other potential
acquirors. The Salomon Brothers opinion necessarily was based upon conditions
as they existed and could be evaluated on the date thereof and Salomon
Brothers assumed no responsibility to update or revise its opinion based upon
circumstances or events occurring after such date. Salomon Brothers' opinion
did not constitute an opinion or imply any conclusion as to the likely trading
range for shares of the Alliance Common Stock following consummation of the
Recapitalization. Salomon Brothers' opinion was for the sole benefit of
Alliance (including its management and directors) in its consideration of the
Recapitalization and was, in any event, limited to the fairness, from a
financial point of view, of the consideration to be received and retained by
the holders of Alliance Common Stock in the Recapitalization and did not
address Alliance's underlying business decision to effect the Recapitalization
or constitute a recommendation to any holder of Alliance Common Stock as to
how such holder should vote with respect to the Recapitalization Merger
Agreement and the Recapitalization, or what election such holder should make
with respect to the retention of such holder's shares of Alliance Common
Stock.
Salomon Brothers has consented to the inclusion in this Proxy
Statement/Prospectus of its fairness opinion attached as Annex C and the
description of the Salomon Brothers fairness opinion contained herein. Salomon
Brothers has advised the Board of Directors that, based on an express
disclaimer in the Engagement Letter, Salomon Brothers does not believe that
any person (including a stockholder of Alliance), other than Alliance or the
Board of Directors, has a legal right to rely upon its fairness opinion to
support any claims against Salomon Brothers arising under applicable state law
and that, should any such claims be brought against Salomon Brothers by any
such person, this assertion will be raised as a defense. In the absence of
applicable state law authority, the availability of such a defense will be
resolved by a court of competent jurisdiction. Resolution of the question of
the availability of such a defense, however, will have no effect on the rights
and responsibilities of the Board of Directors under applicable state law and
the availability of such a state law defense to Salomon Brothers
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would not have any effect on the rights and responsibilities of either Salomon
Brothers or the Board of Directors under the federal securities laws.
In connection with the delivery of its fairness opinion, Salomon Brothers
made a presentation to the Board of Directors on July 22, 1997, with respect
to certain financial analyses performed by Salomon Brothers in evaluating the
consideration to be received and retained in the Recapitalization by the
holders of Alliance Common Stock. The following is a summary of Salomon
Brothers' July 22 presentation.
Overview of Recapitalization. As part of its presentation, Salomon Brothers
provided an overview of the Recapitalization and of the events leading up to
the negotiation of the terms of the transaction. In this part of the
presentation, the material terms of the transaction and the background of
events described in detail elsewhere in this Proxy Statement/Prospectus were
summarized. In connection with its description of the terms of the
Recapitalization, Salomon Brothers analyzed the consideration to be received
and retained by the holders of shares of Alliance Common Stock. In analyzing
the value of the consideration to be received and retained, Salomon Brothers
calculated the pro rata per share cash value of the consideration based on the
$11.00 per share cash conversion of the maximum number of shares of Alliance
Common Stock (in accordance with the terms of the draft Recapitalization
Merger Agreement dated July 22, 1997, without taking into account Amendments
Nos. 1, 2 and 3 thereto), which resulted in a deemed per share cash value of
the consideration equal to $10.43 (assuming 10,943,138 shares of Alliance
Common Stock outstanding, the conversion of Alliance's Series C and Series D
convertible preferred stock into 3,077,520 shares of Alliance Common Stock
prior to the consummation of the Transactions and that the outstanding
warrants and options would receive 100% cash consideration equal to the Net
Amount (as defined below)). Salomon Brothers then analyzed the "stub" equity
to be retained by the holders of Alliance Common Stock. Based on projected
EBITDA for the Company for 1998, and applying a range of multiples of EBITDA
of 5.5x to 6.5x and a range of discount rates, and based on the Company's
projected weighted average cost of capital, of 15% to 25%, Salomon Brothers
derived a pro rata per share value of the "stub" equity consideration retained
by holders of shares of Alliance Common Stock equal to between $0.41 and
$0.81, and centered around $0.60. Based on this analysis, Salomon Brothers
used a valuation of $11.00 per share ($10.43 in cash and $0.57 in stock) for
the consideration received and retained by holders of shares of Alliance
Common Stock in the Recapitalization for purposes of its other analyses
discussed below.
Historical Price and Volume Analysis. Salomon Brothers reviewed certain
information concerning the trading price and volume of shares of Alliance
Common Stock from January 1, 1996 through July 18, 1997. Salomon Brothers
noted that the shares of Alliance Common Stock had (i) ranged in price between
$4.00 per share and $11.125 per share in the last twelve months and traded
lightly during such period, (ii) weighted average trading prices between
approximately $7.00 and $9.00 per share over the past twelve months and (iii)
increased in price per share in the past approximately two months, which could
be attributable in part to speculation concerning takeover activity in the
diagnostic imaging industry in general and, possibly, Alliance in particular.
Salomon Brothers also noted that from January 1, 1996 through July 18, 1997,
the price of Alliance Common Stock had outperformed the Nasdaq Composite Index
and an index reflecting the average of the common stock prices of several
comparable companies in the diagnostic imaging sector.
Analysis of Selected Publicly-Traded Comparable Companies. Salomon Brothers
reviewed certain publicly available financial, operating and stock market
information for Alliance, SMT and three other publicly traded diagnostic
imaging companies (Diagnostic Health Services, Inc., InSight Health Services
("InSight") and Medical Resources, Inc. (excluding Alliance, each of which is
a "Comparable Company," and collectively referred to as "Comparable
Companies")). Salomon Brothers considered the Comparable Companies to be
somewhat similar to Alliance, but noted that there are very few public
companies in Alliance's industry and none of these companies is identical to
Alliance. Accordingly, the analysis described below is not purely
mathematical. Rather it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of Alliance and the Comparable Companies and other factors
that could affect public trading value. Additionally, Salomon Brothers
observed that the valuation multiples in the
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diagnostic imaging sector were highly variable. Salomon Brothers noted that,
in its view, the comparable company analysis was of somewhat limited utility.
For Alliance and each of the Comparable Companies, Salomon Brothers
calculated, among other things, multiples of trading price (as of July 18,
1997 and as of May 23, 1997 for SMT and Alliance which was 30 days prior to
the public announcement of the acquisition of SMT by Three Rivers) to LTM
earnings per share ("EPS"), estimated calendar 1997 EPS and estimated calendar
1998 EPS, and of Firm Value (equity market capitalization plus net debt) to
LTM revenues, LTM EBITDA and LTM EBIT. (Estimated EPS was based upon First
Call Corporation consensus estimates as of July 18, 1997.)
Taking into account Alliance's financial performance relative to the
Comparable Companies, Salomon Brothers derived a reference range of multiples
of Firm Value to LTM EBITDA (5.5x to 7.0x), Firm Value to 1997 EBITDA (5.0x to
6.4x) and Firm Value to 1998 EBITDA (4.5x to 5.7x) using, in particular, data
for two companies, SMT and InSight, that it viewed as the closest comparables
given their primary mobile focus. These ranges were narrower than the ranges
based solely on calculations from the public data based on subjective and
qualitative judgments applied by Salomon Brothers to such calculations to more
accurately reflect the valuation sensitivity provided by this analysis. Using
such derived range of multiples, Salomon Brothers derived a valuation range
for the Implied Equity Value per share of Alliance of $8.00 to $11.50, with
particular focus on the valuation based on the 1997 EBITDA multiples.
Analysis of Selected Mergers/Acquisition Transactions. Salomon Brothers also
analyzed certain publicly available financial, operating and stock market
information for nine selected merger or acquisition transactions in the
diagnostic imaging industry over the past three years (Apollo's then pending
tender offer to acquire SMT later in 1997; HEALTHSOUTH Corp.'s 1996
acquisition of Health Images, Inc.; Medical Resources, Inc.'s 1996 acquisition
of NMR of America, Inc.; USDL's 1996 acquisition of Medical Imaging Centers of
America, Inc.; the 1996 merger of American Health Corp. and Maxum Health
Corp.; USDL's 1996 acquisition of Meditek Health Corp; USDL's 1996 acquisition
of U.S. Imaging, Inc.; USDL's 1996 acquisition of Allegheny MRI, Inc.; and
Health Images, Inc.'s 1994 acquisition of MedAlliance, Inc.). Salomon Brothers
considered the precedent mergers and acquisition transactions to be reasonably
comparable to the Recapitalization, but not identical to the Recapitalization.
Accordingly, the analysis described below is not purely mathematical. Rather
it involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of Alliance,
the companies involved in the precedent merger and acquisition transactions
and other factors that could affect the private market valuation. For each
such transaction, Salomon Brothers calculated the multiples of, among other
things, Firm Value to LTM revenue, Firm Value to LTM EBITDA, Firm Value to LTM
EBIT and offer price to LTM EPS.
Giving special weight to the SMT transaction, Salomon Brothers derived a
reference range of multiples of Firm Value to LTM EBITDA (5.5x to 6.5x), Firm
Value to 1997 EBITDA (5.2x to 6.2x) and Firm Value to 1998 EBITDA (4.6x to
5.5x). This range was narrower than the range based solely on calculations
from the public data based on certain subjective and qualitative judgments
applied by Salomon Brothers to such public data. Using such derived range of
multiples, Salomon Brothers derived a valuation range for the Implied Equity
Value per share of Alliance of $9.00 to $11.00, with particular focus on the
valuation based on the 1997 EBITDA multiples.
Discounted Cash Flow Analysis. Salomon Brothers performed a discounted cash
flow analysis of the projected unlevered free cash flows of Alliance for the
fiscal years 1997 through 2001 based on financial projections provided by
management of Alliance. In conducting the discounted cash flow analysis,
Salomon Brothers utilized discount rates ranging from 11.5%to 13.5% (with
particular focus on discount rates of 12.0% to 13.0%), that were derived by
using the median unlevered beta for the Comparable Companies and certain other
assumptions about capital structure, and market risk, and terminal multiples
of year 2001 EBITDA ranging from 4.5x to 6.5x (with particular focus on
terminal multiples of 5.0x to 6.0x). From this analysis, Salomon
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Brothers derived a present value of the firm range of $197.2 million to $240.0
million for Alliance at June 30, 1997, from which Salomon Brothers derived a
valuation range of the implied present value per share of $9.00 to $11.50.
In connection with the opinion dated as of November 10, 1997, Salomon
Brothers performed procedures to update, as necessary, certain of the analyses
described above and reviewed the assumptions on which such analyses were based
and the factors considered in connection therewith, as well as the terms of
the Recapitalization, as modified by Amendment Nos. 1, 2 and 3 to the
Recapitalization Merger Agreement. See "THE RECAPITALIZATION--Background of
the Recapitalization." In performing these updating analyses, Salomon Brothers
utilized a valuation of $11.00 per share of Alliance Common Stock (consisting
of $10.68 in cash and $0.32 in retained shares) to reflect the modified terms
of the Recapitalization Merger Agreement. Salomon Brothers did not perform any
type of analysis other than those described above in updating its opinion.
The foregoing summary does not purport to be a complete description of the
analyses performed by Salomon Brothers or of its presentations to the Board of
Directors. The preparation of financial analyses and fairness opinions is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. Salomon Brothers made
no attempt to assign specific weight to particular analyses or factors
considered, but rather made qualitative judgments as to the significance and
relevance of the analyses and factors considered. Accordingly, Salomon
Brothers believes that its analyses (and the summary set forth above) must be
considered as a whole, and that selecting portions of such analyses and of the
factors considered by Salomon Brothers, without considering all of such
analyses and factors, could create a misleading or incomplete view of the
processes underlying the analyses conducted by Salomon Brothers and its
opinion. In its analyses, Salomon Brothers made numerous assumptions with
respect to Alliance, industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond the
control of Alliance. Any estimates contained in Salomon Brothers' analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. Estimates of values of companies do not purport to be
appraisals or necessarily to reflect the prices at which companies may
actually be sold. Because such estimates are inherently subject to
uncertainty, Salomon Brothers does not assume responsibility if future results
or actual values differ materially from the estimates. Salomon Brothers'
analyses were prepared solely as part of Salomon Brothers' analysis of the
fairness of consideration to be received and retained by holders of Alliance
Common Stock in the Recapitalization and were provided to the Board of
Directors of Alliance in that connection. The opinion of Salomon Brothers was
one of the factors taken into consideration by the Board of Directors of
Alliance in making its determination to approve the Recapitalization.
Salomon Brothers is an internationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Salomon Brothers has
previously rendered certain investment banking and financial advisory services
to Alliance and to certain affiliates of the Investor, for which it has
received customary compensation. In addition, in the ordinary course of its
business, Salomon Brothers may actively trade the debt and equity securities
of Alliance for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In addition, since the time of rendering its fairness opinion to the Board of
Directors, Salomon Brothers has been invited and has agreed to participate as
syndication agent and as a Lender (as defined in the Credit Agreement) under
the Credit Agreement, and to participate as co-manager in the Offering, to
fund the cash payments to be made in the Recapitalization, and will receive
customary compensation. See "SOURCES AND AMOUNT OF FUNDS."
Pursuant to the Engagement Letter, Alliance will pay Salomon Brothers the
following fees: (a) $100,000, which was earned upon Alliance's execution of
the Recapitalization Merger Agreement; plus (b) an additional
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fee of $400,000, which was earned upon the initial submission of Salomon
Brothers' fairness opinion to the Board of Directors on July 22, 1997; plus
(c) an additional fee of approximately $2.4 million, which is contingent upon
the consummation of the Recapitalization. Alliance has also agreed to
reimburse Salomon Brothers for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of its counsel) and to indemnify Salomon Brothers
against certain liabilities and expenses relating to or arising out of its
engagement, including certain liabilities under the Federal securities laws.
As noted under the caption "THE RECAPITALIZATION--Recommendation of the
Board of Directors; Reasons for the Recapitalization," the fairness opinion of
Salomon Brothers was one of several factors considered by the Board of
Directors in determining to approve the Recapitalization Agreement and the
Recapitalization. The amount of consideration payable in the Recapitalization
was determined by arms' length negotiations between the Investor and Alliance,
in consultation with their respective financial advisors and other
representatives, and was not established by such financial advisors.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
In considering the recommendation of the Board of Directors with respect to
the Recapitalization Merger Agreement, stockholders should be aware that
certain members of management of Alliance at the time of the Board of
Director's approval of the Recapitalization Merger Agreement had, and
currently have, certain interests which may present them with potential
conflicts of interest in connection with the Recapitalization. In addition,
each member of the Board of Directors (including the members of the Special
Committee) holds stock options which will be accelerated as a result of the
Recapitalization. The interests of executive officers and the directors of
Alliance in the Recapitalization are summarized below. The Board of Directors
was aware of these interests and considered them in addition to the other
matters described under "--Background of the Recapitalization," "--
Recommendation of the Board of Directors; Reasons for the Recapitalization"
and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Executive Officers of Alliance Following the Recapitalization. All of the
current executive officers of Alliance will remain executive officers of
Alliance following the Recapitalization. Messrs. Zehner and Pino have entered
into Employment Agreements with Alliance, effective as of the Recapitalization
Effective Time, which will replace their current employment agreements. In
addition, Messrs. Zehner and Pino will continue as directors of Alliance
following the Recapitalization. See "MANAGEMENT" and "CERTAIN RELATED
AGREEMENTS--Employment Agreements and Agreement Not to Compete."
Alliance's Amended and Restated 1991 Stock Option Plan. Certain executive
officers and directors of Alliance have previously received stock options
pursuant to Alliance's Amended and Restated 1991 Stock Option Plan (the "1991
Plan"). Notwithstanding the vesting schedule otherwise applicable to such
stock options, as a result of the Recapitalization, substantially all such
stock options will become fully vested. At the Recapitalization Effective
Time, each outstanding option will either (i) pursuant to agreements entered
into between Alliance and certain officers of Alliance, remain outstanding
following the Recapitalization Effective Time or (ii) be canceled in exchange
for an amount in cash, payable at the time of such cancellation, equal to the
product of (x) the number of shares of Alliance Common Stock subject to such
option immediately prior to the Recapitalization Effective Time and (y) the
excess of $11.00 over the per share exercise price of such option. The
following table shows, for each of the executive officers and directors of
Alliance, (i) the number of options granted to such individual since December
31, 1996, (ii) the total number of outstanding options held by such individual
as of the date of this Proxy Statement/Prospectus, (iii) the value of such
individual's options that will be cancelled in exchange for cash (before
federal and state income taxes) at the Recapitalization Effective Time and
(iv) the aggregate value of all the stock options held by such individual. The
value of each option was calculated by subtracting the exercise price per
share of Alliance Common Stock from the Cash Merger Price.
45
<PAGE>
<TABLE>
<CAPTION>
OPTIONS TOTAL TOTAL
GRANTED IN NUMBER OF VALUE OF
NAME 1997 OPTIONS OPTIONS*
---- ---------- --------- ----------
<S> <C> <C> <C>
Richard N. Zehner............................... 100,000 460,000 $3,761,875
Vincent S. Pino................................. 80,000 205,025 1,284,873
Terrence M. White............................... 60,000 150,025 935,811
Jay A. Mericle.................................. 25,000 128,050 1,096,122
Terry A. Andrues................................ 25,000 128,050 1,096,122
Neil M. Cullinan, Ph.D ......................... 25,000 45,000 322,188
Cheryl A. Ford.................................. 25,000 58,050 356,747
Michael W. Grismer.............................. 10,000 45,000 328,438
James E. Buncher................................ 30,000 40,000 231,875
Douglas M. Hayes................................ 10,000 10,000 31,250
Robert B. Waley-Cohen........................... 30,000 50,000 245,625
John C. Wallace................................. 30,000 40,000 226,250
------- --------- ----------
Total....................................... 450,000 1,359,200 $9,917,176
======= ========= ==========
</TABLE>
- --------
* The total value of options includes the following amounts to be paid to the
option holder at the Recapitalization Effective Time, to the extent that
such options are not exercised prior thereto: Mr. Zehner $3,601,978; Mr.
Pino $1,258,842; Mr. White $935,811; Mr. Mericle $984,559; Mr. Andrues
$984,559; Dr. Cullinan $322,188; Ms. Ford $245,184; Mr. Grismer $328,438;
Mr. Buncher $231,875; Mr. Hayes $31,250; Mr. Waley-Cohen $245,625; Mr.
Wallace $226,250. The remaining option value and related options will remain
outstanding and substantially all of such options will be fully vested.
All of the options granted in 1997 were granted on March 25, 1997, with an
exercise price of $6.5625 per share, except for the options granted to Mr.
Hayes which were granted on May 15, 1997 with an exercise price of $7.875 per
share. The exercise price with respect to each such option is equal to the
fair market value of one share of Alliance Common Stock on the date of grant
of such option.
Certain members of management will be permitted to retain certain options to
acquire 70,000 shares of Alliance Common Stock following the Recapitalization,
which options have an approximate aggregate value of $0.5 million. The terms
of the options that remain outstanding following the consummation of the
Recapitalization will not change materially, except that the provision which
specified that such options would no longer be exercisable 90 days after
termination of employment will no longer apply to certain of such options.
Alliance does not intend to redeem such options that remain outstanding for
cash at a future date.
Long Term Incentive Plan. Pursuant to the terms of Alliance's Amended and
Restated Long Term Incentive Plan (the "LTIP"), at the Recapitalization
Effective Time, Alliance's executive officers will be paid the amounts (before
federal and state income taxes) earned by them pursuant to the LTIP through
the date of the Recapitalization, as set forth below:
<TABLE>
<CAPTION>
AMOUNT PAYABLE UNDER LTIP AT RECAPITALIZATION
NAME EFFECTIVE TIME
---- ---------------------------------------------
<S> <C>
Richard N. Zehner................. $ 543,750
Vincent S. Pino................... 435,000
Terrence M. White................. 326,250
Jay A. Mericle.................... 217,500
Terry A. Andrues.................. 217,500
Cheryl A. Ford.................... 217,500
Neil M. Cullinan, Ph.D............ 108,750
----------
Total......................... $2,066,250
==========
</TABLE>
The LTIP was amended on July 22, 1997, immediately prior to Alliance's
entering into the Recapitalization Merger Agreement, to provide that the
participants in the LTIP will be eligible to earn (subject to satisfying the
goals set forth in the LTIP) the potential LTIP awards for 1998, not to exceed
$125,000 for all participants in
46
<PAGE>
the aggregate. Absent such amendment, the LTIP would have terminated at the
Recapitalization Effective Time and the executives would not have been
eligible to earn the aggregate amount set forth in the preceding sentence.
Payments Under Employment Agreements. The employment agreements for
Alliance's executive officers provide for certain benefits and rights upon the
occurrence of a "change of control." Alliance's executive officers have agreed
that the execution of the Recapitalization Merger Agreement and the
Stockholder Agreement does not, on its own, constitute a change of control for
the purposes of such employment agreements. However, the consummation of the
Recapitalization will constitute a "change of control" for the purposes of
such employment agreements.
The employment agreements for Ms. Ford and for Messrs. Andrues, Mericle,
Cullinan and Grismer provide that (i) if Alliance takes actions which
constitute Constructive Discharge (as defined in such agreements) or
terminates such executive without Just Cause (as defined in such agreements)
within one year before or one year after a change of control or (ii) the
executive quits for any reason within one year following a change of control,
then such executive shall be entitled to receive: (x) a cash amount equal to
the sum of the executive's salary at the time of termination and the
executive's target bonus for the year of termination and (y) a continuation of
benefits (including car allowance, health insurance and 401(k) plan benefits)
for a period of 12 months following termination.
The employment agreements for Messrs. Zehner, Pino and White were amended on
May 15, 1997 to provide that upon the occurrence of a change in control, such
executives are entitled to receive (i) a cash amount equal to 2.5 times (two
times in the case of Mr. White) the sum of the executive's salary at the time
of the change of control and the executive's target bonus for the year in
which the change of control occurs and (ii) a continuation of benefits
(including car allowance, health insurance and 401(k) plan benefits) for a
period of 30 months (24 months in the case of Mr. White) following the change
of control. Absent the May 15, 1997 amendments, such payments would have been
made, and such benefits would have been provided, only if (i) Alliance were to
take actions which constitute Constructive Discharge (as defined in such
agreements) or to terminate such executive without Just Cause (as defined in
such agreements) within one year before or one year after the change of
control, or (ii) the executive were to quit for any reason within one year
following a change of control.
All of the employment agreements discussed above prohibit the provision of
payments and benefits to the extent such payments or benefits would cause
Alliance to be unable to deduct amounts pursuant to the provisions of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), which
imposes a limit on certain payments made by a corporation that are contingent
upon a change of control. As a result of such limits, it is estimated that the
amount of payments that Alliance will make to Messrs. Zehner, Pino and White
as a result of the consummation of the Recapitalization pursuant to the
employment agreements (prior to federal and state income taxes) will be
reduced to equal $850,000, $500,000 and approximately $420,000, respectively.
Agreements Not to Compete. Alliance, the Investor and Messrs. Zehner and
Pino have entered into an agreement that contains, among other things,
covenants not to compete with Alliance. Pursuant to these covenants, Alliance
will be required under certain circumstances to make payments to Messrs.
Zehner and Pino following the termination of their employment with Alliance.
See "CERTAIN RELATED AGREEMENTS--Employment Agreements and Agreement Not to
Compete."
Indemnification and Insurance. All rights to indemnification and exculpation
(including the advancement of expenses) from liabilities for acts or omissions
occurring at or prior to the Recapitalization Effective Time in effect as of
the date of the Recapitalization Merger Agreement in favor of the current or
former directors, officers and employees of Alliance, shall continue in full
force and effect without amendment in accordance with their terms for a period
of not less than five years after the Recapitalization Effective Time.
Currently, Alliance indemnifies directors and officers to the fullest extent
permitted by law with respect to any claims or proceedings relating to or
arising out of their service as an officer or director. Directors and officers
have the right to be paid by Alliance for expenses incurred in defending any
such claim or proceeding in advance of its final disposition.
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<PAGE>
In addition, for a period of at least five years after the Recapitalization
Effective Time, Alliance has agreed to maintain in effect standard policies of
directors' and officers' liability insurance in an aggregate coverage amount
not less than the coverage amounts maintained by Alliance as of the date of
the Recapitalization Merger Agreement, and including coverage with respect to
claims arising from facts or events which occurred before the Recapitalization
Effective Time to the extent available.
New Option Plan. The Company intends to adopt the New Option Plan as of the
Recapitalization Effective Time. See "CERTAIN RELATED AGREEMENTS--The New
Option Plan."
EFFECT OF THE RECAPITALIZATION
Pursuant to the Recapitalization Merger Agreement, Newco will be merged with
and into Alliance. At the Recapitalization Effective Time, the separate
corporate existence of Newco will cease, Alliance will continue as the
surviving corporation, the shares of common stock of Newco will be converted
into 3,632,222 shares of Alliance Common Stock, 411,358 shares of Alliance
Common Stock will be retained by Alliance's existing stockholders and the
balance of the shares of Alliance Common Stock issued and outstanding
immediately prior to the Recapitalization Effective Time (other than
Dissenting Shares) will be converted into the right to receive $11.00 in cash.
The Recapitalization Merger Agreement provides that 411,358 shares of
Alliance Common Stock, or approximately 3% of the presently issued and
outstanding shares of Alliance Common Stock (assuming conversion of all shares
of preferred stock of Alliance), will be retained by Alliance's existing
stockholders and the remainder, approximately 97 % of the issued and
outstanding shares of Alliance Common Stock (assuming conversion of all shares
of preferred stock of Alliance and assuming there are no Dissenting Shares)
will be converted into the right to receive $11.00 per share in cash. The
Recapitalization Merger Agreement provides that an aggregate of 411,358 shares
of Alliance Common Stock will be retained by Alliance's existing stockholders.
Each stockholder of Alliance may elect to retain shares of Alliance Common
Stock by following the procedures set forth in "THE RECAPITALIZATION--
Proration." If Alliance's stockholders elect to retain more or less than
411,358 shares of Alliance Common Stock, the number of shares to be retained
will be prorated as described in "THE RECAPITALIZATION--Proration."
Consequently, at the time holders of shares of Alliance Common Stock vote in
respect of the Recapitalization Merger Agreement and decide whether to elect
to retain shares of Alliance Common Stock, they will not know if they will be
entitled to retain all of the shares they elect to retain or if they will be
required to retain shares of Alliance Common Stock which they do not elect to
retain. The Principal Stockholders will be entitled to participate in the
proration of the retained shares in the same manner as Alliance's other
stockholders, unless the Investor exercises the option (in which case, the
Principal Stockholders would receive cash for their shares and would not be
subject to proration). The Investor has advised the Company that it does not
currently intend to exercise the option and would do so only if a third party
sought to acquire Alliance prior to consummation of the Recapitalization or
the termination of the Recapitalization Merger Agreement. If the Investor does
exercise the options, all 411,358 of the retained shares would be prorated
among Alliance's existing public stockholders, who own approximately 34% of
the issued and outstanding shares of Alliance Common Stock (assuming the
conversion or exercise by the Principal Stockholders of all of their
securities which are convertible into or exercisable for shares of Alliance
Common Stock).
Pursuant to the Recapitalization Merger Agreement, Apollo will receive a
total of 3,632,222 shares of Alliance Common Stock and 150,000 shares of
Alliance's Series F Preferred Stock. Consequently, immediately after the
Recapitalization, Alliance will have 4,043,580 shares of common stock
outstanding, of which Apollo will own 3,632,222 shares (or approximately 90%)
and Alliance's existing stockholders will own 411,358 shares (or approximately
10%). Immediately after consummation of the Recapitalization, Apollo intends
to sell 242,898 shares of Alliance Common Stock owned by Apollo to BT for
$11.00 per share (or approximately $2.7 million in the aggregate) in cash, the
amount paid to Alliance's existing stockholders for their shares of Alliance
Common Stock. In addition, options to acquire 524,545 shares of Alliance
Common Stock will be held by or issuable to management of Alliance after
consummation of the Recapitalization. Immediately after
48
<PAGE>
consummation of the Transactions, Apollo also intends to sell to BT $0.9
million stated amount of the Series F Preferred Stock purchased by it for $0.9
million in cash. See "THE RECAPITALIZATION--Interests of Certain Persons in
the Recapitalization," "CERTAIN RELATED AGREEMENTS--The New Option Plan."
The aggregate cash consideration to be received by Alliance's stockholders
in respect of shares of Alliance Common Stock (other than retained shares)
will be approximately $149.7 million. Assuming all securities convertible into
or exercisable for shares of Alliance Common Stock were converted or
exercised, the aggregate cash consideration to be received by Alliance's
stockholders would be approximately $161.7 million.
PROCEDURE FOR RETAINED SHARE ELECTION
Each person who is a record holder of shares of Alliance Common Stock on or
prior to 5:00 p.m., New York City time, on the Record Date, will be entitled
to make a Retained Share Election with respect to all or any portion of his or
its shares of Alliance Common Stock. The Election Form for making a Retained
Share Election is being mailed to holders of record of shares of Alliance
Common Stock as of the Record Date, together with this Proxy
Statement/Prospectus. A RETAINED SHARE ELECTION SHALL HAVE BEEN VALIDLY MADE
ONLY IF THE EXCHANGE AGENT SHALL HAVE RECEIVED, ON OR PRIOR TO THE SPECIAL
MEETING DATE, AN ELECTION FORM, PROPERLY COMPLETED AND SIGNED IN ACCORDANCE
WITH SUCH RULES AS THE EXCHANGE AGENT MAY ESTABLISH PURSUANT TO THE
RECAPITALIZATION MERGER AGREEMENT, AND ACCOMPANIED BY EITHER (I) CERTIFICATES
FOR THE SHARES OF ALLIANCE COMMON STOCK TO WHICH SUCH ELECTION FORM RELATES,
DULY ENDORSED IN BLANK OR OTHERWISE IN FORM ACCEPTABLE FOR TRANSFER ON THE
BOOKS OF ALLIANCE, OR (II) AN APPROPRIATE NOTICE OF GUARANTEED DELIVERY OF
SUCH CERTIFICATES AS SET FORTH IN SUCH ELECTION FORM FROM A FIRM WHICH IS A
MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC., OR FROM A COMMERCIAL BANK OR TRUST
COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES.
Notwithstanding anything to the contrary contained herein, any Election Form
accompanied by a Notice of Guaranteed Delivery shall be deemed not validly
made if the certificate or certificates are in fact delivered to the Paying
Agent after three (3) Nasdaq SmallCap Market trading days after the date of
execution of such Notice of Guaranteed Delivery. The Exchange Agent may, with
the mutual agreement of the Investor and Alliance, make such rules as are
consistent with the Recapitalization Merger Agreement for the implementation
of the elections provided for herein as shall be necessary or desirable fully
to effect such elections.
REVOCATION OF RETAINED SHARE ELECTIONS
Any Election Form may be revoked by the stockholder submitting such Election
Form if a written notice of revocation is received by the Exchange Agent prior
to 5:00 p.m., New York City time, on the Special Meeting Date. In addition,
all Election Forms will be revoked automatically if the Recapitalization
Merger Agreement is terminated pursuant to the terms of the Recapitalization
Merger Agreement. If an Election Form is revoked, the certificate or
certificates (or guarantees of delivery, as appropriate) for the shares of
Alliance Common Stock to which such Election Form relates will be returned by
the Exchange Agent to the stockholder submitting the same to the Exchange
Agent.
ROLE OF THE EXCHANGE AGENT
The Exchange Agent will determine (i) whether or not Retained Share
Elections have been validly made or validly revoked and (ii) when elections
and revocations have been received by it. If the Exchange Agent determines
that any Retained Share Election was not validly made, then, subject to any
proration, such shares of Alliance Common Stock will be converted in the
Recapitalization into the right to receive the Cash Merger Price. The Exchange
Agent will also make all computations as to the allocation and the proration
described below. All determinations and calculations by the Exchange Agent
will be conclusive and binding on the holders of shares of Alliance Common
Stock.
49
<PAGE>
PRORATION
Pursuant to the Recapitalization Merger Agreement, if the Elected Retained
Share Number exceeds the Actual Retained Share Number, then the number of
shares of Alliance Common Stock which will be retained will be reduced by such
excess number of shares. In such event, each holder of Elected Retained Shares
shall be allocated Non-Elected Cash Shares in lieu of Elected Retained Shares
such that (after giving effect to adjustments for fractional shares) each such
holder shall be deemed to hold Non-Elected Cash Shares in an amount equal to
(x) the total number of Elected Retained Shares held by such holder less (y)
the product of (A) a fraction, the numerator of which is the Actual Retained
Share Number, and the denominator of which is the Elected Retained Share
Number, multiplied by (B) the total number of Elected Retained Shares held by
such holder.
Pursuant to the Recapitalization Merger Agreement, if the Actual Retained
Share Number is greater than the Elected Retained Share Number, then the
aggregate number of shares of Alliance Common Stock which shall be converted
into the right to receive cash shall be decreased by a number of shares equal
to the excess of the Actual Retained Share Number over the Elected Retained
Share Number. In such event, each holder of Elected Cash Shares (other than
the Investor) shall be allocated a portion of the Non-Elected Retained Shares
in lieu of Elected Cash Shares (after giving effect to adjustments for
fractional shares) equal to (i) the number of Elected Cash Shares held by such
holder, multiplied by (ii) a fraction, the numerator of which is the number of
Non-Elected Retained Shares and the denominator of which is the aggregate
number of Elected Cash Shares held by all holders (other than the Investor).
The following examples illustrate the potential effects of proration,
assuming 14,023,344 outstanding shares of Alliance Common Stock as of the time
of the Recapitalization (the number of shares of Alliance Common Stock
outstanding assuming conversion of all shares of preferred stock of Alliance).
A. HOLDER A OWNS 100 SHARES AND DOES NOT ELECT TO RETAIN ANY SHARES.
(1) If Alliance's other stockholders elect to retain, in the aggregate, a
number of shares of Alliance Common Stock that is at least equal to the Actual
Retained Share Number, then Holder A would receive cash for all of its shares
of Alliance Common Stock.
(2) If Alliance's other stockholders elect to retain, in the aggregate, a
number of shares of Alliance Common Stock that is less than the Actual
Retained Share Number, then Holder A would not be able to receive cash for all
100 of its shares and would be required to retain a number of Non-Elected
Retained Shares so that the aggregate number of shares to be retained by all
of Alliance's existing stockholders is equal to the Actual Retained Share
Number. However, even in the case of maximum proration (i.e., no stockholders
elect to retain shares), Holder A would be entitled to receive at least $1,078
in cash (98 shares at $11.00 per share) and would retain 2 shares of Alliance
Common Stock.
B. HOLDER B OWNS 100 SHARES AND ELECTS TO RETAIN ALL OF ITS SHARES.
(1) If Alliance's stockholders (including Holder B) elect to retain, in the
aggregate, a number of shares of Alliance Common Stock that is less than the
Actual Retained Share Number, then Holder B would be able to retain all 100 of
its Elected Retained Shares. As described in example A.(2) above, if elections
to retain shares are received in respect of less than the Actual Retained
Share Number, non-electing stockholders would retain a number of Non-Elected
Retained Shares so that the aggregate number of shares to be retained by all
of Alliance's existing stockholders is equal to the Actual Retained Share
Number.
(2) If Alliance's stockholders (including Holder B) elect to retain, in the
aggregate, a number of shares of Alliance Common Stock that is more than the
Actual Retained Share Number, then Holder B would not be able to retain all
100 of its Elected Retained Shares and would be required to receive some cash
so that the aggregate number of shares of Alliance Common Stock to be retained
by all of Alliance's existing stockholders is equal to the Actual Retained
Share Number. For example, if stockholders elect to retain 1,000,000 shares in
the aggregate, then each holder, including Holder B, would be able to retain
only approximately 43% of the shares sought to be
50
<PAGE>
retained by such stockholder so that the number of shares of Alliance Common
Stock to be retained by all of Alliance's existing stockholders is equal to
the Actual Retained Share Number. Therefore, Holder B would be able to retain
only 43 Elected Retained Shares (or 43% of its 100 Elected Retained Shares)
and would receive $627 in cash (57 shares at $11.00 per share), after giving
effect to the cash payment for fractional shares. In the case of maximum
proration (i.e., all stockholders elect to retain their shares), Holder B
would be able to retain only 2 Elected Retained Shares (or 2%) and would
receive $1,078 in cash (or 98%).
C. HOLDER C OWNS 100 SHARES AND ELECTS TO RETAIN 50 OF ITS SHARES.
(1) If Alliance's stockholders (including Holder C) elect to retain a number
of shares of Alliance Common Stock that is equal to the Actual Retained Share
Number, then Holder C would be able to retain exactly 50 of its Elected
Retained Shares and would receive $550 in cash (50 shares at $11.00 per
share).
(2) If Alliance's stockholders (including Holder C) elect to retain, in the
aggregate, a number of shares of Alliance Common Stock that is more than the
Actual Retained Share Number, then Holder C would not be able to retain all 50
Elected Retained Shares and would be required to receive some cash in lieu of
some of such 50 Elected Retained Shares so that the aggregate number of shares
of Alliance Common Stock to be retained by all of Alliance's existing
stockholders is equal to (and not more than) the Actual Retained Share Number.
For example, if Alliance's stockholders elect to retain 1,000,000 shares in
the aggregate, then each stockholder, including Holder C, would be able to
retain only approximately 43% of its Elected Retained Shares so that the
aggregate number of shares of Alliance Common Stock to be retained by all of
Alliance's existing stockholders is equal to the Actual Retained Share Number.
Therefore, Holder C would be able to retain only 21 Elected Retained Shares
(or 42% of its 50 Elected Retained Shares) and would receive $869 in cash (79
shares at $11.00 per share). If the stockholders elect to retain more than
1,000,000 shares in the aggregate, then Holder C would receive fewer Elected
Retained Shares than in the example above, but would receive a greater amount
of cash.
(3) If Alliance's stockholders (including Holder C) elect to retain, in the
aggregate, a number of shares less than the Actual Retained Share Number, then
Holder C would be required to retain a number of Non-Elected Retained Shares
(in addition to the 50 Elected Retained Shares) so that the aggregate number
of shares of Alliance Common Stock to be retained by all of Alliance's
existing stockholders is equal to (and not less than) the Actual Retained
Share Number. For example, if stockholders elected to retain 100,000 shares in
the aggregate, then all stockholders must collectively retain an additional
311,358 Non-Elected Retained Shares so that the aggregate number of shares of
Alliance Common Stock to be retained by all of Alliance's existing
stockholders is equal to the Actual Retained Share Number. In this example,
Holder C would be required to retain one additional Non-Elected Retained Share
(for a total of 51 Non-Elected Retained Shares) and would receive $539 in cash
(49 shares at $11 per share). The additional Non-Elected Retained Shares is
calculated by multiplying the 50 shares in respect of which Holder C wants to
receive cash by a fraction, the numerator of which is 311,358 and the
denominator of which is the total number of outstanding shares less the
100,000 shares for which an election to retain such shares is made. If the
stockholders elect to retain fewer than 100,000 Elected Retained Shares in the
aggregate, then Holder C would receive more shares than in the example above,
but would receive less cash.
Fractional shares of Alliance Common Stock will not be issued in the
Recapitalization. Holders of Alliance Common Stock otherwise entitled to a
fractional share of Alliance Common Stock following the Recapitalization will
be paid cash in lieu of such fractional share determined and paid as described
under "--Fractional Shares" below.
If a stockholder does not make a valid Retained Share Election prior to the
Special Meeting Date (or validly revokes such election) and receives cash as a
result of the proration procedures described above, such stockholder may
receive dividend treatment (rather than capital gain treatment) for any cash
received in the Recapitalization as a result of such proration procedures. See
"THE RECAPITALIZATION--Certain Tax Consequences of the Recapitalization--
Stockholders Receiving Cash" below.
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<PAGE>
EFFECTIVE TIME OF THE RECAPITALIZATION
The Recapitalization will become effective upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware or such later
date as is specified in such Certificate of Merger. The filing of the
Certificate of Merger for the Recapitalization will occur as soon as
practicable on or after the Special Meeting Date unless another date is agreed
to in writing by the Company and the Investor. Subject to certain limitations,
the Recapitalization Merger Agreement may be terminated by either party if,
among other reasons, the Recapitalization has not been consummated on or
before December 31, 1997. See "CERTAIN PROVISIONS OF THE RECAPITALIZATION
MERGER AGREEMENT--Conditions" and "CERTAIN PROVISIONS OF THE RECAPITALIZATION
MERGER AGREEMENT--Termination of the Recapitalization Merger Agreement."
RETENTION OF SHARES; PROCEDURES FOR EXCHANGING CERTIFICATES
The retention of shares of Alliance Common Stock or the conversion of shares
of Alliance Common Stock into the right to receive cash (other than shares as
to which dissenters' rights are properly exercised) pursuant to the
Recapitalization will occur at the Recapitalization Effective Time.
As soon as practicable as of or after the Recapitalization Effective Time,
the Exchange Agent will send a letter of transmittal to each holder of
Alliance Common Stock (other than holders who have made a valid Retained Share
Election). The letter of transmittal will contain instructions with respect to
the surrender of certificates representing shares of Alliance Common Stock in
exchange for cash and, under certain circumstances, certificates representing
shares of Alliance Common Stock to be retained in the Recapitalization and the
amount of cash in lieu of any fractional interest in a share of Alliance
Common Stock for which the shares represented by the certificates so
surrendered are exchangeable pursuant to the Recapitalization Merger
Agreement.
EXCEPT FOR CERTIFICATES REPRESENTING ALLIANCE COMMON STOCK SURRENDERED WITH AN
ELECTION FORM AS DESCRIBED ABOVE UNDER "--PROCEDURE FOR RETAINED SHARE
ELECTION," ALLIANCE'S STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Recapitalization Effective Time, each
holder of an outstanding certificate or certificates at such time which prior
thereto represented shares of Alliance Common Stock shall, upon surrender to
the Exchange Agent of such certificate or certificates and acceptance thereof
by the Exchange Agent, be entitled to the amount of cash, if any, into which
the number of shares of Alliance Common Stock previously represented by such
certificate or certificates surrendered shall have been converted pursuant to
the Recapitalization Merger Agreement and a certificate or certificates
representing the number of full shares of Alliance Common Stock, if any, to be
retained by the holder thereof pursuant to the Recapitalization Merger
Agreement. The Exchange Agent will accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange
practices. After the Effective Time of the Recapitalization, there will be no
further transfer on the records of Alliance or its transfer agent of
certificates representing shares of Alliance Common Stock which have been
converted, in whole or in part, pursuant to the Recapitalization Merger
Agreement, into the right to receive cash, and if such certificates are
presented to Alliance for transfer, they will be canceled against delivery of
cash and, if appropriate, certificates for retained shares of Alliance Common
Stock. Until surrendered as contemplated by the Recapitalization Merger
Agreement, each certificate for shares of Alliance Common Stock will be deemed
at any time after the Recapitalization Effective Time to represent only the
right to receive upon such surrender the consideration contemplated by the
Recapitalization Merger Agreement. No interest will be paid or will accrue on
any cash payable as consideration in the Recapitalization or in lieu of any
fractional shares of retained Alliance Common Stock.
No dividends or other distributions with a record date after the
Recapitalization Effective Time will be paid with respect to any shares of
retained Alliance Common Stock represented by an unsurrendered certificate,
and no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to the Recapitalization
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<PAGE>
Merger Agreement, until the surrender of such certificate in accordance with
the Recapitalization Merger Agreement. Subject to the effect of applicable
laws, following surrender of any such certificate, there shall be paid to the
holder of the certificate representing whole shares of retained Alliance
Common Stock issued in connection therewith, without interest, (1) at the time
of such surrender or as promptly after the sale of the Excess Shares (as
defined below) as practicable, the amount of any cash payable in lieu of a
fractional share of retained Alliance Common Stock to which such holder is
entitled pursuant to the Recapitalization Merger Agreement and the
proportionate amount of dividends or other distributions, if any, with a
record date after the Effective Time of the Recapitalization theretofore paid
with respect to such whole shares of retained Alliance Common Stock, and (2)
at the appropriate payment date, the proportionate amount of dividends or
other distributions, if any, with a record date after the Recapitalization
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole retained shares of Alliance
Common Stock. The Company does not intend to pay dividends on shares of
Alliance Common Stock following consummation of the Recapitalization.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of retained Alliance
Common Stock will be issued in connection with the Recapitalization, and such
fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of Alliance after the Recapitalization. Each
holder of shares of Alliance Common Stock exchanged pursuant to the
Recapitalization who would otherwise have been entitled to receive a fraction
of a share of retained Alliance Common Stock (after taking into account all
shares of Alliance Common Stock delivered by such holder) will receive, in
lieu thereof, a cash payment (without interest) representing such holder's
proportionate interest in the net proceeds from the sale by the Exchange Agent
(following the deduction of applicable transaction costs), on behalf of all
such holders, of the shares (the "Excess Shares") of retained Alliance Common
Stock representing such fractions. Such sale shall be made as soon as
practicable after the Recapitalization Effective Time.
CONDUCT OF BUSINESS PENDING THE RECAPITALIZATION
Pursuant to the Recapitalization Merger Agreement, Alliance has agreed to
carry on its business and that of its subsidiaries prior to the
Recapitalization Effective Time in the ordinary course of business consistent
with past practice. See "CERTAIN PROVISIONS OF THE RECAPITALIZATION MERGER
AGREEMENT--Conduct of Business."
CONDITIONS TO THE CONSUMMATION OF THE RECAPITALIZATION
The Recapitalization Merger Agreement contains various conditions, including
the receipt of the necessary stockholder approval and financing, the Investor
having received advice from Ernst & Young LLP that the Recapitalization
qualifies for recapitalization accounting treatment, Alliance having taken
appropriate steps to arrange the payment or prepayment of certain capital
leases and other financing obligations, the expiration or termination of the
waiting period under the HSR Act, which waiting period has expired, the
absence of any injunction or other legal restraint or prohibition preventing
the consummation of the Merger and there not having occurred any material
adverse change in respect of Alliance. The Recapitalization Merger Agreement
also contains certain customary conditions relating to the accuracy of the
representations and warranties, the performance of the covenants and
agreements, consents having been obtained or filings having been made and
holders of less than 10% of the outstanding shares of Alliance Common Stock
having validly elected to demand appraisal of their shares. Subject to
applicable law, each of the conditions other than the condition requiring
shareholder approval, may be waived. Alliance does not intend to resolicit a
vote of its shareholders on the Recapitalization Merger Agreement in the event
any material conditions are waived, unless such waiver results in a
fundamental change in the Recapitalization, including a material change in
accounting or tax treatment, in which event Alliance has undertaken to
resolicit the vote of its shareholders and would amend this Proxy
Statement/Prospectus. However, the Investor has agreed, pursuant to the
Stockholder Agreement, not to waive any condition so as to reduce the value of
the consideration payable in the Recapitalization, materially adverse
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affect the timing of the closing of the Recapitalization, reduce the Cash
Merger Price or otherwise adversely affect the interests of the Principal
Stockholders. See "CERTAIN PROVISIONS OF THE RECAPITALIZATION MERGER
AGREEMENT--Conditions" and "REGULATORY APPROVALS."
ANTICIPATED ACCOUNTING TREATMENT
The Recapitalization will be accounted for as a recapitalization.
Accordingly, the historical basis of Alliance's assets and liabilities will
not be impacted by the transaction.
EFFECT ON WARRANTS AND ALLIANCE STOCK OPTIONS
Pursuant to the Recapitalization Merger Agreement, as soon as practicable
following the date of the Recapitalization Merger Agreement but in no event
later than the Recapitalization Effective Time, except as described below,
Alliance (or, if appropriate, the Board of Directors of Alliance or any
committee administering the Stock Option Plans (as defined below)) will take
action, including by adopting resolutions or taking any other actions, so as
to allow each outstanding option to purchase Shares (an "Alliance Stock
Option") heretofore granted under any stock option, stock appreciation rights
or stock purchase plan, program or arrangement of Alliance (collectively, the
"Stock Option Plans") and each outstanding warrant or other right or option to
purchase Shares (a "Warrant"), in each case outstanding immediately prior to
the date hereof, whether or not then exercisable, either (i) to be canceled at
the Recapitalization Effective Time in exchange for an amount in cash, payable
at the time of such cancellation, equal to the product of (x) the number of
shares of Alliance Common Stock subject to such Alliance Stock Option or
Warrant immediately prior to the Recapitalization Effective Time and (y) the
excess of the Cash Merger Price over the per share exercise price of such
Alliance Stock Option or Warrant (the "Net Amount") or (ii) to be converted
immediately prior to the Recapitalization Effective Time into the right solely
to receive the Net Amount; provided, that no such cash payment has been made.
The Company will continue to be obligated to pay the Net Amount to holders of
any Alliance Stock Options or Warrants converted in accordance with the
foregoing.
Substantially all of the stock options held by Alliance's executive officers
will become fully vested at the Recapitalization Effective Time. Pursuant to
agreements entered into as of November 10, 1997, between Alliance and certain
of its executive officers, options to purchase 70,000 shares of Alliance
Common Stock with an aggregate value of approximately $0.5 million (the
"Rollover Amount") will not be cancelled but will instead remain outstanding
following the Recapitalization Effective Time. The value of each option was
calculated by subtracting the exercise price per share of Alliance Common
Stock from the Cash Merger Price.
Such options are held by management and other Alliance employees, and
substantially all of Alliance's warrants are held by certain of Alliance's
current and former institutional lenders. The total value of the options and
warrants to be paid is approximately $9.9 million and $2.1 million,
respectively. See "THE RECAPITALIZATION--Interests of Certain Persons in the
Recapitalization."
EFFECT ON PREFERRED STOCK
The Recapitalization Merger Agreement requires Alliance to cause all of its
currently outstanding shares of preferred stock (solely comprising 3,876
shares of Series C Preferred Stock and 18,000 shares of Series D Preferred
Stock) to be redeemed or converted into shares of Alliance Common Stock on or
prior to the Special Meeting Date. All of the Series C Preferred Stock was
converted into Alliance Common Stock prior to the Record Date and,
accordingly, holders thereof may vote on the Recapitalization. The Series C
Preferred Stock was converted into 80,206 shares of Alliance Common Stock
representing 0.6% of the outstanding Alliance Common Stock (assuming
conversion of all outstanding preferred stock). The holder of the Series D
Preferred Stock has agreed that its shares of Series D Preferred Stock shall
be automatically converted into Alliance Common Stock immediately prior to the
closing of the Recapitalization. The outstanding shares of Series D Preferred
Stock are convertible into 3,000,000 shares of Alliance Common Stock,
representing approximately 21.4% of the outstanding Alliance Common Stock
(assuming conversion of all outstanding preferred stock). As
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of the Record Date, the holder of the Series D Preferred Stock did not convert
its Series D Preferred Stock into Alliance Common Stock. Accordingly, such
holder will not be entitled to vote on the Recapitalization.
Prior to the conversion of the Series C Preferred Stock in September 1997,
10,943,138 shares of Alliance Common Stock were outstanding; 11,023,344 shares
of Alliance Common Stock were outstanding after conversion of all Series C
Preferred Stock. The conversion of the Series D Preferred Stock will increase
the number of outstanding shares of Alliance Common Stock to 14,023,344,
assuming no additional issuance of Alliance Common Stock from the exercise of
outstanding stock options.
In connection with the Recapitalization, Apollo will purchase $15 million of
a new issue of Alliance's Series F Preferred Stock. Alliance decided to issue
the Series F Preferred Stock in connection with the Recapitalization because
additional equity financing was required in order for Alliance to consummate
the Recapitalization. The terms of the Series F Preferred Stock were
determined through negotiations between Alliance and Apollo. See "--Background
of the Recapitalization" and "DESCRIPTION OF ALLIANCE CAPITAL STOCK--Series F
Preferred Stock."
POSSIBLE DELISTING; TERMINATION OF SEC REPORTING
Following the consummation of the Recapitalization, Alliance may be required
to or may seek to have the Alliance Common Stock, which is currently traded on
the Nasdaq SmallCap Market, delisted and may deregister under the Exchange
Act. See "RISK FACTORS--Possible Delisting; Loss of Liquidity" and "RISK
FACTORS--Termination of SEC Reporting."
RESALE OF ALLIANCE COMMON STOCK FOLLOWING THE RECAPITALIZATION
Alliance Common Stock to be retained in connection with the Recapitalization
will be freely transferable, except that shares retained by any stockholder
who is an "affiliate" (as defined under the Securities Act and generally
including, without limitation, directors, certain executive officers and
beneficial owners of 10% or more of a class of capital stock) of Alliance for
purposes of Rule 145 under the Securities Act will not be transferable except
pursuant to an effective registration statement or an exemption from the
registration requirements of the Securities Act. This Proxy
Statement/Prospectus does not cover sales of Alliance Common Stock retained by
any person who is an affiliate of Alliance.
CONVERSION OF NEWCO STOCK
By virtue of the Recapitalization, the shares of common stock, par value
$.01, of Newco that are issued and outstanding immediately prior to the
Recapitalization Effective Time will be converted into and become 3,632,222
shares of Alliance Common Stock.
CERTAIN TAX CONSEQUENCES OF THE RECAPITALIZATION
This discussion contains a summary of the opinion of Irell & Manella LLP,
counsel to Alliance ("Counsel"), as to the material United States federal
income tax ("U.S. federal income tax") consequences of the Recapitalization.
Such opinion is not binding upon the Internal Revenue Service (the "Service")
and no assurance can be given that the Service will not take contrary
positions. If the Service were to assert positions contrary to the U.S.
federal income tax consequences described herein and in the opinion, the
consequences so described, if properly presented to a court, should prevail.
However, there is a risk that such contrary positions of the Service might
ultimately be sustained by the courts. The opinion of Counsel is not binding
on the courts, and should not be construed as a guarantee of ultimate results.
This discussion does not purport to be a complete analysis or discussion of
all potential tax considerations or consequences relevant to a decision
whether to vote for the approval of the Recapitalization. The discussion does
not address all aspects of U.S. federal income taxation that may be applicable
to Alliance stockholders in light of their status or personal investment
circumstances including, without limitation, the alternative minimum tax. In
particular, it does not address the
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U.S. federal income tax consequences of the Recapitalization that are
applicable to Alliance's stockholders subject to special U.S. federal income
tax treatment including (without limitation) persons who are not U.S. citizens
or residents, foreign persons, insurance companies, tax-exempt entities,
retirement plans, dealers in securities, persons who acquired their Alliance
Common Stock pursuant to the exercise of employee stock options or otherwise
as compensation and persons who hold their Alliance Common Stock as part of a
"straddle," "hedge" or "conversion transaction."
The discussion addresses neither the effect of any applicable state, local
or foreign tax laws, nor the effect of any federal tax laws other than those
pertaining to the U.S. federal income tax. THE FOLLOWING CONTAINS A SUMMARY OF
THE OPINION OF COUNSEL AS TO THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE RECAPITALIZATION TO CERTAIN OF ALLIANCE'S STOCKHOLDERS. THE FOLLOWING
DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES
OF EACH STOCKHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE U.S. FEDERAL
INCOME TAX CONSEQUENCES ADDRESSED IN THE FOLLOWING MAY NOT APPLY TO EACH OF
ALLIANCE'S STOCKHOLDERS. ACCORDINGLY, EACH STOCKHOLDER SHOULD CONSULT ITS OWN
TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE RECAPITALIZATION,
INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
The discussion is based on the Code, the regulations proposed or promulgated
thereunder and current administrative interpretations and judicial precedents
relating thereto, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences discussed
herein. The discussion is also based on certain customary assumptions
regarding the factual circumstances that will exist at the Recapitalization
Effective Time. If any of these factual assumptions is inaccurate, the tax
consequences of the Recapitalization could differ from those described herein.
The discussion assumes that shares of Alliance Common Stock are held as
capital assets (within the meaning of Section 1221 of the Code) at the
Recapitalization Effective Time.
Characterization of the Recapitalization for U.S. Federal Income Tax
Purposes. Subject to the assumptions, limitations and qualifications set forth
elsewhere in "--Certain Tax Consequences of the Recapitalization," Counsel is
of the opinion that for U.S. federal income tax purposes, Newco will be
disregarded as a transitory entity, and the merger of Newco with and into
Alliance will be treated as a sale of a portion of a stockholder's Alliance
Common Stock to the Investor in connection with the Recapitalization and as a
redemption of a portion of such stockholder's Alliance Common Stock by
Alliance. The number of shares of Alliance Common Stock disposed of by a
stockholder pursuant to the Recapitalization that will be treated as sold in
the Recapitalization will be equal to the total number of shares surrendered
by the stockholder multiplied by (a) the amount of cash contributed to Newco
by the Investor in exchange for Newco stock (or otherwise) prior to the
Recapitalization Effective Time (and not attributable to expenses) divided by
(b) the aggregate amount of cash paid to stockholders pursuant to the
Recapitalization. The remainder of the stockholder's shares of Alliance Common
Stock disposed of in the Recapitalization will be treated as redeemed by
Alliance. Because the Actual Retained Share Number is limited to 411,358
shares of Alliance Common Stock and stockholders making a Retained Share
Election will be subject to pro rata reduction in the event the number of
shares of Alliance Stock for which elections to retain such shares are validly
made exceeds the Actual Retained Share Number, there can be no assurance that
a stockholder making an election will be able to retain all of its shares of
Alliance Common Stock. See "--Stockholders Receiving Cash" below for a
discussion of the consequences of cash being deemed paid in redemption of
Alliance Common Stock.
Stockholders Receiving Cash. Subject to the assumptions, limitations and
qualifications set forth elsewhere in "--Certain Tax Consequences of the
Recapitalization," Counsel is of the opinion that the material U.S. federal
income tax consequences of the Recapitalization with respect to a particular
stockholder who receives cash (including cash paid to dissenters and cash in
lieu of fractional shares) are as set forth herein. As described more fully
below, the U.S. federal income tax consequences of the Recapitalization with
respect to a particular
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stockholder who receives cash (including cash paid to dissenters and cash paid
in lieu of fractional shares) will depend upon, among other things, (i) the
extent to which a stockholder is deemed to have sold its Alliance Common Stock
in the Recapitalization or is deemed to have had its shares of Alliance Stock
redeemed by Alliance and (ii) whether the deemed redemption of a holder's
Alliance Common Stock by Alliance will qualify as a sale or exchange under
Section 302 of the Code. First, to the extent that a stockholder is considered
to have sold Alliance Common Stock in the Recapitalization, such stockholder
will recognize either capital gain or loss in an amount equal to the
difference between (x) the number of shares treated as sold in the
Recapitalization multiplied by $11.00 and (y) the stockholder's adjusted tax
basis in such shares. Such gain or loss generally will be mid-term capital
gain or loss, currently taxable at a maximum rate of 28% (for individuals), in
respect of Alliance Common Stock held by the stockholder for more than one
year and long-term capital gain or loss, currently taxable at a maximum rate
of 20% (for individuals; which rate may be 10% for individuals in lower tax
brackets), in respect of Alliance Common Stock held by the stockholder for
more than 18 months. Second, a stockholder also will recognize either capital
gain or loss equal to the difference between (x) the number of shares treated
as redeemed by Alliance multiplied by $11.00 and (y) the stockholder's
adjusted tax basis in such Common Stock, if such redemption is treated as a
sale or exchange under Section 302 of the Code with respect to such
stockholder. Such gain or loss will also generally be mid-term or long-term
capital gain or loss in respect of Alliance Common Stock held by an individual
stockholder for more than one year or 18 months, respectively.
Under Section 302 of the Code, a redemption of Alliance Common Stock
pursuant to the Recapitalization will, as a general rule, be treated as a sale
or exchange if the redemption (a) results in a "complete termination" of the
stockholder's interest in Alliance, (b) is "substantially disproportionate"
with respect to the stockholder or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder. In determining whether any of these
Section 302 tests is satisfied, stockholders must take into account not only
Alliance Common Stock that they actually own, but also any Alliance Common
Stock they are "deemed" to own under the constructive ownership rules set
forth in Section 318 of the Code. Pursuant to these constructive ownership
rules, a stockholder will be deemed to own stock that is actually or
constructively owned by certain members of his or her family (spouse,
children, grandchildren and parents) and other related parties including, for
example, certain entities in which such stockholder has a direct or indirect
interest (including partnerships, estates, trusts and corporations), as well
as shares of stock that such stockholder (or a related person) has the right
to acquire upon exercise of an option or conversion right. In addition, if a
stockholder lives in a community property state, the community property laws
of that state may have an effect on the constructive ownership rules.
Stockholders who live in a community property state should consult their own
advisors with respect to the impact of community property laws on the
constructive ownership rules. Section 302(c)(2) of the Code provides certain
exceptions to the family attribution rules for the purpose of determining a
"complete termination." If a stockholder intends to rely upon these
exceptions, the stockholder must file a "waiver of family attribution"
statement with his tax return and must comply with certain other requirements
set forth in the Code and Regulations.
The redemption of a stockholder's shares of Alliance Common Stock will
result in a "complete termination" of a stockholder's interest in Alliance if
either (a) all Alliance Common Stock actually and constructively owned by the
stockholder is redeemed or sold pursuant to the Recapitalization or (b) all of
the Alliance Common Stock actually owned by the stockholder is redeemed or
sold pursuant to the Recapitalization and the stockholder is eligible to
waive, and does effectively waive in accordance with Section 302(c) of the
Code, attribution of all Alliance Common Stock which otherwise would be
considered to be constructively owned by such stockholder. Such waiver of
attribution applies only to Alliance Common Stock that would be attributed to
a stockholder from members of such stockholder's family. Stockholders should
consult their own tax advisors with respect to the application of the
"complete termination" test to their particular facts and circumstances.
The redemption of a stockholder's Alliance Common Stock will be
"substantially disproportionate" with respect to such stockholder if the
percentage of Alliance Common Stock actually and constructively owned by such
stockholder immediately following the Recapitalization is less than 80% of the
percentage of Alliance Common Stock actually and constructively owned by such
stockholder immediately prior to the Recapitalization and is less than 50% of
the total Alliance Common Stock outstanding after the Recapitalization.
Stockholders
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should consult their own tax advisors with respect to the application of the
"substantially disproportionate" test to their particular facts and
circumstances. Waiver of family attribution is not available in applying the
"substantially disproportionate" test.
Even if the redemption of a stockholder's Alliance Common Stock fails to
satisfy the "complete termination" test and the "substantially
disproportionate" test described above, the redemption of a stockholder's
Alliance Common Stock may nevertheless satisfy the "not essentially equivalent
to a dividend" test if the stockholder's redemption of Alliance Common Stock
pursuant to the Recapitalization results in a "meaningful reduction" in such
stockholder's proportionate Alliance Common Stock interest in Alliance.
Whether the receipt of cash by a stockholder will be considered "not
essentially equivalent to a dividend" will depend upon such stockholder's
particular facts and circumstances. No general guidelines indicating the facts
and circumstances under which a redemption will be considered to produce a
meaningful reduction in proportionate interest have been provided by the
courts or issued by the Service. However, the Service has clearly stated its
position that if no reduction in percentage interest occurs, none of the
Section 302 tests will be satisfied. Stockholders should consult with their
own tax advisors as to the application of this test in their particular
situation. Waiver of family attribution is not available in the context of the
"not essentially equivalent to a dividend" test.
In assessing whether the redemption of a stockholder's shares of Alliance
Common Stock satisfies the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test described above, stockholders
should consider the fact that the Recapitalization will substantially reduce
the number of outstanding shares of Alliance Common Stock. As a result, if a
stockholder elects to retain a portion of its Alliance Common Stock, the
stockholder's percentage interest in Alliance Common Stock of Alliance may not
be reduced even if the stockholder receives cash for a substantial portion of
its Alliance Common Stock. Stockholders should consult their own tax advisors
as to the impact of the reduction in the outstanding shares of Alliance Common
Stock on the application of the "substantially disproportionate" and "not
essentially equivalent to a dividend" tests described above.
With respect to shares of Alliance Common Stock treated as redeemed, if a
stockholder cannot satisfy any of the three tests described above and to the
extent Alliance has sufficient current and/or accumulated earnings and
profits, such stockholder will be treated as having received a dividend which
will be includible in gross income (and treated as ordinary income) in an
amount equal to that portion of the cash received with respect to the deemed
redemption of the Alliance Common Stock. In addition, the stockholder's basis
in such Alliance Common Stock disposed of will not offset the amount of cash
received, but instead will be reallocated to shares of Alliance Common Stock
still held by such stockholder or, although the matter is not free from doubt,
if no shares are actually owned, reallocated to those shares constructively
owned, under certain circumstances. To the extent that a portion of the cash
received with respect to the deemed redemption of the shares of Alliance
Common Stock exceeds the current and/or accumulated earnings and profits of
Alliance attributable to the retained and (deemed) redeemed shares of Alliance
Common Stock, such excess will first be treated as a non-taxable return of
capital to the extent of the basis attributable to such retained and (deemed)
redeemed shares and then as a capital gain. Such capital gain will be short-
term, mid-term or long-term depending on the holding period for the retained
shares. If a stockholder acquired shares of Alliance Common Stock at different
times and/or at different prices, the application of the rules for basis
reduction, gain recognition and type of capital gain is unclear. Stockholders
in such situation should consult their tax advisors to determine an
appropriate methodology for determining the amounts of basis reduction and
gain recognition and type of capital gain, if any, recognized.
To the extent that one of the three tests described above is satisfied, a
stockholder will be treated as having sold its Alliance Common Stock, which
will generally give rise to mid-term or long-term capital gain or loss in
respect of Alliance Common Stock held by the individual stockholder for more
than 12 or 18 months, respectively. While the marginal tax rates for dividends
and capital gains are the same for corporate stockholders, the current maximum
U.S. federal income tax rate on ordinary income and short-term capital gains
of individuals (39.6%) exceeds the maximum tax rate on mid-term capital gains
(28%) and on long-term capital gains (20%).
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In addition, capital gain can generally be offset by any capital loss that an
individual stockholder may have incurred, whereas capital loss of a
corporation may not offset ordinary income, and capital loss of an individual
can only offset ordinary income to the extent of $3,000 per year (subject to
carryover).
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, such dividend income may be eligible for the 70% (or 80% if more
than 20% of the vote and value of Alliance Common Stock is held by such
corporate stockholder) dividends-received deduction. The dividends-received
deduction is subject to certain limitations, and may not be available if the
corporate stockholder does not satisfy certain holding period requirements
with respect to Alliance Common Stock or if Alliance Common Stock is treated
as "debt financed portfolio Stock" within the meaning of Code Section 246A(c).
Additionally, if a dividends-received deduction is available, the dividend may
be treated as an "extraordinary dividend" under Section 1059(a) of the Code,
in which case a corporate stockholder's adjusted tax basis in Alliance Common
Stock retained by such stockholder would be reduced, but not below zero, by
the amount of the nontaxed portion of such dividend. Any amount of the
nontaxed portion of the dividend in excess of the corporate stockholder's
adjusted tax basis generally will be subject to taxation when the
extraordinary dividend is received. Corporate stockholders are urged to
consult their own tax advisors as to the effect of Section 1059 of the Code.
BECAUSE THE DETERMINATION OF WHETHER THE RECEIPT OF CASH WILL BE TREATED AS
HAVING THE EFFECT OF THE DISTRIBUTION OF A DIVIDEND WILL GENERALLY DEPEND UPON
THE FACTS AND CIRCUMSTANCES OF EACH ALLIANCE STOCKHOLDER, ALLIANCE'S
STOCKHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE TAX TREATMENT OF CASH RECEIVED IN THE RECAPITALIZATION.
The ability to elect the type of consideration to be received pursuant to
the Recapitalization affords each stockholder some flexibility in selecting
the type of consideration that will best serve his or her personal tax and
financial planning needs. However, each stockholder should be aware that his
or her ability to satisfy (or, alternatively, fail to satisfy) any of the
foregoing tests and thereby avoid (or, alternatively, obtain) dividend
treatment may be affected by the various adjustments, pro-rations and
allocations of the Recapitalization consideration. Stockholders may receive
more or less cash than may be anticipated at the time an election to receive
cash or retain shares is made.
Stockholders Retaining Alliance Common Stock and Receiving No Cash. Subject
to the assumptions, limitations and qualifications set forth elsewhere in "--
Certain Tax Consequences of the Recapitalization," Counsel is of the opinion
that the Recapitalization will have no U.S. federal income tax consequences
for stockholders who retain their Alliance Common Stock and receive no cash.
Accordingly, a stockholder will not recognize any gain or loss on any Alliance
Common Stock retained by such stockholder.
Stockholders Retaining a Portion of their Alliance Common Stock and
Receiving Cash. Subject to the assumptions, limitations and qualifications set
forth elsewhere in "--Certain Tax Consequences of the Recapitalization,"
Counsel is of the opinion that to the extent that a stockholder elects to
retain a portion of its Alliance Common Stock and exchange a portion of its
Alliance Common Stock for cash and does receive cash, or to the extent a
stockholder receives cash in exchange for some portion of its Alliance Common
Stock as a result of proration, the tax treatment of the stockholder's receipt
of such cash will be the same as set forth above under "--Stockholders
Receiving Cash."
Information Reporting and Backup Withholding. Alliance must report annually
to the Service and to each stockholder the amount of dividends paid to such
stockholder and the backup withholding tax, if any, withheld with respect to
such dividends. Backup withholding is a withholding tax imposed at the rate of
31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements. Payment of the
proceeds of a sale of Alliance Common Stock by or through a United States
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner establishes an exemption. Any amounts
withheld under the backup withholding rules may be allowed as a refund or a
credit against the holder's U.S. federal income tax liability provided the
required information is furnished to the Service.
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CERTAIN PROVISIONS OF THE RECAPITALIZATION MERGER AGREEMENT
The following is a brief summary of the Recapitalization Merger Agreement,
as amended, a copy of which appears as Annex A to this Proxy
Statement/Prospectus and is incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Recapitalization Merger
Agreement, as amended.
Pursuant to the Recapitalization Merger Agreement, if the Recapitalization
Merger Agreement is approved by the holders of a majority of Alliance's Common
Stock eligible to vote at the Special Meeting and the other conditions to the
Recapitalization are satisfied or waived, at the Recapitalization Effective
Time, the separate corporate existence of Newco will cease, the Company will
continue as the surviving corporation and each share of Alliance Common Stock
issued and outstanding immediately prior to the Recapitalization Effective
Time, other than shares of Alliance Common Stock held by stockholders of
Alliance, if any, who dissent from the Recapitalization and comply with all of
the provisions of the DGCL concerning the right of holders of shares of
Alliance Common Stock to seek appraisal of their shares of Alliance Common
Stock, either (1) will be converted into the right to receive $11.00 in cash
or (2) will be retained by such stockholder. See "THE RECAPITALIZATION."
Termination of the Recapitalization Merger Agreement. The Recapitalization
Merger Agreement provides that it may be terminated at any time prior to the
Recapitalization Effective Time, whether before or after approval of the terms
of the Recapitalization Merger Agreement by the stockholders of Alliance, as
follows:
(a) by mutual written consent of the Investor and Alliance; (b) by either
the Investor or Alliance if the Recapitalization Effective Time shall not
have occurred on or before December 31, 1997 (provided that the right to
terminate the Recapitalization Merger Agreement under this clause (b) shall
not be available to any party whose failure to fulfill any obligation under
the Recapitalization Merger Agreement has been the cause of or resulted in
the failure of the Recapitalization Effective Time to occur on or before
such date); (c) by either the Investor or Alliance if any governmental
entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibiting the
Recapitalization and such order, decree or ruling or other action shall
have become final and nonappealable; (d) by either the Investor or Alliance
if the approval of the Recapitalization Merger Agreement and the
Recapitalization by Alliance's stockholders is not obtained by reason of
the failure to obtain the required vote upon a vote held at a duly called
meeting of stockholders or at any adjournment thereof; (e) by the Investor,
if (x) any of the representations and warranties of Alliance contained in
the Recapitalization Merger Agreement shall fail to be true and correct in
any material respect, in each case either when made or (except for
representations and warranties made only as of a specific date) have since
become, and at the time of termination remain, untrue in any material
respect, or (y) Alliance shall have breached or failed to comply in any
material respect with any of its obligations under the Recapitalization
Merger Agreement (other than as a result of a breach by the Investor or
Newco of any of their obligations under the Recapitalization Merger
Agreement) and such breach or failure shall continue unremedied for ten
(10) days after Alliance has received written notice from the Investor or
the Newco of the occurrence of such breach or failure; provided, however,
that in remedying any such breach or failure Alliance shall not have spent
any money, incurred any liabilities or undertaken any obligations that,
individually or together with the breach or failure so remedied, would
itself constitute a breach of or failure to perform any representation,
warranty or covenant of the Recapitalization Merger Agreement; (f) by the
Investor if there shall have occurred any change or event that,
individually or in the aggregate, with any other change or event, is
materially adverse to the assets, properties, business, financial
condition, results of operations or prospects of Alliance, taken as a
whole; (g) by either the Investor or Alliance if, prior to the
Recapitalization Effective Time, (i) the Board of Directors determines that
a Third Party Proposal (as defined below) for an Alternative Transaction
(as defined below) constitutes a Superior Proposal (as defined below), (ii)
Alliance promptly notifies the Investor of its determination in writing,
which writing shall set forth the terms and conditions of the Third Party
Proposal and the identity of the person making the Third Party Proposal,
(iii) ten days have elapsed following receipt by the Investor of such
written notice, (iv) during such ten day period Alliance cooperates with
the Investor with the intent of enabling, but not obligating, the Investor
and Alliance to agree to a modification of the terms and conditions of the
Recapitalization Merger Agreement so that the transactions contemplated
thereby may be effected and (v) at the end of such ten day period, the
Board of Directors continues to believe that such Third Party
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Proposal constitutes a Superior Proposal and Alliance pays to the Investor
the amount specified under the section below entitled "Fees and Expenses"
or (h) by Alliance if (i) any of the representations and warranties of the
Investor or Newco contained in the Recapitalization Merger Agreement shall
fail to be true and correct in any material respect, in each case either
when made or (except for representations and warranties made only as of a
specific date) have since become, and at the time of termination remain,
untrue in any material respect, or (ii) the Investor or the Newco shall
have breached or failed to comply in any material respect with any of its
obligations under the Recapitalization Merger Agreement (other than as a
result of a breach by Alliance of any of its obligations under the
Recapitalization Merger Agreement) and such breach or failure shall
continue unremedied for ten (10) days after the Investor or the Newco has
received written notice from Alliance of the occurrence of such breach or
failure; provided, however, that in remedying any such breach or failure
neither the Investor nor Newco shall have spent any money, incurred any
liabilities or undertaken any obligations that, individually or together
with the breach or failure so remedied, would itself constitute a breach of
or failure to perform any representation, warranty or covenant of the
Recapitalization Merger Agreement.
For purposes of the Recapitalization Merger Agreement, a "Superior Proposal"
means any Third Party Proposal to acquire, directly or indirectly, at least
80% of the shares of Alliance Common Stock or all or substantially all of the
assets of Alliance; provided that (i) the Board of Directors of Alliance
determines in its good faith judgment (following consultation with and the
receipt of the advice of Alliance's financial advisor) that such Third Party
Proposal is on terms that are more favorable to Alliance's stockholders than
the Recapitalization (taking into account all factors that the Board of
Directors reasonably deems relevant, including, in the judgment of the Board
of Directors, the amount and form of consideration to be received in respect
of shares of Alliance Common Stock, and the timing of, and likelihood of
closing such proposal and the relative value of any non-cash consideration)
and (ii) the Board of Directors of Alliance determines in its good faith
judgment (following receipt of the written advice of its outside counsel) that
the failure to recommend or accept such Third Party Proposal would violate the
fiduciary duties of the Board of Directors of Alliance to its stockholders
under applicable law.
Alternative Transactions. The Recapitalization Merger Agreement provides
that Alliance shall, shall cause each Subsidiary to and shall direct and use
reasonable efforts to cause its and its Subsidiaries' officers, directors,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties other than Investor and Newco that may be
ongoing with respect to an Alternative Transaction (as defined below). The
Recapitalization Merger Agreement further provides that Alliance shall not,
shall cause each of its Subsidiaries not to and shall not authorize and shall
direct and use reasonable efforts to cause its and its Subsidiaries' officers,
directors, employees and any investment banker, financial advisor, attorney,
accountant or other representative retained by it not to, directly or
indirectly, (i) solicit, initiate or encourage (including by way of furnishing
information), or take any other action to facilitate, any inquiries or the
making of any proposal that may lead to an Alternative Transaction or (ii)
participate in any discussions or negotiations regarding any proposed
Alternative Transaction; provided, however, that if, during the 45 days
following the date of the Recapitalization Merger Agreement, the Board of
Directors determines in good faith, after consultation with its financial
advisors, and following receipt of written advice from outside counsel, that
action is required by reason of Alliance's Board of Directors' fiduciary
duties to Alliance's stockholders under applicable law, Alliance may (subject
to compliance with Alliance's notification obligations discussed below),
during such 45 day period, in response to an unsolicited Third Party Proposal
(as defined below), (A) furnish information with respect to Alliance to the
person making such Third Party Proposal pursuant to a confidentiality
agreement that is at least as protective of Alliance's interests as is the
Confidentiality Agreement (as defined below), (B) participate in negotiations
regarding such Third Party Proposal and (C) take any position (and disclose
such position to its stockholders) with regard to such Third Party Proposal
pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act;
provided, however, that in the case of clause (C), (x) Alliance shall have
provided the Investor and Newco with as much advance notice of its position
and proposed disclosure as is practicable under the circumstances and (y)
neither Alliance nor its Board of Directors nor any committee thereof shall,
except as permitted below, withdraw or modify its position with respect to the
Recapitalization or the Recapitalization Merger Agreement or approve or
recommend such Third Party Proposal.
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For purposes of the Recapitalization Merger Agreement, a "Third Party
Proposal" means a bona fide proposal from a third party, which proposal did
not result from a breach of the foregoing by Alliance and which third party
the Board of Directors of Alliance determines in good faith, taking into
account all factors that the Board of Directors reasonably deems relevant and
upon the advice of Alliance's financial advisor, has the capacity and is
reasonably likely to have the ability to consummate a Superior Proposal. For
purposes of the Recapitalization Merger Agreement, an "Alternative
Transaction" means any direct or indirect acquisition or purchase of assets of
Alliance or any subsidiary thereof outside the ordinary course of business or
any outstanding equity securities of Alliance or any subsidiary thereof, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning equity securities of Alliance or any merger,
consolidation, business combination, sale of substantially all the assets,
recapitalization, liquidation, dissolution or similar transaction involving
Alliance, other than the transactions contemplated by the Recapitalization
Merger Agreement and other than the acquisition of shares of Alliance Common
Stock pursuant to the exercise of Alliance Stock Options or Warrants that are
issued and outstanding as of July 23, 1997 or the conversion of Alliance's
Series C preferred stock (the "Alliance Series C Shares") or Alliance's Series
D preferred stock (the "Alliance Series D Shares").
Neither the Board of Directors nor any committee thereof shall (i) withdraw
or modify the approval or recommendation by such Board of Directors or such
committee of the Recapitalization Merger Agreement or the Recapitalization,
(ii) approve or recommend any Alternative Transaction or (iii) cause Alliance
to enter into any letter of intent, agreement in principle, acquisition
agreement or other agreement, including any exclusivity agreement (an
"Acquisition Agreement"), with respect to an Alternative Transaction unless
the Board of Directors of Alliance shall have previously terminated the
Recapitalization Merger Agreement pursuant to clause (g) under the Section
above entitled "Termination of the Recapitalization Merger Agreement."
In addition to the obligations of Alliance set forth above, the
Recapitalization Merger Agreement requires Alliance (i) to immediately advise
the Investor orally and in writing of any request for information or of any
proposal or any inquiry regarding any Alternative Transaction, the material
terms and conditions of such request, proposal or inquiry and the identity of
the person making such request, proposal or inquiry and (ii) to keep the
Investor fully informed of the status and details (including amendments or
proposed amendments) of any such request, proposal or inquiry.
Fees and Expenses. The Recapitalization Merger Agreement provides, in
general, that all fees and expenses incurred in connection with the
Recapitalization, the Recapitalization Merger Agreement and the transactions
contemplated by the Recapitalization Merger Agreement shall be paid by the
party incurring such fees or expenses, whether or not the Recapitalization is
consummated. However, certain termination fees and expenses are payable under
the Recapitalization Merger Agreement, as follows:
(a) If the Recapitalization Merger Agreement is terminated (i) pursuant
to clause (g) under the section above entitled "Termination of the
Recapitalization Merger Agreement," (ii) by the Investor pursuant to clause
(b) or clause (e) under the section above entitled "Termination of the
Recapitalization Merger Agreement" as a result of any willful breach by
Alliance of any covenant or agreement made in the Recapitalization Merger
Agreement or (iii) by the Investor pursuant to clause (b) or clause (e)
under the section above entitled "Termination of the Recapitalization
Merger Agreement" as a result of any failure or failures to be true as of
the date thereof of one or more of the representations and warranties made
by Alliance in the Recapitalization Merger Agreement, which failures to be
true are reasonably expected to have an aggregate negative impact on the
value of Alliance and its subsidiaries, taken as a whole (a "Negative
Impact"), of $25 million or more, Alliance shall pay to the Investor within
90 days of such termination (except for any termination pursuant to clause
(g), in which case payment shall be made promptly upon such termination),
$10 million (or, in the case of clause (iii), $5 million) plus all Expenses
(as defined below).
(b) If the Recapitalization Merger Agreement is terminated (i) by the
Investor pursuant to clause (b) or clause (e) under the section above
entitled "Termination of the Recapitalization Merger Agreement" as a result
of any breach by Alliance, other than a willful breach, of any covenant or
agreement made in the Recapitalization Merger Agreement, (ii) by the
Investor pursuant to clause (b) or clause (e) under the section
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above entitled "Termination of the Recapitalization Merger Agreement" as a
result of any failure or failures to be true as of the date of the
Recapitalization Merger Agreement of one or more representations and
warranties made by Alliance in the Recapitalization Merger Agreement which
failures to be true in the aggregate have a Negative Impact of less than
$25 million, (iii) by the Investor pursuant to clause (b) or clause (e)
under the section above entitled "Termination of the Recapitalization
Merger Agreement" as a result of any failure or failures to be true as of
the time of such termination one or more representations and warranties,
which representations and warranties were true as of the date of the
Recapitalization Merger Agreement, (iv) by the Investor pursuant to clause
(b) under the section above entitled "Termination of the Recapitalization
Merger Agreement" as a result of a failure to satisfy the condition to the
Investor's and Newco's obligations of no material adverse change having
occurred or (v) pursuant to clause (f) under the section above entitled
"Termination of the Recapitalization Merger Agreement," Alliance shall
promptly pay to the Investor all Expenses (as defined below), and, if,
within 180 days of such termination either an Alternative Transaction shall
be consummated or Alliance shall enter into an Acquisition Agreement
providing for an Alternative Transaction (in either event, the "Tail
Condition"), then Alliance shall pay to the Investor, upon the closing of
such transaction, if and whenever it occurs, $5 million.
(c) If the Recapitalization Merger Agreement is terminated by the
Investor pursuant to clause (b) under the section above entitled
"Termination of the Recapitalization Merger Agreement" as a result of a
failure to obtain the approval of the Recapitalization Merger Agreement and
the Recapitalization or pursuant to clause (d) under the section above
entitled "Termination of the Recapitalization Merger Agreement," Alliance
shall pay to the Investor all Expenses, and if the Tail Condition is
subsequently satisfied, shall pay to the Investor upon the closing of the
relevant transaction, if and whenever it occurs, $10 million; provided,
however that no amounts whatsoever shall be payable to the Investor under
this clause (c) if, at the Special Meeting or any adjournments or
postponements thereof, the Investor fails to vote or cause to be voted, or
fails to grant or to cause the granting of consent or approval with respect
to, any shares of Alliance Common Stock owned by Alliance or any Affiliate
thereof or as to which it or any Affiliate thereof has voting rights in
favor of the Recapitalization Merger and the adoption by Alliance of the
Recapitalization Merger Agreement and Recapitalization.
(d) If the Recapitalization Merger Agreement is terminated (i) by the
Investor pursuant to clause (b) under the section above entitled
"Termination of the Recapitalization Merger Agreement" in connection with
the failure of any of the conditions set forth in any of the following:
clause (b), (c) or (d) under the conditions to each party's obligations to
effect the Recapitalization as set forth below in the section entitled
"Conditions" or clause (b), (d), (e), (f), (g), (h) or (i) under the
conditions to the Investor's and Newco's obligations to effect the
Recapitalization as set forth below in the section entitled "Conditions"
and the Tail Condition is subsequently satisfied or (ii) by the Investor
pursuant to clause (c) under the section above entitled "Termination of the
Recapitalization Merger Agreement" and the Tail Condition is subsequently
satisfied, Alliance shall pay to the Investor, upon the closing of the
relevant transaction, if and wherever it occurs, $5 million plus Expenses.
For purposes of the Recapitalization Merger Agreement, "Expenses" means all
reasonably documented out-of-pocket expenses incurred by the Investor and
Newco in connection with the Recapitalization Merger Agreement (including the
financing contemplated thereby), the Stockholder Agreement and the
transactions contemplated by the Recapitalization Merger Agreement and
thereby, including fees and expenses of its, and its financing sources',
printer, consultants, attorneys, accountants, and other advisors; provided,
however, that (i) such expenses shall not include any advisory or similar fees
paid to the Investor or any Affiliate thereof or to any investment banking
firm or placement agent retained in connection with the financing contemplated
by the Recapitalization Merger Agreement and (ii) unless Alliance has
previously agreed in writing to increase such amount, the aggregate amount of
such Expenses shall not exceed (i) $3 million if such termination occurs prior
to September 1, 1997, or (ii) $5 million if such termination occurs thereafter
(the parties further agreeing that such amounts shall be reduced, dollar for
dollar, to the extent that Alliance funds the expenses (excluding for the
services of Alliance's professionals) of filing or printing this Proxy
Statement/Prospectus or the solicitation of proxies with respect thereto).
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Conditions. The Recapitalization Merger Agreement provides that the
respective obligations of each party to effect the Recapitalization are
subject to the satisfaction or waiver, where permissible, prior to the
Recapitalization Effective Time, of the following conditions:
(a) Alliance's stockholders shall have approved the Recapitalization
Merger Agreement and the Recapitalization as required by and in accordance
with applicable law and Alliance's Second Restated Certificate of
Incorporation.
(b) No statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
governmental entity that prohibits or restricts the consummation of the
Recapitalization or makes such consummation illegal (each party agreeing to
use commercially reasonable efforts to have any such prohibition lifted).
(c) The waiting period applicable to the consummation of the
Recapitalization under the HSR Act shall have expired or been terminated.
(d) The Registration Statement on Form S-4 (or an alternative form
prescribed by the Commission) shall have been declared effective and shall
not be the subject of any stop order, unless the parties shall have
mutually determined that registration under the Securities Act is not
required with respect to the Recapitalization.
The Recapitalization Merger Agreement provides that the obligation of
Alliance to effect the Recapitalization shall be subject to the satisfaction
or waiver, prior to the proposed Recapitalization Effective Time, of the
following conditions: All of the representations and warranties of the
Investor and Newco set forth in the Recapitalization Merger Agreement shall be
true and correct in all material respects as of the date of the
Recapitalization Merger Agreement and (except for those that are expressly
made only as of another date) as of the Recapitalization Effective Time as
though made on and as of such time, and the Investor and Newco shall have
performed in all material respects all covenants and agreements required to be
performed by them under the Recapitalization Merger Agreement at or prior to
the Recapitalization Effective Time.
The Recapitalization Merger Agreement provides that the obligations of the
Investor and Newco to effect the Recapitalization shall be subject to the
satisfaction or waiver by the Investor and Newco, prior to the proposed
Recapitalization Effective Time, of the following conditions:
(a) All of the representations and warranties of Alliance set forth in
the Recapitalization Merger Agreement shall be true and correct in all
material respects as of the date thereof and (except for those that are
expressly made only as of another date) as of the Recapitalization
Effective Time as though made on and as of such time, and Alliance shall
have performed in all material respects all covenants and agreements
required to be performed by it under the Recapitalization Merger Agreement
at or prior to the Recapitalization Effective Time.
(b) None of the following shall have occurred: (i) any general suspension
of trading in, or limitation on prices for, securities on the New York
Stock Exchange or Nasdaq, (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by federal or state authorities on the extension of credit by
lending institutions, or a disruption of or material adverse change in
either the syndication market for credit facilities or the financial,
banking or capital markets, (iii) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States or (iv) in the case of any of the
foregoing existing as of July 23, 1997, a material acceleration or
worsening thereof.
(c) There shall not have occurred any material adverse change.
(d) The conditions set forth in the Financing Letters (as defined in the
Recapitalization Merger Agreement) shall have been satisfied or waived and
the funding referred to therein shall be available to the Investor and
Newco on terms no less favorable to the Investor and Newco than are set
forth in such Financing Letters, unless the failure of such conditions to
be satisfied or waived, or the non-availability of such funds, is caused
solely by any actions or failures to act of the Investor or Newco that
constitute a breach of any representation, warranty or covenant of either
of them set forth in the Recapitalization Merger Agreement.
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(e) All filings required to be made prior to the Recapitalization
Effective Time with, and all consents, approvals, authorizations and
permits required to be obtained prior to the Recapitalization Effective
Time from, any governmental entity in connection with the consummation of
the Recapitalization have been made and/or obtained, other than those the
failure of which to be made and/or obtained would not reasonably be
expected to have a material adverse effect on, or prevent or materially
delay the consummation of, the Recapitalization.
(f) All notices required to be given prior to the Recapitalization
Effective Time with, and all consents, approvals, authorizations, waivers
and amendments required to be obtained prior to the Recapitalization
Effective Time from, any third party in connection with the consummation of
the Recapitalization and the finances thereof have been made and/or
obtained (or, if the notice, consent, approval, authorization, waiver or
amendment that is not so made and/or obtained is required pursuant to the
terms of any of Alliance's indebtedness or obligations for money borrowed,
Alliance has repaid such indebtedness or obligation on or prior to the
Recapitalization Effective Time), other than those the failure of which to
be made and/or obtained would not reasonably be expected to have a material
adverse effect on, or prevent or materially delay the consummation of, the
Recapitalization; provided that Alliance shall have obtained the consents
set forth on Schedule 7.3(f) of the Recapitalization Merger Agreement.
(g) The Investor shall have received advice from Ernst & Young LLP that
the Recapitalization will qualify for recapitalization accounting treatment
in accordance with generally accepted accounting principles consistently
applied.
(h) Alliance shall have taken appropriate steps to arrange for the
payment or prepayment of capital leases, promissory notes and other loan or
financing obligations (collectively, "Obligations"; provided, that such
term shall not include (i) obligations under operating leases classified as
such in accordance with generally accepted accounting principles or (ii)
any obligations incurred from and after October 1, 1997) to which Alliance
or any subsidiary thereof is a party or by which the assets or properties
of Alliance or any subsidiary thereof is a party or by which the assets or
properties of Alliance or any subsidiary thereof are bound (including those
in respect of MRI Units and CT Units), such that, immediately following the
Recapitalization Effective Time (and assuming the receipt of equity and
debt financing by Alliance in connection with the Recapitalization, as
contemplated by the Recapitalization Merger Agreement), Alliance will be
able to pay (or prepay) the aggregate amount of all such Obligations,
including the amount of any prepayment penalties or similar payments
related thereto (but excluding from such aggregate amount (i) no more than
an aggregate principal amount of $10 million of Obligations that Alliance
elects to leave outstanding (the "Carryover Obligations") and (ii) accrued
interest on the Obligations being paid), for an amount not to exceed $76
million (assuming that all regular payments due on or before October 1,
1997 in respect of the Obligations have been paid); provided, further, that
(x) the consummation of the Recapitalization Merger will neither give rise
to a right of acceleration of, nor constitute an event of default under the
terms of, any Carryover Obligations, except, in either case, as set forth
in Schedule 7.3(h) of the Recapitalization Merger Agreement and (y)
Alliance will not incur additional indebtedness or financing obligations
(again, excluding operating leases) during the fourth quarter of 1997 in
excess of an aggregate principal or face amount thereof equal to $11
million.
(i) The holders of less than 10% of the outstanding shares of Alliance
Common Stock shall have validly elected to demand the appraisal of their
shares of Alliance Common Stock pursuant to Section 262 of the DGCL.
Subject to applicable law, each of the conditions, other than the condition
requiring stockholder approval, may be waived. Alliance does not intend to
resolicit a vote of its stockholders on the Recapitalization Merger Agreement
in the event any material conditions are waived. However, the Investor has
agreed, pursuant to the Stockholder Agreement, not to waive any condition so
as to reduce the value of the consideration payable in the Recapitalization,
materially adversely affect the timing of the closing of the Recapitalization,
reduce the Cash Merger Price or otherwise adversely affect the interests of
the Principal Stockholders.
Conduct of Business. The Recapitalization Merger Agreement provides that
until the Recapitalization Effective Time, subject to certain exceptions,
Alliance shall, and shall cause each of its subsidiaries to, carry on
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its business in the ordinary course consistent with past practice and use
reasonable efforts to preserve intact its current business organization, keep
available the services of its current officers and employees and preserve its
relationships with customers, suppliers, licensors, licensees and others
having significant business dealings with it. The Recapitalization Merger
Agreement further provides that without limiting the generality of the
foregoing, until the Recapitalization Effective Time, Alliance shall not and
shall cause each of its subsidiaries not to (except as expressly permitted by
the Recapitalization Merger Agreement or with the Investor's consent, which
consent shall be deemed given after Investor's receipt of Alliance's written
request for a waiver of a covenant, which request has not been rejected in
writing by the Investor within three days after Investor's signed receipt
thereof by overnight courier service):
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock other than regular
dividends on Alliance Series D Shares in accordance with the terms of such
securities, (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or (iii)
purchase, redeem or otherwise acquire any shares of Alliance Common Stock
or any capital stock of Alliance or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares,
voting securities or convertible securities (other than the conversion of
Alliance Series D Shares and Alliance Series C Shares, in accordance with
the terms of such securities and the issuance of shares of its capital
stock upon the exercise of Alliance Stock Options or Warrants outstanding
on July 23, 1997 in accordance with their present terms);
(c) amend its Certificate of Incorporation or Bylaws or other comparable
charter or organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets or stock of, or by any
other manner, any business or any person, other than as set forth on
Schedule 5.1 of the Recapitalization Merger Agreement, or (ii) any assets
except for the purchase of (x) equipment as identified on the Commitments
List (as defined in the Recapitalization Merger Agreement) or the schedule
of anticipated commitments, as set forth on Schedule 5.1 of the
Recapitalization Merger Agreement (the "Anticipated Commitments List"), or
(y) equipment or other assets in the ordinary course of business, provided
that the amount thereof does not exceed, individually or in the aggregate,
$1 million, other than as set forth on Schedule 5.1 of the Recapitalization
Merger Agreement;
(e) sell, lease, license, mortgage or otherwise encumber or subject to
any lien or otherwise dispose of any of its properties or assets, except
(i) immaterial assets, (ii) in the ordinary course of business (including
for trade-ins) and (iii) where the amount of such sales does not exceed,
individually or in the aggregate, $1 million;
(f) except as identified on the Commitments List (as defined in the
Recapitalization Merger Agreement), the Anticipated Commitments List or in
the ordinary course of business consistent with past practice, or as set
forth in Schedule 5.1 of the Recapitalization Merger Agreement, (i) incur
any indebtedness or guarantee any such indebtedness of another person,
issue or sell any debt securities or warrants or other rights to acquire
any debt securities of Alliance or any of its subsidiaries, guarantee any
debt securities of another person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another person
or enter into any arrangement having the economic effect of any of the
foregoing except for short-term borrowings incurred in the ordinary course
of business consistent with past practice or (ii) make any loans, advances
(other than advances to its subsidiaries or among its subsidiaries) or
capital contributions to, or investments in, any other person;
(g) make or agree to make any capital expenditure or expenditures with
respect to property, plant or equipment which, individually, is in excess
of $50,000 or, in the aggregate, are in excess of $250,000, except as
identified on the Commitments List (as defined in the Recapitalization
Merger Agreement), the
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Anticipated Commitments List or otherwise in the ordinary course of
business consistent with past practice in order to satisfy actual or
expected contractual commitments to customers, or as set forth in Schedule
5.1 of the Recapitalization Merger Agreement;
(h) make any material tax election or settle or compromise any material
income tax liability;
(i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in the most
recent consolidated financial statements (or the notes thereto) of Alliance
included in the SEC Documents (as defined in the Recapitalization Merger
Agreement) or incurred thereafter in the ordinary course of business
consistent with past practice, or waive any material benefits of, or agree
to modify in any material respect, any confidentiality, standstill, non-
solicitation or similar agreement to which Alliance or any of its
subsidiaries is a party;
(j) modify, amend or terminate any commitment to which Alliance or any of
its subsidiaries is a party, or waive, release or assign any rights or
claims, other than in the ordinary course of business consistent with past
practice;
(k) enter into any commitment relating to the provision of services by
Alliance or any of its subsidiaries, the maintenance of any MRI system or
CT systems (as such terms are defined in the Recapitalization Merger
Agreement) or the distribution, sale or marketing by third parties of
Alliance's or its subsidiaries' services, including any commitment with any
hospital, clinic, medical or healthcare provider, health maintenance
organization or other customer or third party payer, other than in the
ordinary course of business consistent with past practice;
(l) except as required to comply with applicable law or with the
Investor's consent, (i) adopt, enter into, terminate or amend any Benefit
Plan (as defined in the Recapitalization Merger Agreement) or other
arrangement for the benefit or welfare of any director, officer or current
or former employee, other than, in the case of non-officer employees, in
the ordinary course of business consistent with past practice,
(ii) increase in any manner the compensation or fringe benefits of, or pay
any bonus to, any director or officer (other than as set forth on Schedule
5.1 of the Recapitalization Merger Agreement), (iii) pay any material
benefit not provided for under any Benefit Plan, (iv) except as permitted
in clause (ii), grant any awards under any bonus, incentive, performance or
other compensation plan or arrangement or Benefit Plan (including the grant
of stock options, stock appreciation rights, stock based or stock related
awards, performance units or restricted stock or the removal of existing
restrictions in any Benefit Plans or agreement or awards made thereunder)
or (v) take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or Benefit Plan or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
Representations and Warranties. The Recapitalization Merger Agreement
contains representations and warranties of Alliance relating to, with respect
to Alliance and its subsidiaries: (a) organization; (b) capitalization; (c)
subsidiaries; (d) authority; (e) consents and approvals; no violations;
(f) SEC documents; financial statements; other financial information; (g)
information supplied; (h) absence of certain changes or events; (i)
litigation; (j) contracts; (k) compliance with laws; (l) environmental
matters; (m) absence of changes in benefit plans; labor relations; (n)
employment matters; affiliate transactions; (o) ERISA compliance; (p) taxes;
(q) title to properties; condition of assets; (r) intellectual property; (s)
non-compete; (t) voting requirements; (u) state takeover statutes; (v)
brokers; schedule of fees and expenses; (w) opinion of financial advisor; (x)
certain additional regulatory matters; (y) Medicare/Medicaid participation and
accreditation; (z) regulated customers; and (aa) insurance.
The Recapitalization Merger Agreement also contains representations and
warranties of the Investor relating to: (a) organization; (b) authority; (c)
consents and approvals; no violations; (d) information supplied; (e) interim
operations of Newco; (f) brokers and (g) financing. The financing
representation and warranty provides that the
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Investor has sufficient sources of liquid capital funds, and concurrently with
the Recapitalization Effective Time will fund, in cash, at least $55.0 million
in equity capital. The Investor delivered financing letters to the Company and
further represented and warranted that, assuming satisfaction of all
conditions set forth in such financing letters and full funding thereunder,
such financing, together with the New Equity Investment and proceeds from the
issuance of the Series F Preferred Stock and pursuant to a senior bank term
loan facility, will provide sufficient funds to finance the Recapitalization
and pay certain related fees and expenses.
Indemnification, Exculpation and Insurance. The Investor has agreed that all
rights to indemnification and exculpation (including the advancement of
expenses) from liabilities for acts or omissions occurring at or prior to the
Recapitalization Effective Time (including with respect to the transactions
contemplated by the Recapitalization Merger Agreement) existing as of the date
of the Recapitalization Merger Agreement in favor of the current or former
directors, officers and employees of Alliance, as provided in Alliance's or
any of its Subsidiaries' Certificate of Incorporation and/or its By-laws
and/or any indemnification agreements and pursuant to applicable law, shall be
assumed by the Recapitalized Company in the Recapitalization, without further
action, as of the Recapitalization Effective Time and shall survive the
Recapitalization and shall continue in full force and effect without
amendment, modification or repeal in accordance with their terms for a period
of not less than five years after the Recapitalization Effective Time;
provided, however, that if any claims are asserted or made within such period,
all rights to indemnification (and to advancement of expenses) under the
Recapitalization Merger Agreement in respect of any such claims shall
continue, without diminution, until disposition of any and all such claims.
The Recapitalization Merger Agreement provides that for a period of at least
five years after the Recapitalization Effective Time, the Recapitalized
Company shall cause to be maintained in effect standard policies of directors'
and officers' liability insurance in an aggregate coverage amount not less
than the coverage amounts maintained by Alliance as of the date of the
Recapitalization Merger Agreement and including coverage with respect to
claims arising from facts or events which occurred before the Recapitalization
Effective Time to the extent available.
Redemption of Preferred Stock and Senior Debt. The Recapitalization Merger
Agreement provides that Alliance shall cause (a) all of its outstanding shares
of preferred stock (including the Series C Shares and the Series D Shares);
provided that in the case of the Series C Shares, the Investor must give
Alliance at least 35 days notice of the anticipated Special Meeting Date) to
be redeemed or converted into shares of Alliance Common Stock on or prior to
the Special Meeting Date in accordance with the terms set forth in the
applicable Certificates of Designation and (b) all of its outstanding senior
notes to be redeemed on or prior to the Special Meeting Date in accordance
with their terms.
Refinancing of Outstanding Indebtedness. The Recapitalization Merger
Agreement provides that Alliance will use all commercially reasonable efforts
to cause satisfaction of the conditions set forth in Section 7.3(h) of the
Recapitalization Merger Agreement (payment of certain financial obligations).
Reasonable Efforts. The Recapitalization Merger Agreement provides that,
upon the terms and subject to the conditions set forth in the Recapitalization
Merger Agreement, each of the parties will use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Recapitalization and the other
transactions contemplated by the Recapitalization Merger Agreement.
Guaranty. AIF III has unconditionally and irrevocably guaranteed the
obligations of the Investor under the Recapitalization Merger Agreement in an
amount not to exceed $37.0 million. Such guaranty terminates upon the earlier
of (a) the consummation of the Recapitalization and (b) subject to certain
exceptions relating primarily to a breach of the Recapitalization Merger
Agreement by the Investor, the termination of the Recapitalization Merger
Agreement. Pursuant to the Guaranty, AIF III has specifically assumed any and
all risks of a bankruptcy or reorganization case or proceeding with respect to
the Investor.
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CERTAIN RELATED AGREEMENTS
STOCKHOLDER AGREEMENT
The following is a brief summary of certain provisions of the Stockholder
Agreement, a copy of which appears as Annex B to this Proxy
Statement/Prospectus and is incorporated herein by reference. Such summary is
qualified in its entirety by reference to this Stockholder Agreement.
Pursuant to the Stockholder Agreement, Principal Stockholders owning
approximately 54.4% of the issued and outstanding shares of Alliance Common
Stock (66% assuming the exercise by such Principal Stockholders and no others
of all securities convertible into or exercisable for shares of Common Stock
immediately prior to the Recapitalization Effective Time) have granted to the
Investor the option to acquire (i) all shares of Alliance Common Stock owned
by such Principal Stockholders, (ii) any other shares of Alliance Common Stock
acquired by the Principal Stockholders during the term of the Stockholder
Agreement (including without limitation, through the conversion of any
convertible security or the exercise of any Alliance Stock Option or Warrants)
(collectively, the "Subject Shares") for a purchase price per share of $11.00
in cash. The option is currently exercisable and terminates, in general, upon
termination of the Stockholder Agreement, which, subject to certain
exceptions, will be December 31, 1997 or earlier if the Recapitalization
Merger Agreement is terminated.
Each Principal Stockholder has further agreed (and the Stockholder Agreement
includes an irrevocable proxy for the benefit of the Investor with respect to
the shares of Alliance capital stock subject to the Stockholder Agreement
owned by each Principal Stockholder) (1) to vote all Subject Shares
beneficially owned by such persons at any meeting of Alliance's stockholders
or at any adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including by written consent) with respect to the
Recapitalization and the Recapitalization Merger Agreement is sought, in favor
of the adoption of the Recapitalization Merger Agreement and the
Recapitalization and (2) to vote such Subject Shares of Alliance Common Stock
at any meeting of stockholders of Alliance or at any adjournment thereof or in
any other circumstances upon which a stockholder's vote, consent or other
approval is sought, against (x) any Alternative Transaction, (y) any amendment
of Alliance's certificate of incorporation or by-laws or other proposal or
transaction involving Alliance, which amendment or other proposal or
transaction would be reasonably likely to impede, frustrate, prevent or
nullify the Recapitalization Merger Agreement, the Recapitalization or any of
the transactions contemplated by the Recapitalization Merger Agreement or
change in any manner the voting rights of each class of Alliance's capital
stock or (z) any action that would cause Alliance to breach any
representation, warranty or covenant contained in the Recapitalization Merger
Agreement.
Each Principal Stockholder has also agreed, until the Stockholder Agreement
has terminated, among other things, not to: (1) sell, transfer, give, pledge
or otherwise dispose of, or enter into any contract, option or other
arrangement with respect to the sale, transfer, pledge, assignment or other
disposition of, the subject shares owned by such Principal Stockholder other
than pursuant to the terms of the Recapitalization Merger Agreement; (2) enter
into any voting arrangement, whether by proxy, voting agreement or otherwise,
in connection with, directly or indirectly, any Alternative Transaction; (3)
directly or indirectly solicit, initiate or encourage the submission of, any
proposal that may lead to an Alternative Transaction; or (4) directly or
indirectly participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Alternative
Transaction (or, in each case, permit any investment banker, financial
advisor, attorney, accountant or other representative retained by it to do any
of the foregoing).
EMPLOYMENT AGREEMENTS AND AGREEMENT NOT TO COMPETE
The following are brief summaries of the Employment Agreements and the
Agreement Not to Compete, copies of which are filed as exhibits to the
Registration Statement on Form S-4. Such summaries are qualified in their
entirety by reference to such exhibits.
Employment Agreements. Alliance has entered into an Employment Agreement
with Richard N. Zehner to act as Chief Executive Officer and with Vincent S.
Pino to act as Chief Operating Officer. Base compensation under the Employment
Agreements is $315,000 per year for Mr. Zehner and $275,000 per year for Mr.
Pino, subject in each case to increase by the Board of Directors. In addition,
Mr. Zehner and Mr. Pino are entitled to
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receive an annual cash bonus based upon Alliance's achievement of certain
operating and/or 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 and 60% in the case of Mr. Pino). Such bonus plan will be
adopted and administered by the compensation committee of the Board of
Directors (the "Compensation Committee"). In connection with the Employment
Agreements, Mr. Zehner and Mr. Pino are entitled to receive 145,000 and
130,000 options, respectively, under the New Stock Option Plan described
below.
The term of each Employment Agreement is initially three years. After the
first year, the Agreements will have a term of two years, with automatic
extensions for additional three month periods if neither party gives notice
that the term will not be so extended. Alliance may terminate Mr. Zehner's or
Mr. Pino's employment at any time and for any reason and Mr. Zehner and Mr.
Pino may resign at any time and for any reason.
Agreement Not to Compete. In connection with the Recapitalization Merger
Agreement, Mr. Zehner and Mr. Pino have entered into an agreement with the
Investor that contains, among other things, covenants not to compete with
Alliance. Pursuant to such covenants, Mr. Zehner and Mr. Pino have each agreed
that they will not, prior to the later of five years following the
Recapitalization Effective Time and two years after the date of their
termination, (i) engage in any Competitive Business in the United States or
(ii) compete or participate as an agent, consultant, advisor, representative,
owner, investor or otherwise in any enterprise engaged in a Competitive
Business in the United States. Ownership of less than 5% of a publicly-traded
entity engaged in a Competitive Business would not be a violation of the
covenant to compete. For these purposes, "Competitive Business" means any
imaging business or other business that becomes material to Alliance during
the term of Mr. Zehner's or Mr. Pino's employment.
In addition, prior to 24 months after the later of the date of termination
of employment or the date of ceasing to receive payments under the agreement
not to compete, Mr. Zehner and Mr. Pino, as the case may be, have each agreed
not to make any contact with any customer of Alliance with respect to the
provision of any service that is the same or substantially similar to any
service provided to such customer by Alliance. Furthermore, prior to 12 months
after the later of the date termination of employment or the date of ceasing
to receive payments under the covenant not to compete, Mr. Zehner and Mr.
Pino, as the case may be, have each agreed not to solicit or make any contact
with any employee of Alliance with respect to any employment, service or other
business relationship. Pursuant to such agreement, Alliance has agreed to make
certain payments to Messrs. Zehner and Pino following the termination of their
employment. However, in the event of a termination for cause, or due to death
or disability or a resignation without good reason (as defined in the
Employment Agreements), Alliance will be under no obligation to make such
payments.
THE NEW OPTION PLAN
After the consummation of the Recapitalization, the Company will adopt an
employee option plan pursuant to which options (the "New Options") with
respect to a total of 454,545 shares of Alliance Common Stock (the "New Option
Shares") will be available for grant. The New Option Shares will be allocated
in amounts agreed upon between the Investor and the Company. Richard Zehner
will be allocated New Options to acquire 145,000 New Option Shares; Vincent
Pino will be allocated New Options to acquire 130,000 New Option Shares. Fifty
percent of the New Option Shares will vest in equal increments over four
years. Fifty percent of the New Option Shares will vest after seven and one
half years (subject to acceleration if certain per-share equity targets are
achieved). Vesting of New Options occurs only during an employee's term of
employment. The exercise price for the New Options is $11.00 per share and the
New Options will expire ten years from the date of grant.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Recapitalization Effective Time, Alliance will pay to Apollo
Management L.P. a fee of $2.5 million in connection with arranging the
transactions contemplated by the Recapitalization (including the financings
thereof). Thereafter, the Company will pay Apollo Management, L.P. an annual
management fee of $500,000 and will continue to receive financial advisory
services from Apollo Management L.P. on an ongoing basis, with compensation to
be determined. In connection with the Transactions, Apollo will purchase $15.0
million of the Company's Series F Preferred Stock and will receive a financing
fee of $600,000. Immediately after consummation of the Transactions, Apollo
intends to sell to BT $0.9 million stated amount of the Series F Preferred
Stock purchased by it for $0.9 million in cash. In connection with such sale,
Apollo will pay to BT $36,000 of the $600,000 financing fee.
Pursuant to an engagement letter, Alliance will pay Salomon Brothers the
following fees: (a) $100,000, which was earned upon Alliance's execution of
the Recapitalization Merger Agreement; plus (b) an additional fee of $400,000,
which was earned upon the initial submission of Salomon Brothers' fairness
opinion to the Board of Directors on July 22, 1997; plus (c) an additional fee
of $2.4 million, which is contingent upon the consummation of the
Recapitalization and payable at the closing thereof. In addition, Salomon
Brothers will be an underwriter in the Offering and a lender under the Credit
Agreement.
BT Alex. Brown Incorporated, an affiliate of BT, will be an underwriter in
the Offering, will be an agent and lender under the Credit Agreement. BT will
purchase approximately $2.7 million of Alliance Common Stock from Apollo
concurrently with the consummation of the Recapitalization.
For a description of certain management arrangements in connection with the
Recapitalization, see "THE RECAPITALIZATION--Interests of Certain Persons in
the Recapitalization" and "MANAGEMENT--Employment and Related Agreements."
REGULATORY APPROVALS
The Recapitalization is subject to the expiration or termination of the
applicable waiting period under the HSR Act. Certain aspects of the
Recapitalization will require notification to, and filings with, certain
governmental authorities, including jurisdictions where Alliance currently
operates.
ANTITRUST
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Recapitalization may not be consummated until
notifications have been filed with the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the applicable waiting
period has expired or been terminated. On August 13, 1997, Alliance and the
Investor filed Notification and Report Forms for the Recapitalization under
the HSR Act with the FTC and the Antitrust Division and the waiting period
under the HSR Act has expired. At any time before or after the
Recapitalization Effective Time, notwithstanding that the waiting period under
the HSR Act has expired the Antitrust Division or the FTC could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the consummation of the
Recapitalization or seeking divestiture of substantial assets of Alliance. At
any time before or after the Recapitalization Effective Time, and
notwithstanding that the waiting period under the HSR Act has expired, any
state could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Recapitalization or seeking divestiture of substantial
assets of Alliance. Private parties may also seek to take legal action under
the antitrust laws under certain circumstances.
Based on information available to them, Alliance and Newco believe that the
Recapitalization can be effected in compliance with federal and state
antitrust laws. However, there can be no assurance that a challenge to the
consummation of the Recapitalization on antitrust grounds will not be made or
that, if such a challenge were made, Alliance and Newco would prevail or would
not be required to accept certain adverse conditions in order to consummate
the Recapitalization.
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OTHER
The obligations of the Investor under the Recapitalization Merger Agreement
are also subject to the receipt of all necessary licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental
authorities and other third parties as are necessary in connection with the
transactions contemplated by the Recapitalization.
DISSENTING STOCKHOLDERS' RIGHTS
Holders of shares of Alliance Common Stock who do not vote in favor of the
Recapitalization Merger Agreement and who properly demand appraisal of their
shares will be entitled to appraisal rights in connection with the
Recapitalization under Section 262 of the DGCL.
The obligations of the Investor under the Recapitalization Merger Agreement
are conditioned upon holders of less than 10% of the outstanding shares of
Alliance Common Stock having validly elected to demand the appraisal of their
shares pursuant to Section 262 of the DGCL.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTION 262 WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS
AS ANNEX D. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A
"STOCKHOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF ALLIANCE COMMON STOCK
AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL
INTEREST IN SHARES OF ALLIANCE COMMON STOCK HELD OF RECORD IN THE NAME OF
ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE
RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY
MANNER TO PERFECT APPRAISAL RIGHTS.
Under the DGCL, holders of shares of Alliance Common Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Alliance Common Stock appraised by the Delaware Court of Chancery and to
receive payment of the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the
Recapitalization, together with a fair rate of interest, as determined by such
court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders entitled to appraisal rights that such appraisal rights are
available and include in such notice a copy of Section 262. This Proxy
Statement/Prospectus shall constitute such notice to the holders of shares of
Alliance Common Stock, and the applicable statutory provisions are attached to
this Proxy Statement/Prospectus as Annex D. Any holder of shares of Alliance
Common Stock who wishes to exercise such appraisal rights or who wishes to
preserve such holder's right to do so should review the following discussion
and Annex D carefully because failure to timely and properly comply with the
procedures specified will result in the loss of appraisal rights under the
DGCL.
A holder of shares of Alliance Common Stock wishing to exercise appraisal
rights must deliver to Alliance, before the vote on the Recapitalization at
the Special Meeting, a written demand for appraisal and must not vote in favor
of the Recapitalization. Because a duly executed proxy which does not contain
voting instructions will, unless revoked, be voted for the Recapitalization, a
holder of shares of Alliance Common Stock who votes by proxy and who wishes to
exercise appraisal rights must either (1) vote against the Recapitalization or
(2) abstain from voting on the Recapitalization. A vote against the
Recapitalization, in person or by proxy, will not in and of itself constitute
a written demand for appraisal satisfying the requirements of Section 262. In
addition, a holder of shares of Alliance Common Stock wishing to exercise
appraisal rights must hold of record such shares on the
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date the written demand for appraisal is made and must continue to hold such
shares until the Recapitalization Effective Time. If any holder of shares of
Alliance Common Stock fails to comply with any of these conditions and the
Recapitalization becomes effective, the holder of shares of Alliance Common
Stock will be entitled to receive the consideration receivable with respect to
such shares in the absence of a valid assertion of appraisal rights in
accordance with the Recapitalization Merger Agreement.
Only a holder of record of shares of Alliance Common Stock is entitled to
assert appraisal rights for the shares of Alliance Common Stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf
of the holder of record, fully and correctly, as such holder of record's name
appears on such holder of record's stock certificates, and must state that the
stockholder intends thereby to demand appraisal of such stockholder's shares
in connection with the Recapitalization. If the shares of Alliance Common
Stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that
capacity, and if the shares of Alliance Common Stock are owned of record by
more than one person, as in a joint tenancy and tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including two or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record
owner or owners and expressly disclose the fact that, in executing the demand,
the agent is agent for such owner or owners. A record holder such as a broker
who holds shares of Alliance Common Stock as nominee for several beneficial
owners may exercise appraisal rights with respect to the shares of Alliance
Common Stock held for one or more beneficial owners while not exercising such
rights with respect to the shares of Alliance Common Stock held for other
beneficial owners. Stockholders who hold their shares of Alliance Common Stock
in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for making of a demand for appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be sent or
delivered to Alliance at 1065 North PacifiCenter Drive, Suite 200, Anaheim, CA
92806, Attention: Richard N. Zehner.
Within 10 days after the Recapitalization Effective Time, Alliance, as the
surviving corporation, must notify each holder of shares of Alliance Common
Stock who has complied with Section 262 and has not voted in favor of or
consented to the Recapitalization of the date that the Recapitalization has
become effective. Within 120 days after the Recapitalization Effective Time,
but not thereafter, Alliance or any holder of shares of Alliance Common Stock
who is entitled to appraisal rights under Section 262 may file a petition in
the Delaware Court of Chancery demanding a determination of the fair value of
such holder's shares of Alliance Common Stock. Notwithstanding the foregoing,
at any time within 60 days after the Recapitalization Effective Time, any
stockholder has the right to withdraw his demand for appraisal and to accept
the terms offered in respect of the Recapitalization. Alliance is under no
obligation to and has no present intention to file such a petition.
Accordingly, it is the obligation of the holders of shares of Alliance Common
Stock to initiate all necessary action to perfect their appraisal rights
within the time prescribed in Section 262.
Within 120 days after the Recapitalization Effective Time, any holder of
shares of Alliance Common Stock who has complied with the requirements for
exercise of appraisal rights will be entitled, upon written request, to
receive from Alliance a statement setting forth the aggregate number of shares
of Alliance Common Stock not voted in favor of the Recapitalization and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such statement must be mailed to the
stockholders within ten days after a written request therefor has been
received by Alliance or within ten days after the expiration of the period for
delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of
Alliance Common Stock and a copy thereof is served upon Alliance, Alliance
will then be obligated within 20 days to file with the Delaware Register in
Chancery a duly verified list containing the names and addresses of all
holders of shares of Alliance Common Stock who have demanded an appraisal of
their shares and with whom agreements as to the value of their shares have not
been reached. After notice to such stockholders as required by the Court, the
Delaware Court of Chancery is empowered to conduct a hearing on such petition
to determine those holders of shares of Alliance
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Common Stock who have complied with Section 262 and who have become entitled
to appraisal rights thereunder. The Delaware Court of Chancery may require the
holders of shares of Alliance Common Stock who demanded payment for their
shares to submit their stock certificates to the Register in Chancery for
notation thereon of the pendency of the appraisal proceeding; and if any
stockholder fails to comply with such direction, the Court of Chancery may
dismiss the proceedings as to such stockholder.
After determining the holders of shares of Alliance Common Stock entitled to
appraisal, the Delaware Court of Chancery will appraise the "fair value" of
their shares of Alliance Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the Recapitalization,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. Holders of shares of Alliance Common Stock
considering seeking appraisal should be aware that the fair value of their
shares of Alliance Common Stock as determined by Section 262 could be more
than, the same as or less than the consideration they would receive pursuant
to the Recapitalization if they did not seek appraisal of their shares of
Alliance Common Stock and that investment banking opinions as to fairness from
a financial point of view are not necessarily opinions as to fair value under
Section 262. The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
the appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy. The Court of Chancery will also determine
the amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of Alliance Common Stock have been appraised. The costs
of the action may be determined by the Court and taxed upon the parties as the
Court deems equitable. The Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of Alliance Common Stock entitled to be
appraised.
Any holder of shares of Alliance Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time,
be entitled to vote the shares of Alliance Common Stock subject to such demand
for any purpose or be entitled to the payment of dividends or other
distributions on those shares of Alliance Common Stock (except dividends or
other distributions payable to holders of record of shares of Alliance Common
Stock as of a date prior to the Recapitalization Effective Time).
If any stockholder who demands appraisal of such stockholder's shares of
Alliance Common Stock under Section 262 fails to perfect, or effectively
withdraws or loses, such stockholder's right to appraisal, as provided in the
DGCL, the shares of Alliance Common Stock of such stockholder will be
converted into the right to receive the Cash Merger Price pursuant to the
Recapitalization Merger Agreement (without interest). A stockholder will fail
to perfect, or effectively lose or withdraw, such stockholder's right to
appraisal if no petition for appraisal is filed by such holder within 120 days
after the Recapitalization Effective Time, or if the stockholder delivers to
Alliance a written withdrawal of his, hers or its demand for appraisal and an
acceptance of the Recapitalization, except that any such attempt to withdraw
made more than 60 days after the Recapitalization Effective Time will require
the written approval of Alliance and, once a petition for appraisal is filed,
the appraisal proceeding may not be dismissed as to any holder absent court
approval. It is not necessary that each holder of shares of Alliance Common
Stock properly demanding appraisal file a petition for appraisal in the
Delaware Court of Chancery. Rather, a single valid petition suffices for the
petitioning and non-petitioning holders of shares of Alliance Common Stock who
have properly demanded appraisal.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH
EVENT A STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CASH MERGER PRICE IN
ACCORDANCE WITH THE RECAPITALIZATION MERGER AGREEMENT FOR EACH SHARE OF
ALLIANCE COMMON STOCK OWNED BY SUCH STOCKHOLDER).
74
<PAGE>
THE INVESTOR, NEWCO AND APOLLO
The Investor and Newco are entities formed by Apollo. The principal
executive offices of the Investor and Newco are located at 2 Manhattanville
Road, Purchase, New York 10577.
Apollo is principally engaged in the business of investing in securities.
The principal office of Apollo is c/o Apollo Advisors II, L.P., 2
Manhattanville Road, Purchase, New York 10577. Apollo Advisors II, L.P., a
Delaware limited partnership ("Advisors"), is the general partner of AIF III
and the managing general partner of Overseas Partners and UK Partners.
Advisors is principally engaged in the business of providing advice regarding
investments by, and serving as the general partner of, Apollo.
Apollo Capital Management II, Inc., a Delaware corporation ("Apollo
Capital"), is the general partner of Advisors. Apollo Capital is principally
engaged in the business of serving as the general partner of Advisors. Apollo
Management, L.P., a Delaware limited partnership ("Apollo Management"), serves
as manager of Apollo and manages their day-to-day operations.
AIF III Management, Inc., a Delaware corporation ("AIM"), is the general
partner of Apollo Management. AIM is principally engaged in the business of
serving as the general partner of Apollo Management.
The respective addresses of the principal office of Advisors, Apollo
Capital, Apollo Management and AIM are c/o Apollo Advisors II, L.P., 2
Manhattanville Road, Purchase, New York 10577.
Apollo Fund Administration II LDC, a Cayman Islands LDS ("Administration"),
is the administrative general partner of Overseas Partners and UK Partners.
Administration is principally engaged in the business of serving as
administrative general partner of Overseas Partners and UK Partners. The
principal place of business of Administration is Apollo Fund Administration II
LDC, c/o CIBC Bank and Trust Company (Cayman) Limited, Edward Street,
Georgetown, Grand Cayman, Cayman Islands, British West Indies.
Apollo Management (UK) Ltd., an English corporation ("Management UK"), is
the resident general partner of UK Partners. Management UK is principally
engaged in the business of serving as resident general partner of UK Partners.
The address of the principal place of business of Management UK is Hill House,
1 Little New Street, London EC4A 3TR, England.
The Investor is a Delaware limited liability company and Newco is a Delaware
corporation, formed solely for the purpose of consummating the
Recapitalization and carrying out the related transactions. The Investor owns
all of the outstanding capital stock of Newco, and all of the membership
interests of the Investor is owned by AIF III, Overseas Partners and UK
Partners. Newco will not have any assets or liabilities other than those
arising under the Recapitalization Merger Agreement or in connection with the
Recapitalization, or engage in any activities other than those incident to its
formation and capitalization and the Recapitalization and accordingly, no
meaningful financial information regarding Newco is available. The address of
the principal place of business of Newco and the Investor is at c/o Apollo
Advisors II, L.P., 2 Manhattanville Road, Purchase, New York 10577.
75
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined consolidated balance sheet at
September 30, 1997 reflects the historical consolidated balance sheet of
Alliance adjusted to give effect to the Transactions as if they had occurred
at September 30, 1997. The Recapitalization will be treated as a leveraged
recapitalization in which there will be no changes to the carrying values of
Alliance's net assets and the sales and purchases of Alliance's common stock
will be accounted for as capital transactions at amounts received from or paid
to stockholders.
The following unaudited pro forma consolidated statements of operations for
the nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively, reflect the historical operations of Alliance adjusted to give
effect to the Transactions as if they had occurred as of January 1, 1997 for
the nine months ended September 30, 1997, and as of January 1, 1996 for the
year ended December 31, 1996.
The unaudited pro forma consolidated financial information is based on the
consolidated financial statements of Alliance giving effect to the
Transactions under the assumptions and adjustments outlined in the
accompanying Notes to Unaudited Pro Forma Consolidated Financial Information.
Such pro forma adjustments are based upon available information and upon
certain assumptions that the Company's management believes are reasonable
under the circumstances. The unaudited pro forma consolidated balance sheet
and statements of operations are provided for comparative purposes only and do
not purport to represent the results that would have been obtained had the
Transactions occurred on the dates indicated or that may be achieved in the
future.
The unaudited pro forma consolidated balance sheet and statements of
operations and accompanying notes should be read in conjunction with the
historical consolidated financial statements of Alliance included elsewhere in
this Proxy Statement/Prospectus. See "INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS."
76
<PAGE>
ALLIANCE IMAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments........... $ 10,557 $ 7,870 (a) $ 18,427
Receivables, net.......................... 10,712 -- 10,712
Other current assets...................... 997 -- 997
-------- -------- --------
Total current assets.................... 22,266 7,870 30,136
Equipment, net.............................. 99,602 -- 99,602
Intangible assets, net...................... 26,657 -- 26,657
Other assets................................ 3,098 6,807 (b) 9,905
-------- -------- --------
Total assets............................ $151,623 $ 14,677 $166,300
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.......................... $ 3,039 $ -- $ 3,039
Accrued compensation and related expenses. 3,399 -- 3,399
Other accrued liabilities................. 11,268 (3,744)(c) 7,524
Current portion of long-term debt......... 20,476 (18,206)(d) 2,270
-------- -------- --------
Total current liabilities............... 38,182 (21,950) 16,232
Other liabilities........................... 7,019 (2,066)(e) 4,953
Long-term debt.............................. 62,597 157,017 (d) 219,614
-------- -------- --------
Total liabilities....................... 107,798 133,001 240,799
Redeemable preferred stock.................. -- 14,400 (f) 14,400
Stockholders' equity (deficit):
Preferred stockholders' equity............ 18,000 (18,000)(e) --
Common stockholders' equity (deficit)..... 36,671 (93,875)(e) (57,204)
Retained earnings (accumulated deficit) .. (10,846) (20,849)(e) (31,695)
-------- -------- --------
Total stockholders' equity (deficit).... 43,825 (132,724) (88,899)
-------- -------- --------
Total liabilities and stockholders'
equity................................. $151,623 $ 14,677 $166,300
======== ======== ========
</TABLE>
See accompanying notes.
77
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(a) Reflects the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources:
Term Loan Facility........................................... $ 50,000
Notes........................................................ 165,000
Redeemable Preferred Stock................................... 15,000
Equity Investment............................................ 39,954
--------
Total sources............................................. $269,954
========
Uses:
Repurchase Alliance equity................................... $165,573
Repay current debt........................................... 18,706
Repay long-term debt......................................... 57,595
Less discount on prepayment of debt, net..................... (1,140)
Transaction costs............................................ 13,800
Deferred financing fees for the Credit Agreement and the
Notes....................................................... 6,950
Redeemable Preferred Stock financing fees.................... 600
Increase in cash............................................. 7,870
--------
Total uses................................................ $269,954
========
</TABLE>
(b) Reflects financing fees associated with the Credit Agreement and the
Notes, which will be amortized over their respective terms, as shown in the
following table, net of $143,000 of deferred financing costs related to debt
being repaid, which will be charged to expense.
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
DESCRIPTION AMOUNT PERIOD EXPENSE
----------- ------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Term Loan Facility............................. $ 800 6 years $133
Revolving Loan Facility........................ 1,200 5 years 240
Notes.......................................... 4,950 8 years 619
------ ----
Total...................................... $6,950 $992
====== ====
</TABLE>
(c) Reflects income tax benefit from net tax deductible expenses incurred in
connection with the Transactions.
(d) Reflects the following:
<TABLE>
<CAPTION>
LONG-
CURRENT TERM
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Term Loan Facility.......................................... $ 500 $ 49,500
Notes....................................................... -- 165,000
Retirement of existing debt................................. (18,706) (57,483)
-------- --------
$(18,206) $157,017
======== ========
</TABLE>
78
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
SEPTEMBER 30, 1997
(e) Reflects the following:
<TABLE>
<CAPTION>
OTHER
PREFERRED COMMON RETAINED TOTAL LONG-TERM
EQUITY* EQUITY EARNINGS EQUITY LIABILITIES TOTAL
--------- --------- -------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Repurchase Alliance
equity................. $(18,000) $(133,829) $(11,678)** $(163,507) $(2,066) $(165,573)
Transaction costs....... -- -- (13,800) (13,800) -- (13,800)
Gain on repayment of
debt................... -- -- 997 997 -- 997
Income tax benefit from
option and other
payments, and gain on
debt repayment, net.... -- -- 3,632 3,632 -- 3,632
Proceeds from sale of
Common Stock in
recapitalization....... -- 39,954 -- 39,954 -- 39,954
-------- --------- -------- --------- ------- ---------
$(18,000) $ (93,875) $(20,849) $(132,724) $(2,066) $(134,790)
======== ========= ======== ========= ======= =========
</TABLE>
- --------
* Alliance's Series D Convertible Preferred Stock will be converted into
shares of Alliance Common Stock prior to the closing of the Transactions.
** Estimated cash used to settle outstanding employee stock options and change
in control payments.
The gross amount to be paid for Alliance Common Stock is $154.3 which
represents the $11.00 per share repurchase price multiplied by 14,023,344
total shares. The total of 14,023,344 shares is comprised of the sum of: (1)
11,023,344 shares of Alliance Common Stock outstanding as of September 30,
1997; and (2) 3,000,000 shares of Alliance Common Stock to be issued with
respect to the conversion of all outstanding shares of Alliance Series D
Convertible Preferred Stock. The gross amount is then increased by $2.1
million in payment of the net value of warrants canceled and reduced by $4.5
million (411,358 shares at $11.00 per share) with respect to the retained
shares, and $18.0 million related to the carrying value of Alliance's
preferred equity converted to common shares, resulting in a net payment for
Alliance equity of $133.8 million.
(f) Reflects the sale of $15.0 million of the Company's Series F Preferred
Stock to the Investor. The Series F Preferred Stock is required to be redeemed
by the Company ten years from its issue date at its stated value plus accrued
and unpaid dividends. It may also be redeemed at the option of the Company at
any time after its issue date at premiums declining over ten years from 13.5%
(expressed as a percentage of the accreted face value) to 0%.
79
<PAGE>
ALLIANCE IMAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA(A)(B)
---------- ----------- -----------
<S> <C> <C> <C>
Revenues............................... $62,285 $ -- $ 62,285
Operating expenses, excluding
depreciation.......................... 27,499 -- 27,499
Selling, general and administrative
expenses.............................. 6,251 375 6,626
------- -------- ----------
Income before items below.............. 28,535 375 28,160
Depreciation expense................... 11,222 -- 11,222
Amortization expense, primarily
goodwill.............................. 1,767 744 (c) 2,511
Interest expense, net.................. 5,315 9,787 (d) 15,102
------- -------- ----------
Income (loss) before income taxes and
extraordinary gain.................... 10,231 (10,906) (675)
Income tax benefit (expense)........... (3,480) 3,480 (e) --
------- -------- ----------
Income (loss) before extraordinary
gain.................................. $ 6,751 $ (7,426) (675)
======= ========
Redeemable Preferred Stock dividends,
including amortization of related (1,616)(f)
financing fees........................ ----------
Loss before extraordinary gain
attributable to Common Stock.......... $ (2,291)
==========
Loss per common share before
extraordinary gain.................... $ (0.57)
==========
Weighted average common shares
outstanding........................... 4,043,580 (g)
==========
Ratio of earnings to fixed charges..... -- (h)
</TABLE>
See accompanying notes.
80
<PAGE>
ALLIANCE IMAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS (A)(B)
---------- ----------- ----------
<S> <C> <C> <C>
Revenues............................... $68,482 $ -- $ 68,482
Operating expenses, excluding
depreciation.......................... 32,344 -- 32,344
Selling, general and administrative
expenses.............................. 8,130 500 8,630
------- -------- ----------
Income before items below.............. 28,008 500 27,508
Depreciation expense................... 12,737 -- 12,737
Amortization expense, primarily
goodwill.............................. 1,952 992 (c) 2,944
Interest expense, net.................. 5,758 14,378 (d) 20,136
------- -------- ----------
Income (loss) before income taxes and
extraordinary gain.................... 7,561 (15,870) (8,309)
Income tax benefit (expense)........... (1,060) 1,060 (e) --
------- -------- ----------
Income (loss) before extraordinary
gain.................................. $ 6,501 $(14,810) (8,309)
======= ========
Redeemable Preferred Stock dividends,
including amortization of related
financing fees........................ (2,190)(f)
----------
Loss before extraordinary gain
attributable to Common Stock.......... $ (10,499)
==========
Loss per common share before
extraordinary gain.................... $ (2.60)
==========
Weighted average common shares
outstanding........................... 4,043,580 (g)
==========
Ratio of earnings to fixed charges..... -- (h)
</TABLE>
See accompanying notes.
81
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(a) Reflects an annual management fee payable to Apollo Management, L.P. of
$0.5 million; does not reflect an equal amount of expected general and
administrative cost savings, primarily related to investor relations and
board of directors fees and expenses.
(b) Non-recurring charges aggregating $20.9 million (comprised of $11.7
million used to settle outstanding employee stock options and other change
in control payments and $13.8 million of transaction costs net of $1.0
million gain on repayment of debt and $3.6 million of estimated tax
benefits) will be charged to operations upon the closing of the
Recapitalization. These amounts have not been reflected in the unaudited
pro forma consolidated statements of operations.
(c) Reflects amortization of deferred financing fees associated with the
Transactions.
(d) Interest expense, as adjusted, reflects the elimination of historical
interest expense due to the retirement of substantially all of the
existing debt obligations and assumes that the following indebtedness and
cash balance was outstanding as of the beginning of the respective
reporting periods:
<TABLE>
<CAPTION>
ANNUAL
INTEREST
PRINCIPAL EXPENSE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Term Loan Facility, interest at LIBOR plus 2.50%
(currently 8.25%)..................................... $ 50,000 $ 4,125
Revolving Loan Facility, interest at LIBOR plus 2.25%
(currently 8.00%) (including 0.50% annual commitment
fee on pro forma unutilized balance of $75 million)... -- 375
Notes, assumed interest at 9.75%....................... 165,000 16,088
Other debt, weighted average interest at approximately
9.50%................................................. 6,884 654
Interest income, assumed interest at 6.00%............. 18,427 (1,106)
-------
Interest expense, net................................ $20,136
=======
</TABLE>
A 1/8% variance in interest rates would change annual interest expense by
approximately $246,000.
(e) Income tax adjustments reflect estimated effective tax rates applied to
the pro forma adjustments excluding book/tax differences associated with
nondeductible amortization expense. In accordance with FAS 109,
"Accounting for Income Taxes," due to the occurrence of losses before
income taxes and extraordinary items, no tax benefits have been recorded.
(f) The preferred stock dividend is calculated based on a 13.50% paid-in-kind
rate compounded quarterly, plus amortization of $0.6 million of related
financing fees over the ten year term of the preferred stock.
(g) The weighted average common shares outstanding includes 4,043,580 common
share issued in connection with the Transactions (3,632,222 to the
Investor and 411,358 to the existing shareholders), and excludes 70,000
rollover option shares, net of 22,670 shares repurchased using the
treasury stock method because such shares would be anti-dilutive.
(h) Pro forma earnings were insufficient to cover fixed charges by $8.3
million for the year ended December 31, 1996, and $0.7 million for the
nine months ended September 30, 1997.
82
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF ALLIANCE
The following selected historical consolidated financial information of
Alliance with respect to each year in the five-year period ended December 31,
1996 is derived from the consolidated financial statements of Alliance. The
consolidated financial statements of Alliance for each of the years in the
three-year period ended December 31, 1996, are included elsewhere in this
Proxy Statement/Prospectus. Such consolidated financial statements have been
audited by Ernst & Young LLP, independent auditors. The financial information
for the nine months ended September 30, 1996 and September 30, 1997 is
unaudited, but in the opinion of management of Alliance reflects all
adjustments necessary for a fair presentation of such information. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1997. The selected financial information provided below should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the consolidated financial statements
of Alliance and the notes thereto included elsewhere in this Proxy
Statement/Prospectus. See "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues................ $ 63,695 $ 60,728 $ 57,875 $ 58,065 $ 68,482 $ 49,097 $ 62,285
Costs and expenses:
Operating expenses,
excluding
depreciation.......... 32,043 31,768 31,093 28,342 32,344 23,549 27,499
Selling, general and
administrative
expenses.............. 5,842 6,538 6,284 6,294 8,130 4,879 6,251
Depreciation expense... 12,408 13,617 13,424 12,202 12,737 9,170 11,222
Amortization expense,
primarily goodwill.... 737 790 943 1,345 1,952 1,309 1,767
Interest expense, net.. 10,846 10,507 10,758 5,053 5,758 4,184 5,315
Special charges........ -- 17,500 13,339 -- -- -- --
--------- --------- --------- ---------- ---------- ---------- ----------
Total costs and
expenses............ 61,876 80,720 75,841 53,236 60,921 43,091 52,054
--------- --------- --------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary gains.... 1,819 (19,992) (17,966) 4,829 7,561 6,006 10,231
Provision (benefit) for
income taxes........... 766 (5,300) 1,100 727 1,060 955 3,480
--------- --------- --------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary gains.... 1,053 (14,692) (19,066) 4,102 6,501 5,051 6,751
Extraordinary gains, net
of taxes............... -- -- -- -- 6,300 -- 1,332
--------- --------- --------- ---------- ---------- ---------- ----------
Net income (loss)(1).... $ 1,053 $ (14,692) $ (19,066) $ 4,102 $ 12,801 $ 5,051 $ 8,083
========= ========= ========= ========== ========== ========== ==========
Earnings (loss) per
common share:
Income before items
below................. $ 0.15 $ (2.07) $ (2.68) $ 0.28 $ 0.48 $ 0.38 $ 0.48
Excess of carrying
amount of preferred
stock repurchased
over consideration
paid.................. -- -- -- -- 0.15 -- 0.14
--------- --------- --------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary gains... 0.15 (2.07) (2.68) 0.28 0.63 0.38 0.62
Extraordinary gains,
net of taxes.......... -- -- -- -- 0.55 -- 0.09
--------- --------- --------- ---------- ---------- ---------- ----------
Income (loss) applicable
to common stock........ $ 0.15 $ (2.07) $ (2.68) $ 0.28 $ 1.18 $ 0.38 $ 0.71
========= ========= ========= ========== ========== ========== ==========
Weighted average common
and common equivalent
shares outstanding..... 6,949,000 7,114,000 7,124,000 11,158,000 11,494,000 11,463,000 14,028,000
========= ========= ========= ========== ========== ========== ==========
CONSOLIDATED BALANCE
SHEET DATA
(AT END OF PERIOD):
Cash and short-term
investments............ $ 4,508 $ 8,420 $ 2,478 $ 11,128 $ 10,867 $ 11,677 $ 10,557
Total assets............ 133,920 117,096 102,527 103,327 128,510 125,828 151,623
Long-term debt,
including current
maturities............. 90,456 95,986 79,208 75,880 89,025 88,598 83,073
Redeemable preferred
stock.................. -- -- 15,500 16,430 4,694 16,197 --
Stockholders' equity
(deficit).............. 29,601 14,909 (1,665) 1,604 16,360 6,847 43,825
OTHER DATA:
EBITDA(2)............... $ 25,810 $ 20,022 $ 20,498 $ 23,429 $ 28,008 $ 20,669 $ 28,535
EBITDA margin(3)........ 40.5% 33.0% 35.4% 40.3% 40.9% 42.1% 45.8%
Cash flows provided by
(used in):
Operating activities.. $ 15,952 $ 12,708 $ 12,784 $ 18,043 $ 21,731 $ 17,348 $ 22,090
Investing activities.. (18,650) (14,188) (19,861) (7,789) (27,936) (21,865) (33,546)
Financing activities.. (534) 5,392 1,135 (1,604) 5,944 5,066 11,146
Capital expenditures(4). 21,123 19,184 22,361 11,383 34,376 24,705 34,175
Number of MRI systems at
end of period.......... 70 71 72 76 86 86 98
Comparable customer
revenue growth(5)...... NA NA (0.1)% 6.9% 8.8% 11.5% 25.9%
Average scans per MRI
system per day......... 6.3 5.7 5.8 5.8 6.7 6.7 7.2
Ratio of earnings to
fixed charges(6)....... 1.2x -- -- 1.9x 2.1x 2.2x 2.7x
</TABLE>
(footnotes on following page)
83
<PAGE>
- --------
(1) Net income (loss) includes special charges of $13.3 million for the year
ended December 31, 1994 related to an equipment exchange transaction, the
impairment of certain equipment, debt restructuring and employee
severances; extraordinary gains (net of tax) of $6.3 million for the year
ended December 31, 1996 related to the early extinguishment of debt; and
an extraordinary gain (net of tax) of $1.3 million for the nine months
ended September 30, 1997 related to the early extinguishment of debt.
(2) EBITDA is defined herein as income before income taxes, plus depreciation,
amortization, net interest expense and other non-recurring items
(principally non-cash). EBITDA is presented because the Company believes
it is a widely accepted financial indicator of a company's ability to
service and/or incur indebtedness. However, EBITDA should not be
considered as an alternative to net income as a measure of operating
results or to cash flows as a measure of liquidity in accordance with
generally accepted accounting principles.
(3) EBITDA margin is defined herein as EBITDA divided by revenues. The Company
believes EBITDA margin provides a comparative reference to measure EBITDA
performance from period to period and against comparable sized companies
in the industry and, as such, provides a supplemental mechanism to
evaluate efficiency and overall operating performance.
(4) The substantial majority of historical capital expenditures have related
to either major upgrades to existing systems or the replacement of older,
less-advanced systems with new, state-of-the-art technologically advanced
systems. As a result of these historical investments, the Company believes
that it has upgraded substantially all of its systems and expects most of
its capital expenditures for at least the next three to five years to
relate to net fleet additions through new system purchases.
(5) Represents period over period revenue growth for customers that generated
revenues for the entire term of both periods.
(6) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and one-third of the rent expense from long-term equipment operating
leases, which management believes is a reasonable approximation of an
interest factor. Earnings were insufficient to cover fixed charges by
$20.0 million and $18.0 million for the years ended December 31, 1993 and
1994, respectively.
84
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of Alliance should be read in conjunction with Alliance's
consolidated financial statements and notes thereto included elsewhere in this
Proxy Statement/Prospectus.
OVERVIEW
The Company is a leading nationwide provider of diagnostic imaging services
and the largest operator of state-of-the-art mobile diagnostic imaging systems
and related outsourced radiology services in the United States. The Company
primarily provides MRI systems and services to hospitals and other health care
providers on a mobile, shared user basis. The Company also provides dedicated,
full-time MRI systems and services as well as full-service management of
imaging operations for selected hospitals. The Company's services enable small
to mid-size hospitals to gain access to advanced diagnostic imaging technology
and related value-added services without making a substantial investment in
equipment and personnel. The Company operates a fleet of 98 MRI systems and
services 356 MRI customers in 36 states under exclusive contracts with an
average remaining length of approximately 24 months as of September 30, 1997.
The Company's revenues are principally a function of the number of systems
in service, scan volumes and fees per scan. The Company generates
substantially all of its revenues under exclusive one to eight-year contracts
with hospitals and health care providers. The Company's contracts typically
offer tiered pricing with lower fees per scan on incremental scans, allowing
customers to benefit from increased scan volumes and the Company to benefit
from the operating leverage associated with increased scan volumes. The
Company expects modest continuing downward pressure on pricing levels as a
result of cost containment measures in the health care industry. However, in
many cases higher scan volumes justify lower prices on incremental scans.
The principal components of the Company's operating costs include salaries
paid to technologists and drivers, annual system maintenance costs, insurance
and transportation costs. Because a majority of these expenses are fixed,
increased revenues as a result of higher scan volumes significantly improve
the Company's profitability while lower scan volumes result in lower
profitability.
Since the beginning of 1995, Alliance has substantially increased revenues
by adding new customers and increasing scan volumes at existing customer
sites. During the same period, the growth rate of Alliance's EBITDA and net
income increased more rapidly than the growth rate of revenues as a result of
spreading costs (which are primarily fixed) over a larger revenue base and
implementing cost reduction and containment measures.
Alliance has historically focused on maximizing cash flow and return on
invested capital nationwide, deploying new and upgraded systems in high volume
markets and redeploying older, less advanced systems with lower carrying
values in lower volume markets. Alliance's ongoing equipment trade-in and
upgrade program has substantially improved the marketability and productivity
of its MRI systems. Because Alliance owns substantially all of its MRI
systems, it periodically evaluates its older, less marketable MRI systems to
determine if it is more beneficial to continue to use such systems in lower
volume markets, which are profitable but produce less revenue, or to trade in
such equipment in connection with new system purchases. Since January 1, 1995,
Alliance has invested approximately $78 million to upgrade and expand its
fleet and currently maintains one of the most advanced fleets in the industry.
The Company also provides CT services and imaging systems. Revenues from CT
services and imaging systems accounted for less than 5% of the Company's
revenues for the year ended December 31, 1996.
On July 23, 1997, Alliance entered into the Recapitalization Merger
Agreement, pursuant to which, among other things, a subsidiary of the
Investor, subject to the terms and conditions of the Recapitalization Merger
Agreement, will be merged with and into Alliance. Immediately following the
Recapitalization, Apollo will own
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approximately 84% of the issued and outstanding common stock of Alliance and
Alliance's existing shareholders will own approximately 10%. See "THE
RECAPITALIZATION." The pro forma effect of the Transactions is set forth under
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION" and the notes thereto
included elsewhere in this Proxy Statement/Prospectus.
On October 20, 1997, the Company announced execution of a definitive
agreement to acquire MCIC, a Cleveland, Ohio based provider of mobile MRI
services, CT services and other outsourced healthcare services. The
acquisition also includes MCIC's one-half interest in an operating joint
venture in Michigan. The purchase price consists of $13 million cash plus the
assumption of approximately $5 million in financing arrangements. MCIC
operates 14 mobile MRI systems and several other diagnostic imaging systems,
primarily in Ohio, Michigan, Indiana and Pennsylvania. The transaction was
completed on November 21, 1997. This transaction will be primarily funded from
existing cash reserves and debt assumed. Additional investments of this nature
may be made in the future (subject to certain conditions contained in the
Company's long-term financing arrangements) from a combination of cash
reserves, cash flow from operations, common or preferred equity and the
Revolving Loan Facility.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996.
Revenues for the first nine months of 1997 were $62,285,000, an increase of
$13,188,000 or 26.9%, over 1996. This increase reflects a scan-based MRI
revenue increase of $11,706,000, or 26.9% ($2,515,000 or 5.8% as a result of
MRI operations acquired subsequent to the first quarter of 1996), resulting
from a 29.2% increase in total scan volume partially offset by a 1.8% decrease
in the average revenue realized per MRI scan. The average daily scan volume
per MRI system increased 7.5% to 7.2 from 6.7 in 1996. Management attributes
the volume increase to the Company's continuing MRI systems upgrade program,
which has enabled the Company to obtain new, long-term contracts from both
existing and new customers, and to the effect of marketing programs
implemented in early 1997. Management believes the decrease in average revenue
realized per scan is the result of: many customers achieving discount price
levels on incremental scan volumes; obtaining contracts with customers that
have high scan volumes which justify lower scan prices; and continuing
competitive pressure in the MRI service industry and cost containment efforts
by health care payors. CT revenues increased $782,000, or 29.4%, as a result
of internal growth and the fourth quarter 1996 acquisition of a small CT
business. Other revenues increased $548,000 primarily as a result of the
implementation in late 1996 of a program providing management services for a
large portfolio of imaging systems owned by others.
The Company operated 98 MRI systems at September 30, 1997 compared to 86 MRI
systems at September 30, 1996. The average number of MRI systems operated by
the Company was 89 during the first nine months of 1997, compared to 84 during
the first nine months of 1996.
Operating expenses, excluding depreciation, totaled $27,499,000 in the first
nine months of 1997, an increase of $3,950,000, or 16.8%, from the first nine
months of 1996. Payroll and related employee expenses increased $2,028,000, or
19.1%, primarily as a result of an increase in operating staffing levels
necessary to support revenue growth. Repairs and maintenance expense increased
$477,000, or 40.0%, due to an increased number of systems in service. Fuel and
other vehicle expenses collectively increased $387,000, or 36.8%, primarily
due to increasing fuel prices and the addition of new mobile MRI systems.
Preventative maintenance and cryogen contract expense increased $186,000, or
2.8%, due to the expiration of the warranties on an increased number of MRI
systems. Other operating expenses (including insurance, site fees, office
expenses, equipment rental, supplies and professional services) increased
$872,000, or 21.0%, as a result of the increased level of operations.
Depreciation expense during the first nine months of 1997 totaled
$11,222,000, an increase of $2,052,000, or 22.4%, from the 1996 level
principally due to a higher amount of depreciable assets associated with
equipment additions and upgrades. Amortization expense during the first nine
months of 1997 increased $458,000, or 35.0%, over the 1996 period as a result
of goodwill amortization associated with recent business acquisitions.
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Selling, general and administrative expenses totaled $6,251,000 in the first
nine months of 1997, an increase of $1,372,000, or 28.1%, from the same period
in 1996. Professional services expenses increased $566,000, or 147.0%,
primarily due to costs associated with increased investor relations efforts
and merger and acquisition activity. Payroll and related expenses increased
$436,000, or 12.0%, primarily as a result of increased staffing levels
necessary to support the Company's increased level of operations. Other
expenses increased primarily as a result of expanded marketing programs and
costs associated with relocating the Company's corporate offices.
Interest expense of $5,315,000 in the first nine months of 1997 was
$1,131,000, or 27.0%, higher than the same period in 1996, as a result of
higher average outstanding debt balances during 1997 as compared to 1996. This
increase was primarily related to the senior bridge loan (which was converted
into Series D convertible preferred stock on March 26, 1997) and to the
financing of several new imaging systems during the first nine months of 1997.
An income tax provision of $3,480,000 was recorded in the first nine months
of 1997, which was higher than the tax provision recorded in the same period
in 1996 by $2,525,000, or 264.4%. The increase resulted from the increase in
income before taxes and an increase in the Company's effective tax rate. The
effective income tax rate increased to 34.0% in 1997 from 15.9% in 1996
because the Company's taxable income in 1997 is expected to exceed remaining
available net operating loss carryforwards.
The Company's income before extraordinary gain was $6,751,000 in the first
nine months of 1997 compared to net income of $5,051,000 in the first nine
months of 1996, an increase of $1,700,000, or 33.7%, primarily attributable to
the increase in revenues achieved without a proportionate increase in costs
and administrative expenses. The Company reported an extraordinary gain, net
of income taxes, in the first quarter of 1997 of $1,332,000 on early
extinguishment of debt in January 1997.
Earnings per common share directly related to operations totaled $0.48 in
the first nine months of 1997, compared to earnings per common share of $0.38
for the same period in 1996, an increase of 26.3%. Alliance reported an
extraordinary gain, net of income taxes, in the first quarter of 1997 of
$1,332,000, or $0.11 per common share, on early extinguishment of debt in
January 1997. In addition, Alliance recorded $1,906,000 or $0.16 per common
share related to the excess of the carrying amount of the Series A 6%
cumulative preferred stock repurchased over the consideration period in
January 1997. Although the preceding earnings per share amounts for the first
nine months of 1997 are not representative of operating performance in
accordance with generally accepted accounting principles ("GAAP"), they have
been provided to highlight the significant non-recurring elements contained
within the GAAP earnings per share calculation. Earnings per common share
totaled $0.71 in the first nine months of 1997. The earnings per common share
calculations reflect preferred dividend requirements of $706,000 in the first
nine months of 1996 and none in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for 1996 were $68,482,000, an increase of $10,417,000, or 17.9%,
over 1995. On April 26, 1996, Alliance acquired all of the outstanding shares
of Royal Medical Health Services, Inc. ("Royal") and certain related assets.
Excluding revenues of $2,895,000 from operations which were sold in the second
half of 1995, the increase in revenues was $13,312,000, or 24.1%, with Royal
accounting for $4,694,000, or 8.5% of the increase. This increase reflects a
scan-based MRI revenues increase of $10,897,000, or 22.0%, ($4,532,000, or
9.2%, as a result of the Royal acquisition), resulting from a 23.4% increase
in total scan volume partially offset by a 1.1% decrease in the average
revenues realized per MRI scan. Royal accounted for 9.8% of the scan volume
increase and 0.1% of the offsetting price per scan decrease. The average
number of scans per day for each MRI system increased 15.5% to 6.7 in 1996
from 5.8 in 1995. Management attributes the non-Royal volume increase to
Alliance's continuing MRI systems upgrade program, which has enabled Alliance
to obtain new long-term contracts from both existing and new customers, and to
the effect of some smaller acquisitions. Management believes the decrease in
average revenues realized per scan is the result of: continuing competitive
pressure in the MRI service industry and cost containment efforts by health
care payors; obtaining contracts with customers that have high scan volumes
which justify lower scan prices; and many customers achieving discount price
levels on incremental scan volumes. Revenues under fixed fee contracts
increased $893,000, or 43.8%, resulting from an increased number of MRI
systems under such arrangements. Other revenues increased $891,000 primarily
as
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a result of Alliance selling its investment in London-based Alliance Medical,
Ltd. and recording a gain of $750,000. CT revenues increased $632,000, or
21.8%, primarily as a result of the third quarter 1995 and fourth quarter 1996
acquisitions of two CT businesses.
Alliance operated 86 MRI systems at December 31, 1996 compared to 76 MRI
systems at December 31, 1995. The average number of MRI systems operated by
Alliance was 85 during 1996, compared to 74 during 1995.
Operating expenses, excluding depreciation, totaled $32,344,000 in 1996, an
increase of $4,002,000, or 14.1%, from 1995. Excluding expenses of $1,008,000
related to operations which were sold in the second half of 1995, the increase
in operating expenses was $5,010,000, or 18.3%, with Royal contributing
$2,333,000, or 8.5% of the increase. Payroll and related employee expenses
increased $1,789,000, or 15.0%, which was in line with the revenue increase.
Equipment rental expense increased $898,000, or 60.4%. The increase resulted
from higher number of rented MRI systems in operation and Alliance's leasing
of 20 new tractors in 1996. Other operating expenses increased $751,000, which
was offset by a $761,000 decrease in preventive maintenance contract and
cryogen expense, primarily as a result of more efficient systems and lower
contract rates associated with Alliance's equipment upgrade program.
Depreciation expense during 1996 totaled $12,737,000, an increase of
$535,000, or 4.4%. Excluding depreciation expense of $638,000 related to
operations which were sold in the second half of 1995, depreciation expense
increased $1,173,000, or 10.1%, from the 1995 level principally due to a
higher amount of depreciable assets associated with equipment additions and
upgrades and the Royal acquisition. Amortization expense in 1996 increased
$607,000, or 45.1%, over the 1995 period as a result of the Royal acquisition
and four smaller acquisitions in late 1995 and 1996.
Selling, general and administrative expenses totaled $8,130,000 in 1996, an
increase of $1,836,000, or 29.2%, from 1995. Excluding expenses of $369,000
related to operations sold in the second half of 1995, selling, general and
administrative expenses increased $2,205,000, or 37.2%. Payroll and related
expenses increased $1,457,000, primarily as a result of increased employee
compensation related to increased sales commissions, performance compensation
in connection with the increase in net income, early achievement of long term
incentive plan objectives and increased staffing levels. Bad debt expense
increase $567,000 in 1996 compared to 1995.
Interest expense of $5,758,000 in 1996 was $705,000, or 14.0%, higher than
1995, primarily as a result of higher average outstanding debt balances during
1996 as compared to 1995. This increase related to debt assumed in connection
with the Royal acquisition and additional borrowing related to equipment
additions.
An income tax provision of $1,060,000 was recorded in 1996. Alliance's pre-
tax income in 1996 was substantially offset by net operating loss
carryforwards; however, certain federal alternative minimum taxes and state
tax liabilities applied to this income, giving rise to the tax provision
recorded. In 1995, an income tax provision of $727,000 was recorded, also
related to certain federal alternative minimum taxes and state tax
liabilities. Alliance's 1996 effective tax rate of approximately 14% of pre-
tax income before extraordinary gains was comparable to the 1995 rate. At
December 31, 1996, Alliance had approximately $26,400,000 of net operating
loss carryovers available for federal regular income tax purposes to offset
future taxable income, subject to certain limitations. Approximately
$4,500,000 of this amount is not subject to such limitations; consequently,
approximately $6,700,000 of operating loss carryovers is available in 1997 for
regular federal income tax purposes. Alliance expects its future effective tax
rate to increase as these net operating loss carryovers are fully utilized.
Alliance's net income before extraordinary gains was $6,501,000 in 1996
compared to net income of $4,102,000 in 1995, an increase of $2,399,000, or
58.5%, primarily attributable to the increase in revenues achieved without a
proportionate increase in operating and selling, general and administrative
expenses. Alliance reported extraordinary gains, net of income taxes, in the
fourth quarter of 1996 of approximately $6,300,000 on early extinguishment of
debt.
Earnings per common share directly related to operations (excluding gains on
sales of assets) totaled $0.43 in 1996, compared to $0.26 for 1995, an
increase of 65.4%. Earnings per common share in 1996 also included $0.05
related to Alliance's fourth quarter sale of its investment in Alliance
Medical, Ltd. Alliance reported
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extraordinary gains, net of income taxes, in the fourth quarter of 1996 of
approximately $6,300,000, or $0.55 per common share, on early extinguishment
of debt. In addition, Alliance recorded earnings of $0.15 per common share
related to the excess of the carrying amount of the Series A 6% cumulative
preferred stock repurchased over the consideration paid and other charges.
Although the preceding earnings per share amounts for 1996 are not
representative of operating performance in accordance with GAAP, they have
been provided to highlight the significant non-recurring elements contained
within the GAAP earnings per share calculation. Earnings per common share
totaled $1.18 in 1996. The earnings per common share calculations reflect
preferred dividend requirements of $943,000 in 1996 and $930,000 for 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues for 1995 were $58,065,000, an increase of $190,000, or 0.3%, over
1994. This increase reflects a $1,557,000 increase in MRI revenues under fixed
fee contracts and an increase in CT and other revenues totaling $125,000,
offset by a $1,492,000, or 2.9%, decrease in scan-based MRI revenues. The
decrease in scan-based MRI revenues resulted from a 5.8% increase in scan
volume offset by an 8.2% decrease in average revenues realized per MRI scan.
Management attributes the volume increases to Alliance's continuing MRI
systems upgrade program, which has enabled Alliance to obtain new long-term
contracts from both existing and new customers. The average number of scans
per day for each MRI system remained unchanged at 5.8. Management believes the
decrease in average revenues realized per scan is the result of continuing
competitive pressure in the MRI service industry and cost containment efforts
by health care payors, as well as obtaining contracts with customers that have
high scan volumes which justify lower scan prices on incremental scan volume.
The increase in MRI revenues under fixed fee contracts is a result of a higher
number of systems deployed in full-time temporary assignments, including
several older systems awaiting trade-in on new equipment. CT and other
revenues increases are generally associated with the acquisition of a mobile
CT business and the gain on sale of equipment and a related service contract,
offset by lower other imaging revenue resulting from the disposition of
Alliance's full-service imaging center in Fresno, California as of September
30, 1995. Alliance operated 76 MRI systems at December 31, 1995, compared to
72 systems at December 31, 1994. The average number of MRI systems operated by
Alliance was 74 in 1995, compared with 73 during 1994.
Operating expenses, excluding depreciation, totaled $28,342,000 in 1995, a
decrease of $2,751,000, or 8.8%, from 1994. Payroll and related employee
expenses decreased $336,000, or 2.7%, to $12,153,000 due to more efficient
staffing associated with cost reduction efforts and a larger number of systems
staffed by customer personnel in 1995. Maintenance and cryogen contract
expense declined $288,000, or 3.1%, to $9,079,000, as a result of an increased
number of newer, efficiently-operating systems in the fleet in 1995 and lower
contract rates, partially offset by an increased number of systems. Equipment
rental expense decreased $828,000, or 33.9%, to $1,618,000, as operating
leases expired and Alliance returned the related equipment to the lessor. The
leased equipment was generally replaced with low cost used MRI systems
purchased by Alliance. Professional medical services, supplies, site fees and
repairs expenses collectively decreased $1,443,000 or 40.0%, to $2,805,000,
primarily as a result of reduced physician staffing and other cost control
efforts at Alliance's full-service imaging center in Fresno, California, which
was disposed of effective September 30, 1995.
Depreciation expense during 1995 decreased $1,222,000, or 9.1%, from the
1994 level due to a lower amount of depreciable assets, resulting from
equipment write-downs in late 1994, partially offset by equipment additions in
1995. Amortization expense in 1995 increased $402,000, or 42.6%, over 1994
because of the revision of the amortization period for goodwill from 40 to 25
years, effective October 1, 1994, and a small business acquisition in 1995.
Selling, general and administrative expenses were essentially unchanged from
the prior year. Payroll and related employee expenses increased $629,000, or
15.7%, as a result of long-term deferred incentive compensation costs and
inflationary pressures. Bad debt expense decreased $609,000, or 100.0%, to
zero in 1995 as a result of revised billing practices and continuing intensive
collection efforts, primarily with respect to Alliance's retail accounts
receivable.
Interest expense of $5,053,000 in 1995 was $5,705,000, or 53.0%, lower than
in 1994 primarily as a result of Alliance's comprehensive debt restructuring,
effective as of December 31, 1994, and lower average outstanding debt balances
in 1995.
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Alliance recorded special charges totaling $13,339,000 in the fourth quarter
of 1994. No such charges were incurred in 1995. Including these charges, the
loss before taxes totaled ($17,966,000) in 1994, compared to income before
taxes of $4,829,000 in 1995, an improvement of $22,795,000. Although the
preceding amounts before taxes are not representative of operating performance
in accordance with GAAP, they have been provided to highlight the significant
non-recurring element contained within the GAAP net income measurement. This
improvement resulted from significantly reduced operating expenses (including
depreciation), substantially lower interest expense and the absence of special
charges in 1995. Income before taxes in 1995 increased $9,456,000 over 1994's
loss before taxes without the effects of special charges.
An income tax provision of $727,000 was recorded in 1995. Alliance's pre-tax
income in 1995 was substantially offset by net operating loss carryforwards;
however, certain federal alternative minimum taxes and state tax liabilities
applied to this income, giving rise to the tax provision recorded. In 1994, an
income tax provision of $1,100,000 was recorded as a result of federal
alternative minimum tax and certain state income taxes related to cancellation
of debt income for tax purposes associated with Alliance's financial
restructuring, as well as increased valuation allowances for deferred tax
assets. However, these reserved tax assets may be available to reduce future
income tax provisions. At December 31, 1995, Alliance had approximately
$33,000,000 in federal net operating loss carryforwards available to offset
future taxable income, subject to certain limitations.
Alliance's net income was $4,102,000 in 1995, compared to a net loss of
($19,066,000) in 1994, an increase of $23,168,000, primarily attributable to
the increased operating profits, lower interest expense and absence of special
charges in 1995, as explained above. Net income in 1995 increased $9,354,000
over the net loss in 1994 without the effect of the special charges and
related tax impact. Although the preceding amount of net loss excludes the
effects of special charges and income taxes is not representative of operating
performance in accordance with GAAP, it has been provided to highlight the
significant non-recurring element contained within the GAAP net loss
measurement. This increase is attributable to higher operating profit and
lower interest expense in 1995.
Earnings per common share totaled $0.28 in 1995, compared to a loss per
common share of ($2.68) in 1994 (which includes ($1.94) net loss per common
share for special charges). Although the preceding earnings per share amount
for 1994 is not representative of operating performance in accordance with
GAAP, it has been provided to highlight the significant non-recurring element
contained within the GAAP earnings per share calculation. The 1995 earnings
per common share calculation reflects preferred dividend requirements totaling
$930,000 which arose as part of Alliance's financial restructuring, effective
December 31, 1994. There were no preferred dividend requirements in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Alliance generated $12.8 million, $18.0 million and $21.7 million from
operating activities in 1994, 1995 and 1996, respectively, and $17.3 million
and $22.1 million in the first nine months of 1996 and 1997, respectively. The
increase in cash provided by operating activities reflects the increase in
scan volumes and improved operating performance. Capital expenditures,
consisting primarily of new equipment purchases, totaled $22.4 million, $11.4
million and $34.4 million in 1994, 1995 and 1996, respectively, and $34.2
million in the first nine months of 1997. Since January 1, 1995, Alliance has
upgraded 23 MRI systems and purchased 35 new MRI systems, including
replacement systems. As of December 31, 1996, Alliance had binding equipment
purchase commitments totalling approximately $29.2 million. Alliance expects
to purchase the equipment under these commitments in 1997 and finance such
purchases with installment debt primarily provided by the equipment
manufacturers.
The Company's primary cash needs consist of capital expenditures and debt
service. The Company incurs capital expenditures for the purposes of (i)
providing routine upgrades of its MRI systems; (ii) replacing or making major
upgrades to older, less advanced systems with new state-of-the-art systems;
and (iii) purchasing
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new systems. The Company estimates that routine annual upgrade expenditures
average approximately $25,000 per system or approximately $2.4 million in the
aggregate, based on the fleet size at September 30, 1997. In addition to these
routine expenditures, the Company expects capital expenditures to be
approximately $12 million in the last three months of 1997 which reflects the
anticipated purchase of eight new MRI systems, including replacement systems.
The Company expects capital expenditures to be approximately $20 million in
1998, which includes the anticipated purchase of 10 new MRI systems and
routine upgrade expenditures. The Company's decision to purchase a new system
is typically predicated on obtaining new or extending existing customer
contracts which serve as the basis of demand for the new system.
After giving effect to the Transactions, the Company will be capitalized
with $165.0 million of Notes, a $125.0 million Credit Agreement consisting of
a $50.0 million Term Loan Facility and a $75.0 million Revolving Loan
Facility, $6.9 million of other obligations and $15.0 million of Series F
Preferred Stock. The Notes will bear interest, payable semiannually, and will
require no principal repayments until maturity. The Term Loan will mature on
the sixth anniversary of the initial borrowing and will require annual
principal repayments of $0.5 million per year during the first five years and
$47.5 million in the sixth year. The Revolving Loan Facility will mature on
the fifth anniversary of the initial borrowing and will have mandatory
commitment reductions of $37.5 million on the fourth and fifth anniversaries
of the initial borrowing. The interest rate under the Credit Agreement is
expected to be based on LIBOR. The Credit Agreement will contain 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, and
prepayments of other indebtedness. In addition, the Credit Agreement will
require loans to be prepaid with 100% of the net proceeds of non-ordinary-
course asset sales or other dispositions of property, issuances of debt
obligations and certain preferred stock and certain insurance proceeds, 75% of
annual excess cash flow and 50% of the net proceeds from common equity and
certain preferred stock issuances, in each case subject to limited exceptions.
Voluntary prepayments are permitted in whole or in part. See "Description of
the Credit Agreement". The Series F Preferred Stock will pay dividends at the
rate of 13.5% per annum, payable quarterly in arrears, with such dividends
payable in kind at the option of the Company for the first five years from the
issue date. The Series F Preferred Stock is mandatorily redeemable for its
liquidation preference plus accrued and unpaid dividends on the 10th
anniversary of the issue date. The Series F Preferred Stock is redeemable at
the option of the Company prior to the 10th anniversary at premiums (expressed
as a percentage of the accreted face value) declining over ten years from
13.5% to 0%. See "ALLIANCE CAPITAL STOCK--Series F Preferred Stock." The
Company does not currently intend to pay dividends in cash on the Series F
Preferred Stock prior to the fifth anniversary of the issue date and does not
currently intend to redeem the Series F Preferred Stock prior to the mandatory
redemption date.
The Company believes that after giving effect to the Transactions and the
incurrence of indebtedness related thereto, based on current levels of
operations and anticipated growth, its cash from operations, together with
other available sources of liquidity, including borrowings available under the
Revolving Loan Facility, will be sufficient over the next several years to
fund anticipated capital expenditures and make required payments of principal
and interest on its debt, including payments due on the Notes and obligations
under the Credit Agreement. In addition, the Company continually evaluates
potential acquisitions and expects to fund such acquisitions from its
available sources of liquidity, including borrowings under the Revolving Loan
Facility.
The Company's expansion and acquisition strategy may require substantial
capital, and no assurance can be given that the Company will be able to raise
any necessary additional funds through bank financing or the issuance of
equity or debt securities on terms acceptable to the Company, if at all.
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INDUSTRY
Diagnostic Imaging. Diagnostic imaging involves the use of non-surgical
techniques to generate representations of internal organs on film or video.
Diagnostic imaging systems have evolved from conventional x-rays to the
advanced technologies of MRI, CT, ultrasound, nuclear medicine, mammography,
positron emission tomography ("PET") and fluoroscopy. The market for
diagnostic imaging services in the United States is estimated to be in excess
of $50 billion annually, or 5% to 6% of total health care spending. MRI
services constituted approximately $6 to $7 billion of the diagnostic imaging
industry in 1996.
Patients are typically billed for diagnostic imaging services by their
hospitals. The bill consists of a technical fee or charge for use of the
equipment as well as a professional fee for the services of the radiologist
who interprets the data. Hospitals which outsource diagnostic imaging
equipment and services pay providers directly and collect fees for service and
technical charges from payors.
Magnetic Resonance Imaging. Magnetic resonance imaging involves the use of
high strength magnetic fields to produce computer-processed cross-sectional
images of the anatomy. MRI services are provided by hospitals with in-house
systems, independent fixed site operators and independent mobile operators.
The approximately 4,000 MRI systems in the United States include 2,400
hospital owned systems, 1,000 independent fixed site systems and approximately
600 mobile systems. The MRI industry has experienced rapid growth as a result
of increased physician acceptance of diagnostic imaging, substitution of MRI
for other imaging modalities (including x-ray based techniques), expanding
applications for MRI technology and health care reform which encourages
outpatient services. Total scan volumes have increased from 5.4 million in
1990 to 8.8 million in 1996. According to an industry consultant, scan volumes
are projected to grow at approximately 7% to 8% per year through 1999 and at
5% per year thereafter.
The MRI services industry is highly fragmented. Recently, however, the
industry has begun to undergo consolidation. The Company believes such
consolidation is primarily the result of (i) economies of scale in the
provision of services to a larger customer base; (ii) cost-effective
purchasing of equipment, supplies and services by larger companies; and (iii)
the decision by many smaller, capital constrained operators to sell their MRI
businesses rather than make substantial investments in new imaging systems.
Despite the recent trend, management estimates that as of September 30, 1997,
the top eight MRI service providers operated only 13% of the total MRI systems
in the United States.
The history of the MRI industry can be divided into three periods: (i)
initial growth from 1984-1992; (ii) downturn in 1993-1994; and (iii) renewed
growth and consolidation beginning in 1995-1996. The increased use of MRI as a
diagnostic tool between 1984 and 1992 resulted from a variety of factors
including falling equipment costs, increased physician acceptance of the
technology, increased number of clinical applications and Medicare reform
enacted by Congress in 1983, which encouraged outpatient treatment.
Changes in the health care industry and legislative reform between 1992 and
1994 slowed the growth of the MRI industry. The threat of health care reform
and the desire to control medical costs and pricing, placed physicians under
tremendous scrutiny to control costs and further contributed to the decrease
in use of MRI by the medical profession. Simultaneously, the shift towards
health maintenance organizations and the trend to decrease utilization of
outpatient services and accept declining reimbursement rates (a 20% decline in
reimbursement rates was experienced between 1992-1994) led to a period in
which the use of MRI as a diagnostic tool was limited.
Despite the new cost-conscious environment in which hospitals and physicians
operated, the advantages of MRI as compared to other forms of diagnostic
imaging, development of new practical uses of MRI and increased Medicare
reimbursement (1%-2% increase per year between 1994-1996) resulted in
increased MRI use beginning in 1995-1996. See "Business--Reimbursement."
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Imaging Systems and Technology. MRI technology dates back to 1971 when Dr.
Raymond Damadian began applying principles of magnetic resonance to the field
of diagnostic imaging. In 1984, the FDA approved the sale of MRI systems to
community hospitals and private clinics. A principal element underlying
magnetic resonance imaging is that atoms in various kinds of body tissue
behave differently in response to a magnetic field, enabling the
differentiation of internal organs and structures and normal and diseased
tissue. MRI facilitates the diagnosis of diseases and disorders at an early
state, often minimizing the cost and amount of care needed and frequently
eliminates the need for invasive diagnostic procedures. MRI is the preferred
imaging modality for the brain, the spine and other internal organs because it
produces a superior image of soft tissue, without artifacts from bony
structures that are sometimes apparent with x-ray based imaging techniques. In
addition, unlike x-rays and CT, MRI does not expose patients to ionizing
radiation. Applications for MRI include detection of brain lesions, such as
multiple sclerosis, tumors, strokes and infections, spinal injuries, diseases
and congenital disorders, and heart, chest, abdomen, ligament, tendon and
joint injuries or diseases.
The major components of an MRI system are a large magnet, radio wave
equipment, and a computer for data storage and image processing. During an MRI
study, a patient lies on a table which is then placed into the magnet. The
patient spends approximately 15 to 45 minutes inside the magnet, depending
upon the type of MRI system and diagnostic study, during which time images of
multiple planes are acquired. Images obtained from an MRI examination are
displayed on a computer screen in the form of a cross-section of the organ or
tissue. This information can be stored on magnetic media for future access or
printed on film for interpretation by a physician and retention in the
patient's files.
Depending upon type, features and options selected, an MRI system and
related housing and installation generally cost between $1.6 million and $2.2
million. The largest manufacturers of MRI systems are General Electric Medical
Systems, Siemens Medical Systems, Phillips N.V. and Picker International.
These manufacturers also supply maintenance and service under warranties and
contracts. Industry participants typically enter into contracts with the
manufacturers after the expiration of the warranty for comprehensive
maintenance programs on equipment to minimize downtime (the period of time
equipment is unavailable during scheduled use hours because of malfunctions).
Research and Contrast Enhancement. Research is currently being conducted for
additional uses of MRI and the Company believes more applications for MRI may
be developed in the future. Contrast agents enhance the use of MRI in the
detection of neurological lesions, including specific types of brain tumors.
Contrast agents also enhance images of the post-operative spine, and are under
investigation for use in the liver and other organ systems. MRI's role in the
evaluation of cardiac disease and diseases of the bone marrow and joints is
also on the increase. New technological developments are expected to extend
the clinical uses of this technology and to increase the number of scans
performed by the Company's customers. In October 1995, Medicare began to
reimburse MRA procedures on a limited basis. MRA utilizes MRI technology to
view blood flow of the head and neck. Prior to October 1995, MRA procedures
were considered experimental and were not reimbursed by Medicare. Some MRA
procedures have been approved by Medicare; it is expected that additional MRA
procedures will be approved in the near future.
Mobile MRI. Mobile MRI operators provide a cost-effective alternative
enabling hospitals to access MRI technology. Mobile MRI operators use
specially designed vans or trailers to transport MRI systems to hospitals and
provide trained technologists to perform the scans. Operators typically enter
into long-term contracts to provide a scheduled amount of service on a fee-
per-scan basis. Operators then design schedules for each system to rotate
among multiple hospitals in a manner that optimizes the utilization of each
system.
Mobile MRI systems typically operate in non-metropolitan areas, targeting
small to mid-sized hospitals that do not own imaging systems. These hospitals
often cannot afford the significant capital investment associated with MRI
systems or lack the patient volume to utilize the systems in a cost-effective
manner. In addition, CON and other licensing requirements in many states have
further limited hospitals' ability to purchase MRI systems. However, such
hospitals need state-of-the-art diagnostic imaging technology to remain
competitive. In addition, many medical professionals have become increasingly
aware of the risks of medical malpractice suits and believe that such risks
would be reduced by utilizing state-of-the-art medical technology and related
services.
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BUSINESS
GENERAL
The Company is a leading nationwide provider of diagnostic imaging services
and the largest operator of state-of-the-art mobile diagnostic imaging systems
and related outsourced radiology services in the United States. The Company
primarily provides MRI systems and services to hospitals and other health care
providers on a mobile, shared user basis. The Company also provides dedicated,
full-time MRI systems and services as well as full-service management of
imaging operations for selected hospitals. The Company's services enable small
to mid-size hospitals to gain access to advanced diagnostic imaging technology
and related value-added services without making a substantial investment in
equipment and personnel. The Company operates a fleet of 98 MRI systems and
services 356 MRI customers in 36 states under exclusive contracts with an
average remaining length of approximately 24 months as of September 30, 1997.
Since the beginning of 1995, Alliance has substantially increased revenues
by adding new customers and increasing scan volumes at existing customer
sites. During the same period, the growth rate of Alliance's EBITDA and net
income has exceeded the growth rate of revenues principally as a result of
spreading costs (which are primarily fixed) over a larger revenue base and
implementing cost reduction and containment measures.
COMPETITIVE STRENGTHS
The Company attributes its market leadership and its significant
opportunities for continued growth and increased profitability to the
following strengths:
Largest Provider of Mobile MRI Services. The Company operates 98 MRI systems
in 36 states. The Company believes that the next largest mobile operator has a
fleet of approximately 70 MRI systems. Compared to its smaller competitors,
the Company believes it benefits from (i) significant equipment purchasing
savings; (ii) attractive service and maintenance contracts from its primary
equipment suppliers; (iii) strong name recognition and a reputation for
quality service; (iv) substantial financial flexibility and access to lower-
cost capital; and (v) the ability to efficiently deploy systems in a manner
which maximizes fleet utilization while satisfying customer requirements.
Technologically Advanced MRI Fleet. The Company has invested approximately
$78 million since January 1, 1995 to replace and upgrade existing systems and
to purchase new systems. As a result, the Company believes that it has
upgraded substantially all of its systems and expects most of its capital
expenditures for at least the next three to five years to relate to new system
purchases. Of the Company's 98 MRI systems, 73 are state-of-the-art, high-
field 1.0 or 1.5 Tesla systems and 13 are state-of-the-art, mid-field 0.5
Tesla systems. The Company believes its fleet is among the newest and most
advanced in the industry, enabling the Company to perform a wider variety and
greater volume of scans and produce higher quality images, which the Company
believes provides a significant competitive advantage. Moreover, all of the
Company's state-of-the-art systems are designed to facilitate hardware and
software upgrades. As a result, the Company's systems should remain on the
leading edge of technological developments. In addition, while many of its
competitors lease their systems, the Company owns the vast majority of its
systems, generally providing greater flexibility and lower costs over the life
of the systems.
Exclusive, Long-Term Contracts in Attractive Markets. The Company generates
substantially all of its revenues from exclusive, long-term contracts with
hospitals and other health care providers, with the price for its services
determined on a fee-per-scan basis. The Company has 20, 84 and 77 contracts
that will expire, if not renewed or extended, in the fourth quarter of 1997,
and the years 1998 and 1999, respectively. The Company anticipates that it
will renew or extend substantially all of these contracts. The Company's
contracts typically offer tiered pricing with lower fees on incremental scans,
allowing customers to benefit from increased scan volumes and the Company to
benefit from the operating leverage associated with increased scan volumes.
Accordingly, tiered pricing enables the Company to retain customers who may be
considering purchasing their own MRI systems rather than renewing a contract
with a mobile provider. As of September 30, 1997, the
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Company had 356 MRI customers under exclusive contracts which averaged
approximately 24 months in remaining length. Most of the Company's contracts
are with hospitals that have fewer than 200 beds, many of which may lack the
financial resources or patient volume to justify the purchase of an MRI
system.
Superior Customer Service and Strong Customer Relationships. The Company
positions itself as a service company rather than solely as an equipment
provider and competes on the basis of value-added services in addition to
price. The Company differentiates itself from competitors by aggressively
marketing its services to referring physicians, radiologists and hospital
administrators and by having the advanced imaging systems, trained
technologists, fleet management capabilities and fleet size to accommodate the
growing needs of its customers. Value-added services offered by the Company
include patient scheduling and pre-screening, insurance pre-authorization,
appointment confirmation, billing, managed care contracting, and management
reporting services. The Company often provides two technologists per mobile
system per shift and is therefore able to accommodate higher patient volume
and operate with greater efficiency, resulting in high customer satisfaction
levels. As a result, the Company enjoys strong customer relationships, having
added 146 net new MRI customers from January 1, 1995 through September 30,
1997 and renewed or extended 197 of its customer contracts in this period.
Substantial Operating Leverage. Because of the significant amount of fixed
costs associated with operating an MRI system, MRI service providers benefit
from operating leverage, with increased utilization rates resulting in
significant increases in operating earnings and operating margins. The
Company's average scans per system per day increased to 7.2 for the nine
months ended September 30, 1997 from 6.7 for the nine months ended September
30, 1996.
Favorable Payment Terms. Approximately 92% of the Company's billings are
direct to hospitals. The hospitals, in turn, generally pay the Company prior
to collecting from patients and third party payors. Accordingly, the Company's
exposure to uncollectible patient receivables is minimized. In addition,
management believes that the Company's average number of DSO of receivables,
which was 45 days as of September 30, 1997, is among the most favorable in the
mobile MRI industry and more favorable than the DSO of many health care
companies.
Experienced Management Team. The Company's senior management team has an
average of nine years of industry experience and six years of experience with
Alliance. The Company's senior and operating managers have successfully
developed and implemented sophisticated marketing, fleet management and
financial strategies which have enabled the Company to become the largest and
among the most efficient and profitable mobile MRI operators. Upon
consummation of the Recapitalization and after giving effect to the Company's
option plans, management will own in excess of 11% of the capital stock of the
Company on a fully diluted basis.
BUSINESS STRATEGY
The Company's management team has developed and implemented a business
strategy designed to maximize return on invested capital and in turn increase
revenues and cash flow. The Company's revenues for the nine months ended
September 30, 1997 increased to $62.3 million from $49.1 million for the nine
months ended September 30, 1996. In addition, the Company's income before
extraordinary gain for the nine months ended September 30, 1997 increased to
$6.8 million from $5.1 million for the nine months ended September 30, 1996.
The Company achieved comparable customer revenue growth of 25.9% and 8.8%,
respectively, in the first nine months of 1997 and in the year ended December
31, 1996. In addition, during the three months ended September 30, 1997, the
Company added a total of eight net mobile MRI systems. Management believes
that the recent financial performance of the Company does not yet fully
reflect the benefit of these new systems.
The primary components of the Company's business strategy are to (i)
increase scan volumes; (ii) maximize return on invested capital; (iii) expand
the scope of services provided and (iv) pursue strategic acquisitions.
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Increase Scan Volumes. The Company believes that the demand for MRI
procedures will continue to grow as new applications are developed and MRI
continues to gain acceptance and replace other imaging modalities. The Company
has an opportunity to significantly increase its scan volumes by both adding
new customers and increasing scans performed for existing customers. In
response to the growing demand for MRI procedures, the Company added 26 net
MRI systems and 146 net new MRI customers from January 1, 1995 to September
30, 1997. The Company expects to add 14 net MRI systems by the end of 1998.
The Company's decision to purchase new systems is typically predicated on
obtaining new customer contracts which serve as the basis of demand for the
new MRI systems.
Maximize Return on Invested Capital. The Company actively manages the
utilization of its MRI systems to maximize its return on invested capital
(i.e., the amount of cash flow generated by each system relative to the
carrying value of such system). In the nine months ended September 30, 1997,
the Company generated an annualized return on invested capital of 42.9%. The
Company typically upgrades the quality of its fleet in markets where demand is
greatest and redeploys less advanced systems in markets where demand is lower
in order to generate incremental cash flow. The Company estimates that, on
average, a system can be utilized in a high demand market for approximately
eight years when properly maintained and upgraded, after which time the system
can either be utilized in a market with less demand or traded in for a new
system.
Expand the Scope of Services Provided. The Company intends to leverage its
national presence and customer service capabilities by introducing new
services, the demand for which management believes will increase as hospitals
continue to outsource departments and cost centers and seek incremental
revenue sources. The Company expects to expand into open MRI services,
lithotripsy services (which involves the utilization of sound waves to
eliminate kidney stones and urinary calculus in the bladder) and full-service
management of hospital radiology departments. Open MRI systems are used on
claustrophobic patients and patients whose size prohibits them from entering
traditional MRI systems. Management believes that with the introduction of its
first open MRI system in the fourth quarter of 1997, the Company will be the
first operator to offer mobile open MRI service.
Pursue Strategic Acquisitions. Management has designed an acquisition
strategy for the Company which capitalizes on the consolidation occurring in
the industry as well as the Company's ability to (i) access substantial and
lower cost financial resources; (ii) realize significant synergies, operating
expense reductions and overhead cost savings; (iii) apply its consolidation
strategy to expand outside of diagnostic imaging in related services; (iv)
utilize the Company's expertise in logistics and fleet management; and (v)
leverage the Company's existing customer relationships to expand into new
modalities.
On October 20, 1997, Alliance announced the execution of a definitive
agreement to acquire MCIC, a Cleveland, Ohio based provider of mobile MRI
services, CT services and other outsourced healthcare services. The
acquisition also includes MCIC's one-half interest in an operating joint
venture in Michigan. The purchase price consists of $13 million cash plus the
assumption of approximately $5 million in financing arrangements. MCIC
operates 14 mobile MRI systems and several other diagnostic imaging systems,
primarily in Ohio, Michigan, Indiana and Pennsylvania. The transaction was
completed on November 21, 1997. In addition, the Company is currently engaged
in acquisition discussions with several other MRI service providers.
Management believes future acquisitions will enable the Company to redeploy
systems in overlapping markets, resulting in higher utilization rates and the
opportunity to increase penetration in other markets.
OPERATIONS
Customer Base. The Company believes that many hospitals and other health
care providers require access to MRI services to remain competitive in the
health care marketplace. Regulatory and licensing requirements in many states
may also limit access to MRI systems. In addition, many health care providers
lack sufficient patient volume or financial resources to justify the purchase
of an MRI system. Such providers contract for mobile, shared-user systems or
single-user, full-time systems to gain access to MRI technology and to provide
comprehensive MRI services to their patients. In addition, many health care
providers, regardless of whether their patient utilization levels and
financial resources justify the purchase of an MRI system, prefer to contract
with
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the Company for full-time or shared-user imaging systems to (i) obtain the use
of an MRI system without any capital investment or financial risk; (ii) retain
the ability to switch system types and avoid technological risk; (iii) obtain
MRI services in jurisdictions in which the use of the Company's services
facilitates the procurement of regulatory approvals; (iv) avoid future
uncertainty as to reimbursement policies; (v) eliminate the need to recruit,
train and manage qualified technologists; (vi) outsource their entire MRI
service to obtain access to needed technology while avoiding financial
investment or risk and obtaining management expertise; or (vii) provide
additional imaging services when patient demand exceeds their in-house
capability.
The Company's MRI and CT services, which include imaging systems,
technologists and support services, are provided on both a mobile, shared-user
basis and on a full-time basis to single customers. As of September 30, 1997,
the Company provided imaging systems and related technologists and support
services to 389 customers (356 for MRI services and 60 for CT services; some
customers contract for both modalities) consisting primarily of small to mid-
sized hospitals (i.e., hospitals with 50-200 beds). The Company believes that
many of such hospitals lack the patient volume or financial resources to
justify the purchase of an MRI system. As of September 30, 1997, the Company
provided services and equipment to customers in 36 states.
Typically, the Company's MRI systems are contracted on average for five to
six days a week. The Company believes that as customers become familiar with
the basic or expanded technology and its applications, the corresponding MRI
system's rate of usage generally increases, causing the number of scans per
day to increase and eventually leading to requests for additional days of
usage.
Contract Terms. Contract fees are charged on a fee-per-scan, fee-per-day or
fee-per-month basis (with numerous variations within each billing method to
accommodate particular customers' needs). Generally, the Company provides
technologists under contracts billed on a fee-per-scan or fee-per-day basis
but not under contracts billed on a fee-per-month basis. Although a typical
contract offers daily flat-rate options, most customers currently pay on a
fee-per-scan basis. The amount of fees paid on this basis depends upon the
type of imaging system provided, the term of the contract, the types and
number of scans performed as well as the day of the week on which scans are
performed. The contracts typically allow the Company to reduce the number of
days of service provided based upon the customer's scan volume, or to
terminate the contract if the Company is unable to realize a profit on the
services provided. The Company typically enters into exclusive, one to eight
year contracts that include automatic renewal provisions. In addition, the
Company's marketing representatives consistently seek to renew and extend
contracts prior to expiration. From January 1, 1995 through September 30,
1997, the Company renewed or extended 197 of its customer contracts. As of
September 30, 1997, the Company's contracts averaged approximately 24 months
in remaining length.
Imaging Systems. At September 30, 1997, the Company operated 98 MRI systems
and 14 CT systems. Of the 98 MRI systems, 73 are state-of-the-art, high-field
1.0 or 1.5 Tesla systems and 13 are state-of-the-art, mid-field 0.5 Tesla
systems. These systems are designed to facilitate hardware and software
upgrades. As a result, the Company's systems should remain at the leading edge
of technological developments. Further, of the 98 MRI systems, 86 are housed
in mobile coaches and 12 are housed in relocatable modular buildings on
hospital campuses or installed in the hospital facility. Substantially all of
the imaging systems are owned by the Company. One of such systems is a fixed-
site system at a large hospital in Georgia operated by a partnership of which
a subsidiary of the Company is a partner.
The Company orders substantially all of its imaging systems from major
medical device manufacturers, primarily General Electric Medical Systems,
Siemens Medical Systems and Picker International. Generally, the Company
orders its imaging systems from such major manufacturers while simultaneously
contracting with health care providers for their use, thereby reducing the
Company's system utilization risk. The Company's MRI systems are installed in
specially-designed trailers or relocatable, modular buildings. The trailers
and relocatable modular buildings are designed jointly by the imaging system
manufacturer and the housing manufacturer and are designed to provide image
quality identical to those installed in hospital facilities.
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Fleet Management. The Company seeks to maximize cash flow and return on
assets by actively managing its fleet to maximize utilization. The Company
employs logistics management systems and redeploys or trades in older MRI
systems when it purchases new MRI systems. MRI systems are currently scheduled
for as little as one-half day and up to seven days per week at any particular
facility. Generally, technologists and a driver are assigned to each of the
mobile operating systems. Movement of the systems typically occurs at night
via a fleet of Company-owned or leased tractors. The drivers move the systems
and activate them upon arrival at each imaging site so that the systems are
operational when the Company's technologists arrive on the following scheduled
imaging day.
Regional Management. The Company's seven regional offices market, manage and
staff the operation of its imaging systems. The Company's regional offices are
located in Anaheim and Roseville, California; Pittsburgh, Pennsylvania;
Chicago, Illinois; Colorado Springs, Colorado; Burlington, Connecticut; and
Macon, Georgia. Each region has individuals responsible for sales and
operations management.
Licensing and JCAHO Accreditation. Most states do not currently license MRI
providers such as the Company, although many do subject such providers to CON
requirements. Hospitals with which the Company has contracted are subject to a
variety of regulations and standards of state licensing and other authorities
and accrediting bodies such as the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"). As an outside vendor, the Company may be
required to comply with such regulations and standards to enable the hospitals
with which it has contracted to maintain their permits, approvals and
accreditation. Alliance is in the process of seeking accreditation from JCAHO.
CUSTOMER SUPPORT
As part of its full service package, the Company provides several levels of
support to a hospital or health care provider. The Company's technologists who
staff the MRI systems regularly work with the hospital radiologists, referring
physicians and nursing staff to perform the scans. The technologists also work
with regional technical advisors who are specialists in MRI technology and
consult on specialized technical problems, hold periodic training sessions for
the technologists, radiologists, referring physicians and health care
customers and provide problem-solving services. These specialists play a
central role in the Company's retention of accounts and building of scan
volumes. Management believes that targeted direct marketing at each hospital
with assigned responsibility for support services is a key element for
broadening the awareness of MRI technology, building scan volumes and
obtaining contract renewals.
SALES AND MARKETING
Currently, the Company's sales force consists of 13 members who identify and
contact candidates for the Company's services each with the overall management
and sales responsibility for a specific region of the country. Direct
marketing plays a primary role in the Company's development of new customers.
The Company employs 18 full-and part-time marketing representatives who
develop scan volumes at existing and new customer locations by introducing the
Company's services to referring physicians and keeping such physicians
apprised of the Company's MRI service capabilities. In addition, certain of
the Company's executive officers and regional vice presidents spend a portion
of their time marketing the Company's services. The Company believes that
having senior managers involved in sales and contract negotiations enhances
its ability to obtain new and retain existing customers.
MAINTENANCE
For its MRI and CT systems, the Company primarily relies upon the
manufacturer to provide maintenance and service under warranties and service
contracts. These service contracts require the Company to pay fixed monthly
fees or variable fees on a risk-sharing basis.
Timely, effective service is essential to maintaining high utilization rates
on the Company's MRI systems. If the Company experiences greater than
anticipated malfunctions of its equipment or if it is unable to promptly
obtain the service necessary to keep its systems functioning effectively, its
business could be adversely affected.
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The Company contracts with the MRI equipment manufacturers for comprehensive
maintenance programs on its systems to minimize downtime (the period of time
equipment is unavailable during scheduled use hours because of malfunctions).
These maintenance contracts commence upon the expiration of the applicable
warranty period. The systems are generally warranted by the systems
manufacturer for a specified period of time, usually one year to eighteen
months from the date of purchase. During the warranty period and maintenance
contract term, the Company receives uptime guarantees (a guarantee that
equipment will function for a specified percentage of scheduled use hours.)
However, these guarantees are not expected to substantially compensate the
Company for loss of revenue for downtime.
REIMBURSEMENT
Substantially all the Company's revenues are derived directly from health
care providers rather than from private insurers, other third party payors or
governmental entities. Consequently, the Company historically has not had
material direct exposure to, or direct connection with, patient billing,
collections or reimbursement by insurance companies, other third parties or
Medicare. However, to a lesser extent, the Company's revenues are 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 less than established patient billing rates. Net revenues from
direct patient billing amounted to approximately 8% of the Company's revenue
in 1996.
Most private health care insurers, including various Blue Cross and Blue
Shield Plans, reimburse approximately 70% to 100% of the health care
provider's charge for MRI and CT scans. Such insurers may impose limits on
reimbursement for imaging services or deny reimbursement for tests that do not
follow recommended diagnostic procedures. Because patient reimbursement may
indirectly affect the levels of fees the Company can charge its customers by
constricting the health care providers' profit margin, widespread application
of restricted or denied reimbursement schedules could adversely affect the
Company's business. Conversely, at lower reimbursement rates, a health care
provider might find it financially unattractive to own an MRI or CT system,
but could benefit from purchasing the Company's services.
Congress has attempted to restrict rising federal reimbursement costs under
the Medicare program by setting predetermined payment amounts for
reimbursement of inpatient services according to each patient's diagnosis
related group ("DRG"). Because a DRG rate compensates a hospital for all
services rendered to a patient, a hospital cannot be separately reimbursed by
Medicare for an MRI scan or other procedure performed on an inpatient. DRG
payment rates for inpatient services became effective in the early 1980's and
have been adjusted downward since then. Currently, those payment rates are not
applicable to outpatient services; instead, Medicare reimbursement for imaging
services furnished in a hospital outpatient setting is subject to alternative,
generally more favorable, payment limits tied to the physician fee schedule
described below. However, it is possible that DRG payment rates or other
limits might be implemented with respect to outpatient services in the future.
Because payments have generally been less restricted in non-hospital
outpatient settings, in prior years there has been rapid growth in MRI systems
at non-hospital free-standing facilities which provide outpatient services.
HHS, as required by statute, has issued fee schedules for reimbursing
physicians who treat Medicare patients. Under these fee schedules, physician
reimbursement for professional services is based on a set of values assigned
to each service provided by a physician. The fee schedules also generally
apply to reimbursement for technical services (such as those provided by the
Company) except in limited circumstances. There can be no assurance that
Medicare payments will remain comparable to present levels. In particular, on
June 18, 1997, the Health Care Financing Administration ("HCFA") issued a
proposed rule affecting, among other things, the practice expense component of
the physician fee schedule, physician supervision requirements for certain
diagnostic tests and the adoption of a new definition of an independent
diagnostic testing facility. Under the proposed rule, the Relative Value Units
("RVU") for MRI scans would be relatively unchanged, but the RVUs for MRI
scans with contrast would be reduced significantly. The proposed effective
date of the rule is January 1, 1998. However, as part of federal budget
legislation recently signed into law, implementation of the practice expense
changes will be delayed until January 1, 1999, with a three year transition
period for implementing the new
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method for calculating practice expenses. While the impact of the proposed
changes is dependent on numerous factors, including whether the proposed rule
is adopted substantially in the proposed form and whether the Company's
hospital customers will seek similar adjustments in payments to the Company
for scans with contrast agents to the extent they are currently charged
additional amounts for contrast exams, there can be no assurance that such
practice expense changes will not, directly or indirectly, have a material
adverse effect on the Company's business or results of operations.
The Budget Reconciliation Act for 1998 that was recently signed into law
contains a number of changes to the Medicare program which will adversely
affect hospitals and which could therefore potentially have an impact on
suppliers of goods and services to hospitals, including the Company. In
particular, among other things, the Act requires implementation of a
prospective payment system for outpatient services beginning in 1999; and
reduces hospital inpatient reimbursement for both operating and capital
expenses compared with reimbursement levels that would have prevailed absent
any change in law. The Company believes that approximately 15% to 20% of its
hospital customers' MRI revenues are derived from Medicare patients.
REGULATION
Many aspects of the health care industry in the United States, including the
Company's business, are subject to extensive federal and state government
regulation. Although the Company believes that its operations comply with
applicable regulations, there can be no assurance that subsequent adoption of
laws or interpretations of existing laws will not regulate, restrict or
otherwise adversely affect the Company's business.
The marketing and operation of the Company's MRI and CT systems are subject
to state laws prohibiting the practice of medicine by non-physicians and the
rebate or division of fees between physicians and non-physicians. Management
believes that its operations do not involve the practice of medicine because
all professional medical services relating to its operations, such as the
interpretation of the scans and related diagnoses, are separately provided by
licensed physicians not employed by the Company. Further, the Company believes
that its operations do not violate state laws with respect to the rebate or
division of fees.
The Company is subject to federal and state laws which govern financial and
other arrangements between health care providers. These include the federal
Medicare and Medicaid anti-kickback statutes which prohibit bribes, kickbacks,
rebates and any other direct or indirect remuneration in return for or to
induce the referral of an individual to a person for the furnishing, directing
or arranging of services, items or equipment for which payment may be made in
whole or in part under the Medicare, Medicaid or other federal health care
programs. Violation of the anti-kickback statute may result in criminal
penalties and exclusion from the Medicare and other federal health care
programs. Many states have enacted similar statutes which are not necessarily
limited to items and services paid for under the Medicare or a federally
funded health care program. In recent years, there has been increasing
scrutiny by law enforcement authorities, HHS, the courts and Congress of
financial arrangements between health care providers and potential sources of
patient and similar referrals of business to ensure that such arrangements are
not designed as mechanisms to pay for patient referrals. HHS interprets the
anti-kickback statute broadly to apply to distributions of partnership and
corporate profits to investors who refer federal health care program patients
to a corporation or partnership in which they have an ownership interest and
to payments for service contracts and equipment leases that are designed to
provide direct or indirect remuneration for patient referrals or similar
opportunities to furnish reimbursable items or services. In July 1991, HHS
issued "safe harbor" regulations that set forth certain provisions which, if
met, will assure that health care providers and other parties who refer
patients or other business opportunities, or who provide reimbursable items or
services, will be deemed not to violate the anti-kickback statute. The Company
is also subject to separate laws governing the submission of false claims. The
Company is a party to a partnership for the provision of MRI services. The
Company believes that the partnership is in compliance with the anti-kickback
statute. The Company believes that its other operations likewise comply with
the anti-kickback statutes.
A federal law, commonly known as the "Stark Law," also imposes civil
penalties and exclusions for referrals for "designated health services" by
physicians to certain entities with which they have a financial
100
<PAGE>
relationship subject to certain exceptions. "Designated health services"
include, among others, MRI services. While implementing regulations have been
issued relating to referrals for clinical laboratory services, no implementing
regulations have been issued regarding the other designated health services,
including MRI services. In addition, several states in which the Company
operates 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 health care provider to their patients to whom
they recommend that provider. Possible sanctions for violating these
provisions include loss of licensure and civil and criminal sanctions. Such
state laws vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Nonetheless, strict enforcement of these
requirements is likely. The Company believes its operations comply with these
federal and state physician self-referral laws.
In some states, a CON or similar regulatory approval is required prior to
the acquisition of high-cost capital items, including diagnostic imaging
systems or provision of diagnostic imaging services by the Company or its
customers. CON regulations may limit or preclude the Company from providing
diagnostic imaging services or systems. A significant increase in the number
of states regulating the Company's business within the CON or state licensure
framework could adversely affect the Company. Conversely, repeal of existing
CON regulations in jurisdictions where the Company has obtained or operates
under a CON could also adversely affect the Company. This is an area of
continuing legislative activity, and there can be no assurance that the
Company will not be subject to CON and licensing statutes in other states in
which it operates or may operate in the future.
LIABILITY INSURANCE
While the Company's imaging systems are at a customer's facility, they
operate only under the direction of licensed physicians on the customer's
staff who direct the procedures, supervise the Company's technologists and
interpret the results of the examinations. Currently, there are no known
biological hazards associated with MRI. However, there is a risk of harm to a
patient who has a ferrous material or certain types of cardiac pacemakers
within his or her body. Patients are carefully screened to safeguard against
this risk. To protect against possible exposure for professional liability,
the Company maintains professional liability insurance.
COMPETITION
The market for diagnostic imaging services and imaging systems is highly
competitive. In addition to direct competition from other mobile providers,
the Company competes with free-standing imaging centers and health care
providers that have their own diagnostic imaging systems and with equipment
manufacturers that sell or lease imaging systems to health care providers for
full-time installation. Some of the Company's direct competitors which provide
contract MRI services may have access to greater financial resources than the
Company. In addition, some of the Company's customers are capable of providing
the same services to their patients directly, subject only to their decision
to acquire a high-cost diagnostic imaging system, assume the associated
financial risk, employ the necessary technologists and satisfy applicable
licensure and CON requirements, if any. The Company competes against other MRI
service providers on the basis of quality of services, quality and magnetic
field strength of imaging systems, price, availability and reliability.
EMPLOYEES
As of September 30, 1997, the Company had 501 employees, of whom
approximately 405 were trained diagnostic imaging technologists, patient
coordinators, technical support staff or other field operations personnel. Of
the Company's employees, 153 are employed on a part-time or "as needed" basis.
None of the Company's employees are represented by a labor organization and
the Company is not aware of any activity seeking such organization. The
Company considers its relations with its employees to be satisfactory.
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<PAGE>
PROPERTIES
The Company leases approximately 15,000 square feet of space in an office
building in Anaheim, California for its executive and principal administrative
offices. This office will be expanded to a total of approximately 24,500
square feet during the fourth quarter of 1997. The Company also leases a
15,600 square foot operations warehouse in Orange, California, as well as
space for its other regional offices.
LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation incidental
to the conduct of its business. The Company believes that no litigation
pending against it will have a material adverse effect on its consolidated
financial position or results of operations.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Pursuant to the Recapitalization Merger Agreement, at the Recapitalization
Effective Time, the Investor will be entitled to designate such number of
directors of Alliance as will give the Investor a majority of such directors.
Alliance has agreed that, immediately following approval of the
Recapitalization Merger Agreement by its stockholders, it will obtain
resignation from each director unless the Investor requests otherwise.
Pursuant to such provision and under the DGCL (as a result of the Investor's
ownership of 84% of the outstanding shares of Alliance Common Stock following
consummation of the Recapitalization), the Investor intends that the
individuals set forth in the following table will be the directors and
executive officers of the Company upon consummation of the Recapitalization.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Richard N. Zehner................ 44 Chairman, President,
Chief Executive Officer and
Director
Vincent S. Pino.................. 49 Executive Vice President,
Chief Operating Officer and
Director
Terrence M. White................ 43 Senior Vice President,
Chief Financial Officer and
Secretary
Terry A. Andrues................. 45 Senior Vice President
Jay A. Mericle................... 42 Senior Vice President
Robert H. Falk................... 58 Director
Michael S. Gross................. 35 Director
Joshua J. Harris................. 32 Director
Michael D. Weiner................ 44 Director
</TABLE>
Richard N. Zehner has been the Chairman, President and Chief Executive
Officer of Alliance since November 1988. Mr. Zehner was a founder and has been
the President of Alliance and its predecessors since 1983. From 1987 until
November 1988 he served as a director and President and Chief Operating
Officer of Alliance.
Vincent S. Pino has been the Executive Vice President and Chief Operating
Officer of Alliance since December 1991 and August 1993, respectively, and a
director since June 1991. From November 1988 to August 1993, he was the Chief
Financial Officer of Alliance.
Terrence M. White joined Alliance in July 1993 as Senior Vice President,
Chief Financial Officer and Secretary. From 1975 through May 1993, he was
employed by Ernst & Young LLP and its predecessor, and was a partner in such
firms since 1987.
Terry A. Andrues was Vice President of Customer Support since 1988 and was
appointed Senior Vice President in 1991. From 1987 to 1988, Mr. Andrues acted
as a marketing representative of the Company.
Jay A. Mericle has acted as Senior Vice President of the Company since 1988
and technical marketing manager of the Company since 1986.
Robert H. Falk has been an officer of certain affiliates of Apollo since
1992. Prior to 1992, Mr. Falk was a partner in the law firm of Skadden, Arps,
Slate, Meagher & Flom LLP. Mr. Falk is also a director of Converse Inc.,
Culligan Water Technologies, Inc., Florsheim Group Inc. and Samsonite
Corporation.
Michael S. Gross is a founding principal of Apollo and has served as an
officer of certain affiliates of Apollo since 1990. Mr. Gross is also a
director of Allied Waste Industries, Inc., Breuners Home Furnishings
Corporation, Converse Inc., Florsheim Group Inc., Furniture Brands
International, Inc., Proffitt's, Inc. and Urohealth, Inc.
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<PAGE>
Joshua J. Harris is a principal of Apollo and has served as an officer of
certain affiliates of Apollo since 1990. Mr. Harris is a director of Converse
Inc., Breuners Home Furnishings Corporation, Florsheim Group Inc. and NRT
Incorporated.
Michael D. Weiner has been an officer of certain affiliates of Apollo since
1992. Prior to 1992, Mr. Weiner was a partner in the law firm of Morgan, Lewis
& Bockius LLP. Mr. Weiner is also a director of Converse Inc., Capital
Apartment Properties, Inc., Continental Graphics Holdings, Inc., Florsheim
Group Inc., NRT Incorporated and WMC Finance Co.
EXECUTIVE COMPENSATION
The following sets forth historical executive compensation information of
the Company's Chief Executive Officer and the other four most highly
compensated executive officers whose total cash compensation exceeded $100,000
during the fiscal year ended December 31, 1996 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
The following table sets forth for the fiscal years indicated the annual and
long-term compensation of the Named Executive Officers who will serve as
executive officers of the Company upon consummation of the Recapitalization.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- -------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR(1) SALARY BONUS COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
------------------ ------- -------- -------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Zehner....... 1996 $296,000 $419,025 -- 155,000 $15,596
Chairman, President,
Chief
Executive Officer and 1995 278,750 191,544 -- -- 15,495
Director 1994 260,000 280,462 -- 205,000 15,490
Vincent S. Pino......... 1996 208,000 192,140 -- 125,025 3,596
Executive Vice Presi-
dent, Chief
Operating Officer and 1995 195,500 113,666 -- -- 3,486
Director 1994 182,000 230,393 -- 125,000 2,125
Terrence M. White....... 1996 150,000 108,150 -- 90,025 3,488
Senior Vice President,
Chief
Financial Officer and 1995 131,250 70,605 -- -- 3,351
Secretary 1994 120,000 209,083 -- 45,000 1,402
Terry A. Andrues........ 1996 126,000 73,392 -- 33,050 3,411
Senior Vice President 1995 116,000 58,000 -- -- 3,320
1994 104,000 36,844 -- 70,000 1,851
Jay A. Mericle.......... 1996 126,000 70,691 -- 33,050 3,436
Senior Vice President 1995 117,300 66,540 -- -- 3,323
1994 109,200 38,816 -- 70,000 2,269
</TABLE>
- --------
(1) Rows specified "1996," "1995" and "1994" represent fiscal years ended
December 31, 1996, 1995 and 1994, respectively.
(2) With respect to each Named Executive Officer for each fiscal year,
excludes perquisites, which did not exceed the lesser of $50,000 or 10% of
the Named Executive Officer's salary and bonus for the fiscal year.
(3) All stock options granted to these Named Executive Officers were granted
under Alliance's 1991 Stock Option Plan. Option grant figures for 1994
include replacement options for previously granted options, in addition to
new issuances.
(4) Includes 401(k) matching contributions (for 1996, 1995 and 1994,
respectively: Mr. Zehner--$3,164, $3,077 and $3,077; Mr. Pino--$3,164,
$3,077 and $1,749; Mr. White--$3,164, $3,077 and $1,154; Mr. Andrues--
$3,139, $3,077 and $1,636; and Mr. Mericle--$3,164, $3,077 and $2,041); the
balance for each of these Named Executive Officers represents life insurance
premiums paid by Alliance.
104
<PAGE>
EXECUTIVE COMPENSATION PLAN
Alliance compensates its executive officers using a plan that includes a
predetermined target level of annual cash compensation for each officer. The
plan is set by the Compensation Committee of Alliance's Board of Directors
(the "Compensation Committee") at the beginning of the fiscal year. The actual
total level of compensation for the fiscal year is determined after the end of
the fiscal year based on the level of achievement of various criteria. The
compensation plan establishes a minimum annual remuneration (i.e., base
salary), a maximum compensation level and a target compensation amount.
The annual minimum, target and maximum compensation levels established for
Alliance's Named Executive Officers for 1996 is presented in the following
table, together with the total actual cash compensation earned.
<TABLE>
<CAPTION>
1996
1996 1996 1996 AMOUNT
NAME MINIMUM MAXIMUM TARGET EARNED
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Richard N. Zehner........................... $296,000 $740,000 $518,000 $715,025
Vincent S. Pino............................. 208,000 416,000 312,000 400,140
Terrence M. White........................... 150,000 270,000 210,000 258,150
Terry A. Andrues............................ 126,000 226,800 176,400 199,392
Jay A. Mericle.............................. 126,000 226,800 176,400 196,691
</TABLE>
The actual amounts of cash compensation to Mr. Zehner, Mr. Pino and Mr.
White, Alliance's Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer, respectively, were determined by the Compensation Committee
based on its evaluation of the extent to which Alliance's 1996 earnings per
share and cash flow budgets and individual objectives applicable to each
executive were achieved. The actual amounts of cash compensation to executives
responsible for the Company's various operating regions were determined by the
Compensation Committee based on its evaluation of the extent to which regional
operating profit budgets and individual objectives applicable to each such
executive were achieved. These amounts were generally more than the target
amounts because Alliance significantly exceeded its earnings per share, cash
flow and regional operating budgets. A predetermined percentage of the
possible compensation award above the minimum amount is determined with
respect to each of the criteria mentioned above for the respective officers.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options during 1996 to
Alliance's Named Executive Officers pursuant to Alliance's 1991 Stock Option
Plan. No stock appreciation rights have ever been granted to Alliance's Named
Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
PERCENTAGE OF ASSUMED ANNUAL RATE OF STOCK
NUMBER OF OPTIONS/SARS EXERCISE OR PRICE APPRECIATION FOR
SHARES GRANTED TO BASE RICE OPTION TERM(3)
UNDERLYING EMPLOYEES IN PER SHARE EXPIRATION ------------------------------
NAME OPTIONS/SARS(1) FISCAL YEAR ($/SH)(2) DATE 0% 5% 10%
---- --------------- ------------- ----------- ---------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard N. Zehner....... 155,000 31.7% $3.5625 3/1/06 $ 0 $ 347,268 $ 880,045
Vincent S. Pino......... 125,025 25.6% 3.5625 3/1/06 0 280,111 709,855
Terrence M. White....... 90,025 18.4% 3.5625 3/1/06 0 201,695 511,136
Terry A. Andrues........ 33,050 6.8% 3.5625 3/1/06 0 74,046 187,648
Jay A. Mericle.......... 33,050 6.8% 3.5625 3/1/06 0 74,046 187,648
</TABLE>
- --------
(1) All options granted in 1996 vest on March 1, 2003; however, vesting of the
1996 option shares will be accelerated based on achievement of the
following per share stock prices for 15 consecutive trading days, as
reported by Nasdaq: $4.75--25%; $5.50--50%; $6.25--75%; $7.00--100%;
subject to a maximum vesting of one-third per year from February 29, 1996
regardless of stock price (no limits after year three). As of March 15,
1997, Alliance's stock price had achieved the first three accelerated
vesting hurdles, and the 1996 options were two-thirds vested at such date.
105
<PAGE>
(2) All options were granted at market value (based on the closing price as
reported on the Nasdaq SmallCap Market on the business day prior to the
grant date) at the date of grant.
(3) Valuations based upon the assumed rates of stock price appreciation are
based upon appreciation over a ten-year period from the $3.5625 exercise
price of the options. The 5% and 10% assumed annual rates of appreciation
would result in the price of the Alliance's common stock increasing to
$5.80 and $9.24 per share, respectively.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUE
The following table presents information with respect to options exercised
by each of Alliance's Named Executive Officers in 1996, as well as the
unexercised options to purchase the Alliance Common Stock granted under
Alliance's 1991 Stock Option Plan to Alliance's Named Executive Officers and
held by them as of December 31, 1996. The value of unexercised in-the-money
options as of the end of the fiscal year is based on the last reported sales
price of the Alliance Common Stock on the Nasdaq SmallCap Market on December
31, 1996 of $5.75 per share.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE MONEY OPTIONS/
ACQUIRED AT YEAR-END SARS AT FISCAL YEAR-END
NAME AND PRINCIPAL ON VALUE --------------------------- -------------------------
POSITION EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ -------- -------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Zehner....... -- -- 243,750 116,250 $1,401,563 $668,438
Vincent S. Pino......... -- -- 31,256 93,769 179,722 539,172
Terrence M. White....... 45,000 $230,625 22,506 67,519 129,375 388,234
Terry A. Andrues........ -- -- 78,263 24,787 450,012 142,525
Jay A. Mericle.......... -- -- 78,263 24,787 450,012 142,525
</TABLE>
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
In addition to the annual plan described above under "--Executive
Compensation Plan," Alliance instituted a long-term executive incentive plan
("LTIP") in 1995 to provide future awards in cash or equivalent amounts of
Alliance common stock to key executives. The objective of the plan is to
advance the long-term interests of Alliance and its stockholders by providing
substantial incentives to meet or exceed certain cash flow goals necessary to
ensure that Alliance would be able to service its long-term obligations on a
continuing basis, and that it would be able to pay certain preferred stock
dividends in cash, thereby avoiding the substantial dilution to existing
common stockholders if such dividends were paid in common stock equivalents.
As of January 2, 1997, Alliance had retired all of its Series A 6% Redeemable
Preferred Stock (the "Series A Preferred Stock"), thereby fully satisfying the
second objective of the LTIP.
The following awards under the plan were earned by the Named Executive
Officers in 1996:
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAY-OUTS
UNDER NON-STOCK PRICE-BASED
NUMBER SHARES, PERFORMANCE OR PLAN(1)
UNITS OR OTHER PERIOD UNTIL ---------------------------
NAME OTHER RIGHTS MATURATION OR PAY-OUT THRESHOLD TARGET MAXIMUM
- ---- -------------- -------------------------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Richard N. Zehner....... $356,250 Four-Year Period Ending 12/31/98 $ 0 $356,250 $356,250
Vincent S. Pino......... 285,000 Four-Year Period Ending 12/31/98 0 285,000 285,000
Terrence M. White....... 213,750 Four-Year Period Ending 12/31/98 0 213,750 213,750
Terry A. Andrues........ 142,500 Four-Year Period Ending 12/31/98 0 142,500 142,500
Jay A. Mericle.......... 142,500 Four-Year Period Ending 12/31/98 0 142,500 142,500
</TABLE>
- --------
(1) Under the LTIP, amounts may be accrued with respect to each of the fiscal
years from 1995 to 1998 based upon two factors: (a) the extent to which
Alliance's actual earnings before depreciation, amortization, interest,
taxes and equipment charges (as more precisely defined in the LTIP,
"EBDIT") exceeds targeted EBDIT for such year and (b) the extent to which
Alliance pays dividends on its Series A Preferred Stock in cash for such
year (thereby avoiding the potential dilution to holders of common stock
from the payment of dividends in common stock equivalents). As noted
above, Alliance retired all of the Series A Preferred Stock as of January
2, 1997, thereby satisfying the Series A Preferred Stock dividend criteria
of the LTIP. Therefore, the cumulative amount of the dividend component of
the award was deemed earned and was accrued in fiscal 1996. Amounts
accrued under the LTIP are allocated to specified senior officers. Amounts
in the table reflect the potential pool amounts accrued in 1996 allocable
to each of Alliance's Named Executive Officers based upon the two criteria
summarized above as applied to fiscal 1996.
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<PAGE>
PRINCIPAL STOCKHOLDERS
Immediately after the Recapitalization and giving effect to the New Option
Plan, Apollo will own approximately 84% of the outstanding shares of Alliance
Common Stock (approximately 74% on a fully diluted basis), BT will own
approximately 6% of the outstanding shares of Alliance Common Stock
(approximately 5% on a fully diluted basis) and management of Alliance will
own in excess of 11% of the shares of Alliance Common Stock on a fully diluted
basis. Following the consummation of the Recapitalization, and depending on
the number of stockholders remaining, Alliance anticipates that it may be
necessary and/or desirable to have Alliance's Common Stock, which is currently
traded on The Nasdaq SmallCap Market, delisted and deregistered from the
reporting requirements of the Exchange Act. See "RISK FACTORS--Possible
Delisting; Loss of Liquidity."
The following table sets forth information regarding the beneficial
ownership of Alliance Common Stock as of November 7, 1997, for each person
known to the Company to beneficially own more than 5% of such stock, each
director and director nominee of the Company, each of the executive officers
and all executive officers and directors of the Company as a group. Unless
otherwise specified, the address of each such person is 1065 North
PacifiCenter Drive, Suite 200, Anaheim, CA 92806.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------ ------------------ ----------------
<S> <C> <C>
Newport Investment LLC (1)............. 9,714,407 66.0%
c/o Apollo Advisors II, L.P.
2 Manhattanville Road
Purchase, New York 10577
GE Fund (2)............................ 3,000,000 21.4%
20825 Swenson Drive, Suite 100
Waukesha, Wisconsin 53186
Northwestern Mutual Life Insurance Co.
(8)................................... 2,030,063 18.3%
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Travelers Insurance Group, Inc. (3)(8). 1,024,499 9.3%
One Tower Square
Hartford, Connecticut 06183
Meridian Trust Company, as trustee for
DLJ Capital Corp. (4)................. 933,435 8.5%
c/oMeridian Asset Management, Inc.
55 Valley Stream Parkway
Malvern, Pennsylvania 19355
Lincoln National Life Insurance Co.
(8)................................... 549,971 5.0%
1300 South Clinton Street
Fort Wayne, Indiana 46801
Richard N. Zehner (5).................. 565,472 5.0%
Vincent S. Pino (5).................... 447,395 4.0%
Robert B. Waley-Cohen (5)(6)........... 188,092 1.7%
James E. Buncher (5)................... 7,500 0.1%
John C. Wallace (5).................... 10,000 0.1%
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------ ------------------ ----------------
<S> <C> <C>
Terrence M. White (5)...................... 114,517 1.0%
Terry A. Andrues(5)........................ 107,555 1.0%
Jay A. Mericle(5).......................... 123,520 1.1%
Douglas M. Hayes........................... -- --
Robert H. Falk............................. -- --
Michael S. Gross........................... -- --
Joshua J. Harris........................... -- --
Michael D. Weiner.......................... -- --
All Directors and Executive Officers as a
group 16 persons (7)...................... 1,564,051 13.4%
</TABLE>
- --------
(1) The Investor is owned by AIF III (91.18%), Overseas Partners (5.45%) and
UK Partners (3.37%). The general partner of each such limited partnership
is Advisors. The address for each such limited partnership and such
general partner is c/o Apollo Advisors II, L.P., 2 Manhattanville Road,
Purchase, New York 10577. Pursuant to the Stockholder Agreement, Apollo
has the right to cause a majority of the outstanding shares of Alliance
Common Stock to be voted in favor of the Recapitalization Merger Agreement
and the Recapitalization and has an option to acquire all of such shares
and, therefore beneficially owns such shares. See "CERTAIN RELATED
AGREEMENTS--Stockholder Agreement."
(2) The GE Fund holds 18,000 shares of Series D Preferred Stock which are
convertible into 3,000,000 shares of Common Stock. General Electric
Company ("GE") transferred such 18,000 shares of Series D Preferred Stock
to the GE Fund in July 1997. GE continues to own a warrant to purchase
50,000 shares of Alliance Common Stock.
(3) The Travelers Insurance Group, Inc. shares voting and dispositive powers
with its affiliates, Associated Madison Companies, Inc. and The Travelers
Inc.
(4) Meridian Trust Company is the Trustee under the Amended and Restated
Voting Trust Agreement, dated December 29, 1988, by and between DLJ
Capital Corp. and Meridian Trust Company.
(5) Includes shares that the following Named Executive Officers and Directors
presently have the right to acquire by exercise of options: Mr. Zehner
308,333 shares; Mr. Pino 83,350 shares; Mr. White 60,017 shares; Mr.
Andrues 92,033; Mr. Mericle 92,033; Mr. Waley-Cohen 20,000 shares; Mr.
Buncher 7,500 shares; and Mr. Wallace 5,000 shares.
(6) Includes 84,046 shares of Alliance Common Stock held by Felicity A. Waley-
Cohen, Mr. Waley-Cohen's wife.
(7) Includes shares that all executive officers and directors as a group
presently have the right to acquire by exercise of options.
(8) Includes shares that the following stockholders presently have the right
to acquire by exercise of warrants: The Northwestern Mutual Life Insurance
Company 41,863; The Travelers Insurance Group, Inc. and affiliates 25,371;
The Lincoln National Life Insurance Company 12,686.
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<PAGE>
DESCRIPTION OF ALLIANCE CAPITAL STOCK
GENERAL
Alliance is authorized by its Restated Certificate of Incorporation, as
amended, to issue an aggregate of 50,000,000 shares of Alliance Common Stock
and 1,000,000 shares of preferred stock. The following is a summary of certain
of the rights and privileges pertaining to the Alliance Common Stock. For a
full description of Alliance Common Stock, reference is made to Alliance's
Restated Certificate of Incorporation, as amended, a copy of which is filed as
an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part.
VOTING RIGHTS
The holders of the Alliance Common Stock are entitled to one vote per share
on all matters submitted for action by the stockholders. There is no provision
for cumulative voting with respect to the election of directors. Accordingly,
the holders of more than 50% of the shares of Alliance Common Stock can, if
they choose to do so, elect all of the directors. In such event, the holders
of the remaining shares will not be able to elect any directors.
DIVIDEND RIGHTS
All shares of Alliance Common Stock are entitled to share in such dividends
as the Board of Directors may from time to time declare from sources legally
available therefor.
LIQUIDATION RIGHTS
Upon liquidation or dissolution of Alliance, whether voluntary or
involuntary, all shares of Alliance Common Stock are entitled to share equally
in the assets available for distribution to stockholders after payment of all
prior obligations of Alliance.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
If the Recapitalization Merger Agreement is approved by the requisite vote
of the holders of shares of Company Common Stock at the Special Meeting,
promptly after the Recapitalization Effective Time, Alliance's Restated
Certificate of Incorporation, as amended, will be amended and restated so as
to read in its entirety in the form set forth as an exhibit to Amendment No. 1
to the Recapitalization Merger Agreement, which is included in Annex A and, as
so amended, until thereafter further amended as provided therein and under the
DGCL, will be the certificate of incorporation of Alliance following the
Recapitalization Effective Time. The Amended and Restated Certificate of
Incorporation will decrease the total number of shares of Alliance Common
Stock that Alliance is authorized to issue from 50,000,000 to 9,000,000 and
will decrease the total number of authorized shares of preferred stock that
Alliance is authorized to issue from 1,000,000 to 500,000. Of the 9,000,000
shares of common stock, 500,000 will be non-voting common stock (but will
otherwise be substantially identical to the voting common stock). The voting
common stock will be convertible into non-voting common stock at any time and
from time to time at the election of the holder thereof.
Promptly after the Recapitalization Effective Time, the Company expects to
file a Certificate of Elimination with respect to the Company's Series C 5%
Cumulative Convertible Redeemable Preferred Stock, Series D 4% Cumulative
Redeemable Convertible Preferred Stock and Series E 4% Cumulative Redeemable
Convertible Preferred Stock.
In addition, the Bylaws of Newco as in effect at the Recapitalization
Effective Time will be the Bylaws of Alliance following the Recapitalization
until thereafter changed or amended as provided therein or by applicable law.
PREFERRED STOCK
Alliance is authorized by its Restated Certificate of Incorporation, as
amended, to issue an aggregate of 1,000,000 shares of preferred stock. The
Amended and Restated Certificate of Incorporation, to be adopted in connection
with the Recapitalization, authorizes the issuance of an aggregate of 500,000
shares of preferred stock.
109
<PAGE>
SERIES F PREFERRED STOCK
Alliance will issue 150,000 shares ($15.0 million stated amount) of Series F
Preferred Stock in connection with the Recapitalization. Holders of Series F
Preferred Stock are entitled to receive, when and as dividends on the Series F
Preferred Stock are declared by the Board of Directors out of funds legally
available therefor, cash dividends, at the rate per share of 13.5% per annum,
payable quarterly in arrears; provided, however, that the Company may, at its
option, pay such dividends in kind for the first five years from the issue
date. The Series F Preferred Stock has a liquidation preference of $100 per
share, is not convertible and carries no voting rights. The Series F Preferred
Stock is required to be redeemed for its liquidation preference plus accrued
but unpaid dividends 10 years from the issue date. The Series F Preferred
Stock is redeemable at the option of the Company at the following premiums,
expressed as a percentage of the accreted face value:
<TABLE>
<S> <C>
Commencing from the issue date, redemptions on or before the end
of
Year 1........................................................ 113.5%
Year 2........................................................ 112.0
Year 3........................................................ 110.5
Year 4........................................................ 109.0
Year 5........................................................ 107.5
Year 6........................................................ 106.0
Year 7........................................................ 104.5
Year 8........................................................ 103.0
Year 9........................................................ 101.0
Year 10....................................................... 100.0
</TABLE>
The Series F Preferred Stock will rank senior to other capital stock of the
Company, including the shares of Alliance Common Stock to be retained by
stockholders in the Recapitalization. The Series F Preferred Stock will be
entitled, upon any liquidation or sale of the Company (including a sale of
assets, sale of stock, merger or otherwise), to a distribution of the
Company's assets prior to any payment to any other equity holders of the
Company. The purchasers of the Series F Preferred Stock in the
Recapitalization will be entitled to registration rights. Amendments to the
rights, preferences or privileges of the Series F Preferred Stock may be
effected only by obtaining the approval of the holders of two-thirds of the
outstanding Series F Preferred Stock.
LEGAL MATTERS
The validity of the shares of Alliance Common Stock being retained in the
Recapitalization is being passed upon for Alliance by Irell & Manella LLP, Los
Angeles, California.
Irell & Manella LLP has delivered an opinion concerning certain Federal
Income tax consequences of the Recapitalization. See "THE RECAPITALIZATION--
Certain Tax Consequences of the Recapitalization."
EXPERTS
The consolidated financial statements and financial statement schedule of
Alliance at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, appearing in this Proxy Statement/Prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
Management of Alliance knows of no other matters that may properly be, or
which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before such Special Meeting, the persons
named in the enclosed proxy or their substitutes will vote the Proxies in
accordance with their judgment with respect to such matters, unless authority
to do so is withheld in the Proxy.
110
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and at
September 30, 1997 (unaudited)......................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997
(unaudited)............................................................ F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997
(unaudited)............................................................ F-5
Consolidated Statements of Preferred Stock, Common Stock, Additional
Paid-In Capital
and Accumulated Deficit for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1997 (unaudited)...... F-7
Notes to Consolidated Financial Statements.............................. F-8
Quarterly Financial Data (unaudited).................................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Imaging, Inc.
We have audited the accompanying consolidated balance sheets of Alliance
Imaging, Inc. as of December 31, 1995 and 1996 and the related consolidated
statements of operations, cash flows and preferred stock, common stock,
additional paid-in capital and accumulated deficit for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of Alliance's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Alliance Imaging, Inc. at December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Orange County, California
February 21, 1997, except for Note 4, as to
which the date is March 26, 1997, and Note 9,
as to which the date is November 21, 1997
F-2
<PAGE>
ALLIANCE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
-------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments.... $ 11,128,000 $ 10,867,000 $ 10,557,000
Accounts receivable, net of
allowance for doubtful accounts of
$367,000 in 1995 and $513,000 in
1996 (Note 4)..................... 5,583,000 8,889,000 10,597,000
Prepaid expenses................... 369,000 710,000 997,000
Other receivables.................. 109,000 345,000 115,000
------------ ------------ ------------
Total current assets............. 17,189,000 20,811,000 22,266,000
Equipment, at cost (Note 4).......... 112,014,000 121,354,000 152,113,000
Less accumulated depreciation........ (52,368,000) (43,735,000) (52,511,000)
------------ ------------ ------------
59,646,000 77,619,000 99,602,000
Goodwill, net of accumulated amorti-
zation of $5,690,000 in 1995 and
$7,568,000 in 1996.................. 23,971,000 27,990,000 26,657,000
Deposits and other assets............ 2,521,000 2,090,000 3,098,000
------------ ------------ ------------
Total assets..................... $103,327,000 $128,510,000 $151,623,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 692,000 $ 1,765,000 $ 3,039,000
Accrued compensation and related
expenses.......................... 2,310,000 3,465,000 3,399,000
Other accrued liabilities.......... 5,025,000 6,341,000 11,268,000
Current portion of long-term debt
(Note 4).......................... 9,948,000 16,323,000 20,476,000
------------ ------------ ------------
Total current liabilities........ 17,975,000 27,894,000 38,182,000
Long-term debt, net of current por-
tion (Note 4)....................... 65,932,000 72,702,000 62,597,000
Other liabilities.................... 596,000 2,029,000 2,188,000
Deferred income taxes (Note 3)....... 790,000 4,831,000 4,831,000
------------ ------------ ------------
Total liabilities................ 85,293,000 107,456,000 107,798,000
Commitments (Note 6)
Redeemable preferred stock, Series A,
$.01 par value;
155,000 shares authorized; shares
issued and outstanding
(at liquidation and redemption
value)--155,000 in 1995
and 44,286 in 1996.................. 16,430,000 4,694,000 --
Convertible preferred stock, $.01 par
value; 22,000 shares authorized;
shares issued and outstanding 3,876
in 1996 and 18,000 at September 30,
1997 (Note 5)....................... -- 388,000 18,000,000
Common stock, $.01 par value;
25,000,000 shares authorized; shares
issued and outstanding--10,836,171
in 1995, 10,913,388 in 1996, and
11,023,344 at September 30, 1997
(Note 5)............................ 108,000 109,000 110,000
Additional paid-in capital........... 31,908,000 34,404,000 36,561,000
Accumulated deficit.................. (30,412,000) (18,541,000) (10,846,000)
------------ ------------ ------------
Total liabilities and
stockholders' equity............. $103,327,000 $128,510,000 $151,623,000
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------ ----------- ----------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 57,875,000 $58,065,000 $68,482,000 $ 49,097,000 $ 62,285,000
Costs and expenses:
Operating expenses,
excluding
depreciation......... 31,093,000 28,342,000 32,344,000 23,549,000 27,499,000
Depreciation expense.. 13,424,000 12,202,000 12,737,000 9,170,000 11,222,000
Selling, general and
administrative
expenses............. 6,284,000 6,294,000 8,130,000 4,879,000 6,251,000
Amortization expense,
primarily goodwill... 943,000 1,345,000 1,952,000 1,309,000 1,767,000
Interest expense, net
of interest income of
$253,000 in 1994,
$437,000 in 1995 and
$502,000 in 1996..... 10,758,000 5,053,000 5,758,000 4,184,000 5,315,000
Asset impairment and
other special
charges.............. 13,339,000 -- -- -- --
------------ ----------- ----------- --------------- ---------------
Total costs and
expenses........... 75,841,000 53,236,000 60,921,000 43,091,000 52,054,000
Income (loss) before
income taxes and
extraordinary gains.... (17,966,000) 4,829,000 7,561,000 6,006,000 10,231,000
Provision for income
taxes (Note 3)......... 1,100,000 727,000 1,060,000 955,000 3,480,000
------------ ----------- ----------- --------------- ---------------
Income (loss) before
extraordinary gains.... (19,066,000) 4,102,000 6,501,000 5,051,000 6,751,000
Extraordinary gains, net
of taxes............... -- -- 6,300,000 -- 1,332,000
------------ ----------- ----------- --------------- ---------------
Net income (loss)....... (19,066,000) 4,102,000 12,801,000 5,051,000 8,083,000
Less: Preferred stock
dividends.............. -- 930,000 943,000 706,000 --
Add: Excess of carrying
amount of preferred
stock repurchased over
consideration paid..... -- -- 1,764,000 -- 1,906,000
------------ ----------- ----------- --------------- ---------------
Income (loss) applicable
to common stock........ $(19,066,000) $ 3,172,000 $13,622,000 $ 4,345,000 $ 9,989,000
============ =========== =========== =============== ===============
Weighted average common
and common equivalent
shares outstanding..... 7,124,000 11,158,000 11,494,000 11,463,000 14,028,000
============ =========== =========== =============== ===============
Earnings per share:
Income before items
below................ $ (2.68) $ 0.28 $ 0.48 $ 0.38 $ 0.48
Excess of carrying
amount of preferred
stock repurchased
over consideration
paid................. -- -- 0.15 -- 0.14
------------ ----------- ----------- --------------- ---------------
Income (loss) before
extraordinary gains.. (2.68) 0.28 0.63 0.38 0.62
Extraordinary gains,
net of taxes......... -- -- 0.55 -- 0.09
------------ ----------- ----------- --------------- ---------------
Income (loss) applicable
to common stock........ $ (2.68) $ 0.28 $ 1.18 $ 0.38 $ 0.71
============ =========== =========== =============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $(19,066,000) $ 4,102,000 $12,801,000 $ 5,051,000 $ 8,083,000
Adjustments to reconcile
net income (loss) to
net cash
provided by operating
activities:
Extraordinary gains.... -- -- (6,300,000) -- (1,332,000)
Depreciation and amor-
tization.............. 14,367,000 13,547,000 14,689,000 10,479,000 12,989,000
Amortization of de-
ferred financing
charges............... 406,000 85,000 411,000 325,000 42,000
Distributions in excess
of (undistributed) in-
come of investee...... 69,000 (262,000) (91,000) (74,000) 85,000
Special charges........ 13,339,000 -- -- -- --
Increase (decrease) in
deferred income taxes. 665,000 (173,000) 1,041,000 -- --
Gain on disposal of
equipment............. -- (335,000) -- -- --
Gain on sale of invest-
ment.................. -- -- (750,000) -- --
Changes in operating as-
sets and liabilities:
Accounts receivable,
net................... (527,000) 1,261,000 (2,474,000) (1,696,000) (1,630,000)
Prepaid expenses....... 167,000 (78,000) (306,000) (566,000) (287,000)
Other receivables...... 151,000 (18,000) (49,000) 247,000 230,000
Other assets........... (71,000) (96,000) (72,000) (31,000) (1,302,000)
Accounts payable, ac-
crued compensation and
other accrued liabili-
ties.................. 3,344,000 (520,000) 2,115,000 2,496,000 5,053,000
Other liabilities...... (60,000) 530,000 716,000 1,117,000 159,000
------------ ----------- ----------- ----------- -----------
Net cash provided by op-
erating activities..... 12,784,000 18,043,000 21,731,000 17,348,000 22,090,000
INVESTING ACTIVITIES
Equipment purchases..... (20,093,000) (10,243,000) (26,510,000) (20,504,000) (32,940,000)
Decrease in deposits on
equipment.............. 232,000 448,000 264,000 1,297,000 150,000
Purchase of contracts
and related assets of
Mobile M.R. Venture,
Ltd.................... -- -- (455,000) (455,000) --
Purchase of common stock
of Royal Medical Health
Services, Inc. and
related assets, net of
cash acquired.......... -- -- (1,844,000) (1,844,000) --
Purchase of common stock
of Sun MRI Services,
Inc.,
net of cash acquired... -- -- (269,000) (269,000) --
Purchase of contracts
and related assets of
West Coast
Mobile Imaging......... -- -- (90,000) (90,000) --
Purchase of contracts
and related assets of
Advanced Healthcare
Diagnostic Service,
Inc.................... -- (412,000) -- -- --
Purchase of MRI
contracts and related
assets of Pacific
Medical Imaging, Inc... -- -- -- -- (756,000)
Proceeds from sale of
investment............. -- -- 968,000 -- --
Proceeds from sale of
equipment.............. -- 2,418,000 -- -- --
------------ ----------- ----------- ----------- -----------
Net cash used in invest-
ing activities......... (19,861,000) (7,789,000) (27,936,000) (21,865,000) (33,546,000)
</TABLE>
(continued)
F-5
<PAGE>
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Payment of preferred
stock dividends........ $ -- $ -- $ (1,594,000) $ (930,000) $ (653,000)
Purchase of senior sub-
ordinated debentures... -- -- (5,714,000) -- (2,286,000)
Partial prepayment of
senior notes........... -- -- (3,537,000) -- --
Repurchase of Series A
preferred stock........ -- -- (6,307,000) -- (2,523,000)
Principal payments on
long-term debt......... (11,141,000) (12,763,000) (13,630,000) (9,567,000) (14,324,000)
Proceeds from long-term
debt................... 12,276,000 11,116,000 23,889,000 15,618,000 25,782,000
Proceeds from senior
bridge loan............ -- -- 12,872,000 -- 5,128,000
Increase in deferred fi-
nancing charges........ -- (54,000) (76,000) (76,000) --
Proceeds from exercise
of employee stock op-
tions.................. -- 97,000 41,000 21,000 22,000
------------ ------------ ------------ ----------- ------------
Net cash provided by fi-
nancing activities..... 1,135,000 (1,604,000) 5,944,000 5,066,000 11,146,000
------------ ------------ ------------ ----------- ------------
Net increase (decrease)
in cash and short-term
investments............ (5,942,000) 8,650,000 (261,000) 549,000 (310,000)
Cash and short-term in-
vestments at beginning
of year................ 8,420,000 2,478,000 11,128,000 11,128,000 10,867,000
------------ ------------ ------------ ----------- ------------
Cash and short-term in-
vestments at end of
year................... $ 2,478,000 $ 11,128,000 $ 10,867,000 $11,677,000 $ 10,557,000
============ ============ ============ =========== ============
<CAPTION>
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMA-
TION
<S> <C> <C> <C> <C> <C>
Cash paid during year
for:
Interest................ $ 8,690,000 $ 5,483,000 $ 5,562,000 $ 4,176,000 $ 5,562,000
Income Taxes............ 104,000 629,000 378,000 307,000 337,000
<CAPTION>
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
<S> <C> <C> <C> <C> <C>
Net book value of assets
exchanged.............. 2,291,000 1,104,000 3,521,000 2,491,000 1,434,000
Issuance of common and
Series A preferred
stock in connection
with debt restructur-
ing.................... 18,125,000 -- -- -- --
Preferred Stock dividend
accrued................ -- 930,000 266,000 468,000 --
Excess of carrying
amount of preferred
stock repurchased over
consideration paid..... -- -- 1,764,000 -- 1,906,000
Conversion of senior
bridge loan into Series
D 4% convertible pre-
ferred stock........... -- -- -- -- 18,000,000
Conversion of Series C
5% convertible pre-
ferred stock into com-
mon stock.............. -- -- -- -- $ 388,000
</TABLE>
During the 1996 second quarter, Alliance purchased all of the common stock
of Royal Medical Health Services, Inc. and related assets for cash
consideration of approximately $1,914,000. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired.............................. $ 8,601,000
Cash paid for common stock................................. (1,914,000)
-----------
Liabilities assumed...................................... $ 6,687,000
===========
</TABLE>
As additional consideration for the above purchase, Alliance issued
convertible stock in the amount of $388,000 and common stock warrants valued
at $212,000. As a result of this transaction, Alliance recorded goodwill of
approximately $3,945,000.
During the 1996 third quarter, Alliance purchased all of the common stock of
Sun MRI Services, Inc. for cash consideration of approximately $391,000. In
connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired............................... $1,602,000
Cash paid for common stock.................................. (391,000)
----------
Liabilities assumed....................................... $1,211,000
==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ALLIANCE IMAGING, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK,
COMMON STOCK, ADDITIONAL PAID-IN-CAPITAL
AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
SERIES C AND D
SERIES A REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- ------------ ------ ----------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... -- $ -- -- $ -- 7,114,371 $ 71,000 $29,356,000 $(14,518,000)
Issuance of common and
Series A preferred
stock in connection
with debt restructuring
(Note 5)............... 155,000 15,500,000 -- -- 3,500,000 35,000 2,457,000 --
Net loss for year ended
December 31, 1994...... -- -- -- -- -- -- -- (19,066,000)
-------- ------------ ------ ----------- ---------- -------- ----------- ------------
Balance at December 31,
1994................... 155,000 15,500,000 -- -- 10,614,371 106,000 31,813,000 (33,584,000)
Exercise of common stock
options................ -- -- -- -- 221,800 2,000 95,000 --
Preferred stock divi-
dends.................. -- 930,000 -- -- -- -- -- (930,000)
Net income for year
ended December 31,
1995................... -- -- -- -- -- -- -- 4,102,000
-------- ------------ ------ ----------- ---------- -------- ----------- ------------
Balance at December 31,
1995................... 155,000 16,430,000 -- -- 10,836,171 108,000 31,908,000 (30,412,000)
Payment of 1995 pre-
ferred stock dividends. -- (930,000) -- -- -- -- -- --
Exercise of common stock
options................ -- -- -- -- 77,217 1,000 39,000 --
Issuance of common stock
warrants in connection
with senior and subor-
dinated debt amendment. -- -- -- -- -- -- 259,000 --
Issuance of common stock
warrants in connection
with transfer and
amendment of senior
notes.................. -- -- -- -- -- -- 222,000 --
Issuance of Series C
preferred stock in
connection with
acquisition of Royal
Medical Health
Services, Inc.......... -- -- 3,876 388,000 -- -- -- --
Issuance of common stock
warrants in connection
with acquisition of
Royal Medical Health
Services, Inc.......... -- -- -- -- -- -- 212,000 --
Preferred stock divi-
dends.................. -- 930,000 -- -- -- -- -- (930,000)
Payment of 1996 pre-
ferred stock dividends. -- (664,000) -- -- -- -- -- --
Repurchase of Series A
preferred stock........ (110,714) (11,072,000) -- -- -- -- 1,764,000 --
Net income for year
ended December 31,
1996................... -- -- -- -- -- -- -- 12,801,000
-------- ------------ ------ ----------- ---------- -------- ----------- ------------
Balance at December 31,
1996................... 44,286 4,694,000 3,876 388,000 10,913,388 109,000 34,404,000 (18,541,000)
Exercise of common stock
options (unaudited).... -- -- -- -- 29,750 -- 22,000 --
Repurchase of Series A
redeemable preferred
stock (unaudited)...... (44,286) (4,694,000) -- -- -- -- 1,906,000 --
Transaction costs asso-
ciated with conversion
of senior bridge loan
into Series D preferred
stock (unaudited)...... -- -- -- -- -- -- (160,000) --
Conversion of senior
bridge loan into Series
D preferred stock (un-
audited)............... -- -- 18,000 18,000,000 -- -- -- --
Series C preferred stock
dividend (unaudited)... -- -- -- -- -- -- -- (16,000)
Series D preferred stock
dividend (unaudited)... -- -- -- -- -- -- -- (372,000)
Conversion of Series C
preferred stock into
common stock (unau-
dited)................. -- -- (3,876) (388,000) 80,206 1,000 389,000 --
Net income for the nine
months ended September
30, 1997 (unaudited)... -- -- -- -- -- -- -- 8,083,000
-------- ------------ ------ ----------- ---------- -------- ----------- ------------
Balance at September 30,
1997 (unaudited)....... -- $ -- 18,000 $18,000,000 11,023,344 $110,000 $36,561,000 $(10,846,000)
======== ============ ====== =========== ========== ======== =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF ALLIANCE AND BASIS OF FINANCIAL STATEMENT PRESENTATION
DESCRIPTION OF ALLIANCE--Alliance Imaging, Inc. (Alliance) provides
outsourced radiology services and high technology diagnostic imaging systems
and related technical support services, as well as management and information
services, to hospitals and other healthcare providers. Diagnostic imaging
services are provided on both a mobile, shared-user basis as well as on a
full-time basis to single customers. Alliance operates entirely within the
United States and is one of the largest providers of magnetic resonance
imaging (MRI) and computed tomography (CT) services in the country. The
equipment used by Alliance is sophisticated and subject to accelerated
obsolescence in the event of significant technological change.
BASIS OF FINANCIAL STATEMENT PRESENTATION--The accompanying consolidated
financial statements include the accounts of Alliance and its consolidated
subsidiaries. The accompanying unaudited consolidated financial statements
have been prepared by Alliance in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Alliance, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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.
DEBT RESTRUCTURING--Effective December 31, 1994, Alliance completed a
comprehensive debt restructuring with the holders of its senior notes and
senior subordinated debentures. The restructuring included a reduction in
interest rates, an exchange of a portion of the debentures for issuance of
redeemable preferred and common stock and the extension of the repayment terms
on all of the remaining debt. These transactions were accounted for as a
troubled debt restructuring. Supplemental loss per common share for the year
ended December 31, 1994, based on historical loss per share adjusted to give
effect to the issuance of common shares in exchange for debt in the debt
restructuring and a reduction of related interest expense assuming the
exchange had occurred on January 1, 1994, is ($1.77) based on 10,614,000
weighted average common shares outstanding.
SPECIAL CHARGES--During the fourth quarter of 1994, Alliance recorded
special charges totaling $13,339,000 related to an equipment exchange
transaction, the impairment of certain equipment, debt restructuring and
employee severances. Alliance entered into an agreement with one of its major
equipment vendors to exchange several older MRI scanners for more
technologically advanced scanners which had been refurbished. The fair value
of the assets received, net of related debt incurred, was less than the net
book value of the assets exchanged, resulting in a non-cash pre-tax charge of
$2,156,000. Alliance also evaluated the carrying values of all of its
remaining older mid-field mobile MRI scanners. An impairment analysis of these
scanners resulted in an $8,670,000 non-cash pre-tax charge to reduce the net
book values to their estimated current market value. Alliance then identified
assets to be held for sale or other disposition and recorded a non-cash pre-
tax charge of $1,831,000 to write these assets down to their estimated net
realizable value on disposition. In addition, Alliance recorded pre-tax
special charges of $440,000 related to debt restructuring and $242,000 for
employee severances.
F-8
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND SHORT-TERM INVESTMENTS--Alliance considers short-term investments
with original maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE--Alliance 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
Alliance'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 and directly
to patients, and generally collateral is not required. Receivables generally
are collected within industry norms for third-party payers. Credit losses are
provided for in the consolidated financial statements.
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 approximating between five and
20 percent of original cost. If Alliance 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 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 and equipment,
substantially all of the property owned by Alliance relates to diagnostic
imaging equipment, tractors and trailers used in the business.
GOODWILL--Alliance amortizes goodwill over a period of one to 25 years. For
acquired entities, the amortization period selected is primarily based upon
the estimated life of the customer contracts, including expected renewals, and
related other assets acquired, not to exceed 20 years. The Financial
Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", in March 1995. Statement 121 requires long-lived assets and certain
intangibles held and used by Alliance to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The recoverability test is to be performed at
the lowest level at which undiscounted net cash flows can be directly
attributable to long-lived assets. Alliance adopted Statement 121 in the first
quarter of 1996 with no material effect on Alliance's financial statements.
REVENUE RECOGNITION--The majority of Alliance's revenues are derived
directly from healthcare providers. To a lesser extent, revenues are generated
from direct billings to patients or their medical payers which are recorded
net of contractual discounts and other arrangements for providing services at
less than established patient billing rates. Net revenues from direct patient
billing amounted to approximately 13%, 10% and 8% of revenues in the years
ended December 31, 1994, 1995 and 1996, respectively. No single customer
accounted for 3% or more of consolidated revenues in each of the three years
in the period ended December 31, 1996. All revenues are recognized at the time
the service is performed.
INCOME TAXES--Alliance calculates deferred taxes and related income tax
expense using the liability method. This method determines deferred taxes by
applying the current tax rate to the cumulative temporary differences between
recorded carrying amounts and the corresponding tax basis of assets and
liabilities. A
F-9
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
valuation allowance is established for deferred tax assets unless their
realization is considered more likely than not. Alliance's provision for
income taxes is the sum of the change in the balance of deferred taxes between
the beginning and the end of the period plus income taxes currently payable.
INVESTMENT TAX CREDITS--Alliance accounts for investment tax credits under
the flow through method.
FAIR VALUES OF FINANCIAL INSTRUMENTS--FASB Statement No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimated cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of Alliance.
The following methods and assumptions were used by Alliance in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments--The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-term debt--The fair values of Alliance's long-term debt are estimated
using discounted cash flow analyses, based on Alliance's current incremental
rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of Alliance's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term invest-
ments........................ $11,128,000 $11,128,000 $10,867,000 $10,867,000
Long-term debt................ 75,880,000 61,500,000 89,025,000 84,150,000
Redeemable preferred stock.... 16,430,000 (See Below) 4,694,000 2,788,000
</TABLE>
As more fully discussed in Note 4, Alliance has repurchased all of its
redeemable preferred stock. Alliance paid approximately $2,788,000 to retire
the December 31, 1996 balance and consequently believes $2,788,000 reasonably
approximates the fair value of its redeemable preferred stock balance at
December 31, 1996. The original fair value of Alliance's redeemable preferred
stock of $15,500,000 was determined by independent valuation consultants as of
December 31, 1994. Although it was not practicable to reevaluate the estimated
fair value of the preferred stock as of December 31, 1995 because of the lack
of a quoted market price and the inability to estimate fair value without
incurring excessive costs, Alliance believes the $16,430,000 carrying amount
at December 31, 1995, which represents the original fair value of the
preferred stock increased for the 1995 cumulative dividend, reasonably
approximates its fair value at that date.
F-10
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
EARNINGS PER COMMON SHARE--Earnings per common share have been computed
based on the weighted average number of shares outstanding during each period
plus the weighted average number of common equivalent shares outstanding that
are determined by the assumed exercise of dilutive stock options and warrants
less the number of treasury shares assumed to be purchased from the proceeds
using the average market price of Alliance's common stock. For the nine month
period ended September 30, 1997 common equivalent shares also include the
assumed conversion of the Series D convertible preferred stock into common
shares. Supplemental earnings per share for the nine months ended September
30, 1997 based on historical earnings per share adjusted assuming the
conversion of the senior bridge loan into Series D convertible preferred stock
had occurred on January 1, 1997 is $0.47 per share. This calculation ignores
amounts reported in the 1997 historical results as gain arising from the
repurchase of the senior subordinated debentures and as the earnings per share
benefit arising from the excess of carrying value of the preferred stock
repurchased over the consideration paid. Therefore, this supplemental earnings
per share calculation is the most comparable to the $0.48 per share "income
before items below" reported in Alliance's nine months ended September 30,
1997 historical results of operations. In February 1997, the FASB issued
Statement No. 128, "Earnings per Share", which is required to be adopted on
December 31, 1997. At that time, Alliance will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options, warrants and the Series D convertible
preferred stock will be excluded. The impact is expected to result in an
increase to basic earnings per share for the nine months ended September 30,
1996 and 1997 of $0.02 and $0.10 per share, respectively.
3. INCOME TAXES
The provision for income taxes shown in the consolidated statements of
operations consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ 960,000 $ 2,958,000
State................................ 120,000 970,000 735,000
---------- ----------- -----------
120,000 1,930,000 3,693,000
Utilization of net operating loss car-
ryovers............................... -- (1,029,000) (2,649,000)
---------- ----------- -----------
120,000 901,000 1,044,000
Deferred:
Federal.............................. 181,000 (181,000) --
State................................ 799,000 7,000 731,000
---------- ----------- -----------
980,000 (174,000) 731,000
---------- ----------- -----------
$1,100,000 $ 727,000 $ 1,775,000
========== =========== ===========
</TABLE>
F-11
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The provision for income taxes applicable to income before extraordinary
gains and attributed to the extraordinary gains is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- -------- ----------
<S> <C> <C> <C>
Provision for taxes on income before extraordi-
nary gains:
Current...................................... $ 120,000 $901,000 $ 329,000
Deferred..................................... 980,000 (174,000) 731,000
---------- -------- ----------
Total provision for taxes on income before ex-
traordinary gains............................. 1,100,000 727,000 1,060,000
Provision for taxes on extraordinary gains
(current)..................................... -- -- 715,000
---------- -------- ----------
$1,100,000 $727,000 $1,775,000
========== ======== ==========
</TABLE>
Significant components of Alliance's deferred tax assets and (liabilities)
at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred Tax Liabilities:
Equipment basis differences......................... $(10,738,000) $(12,981,000)
Cancellation of indebtedness........................ -- (2,258,000)
------------ ------------
Total deferred tax liabilities.................... (10,738,000) (15,239,000)
Deferred Tax Assets:
Net operating losses................................ 12,549,000 9,900,000
Cancellation of indebtedness........................ 3,265,000 --
Accounts receivable................................. 266,000 266,000
Basis differences associated with other assets...... 1,015,000 2,105,000
Other............................................... 1,174,000 330,000
------------ ------------
Total deferred tax assets......................... 18,269,000 12,601,000
Valuation allowance................................. (8,631,000) (2,193,000)
------------ ------------
Net deferred tax assets........................... 9,638,000 10,408,000
------------ ------------
Net deferred taxes.................................. (1,100,000) (4,831,000)
Current deferred tax liability...................... 310,000 --
------------ ------------
Noncurrent deferred tax liability................... $ (790,000) $ (4,831,000)
============ ============
</TABLE>
The net change in Alliance's valuation allowance on deferred tax assets
during the year ended December 31, 1996 totaled $4,664,000 and $1,774,000 for
federal and state purposes, respectively.
At December 31, 1996, for federal regular income tax purposes, Alliance had
approximately $26,400,000 of operating loss carryovers expiring through 2006.
Due to a change in ownership in November 1991, utilization of $19,700,000 of
these net operating losses is subject to an annual limitation of approximately
$2,200,000. Any unutilized annual limitation may be carried forward to future
years. The annual limitation may be increased if built-in gains which existed
on the date of the change in ownership are recognized by sale or other
disposal of equipment. As a result of these limitations, Alliance has
approximately $6,700,000 of operating loss carryovers available in 1997 for
federal regular income tax purposes. Future changes in the ownership of
Alliance could result in additional limitations on the utilization of its
operating loss carryovers.
F-12
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
A reconciliation of the expected total provision for income taxes, computed
using the federal statutory rate on income before extraordinary gains, is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected provision
(benefit).......................... $(6,288,000) $ 1,690,000 $ 2,646,000
State income taxes, net of federal
benefit............................ 919,000 313,000 572,000
Amortization of goodwill............ 310,000 458,000 487,000
Alternative minimum tax............. 181,000 34,000 182,000
Increase (decrease) in valuation
allowance on federal deferred
tax assets......................... 5,936,000 (1,710,000) (2,798,000)
Other............................... 42,000 (58,000) (29,000)
----------- ----------- -----------
$ 1,100,000 $ 727,000 $ 1,060,000
=========== =========== ===========
4. INDEBTEDNESS
Long-term debt consisted of the following at December 31:
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C> <C>
Obligations to lending institutions, secured by
equipment, due in monthly installments through
December 2001 with weighted average interest
rates of 9.62% and 9.77% at December 31, 1995
and 1996, respectively......................... $32,547,000 $51,695,000
Senior notes, secured by equipment (see below).. 26,700,000 19,866,000
Senior bridge loan, due March 31, 1997 if not
converted into preferred stock (see below),
interest at 10% payable at maturity............ -- 12,872,000
Senior subordinated debentures, unsecured, due
in quarterly installments through 2005 with an
effective interest rate of 0% (7.5% stated
interest rate)................................. 16,633,000 4,592,000
----------- -----------
75,880,000 89,025,000
Less current portion............................ 9,948,000 16,323,000
----------- -----------
$65,932,000 $72,702,000
=========== ===========
</TABLE>
Installment obligations to lending institutions and the senior notes are
collateralized by equipment with a net book value of $77,339,000 at December
31, 1996.
On December 31, 1996, Alliance entered into a Bridge Loan Agreement
(enabling Alliance to borrow up to $18,000,000) and borrowed $12,872,000 under
a senior bridge loan; an additional $5,128,000 was borrowed on January 2,
1997. The senior bridge loan is convertible into 18,000 shares of a new Series
D convertible preferred stock (see Note 5). On December 31, 1996, Alliance
used the proceeds of the senior bridge loan to repurchase $11,345,000 carrying
value of its senior subordinated debentures (debentures) and $11,071,000 of
its Series A redeemable preferred stock at a discount (plus related accrued
interest and dividends). As a result, in the fourth quarter of 1996, Alliance
recorded an extraordinary gain of $4,935,000, net of taxes of $560,000, from
this early extinguishment of debt. In addition, the excess of carrying amount
of preferred stock repurchased over consideration paid and other charges
amounted to $1,764,000, which has been recognized as an increase in additional
paid-in capital. In connection with this transaction, on January 2, 1997,
Alliance used the additional senior bridge loan proceeds to repurchase the
remaining balance of its debentures and Series A redeemable preferred stock at
a discount (plus related accrued interest and dividends). Accordingly, in
January 1997, Alliance
F-13
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
recorded an extraordinary gain of $1,332,000, net of taxes of $920,000, from
this early extinguishment of debt. The excess of carrying amount of preferred
stock repurchased over consideration paid in January 1997 amounted to
$1,906,000.
On March 26, 1997, the holder of the senior bridge loan exercised its option
to convert the senior bridge loan into 18,000 shares of Series D convertible
preferred stock. At that time, senior notes not to exceed $9,000,000 held by
the same lender become convertible into a new Series E preferred stock on or
after January 1, 1998 (see Note 5). Supplemental earnings per share for the
year ended December 31, 1996, based on historical earnings per share adjusted
to give effect to (1) the issuance of the Series D preferred stock, and (2)
the use of the $18 million proceeds therefrom on a pro rata basis to
repurchase the debentures and Series A redeemable preferred stock repurchased
in December 1996 and January 1997, and assuming the transactions had occurred
on January 1, 1996, is $0.45 per share. This calculation ignores amounts
reported in the historical results for 1996 as gains arising from the
repurchase of the senior notes and debentures and as the earnings per share
benefit arising from the excess of the carrying value of the preferred stock
repurchased over the consideration paid. Therefore, this supplemental earnings
per share calculation is most comparable to the $0.48 per share "income before
items below" reported in Alliance's 1996 historical results of operations.
In November 1996, Alliance arranged for the sale of all of its senior notes
by the original holders to new owners. In connection with the sale, Alliance
prepaid $5,300,000 of the senior notes at a discount and recorded an
extraordinary gain of $1,365,000, net of taxes of $155,000, from this early
extinguishment of debt. In addition, the new holders and Alliance agreed to
remove or modify various restrictive covenants contained in the note purchase
agreement governing the senior notes. The amended senior notes bear interest
at a stated annual rate of 7.5%, with interest payable monthly, and require
minimum mandatory quarterly principal payments of $150,000 in 1997 increasing
to $1,800,000 in 2003. Alternatively, Alliance may make voluntary monthly
principal and interest payments of $335,000 through October 2002 to fully
retire the notes. Alliance may also prepay the notes at any month end at
specified discounts from their face amount. The senior notes agreement
contains limitations on equipment additions, incurrence of debt and other
similar items.
The carrying amount of long-term debt as of December 31, 1996 is due as
follows (assuming voluntary prepayments of Alliance's senior notes, and
excluding the senior bridge loan, which was converted to preferred stock in
March 1997, and the debentures refinanced thereby):
<TABLE>
<S> <C>
Year ending December 31:
1997...................................................... $16,323,000
1998...................................................... 17,263,000
1999...................................................... 14,914,000
2000...................................................... 11,403,000
2001...................................................... 8,097,000
2002...................................................... 3,561,000
-----------
$71,561,000
===========
</TABLE>
Of Alliance's total indebtedness at December 31, 1996, $83,552,000 is an
obligation of Alliance and $5,473,000 is an obligation of Alliance's
consolidated subsidiaries.
F-14
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Alliance has a $3 million revolving line of credit with a bank. The line
bears interest at the bank's prime rate (8.5% at December 31, 1995 and 8.25%
at December 31, 1996) plus two percent, with a commitment fee of 0.375% per
year on the unused balance, and is secured by substantially all of Alliance's
accounts receivable. The line of credit had not been utilized through December
31, 1996.
5. PREFERRED AND COMMON STOCK
PREFERRED STOCK--Alliance is authorized to issue 1,000,000 shares of
preferred stock, undesignated as to series. The Board of Directors has the
authority to establish the voting powers, designations, preferences and other
special rights for each series of preferred stock issued.
In connection with Alliance's debt refinancing effective December 31, 1996
(see Note 4), Alliance authorized 18,000 shares of a new Series D convertible
preferred stock and 9,000 shares of a new Series E convertible preferred
stock. The holders of the Series D and E convertible preferred stock, when
issued, are entitled to receive cumulative dividends at the rate of 4% per
annum of the stated liquidation value (subject to increase, to a maximum of
8%, under certain circumstances). Unpaid dividends accumulate and are payable
quarterly by Alliance in cash. Shares of Series D convertible preferred stock
are convertible at the option of the holder at any time on or before December
31, 2006 into shares of common stock at a conversion price of $6.00 per common
share, subject to adjustment. Shares of Series E convertible preferred stock
are convertible at the option of the holder at any time on or before December
31, 2006 into shares of common stock at a conversion price of the greater of
$6.00 per share of common stock or the market price (as defined) per common
share at date of issuance of the Series E convertible preferred stock. Shares
of Series D and E convertible preferred stock are subject to redemption at the
option of Alliance after December 31, 2006.
In connection with the Royal acquisition (Note 8), Alliance issued 3,876
shares of a new Series C convertible preferred stock. The Series C convertible
preferred stock bears a dividend of 5% of its original liquidation value
($388,000) payable annually in cash and is redeemable at Alliance's option.
Holders of Series C convertible preferred stock may convert their stock into
common stock at a price of $5.00 per common share.
In the event of liquidation, dissolution or winding up of Alliance, the
holders of Series C, D and E convertible preferred stock shall be entitled to
receive an amount equal to the stated liquidation value per share (plus
accumulated but unpaid dividends) prior to any distributions to common
stockholders. No sinking fund has been or will be established for the
retirement or redemption of shares of Series C, D or E convertible preferred
stock.
The holders of shares of preferred stock are not entitled to any voting
rights with respect to any matters voted upon by the common stockholders.
However, a majority of preferred stockholders (with each series voting as a
single class) must approve certain corporate transactions including the
authorization of additional classes or series of stock ranking prior to their
stock, any increase in the number of authorized shares of their preferred
stock series, any amendment to the terms of such preferred stock series and
similar actions.
STOCK OPTIONS AND AWARDS--Alliance 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 FASB Statement No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of Alliance's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-15
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Alliance's 1991 Stock Option Plan provides that up to 2,000,000 shares may
be granted to management and key employees. Options are granted at their fair
market value at the date of grant. All options granted have 10 year terms and
vest and become fully exercisable at the end of three to four years of
continued employment. The weighted-average remaining contractual life of
options outstanding as of December 31, 1996 is 9.6 years. The following table
summarizes the activity under this plan.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1993................ 509,000 $3.5423
Granted....................................... 738,400 0.4375
Canceled...................................... (505,000) 3.5535
-------- -------
Outstanding at December 31, 1994................ 742,400 0.4375
Granted....................................... 32,000 2.1172
Exercised..................................... (221,800) 0.4375
Canceled...................................... (11,600) 0.4375
-------- -------
Outstanding at December 31, 1995................ 541,000 0.5369
Granted....................................... 489,200 3.5625
Exercised..................................... (77,217) 0.5151
Canceled...................................... (2,000) 1.6875
-------- -------
Outstanding at December 31, 1996................ 950,983 $2.0926
======== =======
</TABLE>
At December 31, 1996, 430,700 of these options were exercisable at $0.4375,
121,050 were exercisable at $3.5625, and 12,667 were exercisable at prices
between $1.6875 and $2.375.
In 1991, options for 30,000 shares not covered by the 1991 Stock Option Plan
were granted to three non-employee directors at an exercise price of $8.25 per
share. In 1993, options for 40,000 shares were granted at exercise prices
ranging from $1.125 to $2.50 per share. In 1995, options for an additional
10,000 shares were granted at an exercise price of $1.6875 per share. These
options vest over a four year period. At December 31, 1996, options for 40,000
shares had been canceled and options for 30,000 shares were exercisable.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if Alliance 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 a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 5.72%; no dividend yield;
volatility factor of the expected market price of Alliance's common stock of
.43; and a weighted-average expected life of the option of seven years. The
weighted-average fair value of options granted during 1996 is $1.93.
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 valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Alliance'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.
F-16
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' maximum vesting period.
Alliance's pro forma information for the year ended December 31, 1996 follows:
<TABLE>
<S> <C>
Pro forma net income........................................ $12,577,000
Pro forma earnings per share................................ $1.17
</TABLE>
At December 31, 1996 Alliance had 328,900 warrants outstanding to purchase
common stock with exercise prices ranging from $2.50 to $5.00 per share over
terms of three to ten years. The weighted-average grant-date fair value of the
warrants was $2.13.
6. COMMITMENTS
Alliance has contracts with its equipment vendors for comprehensive
maintenance and cryogen coverage for its MRI and CT systems. The contracts are
between one and five years and extend through December 2001, but may be
canceled by Alliance under certain circumstances. Contract payments are
approximately $9,200,000 per year. At December 31, 1996, Alliance had binding
equipment purchase commitments totaling approximately $29,200,000.
Alliance 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:
<TABLE>
<S> <C>
Year ending December 31:
1997....................................................... $1,478,000
1998....................................................... 960,000
1999....................................................... 668,000
2000....................................................... 141,000
2001....................................................... 34,000
----------
$3,281,000
==========
</TABLE>
Alliance's total rental expense, which includes short-term equipment
rentals, for the years ended December 31, 1994, 1995 and 1996 was $2,781,000,
$1,923,000 and $3,380,000, respectively.
7. 401(K) SAVINGS PLAN
Alliance established a 401(k) Savings Plan in January 1990. All employees of
Alliance are eligible to participate after a six month waiting period.
Employees may contribute between 1% and 15% of their annual compensation.
Alliance matches 33.3 cents for every dollar of employee contributions up to
7% of their compensation, subject to the limitations imposed by the Internal
Revenue Code. Alliance may also make discretionary contributions depending on
profitability. Alliance incurred and charged to expense $119,000, $140,000 and
$157,000 during 1994, 1995 and 1996, respectively, related to the plan.
8. ACQUISITION
On April 26, 1996, Alliance acquired all of the outstanding shares of Royal
Medical Health Services, Inc. (Royal) of Pittsburgh, Pennsylvania. Like
Alliance, Royal is a provider of comprehensive MRI services. Alliance issued
3,876 shares of Series C convertible preferred stock valued at $388,000,
common stock warrants valued at $212,000, and paid $1,914,000 in cash as
consideration for the acquisition of Royal and certain related assets. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Royal have been included in Alliance's consolidated financial
statements from the date of acquisition.
F-17
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The unaudited pro forma information below presents combined results of
operations as if the Royal acquisition had occurred at the beginning of the
respective periods presented. The unaudited pro forma information is not
necessarily indicative of the results of operations of the combined company
had the acquisition actually occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Revenues.......................................... $63,621,000 $70,518,000
Income before extraordinary gains................. 4,492,000 6,487,000
Net income........................................ 4,492,000 12,787,000
Earnings per share:
Income before extraordinary gains................ $ 0.32 $ 0.48
Income applicable to common stock................ 0.32 1.18
</TABLE>
9. SUBSEQUENT EVENTS
On July 23, 1997, Alliance entered into an Agreement and Plan of Merger as
amended, (the "Recapitalization Merger Agreement"). Under the terms of the
Recapitalization Merger Agreement, an entity formed by affiliates of Apollo
Management, L.P. (collectively, "Apollo") will merge with and into Alliance
(the "Recapitalization"). Each share of Alliance common stock, par value $.01
per share, issued and outstanding immediately prior to the effective time of
the Recapitalization, other than dissenting shares, either (1) will be
converted into the right to receive $11.00 in cash or (2) will be retained by
such stockholder. The Recapitalization Merger Agreement requires that 411,358
shares in the aggregate of common stock be retained by Alliance's existing
shareholders; therefore, the right to receive either $11.00 in cash for each
share or to retain that share of Alliance common stock is subject to
proration.
The proposed Recapitalization is subject to stockholder approval. However,
pursuant to a Stockholder Agreement, stockholders representing beneficial
ownership of not less than 54.4% of Alliance common stock (the "Stockholders")
have agreed to vote all shares beneficially owned by them in favor of the
approval of the Recapitalization Merger Agreement and the Recapitalization and
to convert or exercise all securities they hold that are convertible into or
exercisable for shares of Alliance common stock prior to the time of the
special meeting of shareholders called in connection with the
Recapitalization. In addition, each Stockholder has granted to Apollo an
option to acquire their shares of common stock, and a proxy to vote such
shares in favor of the Recapitalization. At the closing of the
Recapitalization, significant new sources of financing will be provided to
Alliance for the purchase of shares of common stock in the Recapitalization,
repayment of indebtedness, and for working capital purposes, among other uses.
The Recapitalization Merger Agreement originally contemplated that, in
connection with the closing of the Recapitalization, Alliance would also
acquire all of the capital stock of the parent corporation of SMT Health
Services, Inc. ("SMT") from Apollo, in exchange for additional shares of
Alliance common stock. The Recapitalization Merger Agreement has been amended
to eliminate that transaction; as a result, SMT will not be acquired by
Alliance in connection with the Recapitalization, and instead will remain an
independent company owned by Apollo.
After the consummation of the Recapitalization, the Company will adopt a new
employee stock option plan pursuant to which options (the "New Options") with
respect to a total of 454,545 shares of Alliance common
F-18
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
stock (the "New Option Shares") will be available for grant. The New Option
Shares will be allocated in amounts agreed upon between Apollo and the
Company. Of the New Option Shares, 50% will vest in equal increments over four
years ending on the fourth anniversary of the last day of the consummation of
the Recapitalization. The remaining 50% will vest seven and one-half years
after the date of grant, subject to acceleration if certain per-share equity
targets are achieved. Vesting of New Options occurs only during an employee's
term of employment. The exercise price for the New Options is expected to be
at the fair market value at a grant date (i.e., $11.00 per share at the
consummation of the Recapitalization)."
As a part of the new financing to be provided, Alliance plans to sell $165
million of Senior Subordinated Notes (the "Notes") in an underwritten public
offering. The Notes are to be unconditionally guaranteed, on a senior
subordinated basis, jointly and severally, by all significant direct and
indirect consolidated subsidiaries of Alliance, which consist of Royal Medical
Health Services, Inc., Alliance Imaging of Central Georgia, Inc., Alliance
Imaging of Ohio, Inc. and Alliance Imaging of Michigan, Inc. (collectively,
the "Subsidiary Guarantors"). Separate financial statements of the Subsidiary
Guarantors are not included herein because such guarantors are jointly and
severally liable with respect to Alliance's obligations pursuant to the Notes,
and the aggregate net assets, earnings and equity of the Subsidiary Guarantors
and Alliance are substantially equivalent to the net assets, earnings and
equity of Alliance on a consolidated basis. Accordingly, management has
determined that separate financial statements and other disclosures concerning
the Subsidiary Guarantors would not provide material information to
prospective purchasers of the Notes. Combined summarized financial information
for the Subsidiary Guarantors is set forth below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Current assets...................................... $ -- $ 131 $ 122
Noncurrent assets................................... 1,450 8,163 8,105
------ ------ ------
Total assets...................................... $1,450 $8,294 $8,227
====== ====== ======
Current liabilities................................. $ -- $1,621 $1,572
Noncurrent liabilities.............................. 641 4,238 4,697
Equity.............................................. 809 2,435 1,958
------ ------ ------
Total liabilities and equity...................... $1,450 $8,294 $8,227
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1994 1995 1996 1996 1997
---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $408 $558 $7,142 $3,963 $5,908
Costs and expenses.............................. 183 225 5,676 3,124 4,785
---- ---- ------ ------ ------
Operating margin................................ 225 333 1,466 839 1,123
Provision for income taxes...................... 14 50 205 117 383
---- ---- ------ ------ ------
Net income...................................... $211 $283 $1,261 $ 722 $ 740
==== ==== ====== ====== ======
</TABLE>
The total assets, revenues and income before extraordinary items of the
Company's non-guarantor subsidiaries on an individual and combined basis are
less than 3% and therefore considered inconsequential.
F-19
<PAGE>
ALLIANCE IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The Notes will be issued in connection with the Recapitalization, the
repayment of certain existing Alliance debt, and the establishment of a new
$50 million term loan and a new $75 million revolving credit line, which will
remain fully available based on the eligible borrowing base at September 30,
1997, in connection with the consummation of the Transactions. The following
table sets forth the pro forma capitalization of Alliance, assuming the
Transactions had occurred on September 30, 1997 (in millions):
<TABLE>
<S> <C>
Long-term debt, including current portion:
Term Loan Facility.............................................. $ 50.0
Other debt...................................................... 6.9
Notes........................................................... 165.0
------
Total debt.................................................... 221.9
Redeemable preferred stock........................................ 14.4
Stockholders' equity (deficit):
Common stockholders' equity (deficit)........................... (57.2)
Accumulated deficit............................................. (31.7)
------
Total stockholders' equity (deficit).......................... (88.9)
------
Total capitalization........................................ $147.4
======
</TABLE>
On October 20, 1997, the Company announced execution of a definitive
agreement to acquire Medical Consultants Imaging Co. (MCIC), a Cleveland, Ohio
based provider of mobile MRI services, CT services and other outsourced
healthcare services. The acquisition also includes MCIC's one-half interest in
an operating joint venture in Michigan. The purchase price consists of $13.0
million in cash (subject to certain reductions) plus the assumption of
approximately $5.0 million in financing arrangements. MCIC operates 14 mobile
MRI systems and several other diagnostic imaging systems, primarily in Ohio,
Michigan, Indiana and Pennsylvania. The transaction was completed on November
21, 1997.
F-20
<PAGE>
ALLIANCE IMAGING, INC.
QUARTERLY FINANCIAL DATA
Summarized quarterly unaudited financial data for the years ended December
31, 1995 and 1996, and the nine month period ended September 30, 1997 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
JUNE 30,
MARCH 31, 1995 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
-------------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues................ $14,481,000 $14,766,000 $15,058,000 $13,760,000
Operating expenses,
excluding depreciation. 7,169,000 7,148,000 7,121,000 6,904,000
Depreciation expense.... 2,992,000 3,024,000 3,074,000 3,112,000
Selling, general and
administrative
expenses............... 1,542,000 1,597,000 1,549,000 1,606,000
Amortization expense,
primarily goodwill..... 331,000 332,000 340,000 342,000
Interest expense, net... 1,254,000 1,349,000 1,273,000 1,177,000
Income before income
taxes.................. 1,193,000 1,316,000 1,701,000 619,000
Net income.............. 1,021,000 1,112,000 1,447,000 522,000
Earnings per common
share:.................
Net income per common
share................ $ 0.07 $ 0.08 $ 0.11 $ 0.02
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding..... 10,881,000 11,202,000 11,267,000 11,283,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
JUNE 30,
MARCH 31, 1996 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
-------------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues................ $14,686,000 $16,616,000 $17,795,000 $19,385,000
Operating expenses,
excluding depreciation. 7,181,000 7,838,000 8,530,000 8,795,000
Depreciation expense.... 2,866,000 3,182,000 3,122,000 3,567,000
Selling, general and
administrative
expenses............... 1,507,000 1,653,000 1,719,000 3,251,000
Amortization expense,
primarily goodwill..... 344,000 401,000 564,000 643,000
Interest expense, net... 1,185,000 1,498,000 1,501,000 1,574,000
Income before income
taxes and extraordinary
gains.................. 1,603,000 2,044,000 2,359,000 1,555,000
Extraordinary gains, net
of taxes............... -- -- -- 6,300,000
Net income.............. 1,364,000 1,738,000 1,949,000 7,750,000
Earnings per common
share:
Income before items
below................ $ 0.10 $ 0.13 $ 0.15 $ 0.10
Excess of carrying
amount of preferred
stock repurchased
over consideration
paid................. -- -- -- 0.15
----------- ----------- ----------- -----------
Income before
extraordinary gains.. 0.10 0.13 0.15 0.25
Extraordinary gains,
net.................. -- -- -- 0.55
----------- ----------- ----------- -----------
Income applicable to
common stock......... $ 0.10 $ 0.13 $ 0.15 $ 0.80
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding..... 11,309,000 11,522,000 11,558,000 11,560,000
=========== =========== =========== ===========
</TABLE>
F-21
<PAGE>
ALLIANCE IMAGING, INC.
QUARTERLY FINANCIAL DATA--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Revenues................................. $19,106,000 $20,805,000 $22,374,000
Operating expenses, excluding
depreciation............................ 8,681,000 9,134,000 9,684,000
Depreciation expense..................... 3,485,000 3,659,000 4,078,000
Selling, general and administrative
expenses................................ 1,897,000 2,093,000 2,261,000
Amortization expense, primarily goodwill. 571,000 594,000 602,000
Interest expense, net.................... 1,933,000 1,624,000 1,758,000
Income before income taxes and
extraordinary gain...................... 2,539,000 3,701,000 3,991,000
Extraordinary gain, net of taxes......... 1,332,000 -- --
Net income............................... 3,036,000 2,411,000 2,636,000
Earnings per common share:
Income before items below.............. $ 0.14 $ 0.16 $ 0.17
Excess of carrying amount of preferred
stock repurchased over consideration
paid.................................. 0.16 -- --
----------- ----------- -----------
Income before extraordinary gain....... 0.30 0.16 0.17
Extraordinary gain, net................ 0.11 -- --
----------- ----------- -----------
Income applicable to common stock...... $ 0.41 $ 0.16 $ 0.17
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding........... 11,985,000 14,934,000 $15,130,000
=========== =========== ===========
</TABLE>
F-22
<PAGE>
ANNEX A
RECAPITALIZATION MERGER AGREEMENT,
AMENDMENT NO. 1 TO THE RECAPITALIZATION MERGER AGREEMENT,
AMENDMENT NO. 2 TO THE RECAPITALIZATION MERGER AGREEMENT
AND AMENDMENT NO. 3 TO THE RECAPITALIZATION MERGER AGREEMENT
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
NEWPORT INVESTMENT LLC,
AND
ALLIANCE IMAGING, INC.
DATED AS OF JULY 23, 1997
A-I-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
ARTICLE I THE MERGER............................................... A-I-5
1.1 The Merger................................................ A-I-5
1.2 Consummation of the Merger................................ A-I-5
1.3 Effects of the Merger..................................... A-I-5
1.4 Certificate of Incorporation and Bylaws................... A-I-5
1.5 Directors and Officers.................................... A-I-5
1.6 Company Actions........................................... A-I-5
ARTICLE II EFFECTS OF THE MERGER................................... A-I-6
2.1 Stockholders' Meeting..................................... A-I-6
2.2 Retained Share Elections.................................. A-I-6
2.3 Conversion of Shares...................................... A-I-7
2.4 Proration................................................. A-I-8
2.5 Conversion of Common Stock of Newco....................... A-I-8
2.6 Exchange of Certificates.................................. A-I-8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......... A-I-10
3.1 Organization.............................................. A-I-10
3.2 Capitalization............................................ A-I-10
3.3 Subsidiaries.............................................. A-I-11
3.4 Authority................................................. A-I-11
3.5 Consents and Approvals; No Violations..................... A-I-12
SEC Documents; Financial Statements; Other Financial
3.6 Information............................................... A-I-12
3.7 Information Supplied...................................... A-I-13
3.8 Absence of Certain Changes or Events...................... A-I-14
3.9 Litigation................................................ A-I-14
3.10 Contracts................................................. A-I-14
3.11 Compliance with Laws...................................... A-I-15
3.12 Environmental Matters..................................... A-I-15
3.13 Absence of Changes in Benefit Plans; Labor Relations...... A-I-16
3.14 Employment Matters; Affiliate Transactions................ A-I-16
3.15 ERISA Compliance.......................................... A-I-17
3.16 Taxes..................................................... A-I-18
3.17 [Intentionally Omitted]................................... A-I-19
3.18 Title to Properties; Condition of Assets.................. A-I-19
3.19 Intellectual Property..................................... A-I-19
3.20 Non-Compete............................................... A-I-20
3.21 Voting Requirements....................................... A-I-20
3.22 State Takeover Statutes................................... A-I-20
3.23 Brokers; Schedule of Fees and Expenses.................... A-I-20
3.24 Opinion of Financial Advisor.............................. A-I-20
3.25 Certain Additional Regulatory Matters..................... A-I-21
3.26 Medicare/Medicaid Participation; Accreditation............ A-I-21
3.27 Regulated Customers....................................... A-I-22
3.28 Insurance................................................. A-I-22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF INVESTOR AND NEWCO... A-I-23
4.1 Organization.............................................. A-I-23
4.2 Authority................................................. A-I-23
4.3 Consents and Approvals; No Violations..................... A-I-23
4.4 Information Supplied...................................... A-I-24
</TABLE>
A-I-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
4.5 Interim Operations of Newco................................... A-I-24
4.6 Brokers....................................................... A-I-24
4.7 Financing..................................................... A-I-24
ARTICLE V COVENANTS.................................................... A-I-25
5.1 Conduct of Business........................................... A-I-25
5.2 No Solicitation............................................... A-I-26
5.3 Certain Tax Matters........................................... A-I-27
5.4 Other Actions................................................. A-I-28
5.5 Advice of Changes; Filings.................................... A-I-28
5.6 Financial Information......................................... A-I-28
5.7 Redemption of Preferred Stock and Senior Debt................. A-I-28
5.8 Refinancing of Outstanding Indebtedness....................... A-I-28
5.9 Matters Involving SMT ........................................ A-I-28
5.10 Insurance..................................................... A-I-29
ARTICLE VI ADDITIONAL AGREEMENTS....................................... A-I-30
6.1 Preparation of Proxy Statement/Prospectus..................... A-I-30
6.2 Access to Information; Confidentiality........................ A-I-30
6.3 Reasonable Efforts; Notification.............................. A-I-30
6.4 Stock Option Plans and Warrants............................... A-I-31
6.5 Indemnification, Exculpation.................................. A-I-32
6.6 Registration Rights Agreement................................. A-I-32
6.7 [Intentionally Omitted]....................................... A-I-32
6.8 Directors..................................................... A-I-32
6.9 Fees and Expenses............................................. A-I-33
6.10 Public Announcements.......................................... A-I-34
6.11 Stop Transfer................................................. A-I-34
ARTICLE VII CONDITIONS................................................. A-I-35
7.1 Conditions to Each Party's Obligation to Effect the Merger.... A-I-35
7.2 Conditions to the Company's Obligation To Effect the Merger... A-I-35
Conditions to Investor's and Newco's Obligations to Effect the
7.3 Merger........................................................ A-I-35
ARTICLE VIII TERMINATION AND AMENDMENT................................. A-I-37
8.1 Termination................................................... A-I-37
8.2 Effect of Termination......................................... A-I-38
8.3 [Intentionally Omitted]....................................... A-I-38
8.4 Extension; Waiver............................................. A-I-38
8.5 Amendment..................................................... A-I-38
ARTICLE IX MISCELLANEOUS............................................... A-I-39
9.1 Nonsurvival of Representations, Warranties and Agreements..... A-I-39
9.2 Notices....................................................... A-I-39
9.3 Interpretation................................................ A-I-40
9.4 Entire Agreement; Third Party Beneficiaries................... A-I-40
9.5 Governing Law................................................. A-I-40
9.6 Counterparts.................................................. A-I-40
9.7 Assignment.................................................... A-I-40
9.8 Enforcement................................................... A-I-41
Signature Page................................................ A-I-42
Exhibit and Schedule Index.................................... A-I-43
</TABLE>
A-I-3
<PAGE>
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of July 23, 1997,
between NEWPORT INVESTMENT LLC, a Delaware limited liability company
("Investor"), and ALLIANCE IMAGING, INC., a Delaware corporation (the
"Company").
WHEREAS, the Board of Directors of the Company has determined that it is
fair and in the best interests of its stockholders for a corporation to be
formed, and wholly-owned, by Investor, to merge with and into the Company (the
"Merger") pursuant to Section 251 of the Delaware General Corporation Law
("DGCL") upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company has adopted resolutions
approving the Merger, this Agreement and the transactions to which the Company
is a party contemplated hereby, and has agreed, upon the terms and subject to
the conditions set forth herein, to recommend that the Company's stockholders
approve the Merger and this Agreement;
WHEREAS, the parties have agreed (subject to the terms and conditions of
this Agreement), as soon as practicable following the approval by the
stockholders of the Company, to effect the Merger, as more fully described
herein;
WHEREAS, it is intended that the Merger be treated as a recapitalization of
the Company for financial reporting purposes;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Investor to enter into this Agreement, Investor and certain
stockholders of the Company are entering into a Stockholder Agreement (the
"Stockholder Agreement") pursuant to which such stockholders have, among other
things, granted to Investor an irrevocable proxy to vote their Shares (as
hereinafter defined) in favor of the Merger and all other actions necessary to
consummate the Merger, upon the terms and subject to the conditions set forth
in the Stockholder Agreement;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Investor to enter into this Agreement, the Company and certain
members of the Company's senior management are executing and delivering the
Employment Agreements, in substantially the form attached hereto as EXHIBIT A
(the "Employment Agreements") pursuant to which such persons have, among other
things, agreed to certain confidentiality and non-solicitation covenants; and
WHEREAS Investor and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Investor and the Company hereby agree as follows:
A-I-4
<PAGE>
ARTICLE I
THE MERGER
1.1 THE MERGER.
Prior to the Effective Time (as defined below), Investor shall form a new
corporation to be called Newport Acquisition Corp. ("Newco") in accordance
with the relevant provisions of the DGCL. Upon the terms and subject to the
conditions hereof, and in accordance with the relevant provisions of the DGCL,
Newco shall be merged with and into the Company as soon as practicable
following the satisfaction or waiver, if permissible, of the conditions set
forth in Article VII hereof. The Company shall be the surviving corporation in
the Merger (the "Surviving Corporation") and shall continue its existence
under the laws of Delaware. The separate corporate existence of Newco shall
cease.
1.2 CONSUMMATION OF THE MERGER.
Subject to the provisions of this Agreement, the parties hereto shall cause
the Merger to be consummated by filing with the Secretary of State of the
State of Delaware a duly executed and verified certificate of merger, as
required by the DGCL, and shall take all such other and further actions as may
be required by law to make the Merger effective as promptly as practicable.
Prior to the filing referred to in this Section, a closing (the "Closing")
will be held at the offices of O'Sullivan Graev & Karabell, LLP, 30
Rockefeller Plaza, 41st Floor, New York, New York (or such other place as the
parties may agree) for the purpose of confirming all the foregoing. The time
the Merger becomes effective in accordance with applicable law is referred to
as the "Effective Time."
1.3 EFFECTS OF THE MERGER.
The Merger shall have the effects set forth in the applicable provisions of
the DGCL and set forth herein.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) The Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), as in effect immediately prior to the
Effective Time, shall be the certificate of incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
(b) The by-laws of Newco (the "By-laws") as in effect immediately prior to
the Effective Time shall be the by-laws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable law.
1.5 DIRECTORS AND OFFICERS.
The directors of Newco immediately prior to the Effective Time and the
officers of the Company immediately prior to the Effective Time shall be the
directors and officers, respectively, of the Surviving Corporation until their
respective successors are duly elected and qualified.
1.6 COMPANY ACTIONS.
The Company hereby represents and warrants that (a) its Board of Directors
(at a meeting duly called and held), has (i) determined that the Merger (upon
the terms and subject to the conditions of this Agreement) is fair to and in
the best interests of the stockholders of the Company, (ii) resolved to
approve this Agreement, the Merger, the issuance of shares of common stock of
the Company, par value $0.01 per share (the "Shares") to the Investor as sole
shareholder of Newco in connection with the Merger, and to recommend (subject
to Section 5.2 of this Agreement) approval of the Merger and this Agreement by
the stockholders of the Company, (iii) taken all necessary steps to render
Section 203 of the DGCL inapplicable to the Merger and the transactions
A-I-5
<PAGE>
contemplated by this Agreement, and (iv) resolved to elect not to be subject,
to the extent permitted by law, to any state takeover law other than Section
203 of the DGCL that may purport to be applicable to the Merger, or the
transactions contemplated by this Agreement, and (b) Salomon Brothers Inc (the
"Financial Advisor") has advised the Company's Board of Directors that, in its
opinion, the consideration to be received and retained by the Company's
stockholders in the Merger is fair, from a financial point of view, to such
stockholders.
ARTICLE II
EFFECTS OF THE MERGER
2.1 STOCKHOLDERS' MEETING.
(a) Subject to Section 5.2 of this Agreement, the Company, acting through
its Board of Directors, shall, in accordance with applicable law, duly call,
give notice of, convene and hold a special meeting (the "Special Meeting") of
its stockholders as soon as practicable for the purpose of obtaining the
approval of this Agreement, include in the registration statement on Form S-4
that includes a proxy statement relating to any required approval by or
meeting of the Company's stockholders with respect to this Agreement and the
Merger (the "Proxy Statement/Prospectus") for use in connection with the
Special Meeting, the recommendation of the Company's Board of Directors that
stockholders of the Company vote in favor of the Merger and approve this
Agreement. The Investor and, subject to Section 5.2 of this Agreement, the
Company agree to use commercially reasonable efforts to cause the Special
Meeting to occur as soon as possible under applicable law and the Company's
Bylaws after the Company has responded to all SEC comments with respect to the
preliminary Proxy Statement/Prospectus as provided in Section 6.1.
(b) Prior to the mailing of the Proxy Statement/Prospectus, Newco shall
appoint an independent bank or trust company to act as paying agent (the
"Paying Agent"), which Paying Agent shall be reasonably satisfactory to the
Company, for the payment of the cash portion of the Merger Consideration.
2.2 RETAINED SHARE ELECTIONS.
(a) Each person who is a record holder of Shares on or prior to 5:00 p.m.,
New York City time, on the date of the Special Meeting or the date of any
meeting of stockholders held pursuant to any adjournment of the Special
Meeting (the "Election Date") will be entitled, with respect to all or any
portion of his or its Shares, to make an election to retain Shares as set
forth in, and subject to the provisions of this Section 2.2.
(b) The Company shall prepare and mail a form of election, which form shall
be subject to the approval of Investor (the "Election Form"), with the Proxy
Statement/Prospectus to the record holders of Shares as of the record date for
the Special Meeting, which Election Form shall be used by each record holder
of Shares who wishes to elect to retain Shares in lieu of such Shares being
converted into the right to receive the Cash Merger Price (as defined below)
for each such Share. Notwithstanding anything to the contrary contained in
this Agreement, any such election shall be subject to proration as set forth
below. The Company will use commercially reasonable efforts to make the
Election Form and the Proxy Statement/Prospectus available to all persons who
become holders of Shares during the period between such record date and the
Election Date. Any such holder's election to retain Shares shall have been
validly made only if the Paying Agent shall have received at its designated
office, on or prior to the Election Date, an Election Form properly completed
and signed in accordance with such rules as the Paying Agent may establish
pursuant to Section 2.2(e), and accompanied by either (i) certificates for the
Shares to which such Election Form relates, duly endorsed in blank or
otherwise in form acceptable for transfer on the books of the Company or (ii)
an appropriate guarantee of delivery of such certificates as set forth in such
Election Form from a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent
in the United States (a "Notice of Guaranteed Delivery"). Notwithstanding
anything to the contrary contained herein, any Election Form accompanied by a
Notice of Guaranteed Delivery shall be deemed not validly made if the
certificate or certificates are in fact delivered to the Paying Agent after
three (3) Nasdaq Stock Market trading days after the date of execution of such
guarantee of delivery.
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(c) Any Election Form may be revoked by the stockholder submitting such
Election Form if a written notice of revocation is received by the Paying
Agent prior to 5:00 p.m., New York City time, on the Election Date. In
addition, all Election Forms shall be revoked automatically if this Agreement
is terminated pursuant to Section 8.1. If an Election Form is revoked, the
certificate or certificates (or guarantees of delivery, as appropriate) for
the Shares to which such Election Form relates shall be returned by the Paying
Agent to the stockholder submitting the same to the Paying Agent.
(d) For purposes of this Agreement, (i) "Elected Retained Share" shall mean
a Share in respect of which an election to retain such Share is validly made
and not validly revoked prior to the Election Date and (ii) "Elected Cash
Share" shall mean a Share in respect of which either an election to retain
such Share is not validly made prior to the Election Date or an election to
retain such Share is validly revoked prior to the Election Date.
(e) The Paying Agent may, with the mutual agreement of the Investor and the
Company, make such rules as are consistent with this Section 2.2 for the
implementation of the elections provided for herein as shall be necessary or
desirable fully to effect such elections.
(f) The Paying Agent shall determine (i) whether or not elections to retain
Shares have been validly made or validly revoked pursuant to this Section 2.2
and (ii) when elections and revocations have been received by it. If the
Paying Agent determines that any election to retain Shares was not validly
made, such Shares shall be converted in the Merger into the right to receive
the Cash Merger Price (as defined below). The Paying Agent shall also make all
computations as to the allocation and the proration contemplated by Section
2.4. All determinations and calculations by the Paying Agent shall be
conclusive and binding on the holders of Shares.
2.3 CONVERSION OF SHARES.
(a) All Shares held in the treasury of the Company (the "Excluded Shares")
shall be canceled and shall cease to exist as of the Effective Time, without
any consideration being payable therefore.
(b) Notwithstanding anything in this Agreement to the contrary, Shares which
would otherwise constitute Elected Cash Shares or Non-Elected Cash Shares
hereunder, which are issued and outstanding immediately prior to the Effective
Time and which are held by stockholders who did not vote in favor of the
Merger and who comply with all of the relevant provisions of Section 262 of
the DGCL (the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the Cash Merger Price (as defined
below), but instead shall be converted into the right to receive payment from
the Surviving Corporation with respect to such Dissenting Shares in accordance
with the DGCL, unless and until such holders shall have effectively withdrawn
or lost their rights to appraisal under the DGCL. If any such holder shall
have effectively withdrawn or lost such right, such holder's Shares shall be
converted into the right to receive the Cash Merger Price (as defined below).
The Company shall give prompt notice to the Investor of any demands received
by the Company for appraisal of Shares, and the Investor shall have the right
to participate in and direct all negotiations and proceedings with respect to
such demands. The Company shall not, except with the prior written consent of
the Investor, make any payment with respect to, or settle or offer to settle,
any such demands.
(c) By virtue of the Merger, each Share issued and outstanding immediately
prior to the Effective Time, other than Excluded Shares and Dissenting Shares,
shall be retained or converted into the right to receive cash as follows:
(i) Each Share that is an Elected Retained Share and each Share that is a
Non-Elected Retained Share (as defined in Section 2.4(c)) (in either case,
a "Retained Share") shall be retained by the holder thereof following the
Effective Time, shall remain outstanding and shall represent one share of
Common Stock, par value $.01 per share, of the Surviving Corporation; and
(ii) Each Share that is an Elected Cash Share and each Share that is a
Non-Elected Cash Share (as defined in Section 2.4(b)) shall be converted
into the right to receive from the Surviving Corporation $11.00 in cash
(the "Cash Merger Price").
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2.4 PRORATION.
(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of Retained Shares (the "Actual Retained Share Number") shall
be equal to 727,273 Shares.
(b) If the aggregate number of Shares constituting Elected Retained Shares
(the "Elected Retained Share Number") exceeds the Actual Retained Share
Number, then the number of Shares which shall be Retained Shares pursuant to
Section 2.3(c)(i) shall be reduced by such excess number of Shares (each such
Share included among such excess, a "Non-Elected Cash Share"). In such event,
each holder of Elected Retained Shares shall be allocated Non-Elected Cash
Shares in lieu of Retained Shares such that (after giving effect to Section
2.6(e)) each such holder shall be deemed to hold Non-Elected Cash Shares in an
amount equal to (x) the total number of Elected Retained Shares held by such
holder less (y) the product of (A) a fraction, the numerator of which is the
Actual Retained Share Number, and the denominator of which is the Elected
Retained Share Number, multiplied by (B) the total number of Elected Retained
Shares held by such holder.
(c) If the Actual Retained Share Number is greater than the Elected Retained
Share Number, then the aggregate number of Shares which shall be converted
into the right to receive cash pursuant to Section 2.3(c)(ii) shall be
decreased by a number of Shares equal to the excess of the Actual Retained
Share Number over the Elected Retained Share Number (each Share included among
such excess, a "Non-Elected Retained Share"). In such event, each holder of
Elected Cash Shares (other than the Investor) shall be allocated a portion of
the Non-Elected Retained Shares in lieu of Elected Cash Shares (after giving
effect to Section 2.6(e)) equal to (i) the number of Elected Cash Shares held
by such holder, multiplied by (ii) a fraction, the numerator of which is the
number of Non-Elected Retained Shares and the denominator of which is the
aggregate number of Elected Cash Shares held by all holders (other than the
Investor).
2.5 CONVERSION OF COMMON STOCK OF NEWCO.
(a) The shares of common stock, par value $.01 per share ("Newco Share"), of
Newco, issued and outstanding immediately prior to the Effective Time shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become at the Effective Time 3,363,636 shares
of Common Stock of the Surviving Corporation.
(b) If the Investor shall purchase Shares prior to the Effective Time
pursuant to the Stockholder Agreement, a number of such Shares, to be
determined in Investor's discretion, may be contributed by the Investor to
Newco immediately prior to the Effective Time and shall be cancelled and shall
cease to exist as of the Effective Time without any consideration being
payable therefor. Any other Shares purchased by the Investor shall be retained
by the Investor and shall be entitled to receive the Cash Merger Price (but
shall not be treated as Retained Shares).
2.6 EXCHANGE OF CERTIFICATES.
(a) As soon as reasonably practicable as of or after the Effective Time of
the Merger, Newco shall deposit with the Paying Agent, for the benefit of the
holders of Shares, for payment in accordance with this Article II, the funds
necessary to pay the Cash Merger Price for each Share.
(b) As soon as practicable after the Effective Time of the Merger, each
holder of an outstanding certificate or certificates which prior thereto
represented Shares, upon surrender to the Paying Agent of such certificate or
certificates and acceptance thereof by the Paying Agent, shall be entitled to
a certificate or certificates representing the number of full Retained Shares
of the Surviving Corporation, if any, to be retained by the holder thereof as
Retained Shares pursuant to this Agreement and the amount of cash, if any,
into which the number of Shares previously represented by such certificate or
certificates surrendered shall have been converted pursuant to this Agreement.
The Paying Agent shall accept such certificates upon compliance with such
reasonable terms and conditions as the Paying Agent may impose to effect an
orderly exchange thereof in accordance with normal
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exchange practices. After the Effective Time of the Merger, there shall be no
further transfer on the records of the Company or its transfer agent of
certificates representing Shares which have been converted, in whole or in
part, pursuant to this Agreement, into the right to receive cash, and if such
certificates are presented to the Company for transfer, they shall be canceled
against delivery of such cash. If any certificate for Retained Shares is to be
issued in, or if cash is to be remitted to, a name other than that in which
the certificate for Shares surrendered for exchange is registered, it shall be
a condition of such exchange that the certificate so surrendered shall be
properly endorsed, with signature guaranteed or otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the Company
or its transfer agent any transfer or other taxes required by reason of the
issuance of certificates for such Retained Shares in a name other than that of
the registered holder of the certificate surrendered, or establish to the
satisfaction of the Company or its transfer agent that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section
2.6(b), each certificate for Shares shall be deemed at any time after the
Effective Time of the Merger to represent only the right to receive upon such
surrender the Cash Merger Price for each Share (other than any Retained Share)
and a new certificate for each Retained Share, as contemplated by Section 2.1.
(c) No dividends or other distributions with respect to Retained Shares with
a record date after the Effective Time of the Merger shall be paid to the
holder of any certificate for Shares not surrendered with respect to the
Retained Shares represented thereby and no cash payment in lieu of fractional
Shares shall be paid to any such holder pursuant to Section 2.6(e) until the
surrender of such certificate in accordance with this Article II. Subject to
applicable law, following surrender of any such certificate, there shall be
paid to the holder of the certificate representing whole Retained Shares
issued in connection therewith, without interest (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional retained
share to which such holder is entitled pursuant to Section 2.6(e) and the
proportionate amount of dividends or other distributions with a record date
after the Effective Time of the Merger therefor paid with respect to such
Retained Shares, and (ii) at the appropriate payment date, the proportionate
amount of dividends or other distributions with a record date after the
Effective Time of the Merger but prior to such surrender and a payment date
subsequent to such surrender payable with respect to such whole Retained
Shares.
(d) All cash paid upon the surrender for exchange of certificates
representing Shares in accordance with the terms of this Article II (including
any cash paid pursuant to Section 2.6(e)) shall be deemed to have been paid in
full satisfaction of all rights pertaining to the Shares exchanged for cash
theretofore represented by such certificates.
(e) Notwithstanding any other provision of this Agreement, each holder of
Shares retained pursuant to the Merger who would otherwise have been entitled
to retain a fraction of a Retained Share (after taking into account all Shares
delivered by such holder) shall receive, in lieu thereof, a cash payment
(without interest) equal to such fraction multiplied by the Cash Merger Price.
(f) Any cash deposited with the Paying Agent pursuant to this Section 2.6
(the "Exchange Fund") which remains undistributed to the holders of the
certificates representing Shares 180 days after the Effective Time of the
Merger shall be delivered to the Surviving Corporation at such time and any
holders of Shares prior to the Merger who have not theretofore complied with
this Article II shall thereafter look only to the Surviving Corporation and
only as general unsecured creditors thereof for payment of their claim for
cash, if any.
(g) None of Newco or the Company or the Paying Agent shall be liable to any
person in respect of any cash from the Exchange Fund delivered to a public
office pursuant to any applicable abandoned property, escheat or similar law.
If any certificates representing Shares shall not have been surrendered prior
to one year after the Effective Time of the Merger (or immediately prior to
such earlier date on which any cash in respect of such certificate would
otherwise escheat to or become the property of any Governmental Entity (as
defined below)), any such cash in respect of such certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
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(h) The Paying Agent shall invest any cash included in the Exchange Fund, as
directed by the Investor, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Company. To the extent
that there are losses with respect to such investments, or the Exchange Fund
diminishes for other reasons below the level required to make prompt payments
of the Cash Merger Price as contemplated hereby, Investor shall promptly
replace or restore the portion of the Exchange Fund lost through investments
or other events so as to ensure that the Exchange Fund is, at all times,
maintained at a level sufficient to make such payments.
(i) The Company shall pay all charges and expenses of the Paying Agent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Investor and, when formed in
accordance with the terms of this Agreement, Newco, as follows (all schedule
references in this Article III are to the schedules to the Disclosure
Statement provided by the Company to Investor as of the date hereof):
3.1 ORGANIZATION.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to carry on its business as now being conducted.
The Company is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or
licensing necessary, except in such jurisdictions where the failure to be so
duly qualified or licensed and in good standing has not had a material adverse
effect (as defined in Section 9.3 of this Agreement) that has not been cured
and reasonably would not be expected to have a material adverse effect or
prevent or materially delay the consummation of the Merger. The Company has
made available to Investor or Newco or their respective counsel,
representatives or advisors, complete and correct copies of its Certificate of
Incorporation and By-laws, as amended to the date hereof.
3.2 CAPITALIZATION.
The authorized capital stock of the Company consists of 50,000,000 Shares
and 1,000,000 shares of preferred stock, par value $.01 per share ("Company
Preferred Stock"), 4,000 of which are designated as Series C 5% Cumulative
Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series
C Shares"), 18,000 of which are designated as Series D 4% Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share (the "Series
D Shares") and 9,000 of which are designated as Series E 4% Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share (the "Series
E Shares" and, collectively with the Series C Shares and the Series D Shares,
the "Convertible Preferred Shares"). At the close of business the business day
immediately preceding the date hereof (except, with respect to subclause (d)
below, at the close of business on July 22, 1997), (a) 10,943,138 Shares were
issued and outstanding, (b) no Shares were held by the Company in its
treasury, (c) 1,409,233 Shares were reserved for issuance upon exercise of
outstanding Company Stock Options (as defined in Section 6.4), (d) 79,676
Shares were issuable upon the conversion of the outstanding Series C Shares,
(e) 3,000,000 Shares were issuable upon the conversion of the outstanding
Series D Shares, (f) no Shares were issuable upon the conversion of the
outstanding Series E Shares, (g) 328,900 Shares were issuable upon the
exercise of outstanding Warrants (as defined in Section 6.4), (h) 3,876 Series
C Shares were issued and outstanding, (i) 18,000 Series D Shares were issued
and outstanding and (j) no Series E Shares were issued and outstanding and
9,000 Series E Shares were reserved for issuance upon the conversion of the
Company's Senior Notes (of which $18,481,867.14 aggregate principal amount is
currently outstanding). The
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Senior Notes may be repaid at the option of the Company at any time or from
time to time and, to the extent convertible into Series E Shares, may not be
converted into Series E Shares prior to January 1, 1998. Except as set forth
above, and except for shares issued since the close of business on the
business day immediately preceding the date hereof upon the exercise of any
then outstanding Company Stock Option or any then outstanding Warrant or upon
the conversion of any then outstanding Convertible Preferred Shares, since
such date no shares of capital stock or other voting securities of the Company
were issued, reserved for issuance, issuable or outstanding. All outstanding
Shares are, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except for the amount of Senior Notes
convertible into Series E Shares (which Series E Shares are convertible into
Shares), there are no bonds, debentures, notes or other indebtedness of the
Company having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders of
the Company may vote. Except as set forth above, there are no securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company is a party or by which it is
bound obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting
securities of the Company or obligating the Company to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
shares of capital stock of the Company (other than as set forth in Section
6.4).
3.3 SUBSIDIARIES.
(a) The authorized capital stock of each of the subsidiaries (as defined in
Section 9.3 of this Agreement) of the Company (the "Subsidiaries"; provided
that Georgia Magnetic Imaging Center, L.P., a Georgia limited partnership
("GMIC"), shall be deemed to be a Subsidiary only for purposes of Sections
3.3, 3.5(a), 3.6(a), 3.6(d), 3.25, 3.26 and 6.9) is set forth on Schedule 3.3.
All of the outstanding shares of capital stock of Subsidiaries are owned of
record and beneficially by the Company, free and clear of all mortgages,
liens, pledges, charges, encumbrances or other security interests
(collectively, "Liens").
(b) Except as set forth on Schedule 3.3, since December 31, 1996, no shares
of capital stock or other voting securities of any Subsidiary were issued,
reserved for issuance, issuable or outstanding. All outstanding shares of
capital stock of Subsidiaries are, duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of any Subsidiary having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which stockholders of Subsidiaries may vote. There are
no securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any
Subsidiary is a party or by which any of them is bound obligating the Company
or any Subsidiary to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities of any
Subsidiary or obligating the Company or any Subsidiary to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding contractual
obligations of the Company or any Subsidiary to repurchase, redeem or
otherwise acquire any shares of capital stock of any Subsidiary. Except for
the Company's interest in the Subsidiaries, neither the Company nor any
Subsidiary owns directly or indirectly any interest or investment in the form
of debt or equity in, and neither the Company nor any Subsidiary is subject to
any obligation or requirement to provide for or to make any investment in, any
person (other than financially insignificant holdings of publicly reporting
companies held in order to obtain filings).
3.4 AUTHORITY.
The Company has the requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby
(other than, with respect to the Merger and this Agreement, the approval of
the Merger and the approval and adoption of this Agreement by the holders of a
majority of the Shares outstanding as of the record date for the Special
Meeting (the "Company Stockholder Approval")). The
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execution, delivery and performance of this Agreement and the consummation by
the Company of the Merger and of the other transactions to which the Company
is a party contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or to
consummate the transactions so contemplated (in each case, other than, with
respect to the Merger and this Agreement, the Company Stockholder Approval).
This Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
3.5 CONSENTS AND APPROVALS; NO VIOLATIONS.
Except for filings, permits, authorizations, consents and approvals as may
be required under, and other applicable requirements of, the Securities Act of
1933 as amended (the "Securities Act") and the Exchange Act (including the
filing with the SEC of the Proxy Statement/Prospectus) and the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), neither
the execution, delivery or performance of this Agreement by the Company nor
the consummation by the Company of the transactions contemplated hereby will
(a) conflict with or result in any breach of any provision of the Certificate
of Incorporation or By-laws or partnership agreement, as applicable, of the
Company or any of its Subsidiaries (or, in the case of GMIC, any agreement or
contract related to the Company's investment therein), (b) except as disclosed
on Schedule 3.5 require any filing with, notice to, or Permit (as defined in
Section 3.11), authorization, consent or approval of, any Federal, state or
local government or any court, tribunal, administrative agency or commission
or other governmental or other regulatory authority or agency, domestic,
foreign or supranational (a "Governmental Entity"), (c) result in the creation
or imposition of any Liens upon the properties or assets of the Company or any
Subsidiary, (d) except as set forth on Schedule 3.5, result in a violation or
breach of, require any notice to any party pursuant to, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation, acceleration or right of non-
renewal or contractually require any prepayment or offer to purchase any debt
or give rise to the loss of a material benefit) under, any of the terms,
conditions or provisions of any Commitment (as defined in Section 3.10) to
which the Company or any of its Subsidiaries is a party or by which the
Company's or any of its Subsidiaries' properties or assets may be bound, (e)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their
respective properties or assets or (f) except as disclosed on Schedule 3.5
result in the loss, forfeiture, revocation, termination or diminution of any
Permit, except in the case of clauses (b), (c), (d), (e) or (f) for failures
to fulfill requirements, Liens, losses, forfeitures, revocations, diminutions,
violations, breaches or defaults that, individually or in the aggregate, have
not had a material adverse effect that has not been cured and reasonably would
not be expected to have a material adverse effect or prevent or materially
delay the consummation of the Merger.
3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; OTHER FINANCIAL INFORMATION.
(a) The Company has filed with the SEC all reports, forms, schedules and
statements and other documents required to be filed by it (the "SEC
Documents"). As of their respective filing dates, (i) the SEC Documents
complied in all material respects with the requirements of the Securities Act,
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such SEC Documents, and (ii) none of
the SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements included in the SEC
Documents complied, as of their respective filing dates as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present, in all material respects,
the consolidated financial position of the Company and its Subsidiaries as of
the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit
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adjustments). Except as set forth on Schedule 3.6 and except for liabilities
and obligations incurred in the ordinary course of business consistent with
past practice since the date of the most recent consolidated balance sheet
included in the SEC Documents filed and publicly available prior to the date
hereof, neither the Company nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a balance sheet or in the notes thereto.
Management of the Company has no reason to believe that with respect to its
and its Subsidiaries' long-lived assets and intangible assets which are
subject to Financial Accounting Standards No. 121, as of June 30, 1997, the
undiscounted future cash flows related to such assets did not exceed the
carrying values thereof recorded as of such date, as required by GAAP.
(b) Schedule 3.6(b) sets forth, as of the close of business on July 3, 1997,
(A) the consolidated indebtedness owed by the Company and its Subsidiaries to
any third party (separately identifying the portion of such indebtedness
incurred in respect of (i) any Magnetic Resonance Imaging unit (each, an "MRI
Unit") owned, leased or on order by the Company or any Subsidiary, including,
mobile and fixed site MRI Units, (ii) any equipment owned, leased or on order
by the Company or any Subsidiary, which equipment is used to provide computed
axial tomography services and imaging systems (each a "CT Unit"), and (iii)
the construction costs incurred in respect of any fixed site location), and
(B) the Company's aggregate consolidated cash and cash equivalents, in the
case of clauses (A) and (B), each calculated in accordance with GAAP,
consistently applied. The term "indebtedness" shall include indebtedness for
borrowed money, reimbursement obligations with respect to letters of credit
and similar instruments, obligations incurred, issued or assumed as the
deferred purchase price of property or services (other than accounts payable
incurred in the ordinary course of business consistent with past practice),
obligations of others secured by (or, for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured)
any Lien on property or assets of the Company or any Subsidiary, capital lease
obligations, and obligations in respect of guarantees of any of the foregoing
or any "keep well" or other agreement to maintain any financial statement
condition of another person, in each case, whether or not matured, liquidated,
fixed, contingent, or disputed.
(c) Schedule 3.6(c) sets forth, (i) as of June 30, 1997, a fixed asset
schedule that includes a general description of each MRI Unit and CT unit
(including upgrades thereto) owned or subject to capital lease obligations by
the Company or any Subsidiary as of that date, and (ii) as of the date of this
Agreement, a list (the "Commitments List") of all outstanding commitments by
the Company or any Subsidiary to purchase an MRI Unit or CT Unit (including
upgrades thereto), indicating for each such commitment the purchase price as
indicated on the purchase order therefor placed with the manufacturer or other
seller of such unit.
(d) To the Company's knowledge, the financial statements of GMIC as of
December 31, 1996, and June 30, 1997, set forth on Schedule 3.6(d), were
prepared in accordance with GAAP, applied on a consistent basis during the
periods involved (except that the June 30, 1997 financial statements were
prepared on the income tax basis of accounting, which is a comprehensive basis
of accounting other than GAAP), and fairly present, in all material respects,
the financial position of GMIC as of the dates thereof and the results of its
operations and cash flows (except the June 30, 1997 financial statements,
which do not contain a statement of cash flows) for the periods then ended
(subject, in the case of unaudited statements, to normal year end
adjustments).
3.7 INFORMATION SUPPLIED.
None of the information supplied or to be supplied by the Company
specifically for inclusion or incorporation by reference in any documents to
be filed by the Company with the SEC or any other Governmental Entity in
connection with the Merger and the other transactions contemplated hereby
will, on the date of its filing or, with respect to the Proxy
Statement/Prospectus, as supplemented if necessary, on the date it is sent or
given to stockholders or at the time of the Special Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided that no representation or warranty is made by the Company
with respect to statements made or incorporated by reference therein based on
information supplied by Investor or Newco specifically for inclusion or
incorporation by reference therein.
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The Proxy Statement/Prospectus and any such other documents filed by the
Company with the SEC or with any other Governmental Entity will comply as to
form in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth on Schedule 3.8 hereto, since the date of the most
recent audited financial statements included in the SEC Documents, the Company
and its Subsidiaries have conducted their respective businesses only in the
ordinary course consistent with prior practice, and there has not been (a) any
material adverse change, (b) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's capital stock, except for regular dividends on
the Series D Shares and Series C Shares in accordance with the terms thereof,
(c) any split, combination or reclassification of any of its capital stock or
any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, (d)
(i) any granting by the Company or any Subsidiary to any officer of the
Company of any increase in compensation, (ii) any granting by the Company or
any Subsidiary to any officer, employee, director or consultant of any
increase in severance or termination pay or (iii) any entry by the Company or
any Subsidiary into any written employment agreement, or any severance or
termination agreement or arrangement with any officer, employee, director or
consultant, (e) any damage, destruction or loss to property, whether or not
covered by insurance, that, individually or in the aggregate, has not been
cured and would not be reasonably expected to have, individually or in the
aggregate, a material adverse effect, (f) any change in accounting methods,
principles or practices by the Company or any Subsidiary, (g) any delivery of
a notice of non-renewal or any other failure to renew contracts or agreements
between the Company or any Subsidiary, on the one hand, and hospitals,
clinics, medical or healthcare providers, health maintenance organizations or
other customers or third party payors, on the other hand, which are material,
individually or in the aggregate, except that any such event shall not be
deemed material for this purpose to the extent that the Company has obtained
new or additional contracts as replacements thereof, or (h) any loss of any
employee who earned more than $100,000 in the most recent fiscal year (in
salary, bonus and other cash compensation).
3.9 LITIGATION.
Except as disclosed on Schedule 3.9, there is no claim, suit, action,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries and
there is no judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the Company or any Subsidiary (other
than such rules or orders that are of general application to the Company's
industry, none of which has had or would likely have, a material adverse
effect).
3.10 CONTRACTS.
Except as set forth on Schedule 3.10, filed as exhibits to or otherwise
reflected in the report on Form 10-K filed with the SEC by the Company related
to the fiscal year ended December 31, 1996 and all SEC Documents filed
thereafter (collectively, the "Recent SEC Documents"), or delivered to or made
available to Investor or Newco, or their respective counsel, representatives
or advisors, there are no (a) notes, bonds, mortgages, indentures, material
leases, or material Permits to which the Company is a party or which affects
its assets, or (b) other material contracts, agreements or other instruments
or obligations or any amendments, supplements or restatements of any of the
foregoing ((a) and (b), collectively, "Commitments") that (i) relate to real
property, (ii) relate to services provided by the Company to or at hospitals,
clinics, medical or healthcare providers or other customers or services paid
for by health maintenance organizations or other third party payors, (iii)
relate to the construction, reconstruction, maintenance, transportation or use
of Magnetic Resonance Imaging equipment, (iv) relate to any proposed
Alternative Transaction (as defined below) as to which discussions have not
been terminated prior to the date hereof, including all Commitments containing
confidentiality, standstill, non-solicitation or similar provisions, (v)
relate to contracts for the provision of services provided to the Company by
physicians, physician groups or other medical professionals or (vi) are
otherwise material to the
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business, financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole. Neither the Company nor any Subsidiary is and,
to the knowledge of the Company, no other party is in violation of or in
default under (nor does there exist any condition affecting the Company, or to
the Company's knowledge, other parties to such Commitments which upon the
passage of time or the giving of notice or both would reasonably be expected
to cause such a violation of or default under) any material Commitment to
which it is a party or by which it or any of its properties or assets is
bound. Each Commitment constitutes a valid and binding obligation of the
Company and/or Subsidiary party thereto and, to the knowledge of the Company,
each other party thereto, enforceable against such other party in accordance
with its terms.
3.11 COMPLIANCE WITH LAWS.
The Company and each Subsidiary is in compliance with all applicable
statutes, laws, codes, ordinances, regulations, rules, Permits, judgments,
decrees and orders of any Governmental Entity applicable to its assets,
properties, business or operations, except for such failures to be in
compliance as have not had a material adverse effect that has not been cured
and would not be reasonably expected to have, individually or in the
aggregate, a material adverse effect. The Company and each Subsidiary has in
effect (and the Company and/or each Subsidiary has timely made appropriate
filings for issuance or renewal thereof) all Federal, state, local and foreign
governmental approvals, authorizations, certificates, filings, franchises,
licenses, notices, permits and rights, including all certificates of need and
authorizations under Environmental Laws (as defined below) and exemptions from
any of the foregoing (collectively, "Permits") necessary for it to own, lease
or operate its properties and assets and to carry on its business as now
conducted, except for the failure to have such Permits that, individually or
in the aggregate, has not had and would not reasonably be expected to have a
material adverse effect. Schedule 3.11 contains a list of all material Permits
(including, without limitation, all Certificates of Need), and copies thereof
have been provided to Investor or its counsel. No default under any Permit has
occurred, except for defaults under Permits that, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect.
The Company has received no notice of any pending investigation or review by
any Governmental Entity with respect to the Company or any Subsidiary. To the
Company's knowledge, no such investigation or review is threatened.
3.12 ENVIRONMENTAL MATTERS.
Except as set forth in Schedule 3.12:
(a) the Company and each Subsidiary is, and has been, in compliance with all
applicable Environmental Laws (as defined below) except for any noncompliance
that, individually or in the aggregate, has not had a material adverse effect
that has not been cured and would not reasonably be expected to have a
material adverse effect. The term "Environmental Laws" means any Federal,
state, provincial, regional, municipal, local or foreign judgment, order,
decree, statute, law, ordinance, rule, regulation, code, permit, consent,
approval, license, writ, decree, directive, injunction or other enforceable
governmental requirement, including any registration requirement, relating to:
(A) Releases (as defined below) or threatened Releases of Hazardous Materials
(as defined below) into the environment; (B) the generation, treatment,
storage, disposal, use, handling, manufacturing, transportation or shipment of
Hazardous Materials; or (C) otherwise relating to pollution or protection of
health or safety or the environment;
(b) there has been no Release or threatened Release of Hazardous Materials,
in, on, under or affecting any property now or previously owned, leased,
controlled or operated by the Company or any Subsidiary or, to the knowledge
of the Company, any adjacent site that has had or would reasonably be expected
to have a material adverse effect. The term "Release" has the meaning set
forth in 42 U.S.C. (S) 9601(22). The term "Hazardous Materials" means any
pollutant, contaminant, hazardous, radioactive or toxic substance, material,
constituent or waste, or any other waste, substance, chemical or material
regulated under any Environmental Law, including (1) petroleum, crude oil and
any fractions thereof, (2) natural gas, synthetic gas and any mixtures
thereof, (3) asbestos and/or asbestos-containing material, (4) radon and (5)
polychlorinated biphenyls ("PCBs"), or materials or fluids containing PCBs;
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(c) there is no pending, or, to the knowledge of the Company, threatened
claim, action, demand, investigation or inquiry of or against the Company by
any Governmental Entity or other person relating to any actual or potential
violations of Environmental Law or any actual or potential obligation to
investigate or remediate a Release or threatened Release of any Hazardous
Materials;
(d) neither the Company nor any Subsidiary has assumed, whether by contract
or operation of law, any liabilities or obligations arising under
Environmental Laws in connection with properties or facilities previously
owned, leased or operated by the Company or any Subsidiary or in connection
with any divisions, subsidiaries, companies or other entities formerly owned
by the Company or any Subsidiary; and
(e) there are no underground or aboveground storage tanks, incinerators or
surface impoundments at, on or about, under or within any property, owned,
leased, controlled or operated by the Company or any Subsidiary, and no such
tanks, incinerators or impoundments have been removed from any such property;
and
(f) neither the Company nor any Subsidiary has used any waste disposal site,
or otherwise disposed of, transported, or arranged for the transportation of,
any Hazardous Materials to any place or location, except for any such use,
disposal, transportation or arrangement that has not had a material adverse
effect that has not been cured and reasonably would not be expected to have a
material adverse effect.
3.13 ABSENCE OF CHANGES IN BENEFIT PLANS; LABOR RELATIONS.
Except as disclosed on Schedule 3.13 or as expressly provided in this
Agreement, since the date of the most recent audited financial statements
included in the SEC Documents, there has not been any adoption or amendment in
any material respect by the Company or any Subsidiary of any collective
bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan or arrangement providing
benefits to any current or former employee, officer or director of the Company
or any Subsidiary (for the avoidance of doubt, regular salary and/or wage
increases and modifications to bonus, commission and other incentive
compensation arrangements in case with respect to non-officer employees of the
Company or any Subsidiary in the ordinary course of business and consistent
with past practice are excluded from the foregoing). Except as set forth in
Schedule 3.13 and except as provided in the Company's certificates and bylaws
or as expressly provided in this Agreement, there exist no employment,
consulting, severance, termination or indemnification agreements or
arrangements between the Company and any current or former employee, officer
or director of the Company. Schedule 3.13 contains a list of all amounts
payable or that will or may become payable to each director, officer or
employee or former director, officer or employee of the Company or any
Subsidiary pursuant to any employment, change-in-control, severance or
termination agreement or arrangement, other than pursuant to the Employment
Agreements, as a result of the Merger. There are no collective bargaining or
other labor union agreements to which the Company or any Subsidiary is a party
or by which it is bound. To the knowledge of the Company, since January 1,
1994, the Company has not encountered any labor union organizing activity, or
had any actual or threatened employee strikes, work stoppages, slowdowns or
lockouts.
3.14 EMPLOYMENT MATTERS; AFFILIATE TRANSACTIONS.
(a) Schedule 3.14(a) sets forth a list of all directors and officers of the
Company and each Subsidiary as of the date hereof and the aggregate salary,
bonus and other cash compensation paid and the number of Company Stock Options
and/or Warrants granted or issued to each such officer and director and to
each employee of the Company or any Subsidiary in the most recently completed
fiscal year and paid and granted or issued to each such person from the
beginning of the current fiscal year through June 30, 1997.
(b) Schedule 3.14(b) sets forth a list of all outstanding Company Stock
Options and Warrants as of the date hereof, showing for each such Company
Stock Option and Warrant: (i) the number of Shares issuable, (ii) the number
of vested Shares, (iii) the date of grant, (iv) the exercise price and (v) the
holder thereof.
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(c) Schedule 3.14(c) or the Recent SEC Documents sets forth a description of
all transactions between the Company or its Subsidiaries, on the one hand, and
any of their respective Affiliates, directors, officers, employees, or
consultants, on the other hand, in each case consummated at any time since
January 1, 1996 (except for ordinary course commercial transactions involving
MRI Units, CT Units and related equipment, and the maintenance thereof, with
General Electric Company and its Affiliates (a "GE Transaction")). Except as
set forth on Schedule 3.14(c) or reflected in the Recent SEC Documents, or
pursuant to a GE Transaction, there are no agreements or arrangements between
the Company or its Subsidiaries, on the one hand, and any of their respective
Affiliates, directors, officers, employees or consultants, on the other hand,
with respect to any such transactions. No Affiliate, director, officer,
employee or consultant of the Company owns any interest in any asset or
property (real or personal, tangible or intangible), business or contract used
or intended for use or otherwise relating to the business currently conducted
or proposed to be conducted by the Company or any Subsidiary, other than
pursuant to a GE Transaction or reflected in the Recent SEC Documents.
3.15 ERISA COMPLIANCE.
(a) Schedule 3.15(a) contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) (sometimes referred to herein as "Pension Plans"),
"employee welfare benefit plans" (as defined in Section 3(1) of ERISA) and all
other benefit plans maintained or contributed to by the Company or any other
person or entity that, together with the Company, is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended (the "Code") (the Company and each such other person or
entity, a "Commonly Controlled Entity"), for the benefit of any current or
former employees, officers or directors of the Company or dependents of any
such person (collectively, "Benefit Plans"). The Company has delivered or made
available to Investor or Newco, or their respective counsel, representatives
or advisors, true, complete and correct copies of (i) each Benefit Plan (or,
in the case of any unwritten Benefit Plans, descriptions thereof), (ii) the
most recent annual report on Form 5500 filed with the Internal Revenue Service
with respect to each Benefit Plan (if any such report was required), (iii) the
most recent summary plan description for each Benefit Plan for which such
summary plan description is required and (iv) each trust agreement and group
annuity contract relating to any Benefit Plan. None of the following have
occurred which could have a material adverse effect: (A) any failure to
administer any Benefit Plan in all material respects in accordance with its
terms, (B) any failure by the Company or any Subsidiary or any Benefit Plan to
comply in all material respects, or any failure of any Benefit Plan to be
operated and administered in all material respects, in accordance with the
applicable provisions of ERISA and the Code, (C) any "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA and the Code),
(D) any termination of any Benefit Plan which results in a "reportable event,"
or (E) the consummation of the transactions entered into pursuant to this
Agreement if such transactions result in a "reportable event."
(b) Except as disclosed in Schedule 3.15(b), all Pension Plans intended to
qualify under Section 401(a) of the Code have been the subject of
determination letters from the Internal Revenue Service to the effect that
such Pension Plans are qualified and exempt from Federal income taxes under
Section 401(a) and 501(a), respectively, of the Code, and no such
determination letter has been revoked nor has any such Pension Plan been
amended since the date of its most recent determination letter or application
therefor in any respect, and no event has occurred that would adversely affect
its qualification or materially increase its costs in a manner which would
constitute a material adverse effect. There have been no material violations
of ERISA or the Code with respect to the filing of applicable documents,
notices or reports (including, without limitation, annual reports filed on IRS
Form 5500) relating to any Benefit Plan maintained by the Company or any
Commonly Controlled Entity with any Governmental Authority or the furnishing
of such required documents to the participants or beneficiaries of such
Benefit Plans.
(c) Neither the Company nor any Commonly Controlled Entity has within the
five year period immediately preceding the date hereof maintained, contributed
to or been obligated to contribute to any Benefit Plan that is subject to
Title IV of ERISA or Section 412 of the Code. Neither the Company nor any
Commonly Controlled Entity is required to contribute to any "multiemployer
plan" (as defined in Section 4001(a) (3) of ERISA) or
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has withdrawn from any multiemployer plan where such withdrawal has resulted
or would result in any "withdrawal liability" (within the meaning of Section
4201 of ERISA) that has not been fully paid.
(d) With respect to any Benefit Plan that is an employee welfare benefit
plan, except as disclosed in Schedule 3.15(d), (1) no such Benefit Plan is
funded through a "welfare benefits fund", as such term is defined in Section
419 (e) of the Code, (2) each such Benefit Plan that is a "group health plan",
as such term is defined in Section 5000 (b)(1) of the Code, complies
substantially with the applicable requirements of Section 4980B(f) of the Code
and (3) except as provided in writing in such plan, there are no
understandings, agreements or undertakings, written or oral, that would
prevent any such plan (including any such plan covering retirees or other
former employees) from being amended or terminated without material liability
to the Company or any Subsidiary on or at any time after the Effective Time.
Except as set forth in Schedule 3.15(d), no Benefit Plan that is a welfare
benefit plan provides for post-retirement medical or life insurance benefits
coverage to any current or former employee, officer, or director of the
Company or any dependent of any such individual except as may be required
under Section 4980B of the Code.
(e) Except as set forth on Schedule 3.15(e) and except with respect to the
Company Stock Options, no employee or director of the Company will be entitled
to any additional compensation or benefits or any acceleration of the time of
payment or vesting of any compensation or benefits under any Benefit Plan as a
result of the transactions contemplated by this Agreement. It shall be assumed
for purposes of the preceding sentence that no payments will be received by,
or accelerated to, any such employee or director as a result of the
termination of such individual's employment/service relationship by the
Surviving Corporation after the Effective Time.
(f) All contributions due and payable on or before the Closing Date in
respect of any Benefit Plan have been made in full and proper form, or
adequate accruals have been provided for in the financial statements contained
in the SEC Documents, in accordance with GAAP, for all other contributions or
amounts in respect of the Benefit Plans for periods ending on the Closing
Date, or, in the case of any contributory Benefit Plan, amounts have been
contributed to such Benefit Plan within the time prescribed by the Code,
ERISA, or any regulations thereunder or interpretations thereof by the
Internal Revenue Service or the Department of Labor.
(g) As of the Closing Date, there are no actions, suits, disputes,
arbitrations or claims pending (other than routine claims for benefits) and
the Company has received no notice of any legal, administrative or other
proceedings or governmental investigations pending or, to the knowledge of the
Company and any Commonly Controlled Entity, threatened against any Benefit
Plan or against the assets of any Benefit Plan.
3.16 TAXES.
(a) The Company has filed all tax returns and reports required to be filed
by it (which returns are true and complete in all material respects) and has
paid all taxes due and required to be paid by it. The most recent financial
statements contained in the SEC Documents reflect an adequate reserve for all
taxes payable by the Company or any Subsidiary for all taxable periods and
portions thereof through the date of such financial statements. No
deficiencies for any taxes have been proposed, asserted or assessed against
the Company or any Subsidiary that have not either been fully paid or
specifically reserved against in the financial statements included in the SEC
Documents, and, except as set forth on Schedule 3.16, no requests for waivers
of the time to assess any such taxes are pending. Except as disclosed in
Schedule 3.16, none of the income tax returns of the Company or any Subsidiary
have been or is currently being examined by the United States Internal Revenue
Service or any other Governmental Entity. Schedule 3.16 sets forth the periods
during which the Company's and its Subsidiaries' Consolidated Federal net
operating loss carryforwards (the "NOL Carryforwards") arose and the
expiration dates of the NOL Carryforwards, identifies which portions thereof
are currently limited under Section 382 of the Code or the "separate return
limitation year" ("SRLY") rules of the consolidated return regulations, and,
in the case of NOL Carryforwards currently limited under Section 382 of the
Code, the relevant Section 382 limitation (within the meaning of Section
382(b) (1) of the Code). As used in this Agreement, "taxes" shall mean all
Federal, state, local and foreign income, property, sales, payroll,
employment, excise, withholding and
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other taxes, tariffs or other governmental charges in the nature of a tax as
well as any interest, penalties and additions to tax.
(b) Except as set forth on Schedule 3.16, no amount that could be received
pursuant to the Benefit Plans or any executed and delivered agreements between
the Company or any Subsidiary and any officer, director or employee thereof in
effect as of the date hereof (whether in cash or property or the vesting of
property) as a result of any of the transactions contemplated by this
Agreement by any employee, officer or director of the Company or any
Subsidiary who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment,
severance, change-in-control or termination agreement, other compensation
arrangement or Benefit Plan currently in effect would either alone, or in
combination with any other amounts to be paid, be an "excess parachute
payment" (as such term is defined in Section 280G(b) (1) of the Code). No
officer, director or employee of the Company or any Subsidiary is entitled to
receive any additional payment from the Company, any Subsidiary, the Surviving
Corporation, or any other person referred to in Q&A 10 under proposed Treasury
Regulation Section 1.280G-1 (a "Parachute Gross-Up Payment") in the event that
the 20 per cent parachute excise tax of Section 4999(a) of the Code is imposed
on such person.
(c) All Company Stock Options granted under any Stock Option Plan qualify,
under Section 162(m)(4) of the Code, as an exception from "applicable employee
remuneration," and as such, no deduction of the Company or any Subsidiary
relating to the Company Stock Options, shall be disallowed by reason of
Section 162(m) of the Code.
3.17 [Intentionally Omitted]
3.18 TITLE TO PROPERTIES; CONDITION OF ASSETS.
(a) Except as set forth in Schedule 3.18, the Company and each Subsidiary
has good and marketable title to, or valid leasehold interests in, all its
material properties and assets except for such as are no longer used in the
conduct of its businesses or as have been disposed of in the ordinary course
of business. All such material assets and properties are free and clear of all
Liens other than those set forth in Schedule 3.18 and except for Liens that,
individually or in the aggregate, do not interfere with the ability of the
Company or any Subsidiary to conduct its business as currently conducted and
do not adversely affect the value of, or the ability to sell, in any material
respect, such assets and properties.
(b) The properties and assets of the Company and its Subsidiaries are in
reasonably good repair and operating condition, ordinary wear and tear
excepted and are sufficient for the conduct of the business of the Company and
Subsidiaries as presently conducted.
(c) Except as set forth in Schedule 3.18, the Company and each Subsidiary
has complied in all material respects with the terms of all material leases to
which it is a party or under which it is in occupancy, and all such leases are
in full force and effect. The Company enjoys peaceful and undisturbed
possession under all such material leases.
(d) Neither the Company nor any Subsidiary owns any real property.
3.19 INTELLECTUAL PROPERTY.
The Company and each Subsidiary owns, or is validly licensed or otherwise
has the right to use, without any obligation to make any fixed or contingent
payments, including any royalty payments, as applicable, all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights, service
marks, service mark rights, copyrights and other proprietary intellectual
property rights and computer programs that are used in the conduct of the
business of the Company as now operated (collectively, "Intellectual Property
Rights"). Schedule 3.19 sets forth a description of all patents, trademarks
and copyrights and applications therefor owned by or licensed to the Company
that are used in the conduct of the business of the Company as now operated
(excluding
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customary commercial software licenses). Except as set forth in Schedule 3.19,
no claims are pending or, to the knowledge of the Company, threatened that the
Company is, and to the knowledge of the Company, neither the Company nor any
Subsidiary is, infringing or otherwise adversely affecting the rights of any
person with regard to any Intellectual Property Right. To the knowledge of the
Company, except as set forth in Schedule 3.19, no person is infringing the
rights of the Company with respect to any Intellectual Property Right. The
Company has not licensed, or otherwise granted, to any third party, any rights
in or to any Intellectual Property Rights.
3.20 NON-COMPETE.
Except for local vicinity covenants provided to certain healthcare customers
of the Company or a Subsidiary or as set forth in Schedule 3.20, neither the
Company nor any Subsidiary is subject to any agreement, covenant or
understanding that restricts the Company or any Subsidiary from entering or
conducting any line of business in any location at any time.
3.21 VOTING REQUIREMENTS.
The affirmative vote of the holders of a majority of the outstanding Shares
is the only vote of the holders of any class or series of the Company's
capital stock necessary to approve this Agreement and the Merger.
3.22 STATE TAKEOVER STATUTES.
The Board of Directors of the Company has approved the Merger and this
Agreement, and such approval is sufficient to render inapplicable to the
Merger and this Agreement, the provisions of Section 203 of the DGCL to the
extent, if any, such Section is applicable to the Merger, this Agreement and
the transactions contemplated by this Agreement and the Stockholder Agreement.
No other state takeover statute or similar statute or regulation applies or
purports to apply to the Merger, this Agreement or the transactions
contemplated by this Agreement.
3.23 BROKERS; SCHEDULE OF FEES AND EXPENSES.
No broker, investment banker, financial advisor, finder or other person is
entitled to any brokerage, investment banker's, financial advisor's, finder's
or other fee or commission for which Investor, Newco or any of their
respective Affiliates (other than, after the Merger, the Company) will be
liable in connection with the execution of this Agreement by the Company or
the performance by the Company or its Subsidiaries of the Company's
obligations hereunder. The fees and expenses incurred and to be incurred by or
on behalf of the Company and/or its Subsidiaries in connection with this
Agreement and the transactions contemplated by this Agreement, including the
fees and expenses of the Financial Advisor and the fees and expenses of the
Company's legal counsel (including any counsel retained by any independent
committee of the Board of Directors of the Company or any other counsel
retained to represent the interests of the Company or its directors or
shareholders), shall not exceed, in the aggregate, the applicable amount set
forth in a disclosure letter delivered to Investor on the date hereof (the
"Disclosure Letter").
3.24 OPINION OF FINANCIAL ADVISOR.
The Board of Directors of the Company has received the opinion of the
Financial Advisor, addressed to the Board, dated the date of this Agreement to
the effect that, as of such date and based upon and subject to the matters set
forth therein, the consideration to be received and retained by holders of
Shares pursuant to the Merger is fair from a financial point of view to such
holders, and a copy of such opinion, signed and addressed to the Company's
Board, has been delivered to Investor.
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3.25 CERTAIN ADDITIONAL REGULATORY MATTERS.
Except where a matter has not had a material adverse effect that has not
been cured or where a material adverse effect would not reasonably be expected
to occur, none of (x) the Company, any Affiliate of the Company, or, the
officers, directors, or employees or agents of the Company or any Affiliate,
(y) to the Company's knowledge (for this purpose, without independent
investigation or inquiry), any of the Persons having a direct or indirect
ownership interest in the Company or any of its Subsidiaries within the
meaning of Section 1320a-7(b)(8) of Title 42 of the United States Code or (z)
to the Company's knowledge (for this purpose, without independent
investigation or inquiry), any of the Persons who provide professional
services under agreements with any of the Company or any Affiliate as agents
of such entities, have engaged in any activities which constitute violations
of, or are cause for imposition of civil penalties upon the Company or
mandatory or permissive exclusion of the Company from Medicare or Medicaid,
under Sections 1320a-7, 1320a-7a, 1320a-7b, or 1395nn of Title 42 of the
United States Code, the federal Civilian Health and Medical Plan of the
Uniformed Services statute ("CHAMPUS"), or the regulations promulgated
pursuant to such statutes or regulations or related state or local statutes
including the following activities:
(a) knowingly and willfully making or causing to be made a false statement
or representation of a material fact in any application for any benefit or
payment;
(b) knowingly and willfully making or causing to be made any false statement
or representation of a material fact for use in determining rights to any
benefit or payment;
(c) presenting or causing to be presented a claim for reimbursement under
CHAMPUS, Medicare, Medicaid or any other State Health Care Program (as defined
below) or Federal Health Care Program (as defined below) that is (i) for an
item or service that the Person presenting or causing to be presented knows or
should know was not provided as claimed, or (ii) for an item or service and
the Person presenting knows or should know that the claim is false or
fraudulent;
(d) knowingly and willfully offering, paying, soliciting or receiving any
remuneration (including any kickback, bribe or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (i) in return for
referring, or to induce the referral of, an individual to a Person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by CHAMPUS, Medicare or Medicaid, or
any other State Health Care Program or any Federal Health Care Program, or
(iii) in return for, or to induce, the purchase, lease, or order, or the
arranging for or recommending of the purchase, lease, or order, of any good,
facility, service, or item for which payment may be made in whole or in part
by CHAMPUS, Medicare or Medicaid or any other State Health Care Program or any
Federal Health Care Program; or
(e) knowingly and willfully making or causing to be made or inducing or
seeking to induce the making of any false statement or representation (or
omitting to state a material fact required to be stated therein or necessary
to make the statements contained therein not misleading) of a material fact
with respect to (i) the conditions or operations of a facility in order that
the facility may qualify for CHAMPUS, Medicare, Medicaid or any other State
Health Care Program certification or any Federal Health Care Program
certification, or (ii) information required to be provided under Section
1124(A) of the Social Security Act ("SSA") (Section 1320a-3 of Title 42 of the
United States Code).
3.26 MEDICARE/MEDICAID PARTICIPATION; ACCREDITATION.
(a) Except where a matter has not had a material adverse effect that has not
been cured or where a material adverse effect would not reasonably be expected
to occur, neither the Company nor any existing officers or directors of the
Company who (based on advice by Investor to the Company) is expected to be an
officer, director, agent (as defined in 42 C.F.R. Section 1001.1001(a)(2)), or
managing employee (as defined in SSA Section 1126(b) or any regulations
promulgated thereunder) of the Company: (1) has had a civil monetary penalty
assessed against it under Section 1128A of the SSA or any regulations
promulgated thereunder; (2) has
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been excluded from participation under the Medicare program or a state health
care program as defined in SSA Section 1128(h) or any regulations promulgated
thereunder ("State Health Care Program") or a federal health care program as
defined in SSA Section 1128B(f) ("Federal Health Care Program"); or (3) has
been convicted (as that term is defined in 42 C.F.R. Section 1001.2) of any of
the following categories of offenses as described in SSA Section 1128(a) and
(b)(1), (2), (3) or any regulations promulgated thereunder:
(i) criminal offenses relating to the delivery of an item or service
under Medicare or any State Health Care Program or any Federal Health Care
Program;
(ii) criminal offenses under federal or state law relating to patient
neglect or abuse in connection with the delivery of a health care item or
service; criminal offenses under federal or state law relating to fraud,
theft, embezzlement, breach of fiduciary responsibility, or other financial
misconduct in connection with the delivery of a health care item or service
or with respect to any act or omission in a program operated by or financed
in whole or in part by any federal, state or local governmental agency;
(iii) federal or state laws relating to the interference with or
obstruction of any investigation into any criminal offense described above
in this clause (a); or
(iv) criminal offenses under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a
controlled substance.
(b) The Company or a Subsidiary has a Medicare provider number, and a
participating provider agreement in force with a Medicare Part B carrier, in
each locale, as applicable, in which the Company or such Subsidiary bills
directly to Medicare for services furnished by the Company or such Subsidiary.
(c) The Company or a Subsidiary has a Medicaid number and a participating
provider agreement in each state, as applicable, in which the Company or such
Subsidiary bills directly to such states' Medicaid agency for services
provided by the Company or such Subsidiary.
(d) The Company or a Subsidiary intends to seek accreditation from a private
accrediting organization and has no reason to believe that such accreditation
will not be issued in the ordinary course.
3.27 REGULATED CUSTOMERS.
To the Company's knowledge (for this purpose, without independent
investigation or inquiry) each party to each Commitment (other than the
Company and its Subsidiaries) and each other person to which the Company or
any Subsidiary provides services has all Permits necessary or advisable for
the conduct of its business and there are no adverse claims, suits, actions,
proceedings or investigations pending or threatened against such person, in
each case, relating to such Commitment or services.
3.28 INSURANCE.
The Company has in full force and effect the insurance policies set forth in
Schedule 3.28 (the "Insurance Policies").
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF INVESTOR AND NEWCO
Investor represents and warrants to the Company, with respect to itself and
Newco and, when formed in accordance with the terms hereof, Newco represents
and warrants to the Company, as follows:
4.1 ORGANIZATION.
Investor is, and Newco, from and after formation in accordance with Section
1.1 hereof (hereinafter, such formation shall be referred to as the
"Formation"), will be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization and has all requisite
power and authority to carry on its business as now being conducted. Investor
is and, from and after Formation, Newco will be, duly qualified or licensed to
do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualifications or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the aggregate)
could not be reasonably expected to either prevent or materially delay the
consummation of the Merger or impair its ability to perform its obligations
hereunder. Investor has made, and from and after Formation, Newco will make
available to the Company complete and correct copies of their certificate of
formation, operating agreement, certificate of incorporation and by-laws, as
amended to the date hereof.
4.2 AUTHORITY.
Investor has, and Newco, from and after Formation, will have the requisite
power and authority to execute and deliver this Agreement and the Stockholder
Agreement, and to consummate the transactions contemplated by this Agreement
and the Stockholder Agreement. The execution, delivery and performance of this
Agreement and the Stockholder Agreement, and the consummation of the
transactions contemplated by this Agreement and the Stockholder Agreement,
have been (or, will be, in case of Newco) duly authorized by all necessary
action on the part of Investor and Newco and no other proceedings on the part
of Investor and Newco are (or, will be, in the case of Newco) necessary to
authorize this Agreement or the Stockholder Agreement or to consummate the
transactions contemplated hereby or thereby. Each of this Agreement and the
Stockholder Agreement has been (or, will be, in the case of Newco) duly
executed and delivered by Investor and Newco and constitutes (or, will
constitute, in the case of Newco) a valid and binding obligation of Investor
and Newco enforceable against Investor and Newco in accordance with its terms.
4.3 CONSENTS AND APPROVALS; NO VIOLATIONS.
Except for filings, permits, authorizations, consents and approvals as may
be required under, and other applicable requirements of the Exchange Act, the
HSR Act, the DGCL and state takeover laws, neither the execution, delivery or
performance of this Agreement or the Stockholder Agreement by Investor and
Newco, nor the consummation by Investor and Newco of the transactions
contemplated hereby or thereby will (i) conflict with or result in any breach
of any provision of the respective certificate of incorporation or formation
or by-laws or operating agreement, or comparable documents of Investor and
Newco, as the case may be, (ii) require any filing with, notice to, or permit,
authorization, consent or approval of, any Governmental Entity (except where
the failure to obtain such permits, authorizations, consents or approvals or
to make such filings would not reasonably be expected to prevent or materially
delay the consummation of the Merger), (iii) result in a violation or breach
of, require any notice to any party pursuant to, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, lease, contract, agreement or other instrument or obligation to which
Investor or any of its subsidiaries is a party or by which any of them or any
of their properties or assets may be bound or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Investor, any of
its subsidiaries or any of their properties or assets, except in the case of
clauses (iii) and (iv) for violations, breaches or defaults which could not,
individually or in the aggregate, be reasonably expected to either prevent or
materially delay the consummation of the Merger or impair its ability to
perform its obligations hereunder.
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4.4 INFORMATION SUPPLIED.
None of the written information supplied or to be supplied by Investor or
Newco specifically for inclusion or incorporation by reference in the Proxy
Statement/Prospectus, as supplemented if necessary, and any other documents to
be filed by the Company with the SEC or any Governmental Entity in connection
with the Merger and the other transactions contemplated hereby will, on the
date of its filing or, with respect to the Proxy Statement/Prospectus, as
supplemented if necessary, on the date it is sent or given to stockholders or
at the time of the Special Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
4.5 INTERIM OPERATIONS OF NEWCO.
Newco was formed solely for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business activities and has
conducted its operations only as contemplated hereby.
4.6 BROKERS.
No broker, investment banker, financial advisor, finder or other person is
entitled to any brokerage, investment banker's, financial advisor's, finder's
or other fee or commission for which the Company will be liable in connection
with the execution of this Agreement by Investor and Newco or the performance
by Investor and Newco of their obligations hereunder.
4.7 FINANCING.
Investor has sufficient sources of liquid capital funds, and concurrently
with the Effective Time will fund, in cash, to the Company at least (a) $37
million in equity capital and (b) $35 million in subordinated PIK notes of the
Company having substantially the terms and conditions reflected on Schedule
4.7 attached hereto (the "Junior Notes"). Investor has delivered to the
Company true and correct copies of signed letters received by Investor with
respect to the balance of the financing (the "Financing Letters") required for
the consummation of the transactions contemplated hereby. A copy of each
Financing Letter is set forth in EXHIBIT B. Assuming satisfaction of all
applicable conditions set forth in the Financing Letters and full funding
thereunder, such financing, together with the equity capital in Newco and
proceeds from the issuance of the Junior Notes, will provide sufficient funds
to (i) pay the aggregate Cash Merger Price with respect to all outstanding
Shares, on a fully diluted basis, (ii) prepay, redeem, refinance or
renegotiate the Company's existing indebtedness, if required to consummate the
Merger and the other transactions contemplated hereby, and pay any and all
fees, expenses, costs and penalties in connection with any such prepayment,
redemption, refinancing or renegotiation and in connection with obtaining of
the financing contemplated by the Financing Letter, (iii) pay the fees and
expenses of the Financial Advisor and the Company's legal counsel (subject to
Section 3.23 hereof), (iv) consummate all of the other transactions
contemplated by this Agreement, and (v) provide sufficient working capital
needs of the Company following the Merger (as determined by Investor).
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ARTICLE V
COVENANTS
5.1 CONDUCT OF BUSINESS.
From the date hereof to the Effective Time, except as set forth on Schedule
5.1, the Company shall, and shall cause each Subsidiary to, carry on its
business in the ordinary course consistent with past practice and use
reasonable efforts to preserve intact its current business organization, keep
available the services of its current officers and employees and preserve its
relationships with customers, suppliers, licensors, licensees and others
having significant business dealings with it. Without limiting the generality
of the foregoing, from the date hereof to the Effective Time, the Company
shall not and shall cause each Subsidiary not to (except as expressly
permitted by this Agreement or with Investor's consent, which consent shall be
deemed given after Investor's receipt of the Company's written request for a
waiver of a covenant in this Section 5.1, which request has not been rejected
in writing by Investor within three days after Investor's signed receipt
thereof by overnight courier service):
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock other than regular
dividends on the Company's Series D Shares in accordance with the terms of
such securities, (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for Shares of its capital stock, or (iii) purchase,
redeem or otherwise acquire any Shares or any capital stock of the Company or
any Subsidiary or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities (other than the conversion of the
Company's Series D Shares and Series C Shares, in accordance with the terms of
such securities and the issuance of Shares upon the exercise of Company Stock
Options or Warrants outstanding on the date hereof in accordance with their
present terms);
(c) amend its Certificate of Incorporation or Bylaws or other comparable
charter or organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with, or by
purchasing a substantial portion of the assets or stock of, or by any other
manner, any business or any person, other than as set forth on Schedule 5.1 or
(ii) any assets except for the purchase of (x) equipment as identified on the
Commitments List or the schedule of anticipated commitments, as set forth on
Schedule 5.1 (the "Anticipated Commitments List") or (y) equipment or other
assets in the ordinary course of business, provided that the amount thereof
does not exceed, individually or in the aggregate, $1,000,000, other than as
set forth on Schedule 5.1;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any
Lien or otherwise dispose of any of its properties or assets, except (i)
immaterial assets, (ii) in the ordinary course of business (including for
trade-ins) and (iii) where the amount of such sales does not exceed,
individually or in the aggregate, $1,000,000;
(f) except as identified on the Commitments List, the Anticipated
Commitments List or in the ordinary course of business consistent with past
practice, or as set forth in Schedule 5.1 (i) incur any indebtedness or
guarantee any such indebtedness of another person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities of the
Company or any Subsidiary, guarantee any debt securities of another person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having the
economic effect of any of the foregoing except for short-term borrowings
incurred in the ordinary course of business consistent with past practice, or
(ii) make any loans, advances (other than advances to Subsidiaries or among
Subsidiaries) or capital contributions to, or investments in, any other
person;
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(g) make or agree to make any capital expenditure or expenditures with
respect to property, plant or equipment which, individually, is in excess of
$50,000 or, in the aggregate, are in excess of $250,000, except as identified
on the Commitments List, the Anticipated Commitments List or otherwise in the
ordinary course of business consistent with past practice in order to satisfy
actual or expected contractual commitments to customers, or as set forth in
Schedule 5.1;
(h) make any material tax election or settle or compromise any material
income tax liability;
(i) (i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in the most recent
consolidated financial statements (or the notes thereto) of the Company
included in the SEC Documents or incurred thereafter in the ordinary course of
business consistent with past practice, or waive any material benefits of, or
agree to modify in any material respect, any confidentiality, standstill, non-
solicitation or similar agreement to which the Company or any Subsidiary is a
party;
(j) modify, amend or terminate any Commitment to which the Company or any
Subsidiary is a party, or waive, release or assign any rights or claims, other
than in the ordinary course of business consistent with past practice;
(k) enter into any Commitment relating to the provision of services by the
Company or any Subsidiary, the maintenance of any MRI Unit or CT Unit or the
distribution, sale or marketing by third parties of the Company's or any
Subsidiary's services, including any Commitment with any hospital, clinic,
medical or healthcare provider, health maintenance organization or other
customer or third party payor, other than in the ordinary course of business
consistent with past practice;
(l) except as required to comply with applicable law or with Investor's
consent, (i) adopt, enter into, terminate or amend any Benefit Plan or other
arrangement for the benefit or welfare of any director, officer or current or
former employee, other than, in the case or non-officer employees, in the
ordinary course of business consistent with past practice (ii) increase in any
manner the compensation or fringe benefits of, or pay any bonus to, any
director or officer (other than as set forth on Schedule 5.1), (iii) pay any
material benefit not provided for under any Benefit Plan, (iv) except as
permitted in clause (ii), grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Benefit Plan
(including the grant of stock options, stock appreciation rights, stock based
or stock related awards, performance units or restricted stock, or the removal
of existing restrictions in any Benefit Plans or agreement or awards made
thereunder) or (v) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Benefit Plan; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
5.2 NO SOLICITATION.
(a) The Company shall, shall cause each Subsidiary to and shall direct and
use reasonable efforts to cause its and its Subsidiaries' officers, directors,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties other than Investor and Newco that may be
ongoing with respect to an Alternative Transaction (as hereinafter defined).
The Company shall not, shall cause each Subsidiary not to and shall not
authorize and shall direct and use reasonable efforts to cause its and its
Subsidiaries' officers, directors, employees and any investment banker,
financial advisor, attorney, accountant or other representative retained by it
not to, directly or indirectly, (i) solicit, initiate or encourage (including
by way of furnishing information), or take any other action to facilitate, any
inquiries or the making of any proposal that may lead to an Alternative
Transaction or (ii) participate in any discussions or negotiations regarding
any proposed Alternative Transaction; provided, however, that if, during the
45 days following the date of this Agreement, the Board of Directors of the
Company determines in good faith, after consultation with its financial
advisors, and following receipt of written advice from outside counsel, that
action is required by reason of the Board of
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Directors' fiduciary duties to the Company's stockholders under applicable
law, the Company may (subject to compliance with Section 5.2(c)), during such
45 day period, in response to an unsolicited Third Party Proposal (as defined
herein), (A) furnish information with respect to the Company to the person
making such Third Party Proposal pursuant to a confidentiality agreement that
is at least as protective of the Company's interests as is the Confidentiality
Agreement (as defined in Section 6.2), (B) participate in negotiations
regarding such Third Party Proposal, and (C) take any position (and disclose
such position to its stockholders) with regard to such Third Party Proposal
pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act;
provided, however, that in the case of clause (C), (x) the Company shall have
provided Investor and Newco with as much advance notice of its position and
proposed disclosure as is practicable under the circumstances, and (y) neither
the Company nor its Board of Directors nor any committee thereof shall, except
as permitted by Section 5.2(b), withdraw or modify its position with respect
to the Merger or this Agreement or approve or recommend such Third Party
Proposal. Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any director,
officer or employee of the Company or any Subsidiary or any investment banker,
financial advisor, attorney, accountant or other representative of the
Company, acting on behalf of the Company, shall be deemed to be a breach of
this Section 5.2(a) by the Company. For purposes of this Agreement, a "Third
Party Proposal" means a bona fide proposal from a third party, which proposal
did not result from a breach of this Section 5.2(a) by the Company and which
third party the Board of Directors of the Company determines in good faith,
taking into account all factors that the Board of Directors reasonably deems
relevant and upon the advice of the Company's financial advisor, has the
capacity and is reasonably likely to have the ability to consummate a Superior
Proposal (as defined in Section 8.1(g)). For purposes of this Agreement, an
"Alternative Transaction" means any direct or indirect acquisition or purchase
of assets of the Company or any Subsidiary outside the ordinary course of
business or any outstanding equity securities of the Company or any
Subsidiary, any tender offer or exchange offer that if consummated would
result in any person beneficially owning equity securities of the Company or
any merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any Subsidiary, other than the transactions
contemplated by this Agreement and other than the acquisition of Shares
pursuant to the exercise of Company Stock Options or Warrants that are issued
and outstanding as of the date hereof or conversion of Series C Shares or
Series D Shares.
(b) Neither the Board of Directors of the Company nor any Committee thereof
shall (i) withdraw or modify, the approval or recommendation by such Board of
Directors or such committee of this Agreement or the Merger, (ii) approve or
recommend, any Alternative Transaction or (iii) cause the Company to enter
into any letter of intent, agreement in principle, acquisition agreement or
other agreement, including any exclusivity agreement (an "Acquisition
Agreement") with respect to an Alternative Transaction unless the Board of
Directors of the Company shall have previously terminated this Agreement
pursuant to Section 8.1(g).
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 5.2, the Company shall immediately advise Investor
orally and in writing of any request for information or of any proposal or any
inquiry regarding any Alternative Transaction, the material terms and
conditions of such request, proposal or inquiry and the identity of the person
making such request, proposal or inquiry. The Company will keep Investor fully
informed of the status and details (including amendments or proposed
amendments) of any such request, proposal or inquiry.
5.3 CERTAIN TAX MATTERS.
From the date hereof until the Effective Time, (i) the Company and each
Subsidiary will file all tax returns and reports ("Post-Signing Returns")
required to be filed; (ii) the Company and each Subsidiary will timely pay all
taxes shown as due and payable on the Company's Post-Signing Returns that are
so filed; (iii) the Company and each Subsidiary will make provision for all
taxes payable by the Company for which no Post-Signing Return is due prior to
the Effective Time; and (iv) the Company will promptly notify Investor of any
action, suit, proceeding, claim or audit pending against or with respect to
the Company and each Subsidiary in respect of any
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tax where there is a reasonable possibility of a determination or decision
which would reasonably be expected to have a significant adverse effect on the
Company's or any Subsidiary's tax liabilities or tax attributes.
5.4 OTHER ACTIONS.
The Company shall not, and shall cause each Subsidiary not to, take or omit
to take any action, the taking or omission of which would reasonably be
expected to result in (a) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or inaccurate or (b) any
of the conditions set forth in Section 7.2 not being satisfied (subject to the
Company's right to take actions specifically permitted by Section 5.1, Section
5.2 or Section 8.1).
5.5 ADVICE OF CHANGES; FILINGS.
The Company shall confer with Investor on a regular and frequent basis as
reasonably requested by Investor, report on operational matters and promptly
advise Investor orally and, if requested by Investor, in writing, of any
material change with respect to the Company or any Subsidiary. The Company
shall promptly provide to Investor (or its counsel) copies of all filings made
by the Company or any Subsidiary with any Governmental Entity in connection
with this Agreement and the transactions contemplated hereby.
5.6 FINANCIAL INFORMATION.
The Company shall furnish to Investor the following financial information
(all to be prepared in accordance with generally accepted accounting
principles consistently applied):
(a) as soon as available but in any event within 20 days of each calendar
month, the unaudited consolidated balance sheets and income statements of the
Company, showing its financial condition as of the close of such month and the
results of operations during such month and for the then elapsed portion of
the Company's fiscal year, in each case, setting forth the comparative figures
for the corresponding month in the prior fiscal year and the corresponding
elapsed portion of the prior fiscal year; and
(b) all documents filed with or submitted to the SEC by the Company
simultaneously with such filing or submission.
5.7 REDEMPTION OF PREFERRED STOCK AND SENIOR DEBT.
The Company shall cause (a) all of its outstanding shares of Preferred Stock
(including the Series C Shares and the Series D Shares; provided that in the
case of the Series C Shares, Investor will give the Company at least 35 days
notice of the anticipated Election Date) to be redeemed or converted into
Shares on or prior to the Election Date in accordance with the terms set forth
in the applicable Certificates of Designation and (b) all of its outstanding
Senior Notes to be redeemed on or prior to the Election Date in accordance
with their terms.
5.8 REFINANCING OF OUTSTANDING INDEBTEDNESS.
The Company will use all commercially reasonable efforts to cause
satisfaction of the condition set forth in Section 7.3(h) of this Agreement,
to the extent requested by Investor.
5.9 MATTERS INVOLVING SMT
(a) The Company (and where applicable, the Investor) covenants and agrees
that, prior to the Effective Time, it shall (i) cause the formation of a new
Delaware corporation, all of the capital stock of which shall be owned by the
Company ("SMT Acquisition") and (ii) if Three Rivers Acquisition Corp., a
Delaware corporation ("Three Rivers Acquisition"), becomes the owner of all of
the shares of common stock, par value $.01, of SMT Health Services Inc., a
Delaware corporation ("SMT"), assuming the exercise of all options, warrants
and other
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rights to acquire shares of common stock, par value $.01, of SMT, the Company
shall (subject to the performance by the Investor of its covenants set forth
in Section 5.9(d)) cause SMT Acquisition to enter into an Agreement and Plan
of Merger (the "SMT/Alliance Merger Agreement") among Three Rivers Holding
Corp. and the Company pursuant to which, if Three Rivers Acquisition is merged
(the "SMT/Three Rivers Merger") with and into SMT on the terms and conditions
set forth in the Agreement and Plan of Merger dated as of June 24, 1997 (the
"SMT/Three Rivers Merger Agreement"), among SMT, Three Rivers Holding Corp., a
Delaware corporation ("Three Rivers Holding Corp.") and Three Rivers
Acquisition, and the other conditions set forth in Section 5.9(c) shall have
been satisfied or waived then, promptly after the Effective Time, (A) SMT
Acquisition and Three Rivers Holding Corp. shall be merged (the "SMT/Alliance
Merger"), (B) each share of SMT Acquisition issued and outstanding as of the
effective time of the SMT/Alliance Merger will be converted into one fully
paid and non-assessable share of common stock, par value $.01, of Three Rivers
Holding Corp., as the surviving corporation, and (C) the shares of common
stock, par value $.01, of Three Rivers Holding Corp. outstanding immediately
prior to the effective time of the SMT/Alliance Merger would be converted
into, in the aggregate, 3,181,818 fully paid and non-assessable Shares of the
Company as the Surviving Corporation of the Merger.
(b) The Company further covenants and agrees that (i) if the SMT/Alliance
Merger Agreement is executed prior to the mailing of the Proxy
Statement/Prospectus, it shall, if requested by the Investor, submit the
SMT/Alliance Merger Agreement and the SMT/Alliance Merger to its shareholders
for the shareholders' approval at the Special Meeting and (ii) it will cause
SMT Acquisition to consummate the transactions contemplated by the
SMT/Alliance Merger Agreement, pursuant to the terms and subject to the
conditions set forth therein.
(c) Notwithstanding anything to the contrary contained herein, the
consummation of the transactions contemplated by the SMT/Alliance Merger
Agreement shall be subject to reasonable and customary terms and conditions,
including the satisfaction or waiver of the following conditions:
(i) the SMT/Three Rivers Merger shall have been consummated in accordance
with the terms and conditions of the SMT/Three Rivers Merger Agreement;
(ii) the Merger shall have been consummated in accordance with the terms
of this Agreement;
(iii) the waiting period applicable to the consummation of the
SMT/Alliance Merger under the HSR Act, if applicable, shall have expired or
shall have been terminated; and
(iv) no statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
Governmental Authority that prohibits or materially restricts the
consummation of the SMT/Alliance Merger or makes such consummation illegal
(each party agreeing to use commercially reasonably efforts to have any
such prohibition lifted).
(d) The Investor covenants and agrees that if Three Rivers Acquisition
becomes the owner of all of the shares of common stock, par value $.01, of SMT
(excluding any shares of such common stock and options and other rights to
acquire such common stock that may be issued to management of SMT in
connection with the transactions contemplated by the SMT/Three Rivers Merger
Agreement), assuming the exercise of all options, warrants and other rights to
acquire shares of common stock, par value $.01, of SMT, the Investor shall (x)
(subject to the performance by the Company of its covenants set forth in
Section 5.9(a)) cause Three Rivers Holding Corp. to enter into the
SMT/Alliance Merger Agreement with SMT Acquisition and to consummate the
transactions contemplated thereby; and (y) concurrently with such
consummation, cause the Company to redeem all Junior Notes then outstanding
for the unpaid principal amount thereof plus accrued interest and otherwise in
accordance with the terms thereof.
5.10 INSURANCE.
The Company shall maintain the Insurance Policies in full force and effect.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 PREPARATION OF PROXY STATEMENT/PROSPECTUS.
The Company shall, as soon as practicable, prepare and file a preliminary
Proxy Statement/Prospectus with the SEC, reasonably satisfactory to Investor,
and will use its best efforts to respond to any comments of the SEC and its
staff and to cause the Proxy Statement/Prospectus to be declared effective and
mailed to the Company's stockholders as promptly as practicable after
responding to all such comments to the satisfaction of the SEC or its staff.
The Company will notify Investor promptly of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Proxy Statement/Prospectus or for additional information
and will supply Investor with copies of all correspondence between the Company
or any of its representatives, on the one hand, and the SEC or its staff, on
the other hand, with respect to the Proxy Statement/Prospectus or the Merger.
If at any time prior to the Stockholders Meeting there shall occur any event
that should be set forth in an amendment or supplement to the Proxy
Statement/Prospectus, the Company will promptly prepare and mail to its
stockholders such an amendment or supplement. The Company will not mail any
Proxy Statement/Prospectus, or any amendment or supplement thereto, to which
Investor reasonably objects, unless required by law, rule, regulation or the
SEC staff, in the opinion of outside counsel; provided, that Investor shall
identify its objections and fully cooperate with the Company to create a
mutually satisfactory Proxy Statement/Prospectus. In connection with such
preliminary Proxy Statement/Prospectus, Proxy Statement/Prospectus and any
amendment or supplement thereto, Investor and, from and after formation, Newco
shall promptly provide all information reasonably requested by the Company.
6.2 ACCESS TO INFORMATION; CONFIDENTIALITY.
The Company and its Subsidiaries shall afford to Investor, and to Investor's
officers, employees, accountants, counsel, financial advisers and other
representatives, reasonable access during normal business hours from the date
hereof to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, the
Company shall furnish promptly to Investor (a) a copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of Federal or state securities laws and
(b) all other information concerning its business, properties and personnel as
Investor may reasonably request. Investor will hold, and will cause its
officers, employees, accountants, counsel, financial advisers and other
representatives and Affiliates to hold, any and all information received from
the Company, directly or indirectly, in confidence, according to the terms of
the confidentiality agreement dated as of April 25, 1997, between the Company
and an affiliate of Investor (the "Confidentiality Agreement").
6.3 REASONABLE EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger, and the other transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from Governmental
Entities and the making of all necessary registrations and filings (including
filings with Governmental Entities, if any) and the taking of all reasonable
steps as may be necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) the obtaining of all
necessary consents, approvals or waivers from third parties, (iii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of any of the
transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other Governmental
Entity vacated or reversed, (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by,
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and to fully carry out the purposes of, this Agreement, (v) reasonably
cooperating with all potential sources of financing to Investor in connection
with the Merger, and the other transactions contemplated by this Agreement,
and the taking of all reasonable steps as may be necessary or advisable to
consummate one or more financing transactions with such potential sources of
financing, including participating in "road shows" with respect to the
issuance of securities in one or more private placements or transactions
registered under the Securities Act, (vi) if necessary to obtain
recapitalization accounting treatment of the Merger and the transactions
contemplated by this Agreement, taking reasonable actions to restructure the
Merger and the transactions contemplated by this Agreement and (vii) with
respect to any Shares that Investor has acquired by exercise of any option
pursuant to the Stockholder Agreement or otherwise, or which Investor has the
right to vote, including, without limitation, pursuant to a proxy granted
pursuant to the Stockholder Agreement or otherwise, Investor's voting or
causing the voting in favor of, or granting or causing the granting of consent
or approval with respect to, the Merger and the adoption by the Company of the
Merger Agreement and, if applicable,, the SMT/Alliance Merger Agreement and
SMT/Alliance Merger. In connection with and without limiting the foregoing,
the Company and its Board of Directors shall (i) take all action necessary to
ensure that no state takeover statute or similar statute or regulation is or
becomes applicable to the Merger, this Agreement, the Stockholder Agreement or
any of the other transactions contemplated by this Agreement or the
Stockholder Agreement and (ii) if any state takeover statute or similar
statute or regulation becomes applicable to the Merger, this Agreement, the
Stockholder Agreement or any other transaction contemplated by this Agreement
or the Stockholder Agreement, take all action reasonably necessary to ensure
that the Merger and the other transactions contemplated by this Agreement may
be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation
on the Merger, this Agreement, the Stockholder Agreement and the other
transactions contemplated by this Agreement or the Stockholder Agreement.
Nothing in this Agreement shall be deemed to require Investor to dispose of or
hold separate any asset or collection of assets.
(b) The Company shall give prompt notice to Investor of, to the knowledge of
the Company (i) any representation or warranty made by it contained in this
Agreement becoming untrue or inaccurate or (ii) the failure by it or any
Subsidiary to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it or any Subsidiary under this Agreement;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreement of the parties or the conditions to the
obligations of the parties under this Agreement.
(c) Each of Investor and, from and after formation, Newco shall give prompt
notice to the Company of, to the knowledge of Investor or Newco (i) any
representation or warranty made by it contained in this Agreement becoming
untrue or inaccurate or (ii) the failure by it to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement, or any adverse development with respect to the financing
contemplated by the Financing Letters referred to in Section 4.7; provided,
however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
6.4 STOCK OPTION PLANS AND WARRANTS.
(a) As soon as practicable following the date hereof but in no event later
than the Effective Time, the Company (or, if appropriate, the Board of
Directors of the Company or any committee administering the Stock Option Plans
(as defined below)) shall take action, including by adopting resolutions or
taking any other actions, so as to allow each outstanding option to purchase
Shares (a "Company Stock Option") heretofore granted under any stock option,
stock appreciation rights or stock purchase plan, program or arrangement of
the Company (collectively, the "Stock Option Plans") and each outstanding
warrant or other right or option to purchase Shares (a "Warrant") in each case
outstanding immediately prior to the date hereof, whether or not then
exercisable, either (i) shall be canceled at the Effective Time in exchange
for an amount in cash, payable at the time of such cancellation, equal to the
product of (x) the number of Shares subject to such Company Stock Option or
Warrant immediately prior to the Effective Time and (y) the excess of the Cash
Merger Price over the per Share exercise
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<PAGE>
price of such Company Stock Option or Warrant (the "Net Amount") or (ii) shall
be converted immediately prior to the Effective Time into the right solely to
receive the Net Amount; provided, that no such cash payment has been made. The
Company shall not make, or agree to make, any payment of any kind to any
holder of a Company Stock Option or a Warrant (except for the payment
described above) without the consent of Investor (which consent will not be
unreasonably withheld).
(b) All Stock Option Plans shall be terminated as of the Effective Time and
the provisions in any other Benefit Plan providing for the issuance, transfer
or grant of any capital stock of the Company or any interest in respect of any
capital stock of the Company shall be terminated as of the Effective Time. The
Company shall ensure that following the Effective Time, no holder of a Company
Stock Option or Warrant or any participant in any Stock Option Plan shall have
any right thereunder to acquire any capital stock of the Company, Investor or
the Surviving Corporation, except as agreed to otherwise by the Investor.
(c) The Surviving Corporation shall continue to be obligated to pay the Net
Amount to holders of any Company Stock Options or Warrants converted in
accordance with clause (y) of Section 6.4(a).
(d) The Company shall pay its portion and withhold and deposit the proper
amount of all Federal and state payroll and employment taxes required to be
paid and withheld from the Net Amount.
6.5 INDEMNIFICATION, EXCULPATION.
(a) All rights to indemnification and exculpation (including the advancement
of expenses) from liabilities for acts or omissions occurring at or prior to
the Effective Time (including with respect to the transactions contemplated by
this Agreement) existing as of the date hereof in favor of the current or
former directors, officers and employees of the Company, as provided in the
Company's or Subsidiary's Certificate of Incorporation and/or its By-Laws
and/or any indemnification agreements and pursuant to applicable law shall be
assumed by the Surviving Corporation in the Merger, without further action, as
of the Effective Time and shall survive the merger and shall continue in full
force and effect without amendment, modification or repeal in accordance with
their terms for a period of not less than 5 years after the Effective Time;
provided, however, that if any claims are asserted or made within such period,
all rights to indemnification (and to advancement of expenses) hereunder in
respect of any such claims shall continue, without diminution, until
disposition of any and all such claims.
(b) For a period of at least five years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect standard policies
of directors' and officers' liability insurance in an aggregate coverage
amount not less than the coverage amounts maintained by the Company as of the
date hereof and including coverage with respect to claims arising from facts
or events which occurred before the Effective Time to the extent available.
(c) The provisions of this Section 6.5 are intended to be for the benefit
of, and will be enforceable by, each indemnified party, his or her heirs and
his or her representatives.
6.6 REGISTRATION RIGHTS AGREEMENT.
Prior to the Effective Time, the Company shall execute and deliver to
Investor a registration rights agreement (the "Registration Rights Agreement")
in a form mutually acceptable to Investor and the Company, such agreement to
provide Investor with three demand registration rights and unlimited piggyback
and S-3 registration rights for its Shares, all subject to customary terms and
provisions.
6.7 [INTENTIONALLY OMITTED].
6.8 DIRECTORS.
At the Effective Time, Investor shall be entitled to designate such number
of directors (the "Investor Nominees") of the Surviving Corporation as will
give Investor a majority of such directors. In connection with the foregoing,
immediately following receipt of Shareholder Approval, the Company will obtain
a resignation from each director of the Company unless Investor requests
otherwise.
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6.9 FEES AND EXPENSES.
(a) Except as otherwise provided herein and as provided below in this
Section 6.9, all fees and expenses incurred in connection with the Merger,
this Agreement and the transactions contemplated by this Agreement shall be
paid by the party incurring such fees or expenses, whether or not the Merger
is consummated.
(b) If this Agreement is terminated (i) pursuant to Section 8.1(g), (ii) by
Investor pursuant to Section 8.1(b) or 8.1(e) as a result of any willful
breach by the Company of any covenant or agreement made in this Agreement or
(iii) by Investor pursuant to Section 8.1(b) or 8.1(e) as a result of any
failure or failures to be true as of the date hereof of one or more of the
representations and warranties made by the Company in this Agreement, which
failures to be true are reasonably expected to have an aggregate negative
impact on the value of the Company and its Subsidiaries taken as a whole (a
"Negative Impact"), of $25 million or more, the Company shall pay to Investor
within 90 days of such termination (except for any termination pursuant to
Section 8.1(g), in which case payment shall be made promptly upon such
termination) $10,000,000 (or, in the case of clause (iii), $5,000,000) plus
all Expenses (as defined below).
(c) If this Agreement is terminated (i) by Investor pursuant to Section
8.1(b) or 8.1(e) as a result of any breach by the Company, other than a
willful breach, of any covenant or agreement made in this Agreement, (ii) by
Investor pursuant to Section 8.1(b) or 8.1(e) as a result of any failure or
failures to be true as of the date hereof of one or more representations and
warranties made by the Company in this Agreement which failures to be true in
the aggregate have a Negative Impact of less than $25 million, (iii) by
Investor pursuant to Section 8.1(b) or 8.1(e) as a result of any failure or
failures to be true as of the time of such termination one or more
representations and warranties, which representations and warranties were true
as of the date hereof, (iv) by Investor pursuant to Section 8.1(b) as a result
of a failure of the condition set forth in Section 7.3(c) to be satisfied, or
(v) pursuant to Section 8.1(f), the Company shall promptly pay to Investor all
Expenses, and, if, within 180 days of such termination either an Alternative
Transaction shall be consummated or the Company shall enter into an
Acquisition Agreement providing for an Alternative Transaction (in either
event, the "Tail Condition") then the Company shall pay to Investor, upon the
closing of such transaction, if and whenever it occurs, $5,000,000.
(d) If this Agreement is terminated by Investor pursuant to 8.1(b) as a
result of a failure of the condition set forth in Section 7.1(a) to be
satisfied or pursuant to Section 8.1(d), the Company shall pay to Investor all
Expenses, and if the Tail Condition is subsequently satisfied, shall pay to
Investor upon the closing of the relevant transaction, if and whenever it
occurs, $10,000,000; provided, however that no amounts whatsoever shall be
payable to Investor under this Section 6.9(d) if, at the Special Meeting or
any adjournments or postponements thereof, the Investor fails to vote or cause
to be voted, or fails to grant or to cause the granting of consent or approval
with respect to, any Shares owned by it or any Affiliate thereof or as to
which it or any Affiliate thereof has voting rights, in favor of the Merger
and the adoption by the Company of the Merger Agreement and, if applicable,
the SMT/Alliance Merger Agreement and SMT/Alliance Merger.
(e) If this Agreement is terminated (i) by Investor pursuant to Section
8.1(b) in connection with the failure of any of the conditions set forth in
any of the following Sections: 7.1(b), 7.1(c), 7.1(d), 7.3(b), 7.3(d), 7.3(e),
7.3(f), 7.3(g), 7.3(h) or 7.3(i) and the Tail Condition is subsequently
satisfied or (ii) by Investor pursuant to Section 8.1(c) and the Tail
Condition is subsequently satisfied, the Company shall pay to Investor, upon
the closing of the relevant transaction, if and whenever it occurs, $5,000,000
plus Expenses.
(f) The Company acknowledges that the agreements contained in this Section
6.9 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Investor would not enter into this
Agreement. Accordingly, if the Company fails promptly to pay any amount due
pursuant to this Section 6.9, and, in order to obtain such payment, Investor
commences a suit which results in a judgment against the Company for the
amounts set forth in this Section 6.9, the Company shall pay to Investor all
costs and expenses (including attorneys' fees and expenses) in connection with
such suit, together with interest on such amounts (excluding Investor's costs
and expenses) at the prime rate of the Bankers Trust Company in effect on the
date
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such payment was required to be made. If such a suit results in a judgment
against Investor and/or Newco, Investor shall pay to the Company all costs and
expenses (including attorney's fees and expenses) in connection with such
suit. "Expenses" shall mean all reasonably documented out-of-pocket expenses
incurred by Investor and Newco in connection with this Agreement (including
the financing contemplated hereby), the Stockholder Agreement and the
transactions contemplated hereby and thereby, including fees and expenses of
its, and its financing sources', printer, consultants, attorneys, accountants,
and other advisors; provided, however, that (i) such expenses shall not
include any advisory or similar fees paid to Investor or any Affiliate thereof
or to any investment banking firm or placement agent retained in connection
with the financing contemplated by this Agreement, and (ii) unless the Company
has previously agreed in writing to increase such amount, the aggregate amount
of such Expenses shall not exceed (i) $3,000,000 if such termination occurs
prior to September 1, 1997, or (ii) $5,000,000 if such termination occurs
thereafter (the parties further agreeing that such amounts shall be reduced,
dollar for dollar, to the extent that the Company funds the expenses
(excluding for the services of the Company's professionals) of filing or
printing the Proxy Statement/Prospectus or the solicitation of proxies with
respect thereto).
(g) After the Effective Time, the Company will pay to an Affiliate of
Investor a fee of $2,500,000 in connection with arranging the transactions
contemplated hereby (including the financings thereof) and an annual
management fee of $500,000 and agree to continue to receive financial advisory
services from such Affiliate on an ongoing basis with compensation to be
determined.
6.10 PUBLIC ANNOUNCEMENTS.
Investor and, from and after formation, Newco, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press
release or other public statements with respect to the transactions
contemplated by this Agreement and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange or national securities
quotation system. The parties agree that the initial press release to be
issued with respect to the transactions contemplated by this Agreement shall
be in the form heretofore agreed to by the parties.
6.11 STOP TRANSFER.
The Company shall not register the transfer of any certificate representing
any Subject Shares (as defined in the Stockholder Agreement), unless such
transfer is made to Investor or Newco or otherwise in compliance with the
Stockholder Agreement. The Company will inscribe upon any certificates
representing Subject Shares submitted by a Stockholder (as defined in the
Stockholder Agreement) for such purpose the following legend:
"THE SHARES OF [COMMON STOCK] [PREFERRED STOCK], $.01 PAR VALUE OF
ALLIANCE IMAGING, INC. REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
A STOCKHOLDERS AGREEMENT DATED AS OF JULY 23, 1997, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED, EXCEPT IN ACCORDANCE THEREWITH. COPIES
OF SUCH AGREEMENT MAY BE OBTAINED AT THE PRINCIPAL EXECUTIVE OFFICES
OF ALLIANCE IMAGING, INC."
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ARTICLE VII
CONDITIONS
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger are subject to
the satisfaction or waiver, where permissible, prior to the Effective Time, of
the following conditions:
(a) The Company Stockholder Approval shall have been obtained as required by
and in accordance with applicable law and the Certificate of Incorporation.
(b) No statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
Governmental Entity that prohibits or restricts the consummation of the Merger
or makes such consummation illegal (each party agreeing to use commercially
reasonable efforts to have any such prohibition lifted).
(c) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(d) The Registration Statement on Form S-4 (or an alternative form
prescribed by the SEC) shall have been declared effective and shall not be the
subject of any stop order, unless the parties shall have mutually determined
that registration under the Securities Act is not required with respect to the
Merger.
7.2 CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT THE MERGER.
The obligation of the Company to effect the Merger shall be subject to the
satisfaction or waiver, prior to the proposed Effective Time, of the following
conditions: All of the representations and warranties of Investor and Newco
set forth in this Agreement shall be true and correct in all material respects
as of the date hereof and (except for those that are expressly made only as of
another date) as of the Effective Time as though made on and as of such time,
and Investor and Newco shall have performed in all material respects all
covenants and agreements required to be performed by then under this Agreement
at or prior to the Effective Time.
7.3 CONDITIONS TO INVESTOR'S AND NEWCO'S OBLIGATIONS TO EFFECT THE MERGER.
The obligations of Investor and Newco to effect the Merger shall be subject
to the satisfaction or waiver by Investor and Newco, prior to the proposed
Effective Time, of the following conditions:
(a) All of the representations and warranties of the Company set forth in
this Agreement, shall be true and correct in all material respects as of the
date hereof and (except for those that are expressly made only as of another
date) as of the Effective Time as though made on and as of such time, and the
Company shall have performed in all material respects all covenants and
agreements required to be performed by it under this Agreement at or prior to
the Effective Time.
(b) None of the following shall have occurred (i) any general suspension of
trading in, or limitation on prices for, securities on the New York Stock
Exchange or the NASDAQ, (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by federal or state authorities on the extension of credit by
lending institutions, or a disruption of or material adverse change in either
the syndication market for credit facilities or the financial, banking or
capital markets, (iii) a commencement of a war or armed hostilities or other
national or international calamity directly or indirectly involving the United
States or (iv) in the case of any of the foregoing existing as of the date
hereof, a material acceleration or worsening thereof.
(c) There shall not have occurred any material adverse change.
(d) The conditions set forth in the Financing Letters shall have been
satisfied or waived and the funding referred to therein shall be available to
Investor and Newco on terms no less favorable to Investor and Newco than are
set forth in such Financing Letters, unless the failure of such conditions to
be satisfied or waived, or the non-availability of such funds is caused solely
by any actions or failures to act of Investor or Newco that constitute a
breach of any representation, warranty or covenant of either of them set forth
in this Agreement.
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(e) All filings required to be made prior to the Effective Time with, and
all consents, approvals, authorizations and Permits required to be obtained
prior to the Effective Time from, any Governmental Entity in connection with
the consummation of the Merger, have been made and/or obtained, other than
those the failure of which to be made and/or obtained would not reasonably be
expected to have a material adverse effect or prevent or materially delay the
consummation of the Merger.
(f) All notices required to be given prior to the Effective Time with, and
all consents, approvals, authorizations, waivers and amendments required to be
obtained prior to the Effective Time from, any third party in connection with
the consummation of the Merger and the finances thereof, have been made and/or
obtained (or, if the notice, consent, approval, authorization, waiver or
amendment that is not so made and/or obtained is required pursuant to the
terms of any of the Company's indebtedness or obligations for money borrowed,
the Company repays such indebtedness or obligation on or prior to the
Effective Time), other than those the failure of which to be made and/or
obtained would not reasonably be expected to have a material adverse effect or
prevent or materially delay the consummation of the Merger; provided that the
Company shall have obtained the items set forth on Schedule 7.3(f).
(g) Investor shall have received advice from Ernst & Young LLP that the
Merger will qualify for recapitalization accounting treatment in accordance
with GAAP consistently applied.
(h) The Company shall have taken appropriate steps to arrange for the
payment or prepayment of capital leases, promissory notes and other loan or
financing obligations (collectively, "Obligations"; provided, that such term
shall not include (i) obligations under operating leases classified as such in
accordance with GAAP or (ii) any obligations incurred from and after October
1, 1997) to which the Company or any Subsidiary is a party or by which the
assets or properties of the Company or any Subsidiary are bound (including
those in respect of MRI Units and CT Units), such that, immediately following
the Effective Time (and assuming the receipt of equity and debt financing by
the Company in connection with the Merger, as contemplated by this Agreement),
the Company will be able to pay (or prepay) the aggregate amount of all such
Obligations, including the amount of any prepayment penalties or similar
payments related thereto (but excluding from such aggregate amount (i) no more
than an aggregate principal amount of $10 million of Obligations that the
Company elects to leave outstanding (the "Carryover Obligations") and (ii)
accrued interest on the Obligations being paid) for an amount not to exceed
$76,000,000 (assuming that all regular payments due on or before October 1,
1997 in respect of the Obligations have been paid); provided, further that (x)
the consummation of the Merger will neither give rise to a right of
acceleration of, nor constitute an event of default under the terms of, any
Carryover Obligations, except, in either case, as set forth on Schedule 7.3(h)
and (y) the Company will not incur additional indebtedness or financing
obligations (again, excluding operating leases) during the fourth quarter of
1997 in excess of an aggregate principal or face amount thereof equal to $11
million.
(i) The holders of less than 10% of the outstanding Shares shall have
validly elected to demand the appraisal of their Shares pursuant to Section
262 of the DGCL.
A-I-36
<PAGE>
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 TERMINATION.
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the terms of this Agreement by the
stockholders of the Company as follows:
(a) By mutual written consent of Investor and the Company.
(b) By either Investor or the Company if the Effective Time shall not have
occurred on or before December 31, 1997 (provided that the right to terminate
this Agreement under this Section 8.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Effective Time to occur on or
before such date).
(c) By either Investor or the Company if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the Merger and such order,
decree or ruling or other action shall have become final and nonappealable.
(d) By either Investor or the Company if the Company Stockholder Approval is
not obtained by reason of the failure to obtain the required vote upon a vote
held at a duly called meeting of stockholders or at any adjournment thereof.
(e) By Investor, if (x) any of the representations and warranties of the
Company contained in this Agreement shall fail to be true and correct in any
material respect, in each case either as of when made or (except for
representations and warranties made only as of a specific date) have since
become, and at the time of termination remain, untrue in any material respect,
or (y) the Company shall have breached or failed to comply in any material
respect with any of its obligations under this Agreement (other than as a
result of a breach by the Investor or the Newco of any of their obligations
under this Agreement) and such breach of failure shall continue unremedied for
ten (10) days after the Company has received written notice from the Investor
or the Newco of the occurrence of such breach or failure; provided, however,
that in remedying any such breach or failure the Company shall not have spent
any money, incurred any liabilities or undertaken any obligations that,
individually or together with the breach or failure so remedied, would itself
constitute a breach of or failure to perform any representation, warranty or
covenant of this Agreement.
(f) By Investor if there shall have occurred any material adverse change.
(g) By either Investor or the Company if, prior to the Effective Time, (i)
the Board of Directors of the Company determines that a Third Party Proposal
for an Alternative Transaction constitutes a Superior Proposal (as defined
below), (ii) the Company promptly notifies Investor of its determination in
writing, which writing shall set forth the terms and conditions of the Third
Party Proposal and the identity of the person making the Third Party Proposal,
(iii) ten days have elapsed following receipt by Investor of such written
notice, (iv) during such ten day period the Company cooperates with Investor
with the intent of enabling, but not obligating, Investor and the Company to
agree to a modification of the terms and conditions of this Agreement so that
the transactions contemplated hereby may be effected, and (v) at the end of
such ten day period, the Board of Directors of the Company continues to
believe that such Third Party Proposal constitutes a Superior Proposal and the
Company pays to Investor the amount specified under Section 6.9(b) pursuant to
the terms thereof. For purposes of this Agreement, a "Superior Proposal" means
any Third Party Proposal to acquire, directly or indirectly at least 80% of
the Shares or all or substantially all of the assets of the Company; provided
that (i) the Board of Directors of the Company determines in its good faith
judgment (following consultation with and the receipt of the advice of the
Company's financial advisor) that such Third Party Proposal is on terms that
are more favorable to the Company's stockholders than the Merger (taking into
account all factors that the Board of Directors reasonably deems relevant,
including, in the judgment of the Board of Directors, the amount and form
A-I-37
<PAGE>
of consideration to be received in respect of Shares, and the timing of, and
likelihood of closing such proposal and the relative value of any non-cash
consideration) and (ii) the Board of Directors of the Company determines in
its good faith judgment (following receipt of the written advice of its
outside counsel) that the failure to recommend or accept such Third Party
Proposal would violate the fiduciary duties of the Board of Directors of the
Company to stockholder under applicable law.
(h) by the Company if (i) any of the representations and warranties of the
Investor or the Newco contained in this Agreement shall fail to be true and
correct in any material respect, in each case either when made or (except for
representations and warranties made only as of a specific date) have since
become, and at the time of termination remain, untrue in any material respect,
or (ii) Investor or the Newco shall have breached or failed to comply in any
material respect with any of its obligations under this Agreement (other than
as a result of a breach by the Company of any of its obligations under this
Agreement) and such breach or failure shall continue unremedied for ten (10)
days after the Investor or the Newco has received written notice from the
Company of the occurrence of such breach or failure; provided, however, that
in remedying any such breach or failure neither Investor nor Newco shall have
spent any money, incurred any liabilities or undertaken any obligations that,
individually or together with the breach or failure so remedied, would itself
constitute a breach of or failure to perform any representation, warranty or
covenant of this Agreement.
8.2 EFFECT OF TERMINATION.
In the event of a termination of this Agreement by either the Company or
Investor as provided in Section 8.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of Investor,
Newco or the Company or their respective officers or directors, except with
respect to Section 4.6, the last sentence of Section 6.2, Section 6.9, Section
8.1, this Section 8.2 and Article IX; provided, however, that nothing herein
shall relieve any party for liability for any breach hereof.
8.3 [INTENTIONALLY OMITTED]
8.4 EXTENSION; WAIVER.
At any time prior to the Effective Time, the parties hereto, by action taken
or authorized by their respective Boards of Directors, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto or (iii) subject to Section 8.3, waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of those
rights.
8.5 AMENDMENT.
To the extent permitted by applicable law, this Agreement may be amended by
action taken by or on behalf of the Boards of Directors of the Company,
Investor and Newco at any time before or after obtaining Company Stockholder
Approval. After obtaining Company Stockholder Approval, no amendment shall be
made which decreases the Merger Consideration or which materially and
adversely affects the rights of the Company's stockholders hereunder without
the approval of the stockholders of the Company. This Agreement may not be
amended except by an instrument in writing signed on behalf of all of the
parties.
A-I-38
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
None of the representations, warranties or covenants (subject to the
succeeding sentence) in this Agreement or in any instrument delivered pursuant
to this Agreement shall survive the Effective Time. This Section 9.1 shall not
limit any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time of the Merger.
9.2 NOTICES.
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally, telecopied (which is confirmed), sent
by overnight courier (providing proof of delivery) or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to Investor or Newco, to
Newport Investment LLC
c/o Apollo Management, L.P.
1301 Avenue of the Americas, 38th Floor
New York, New York 10019
Attention: Josh Harris
Telecopy No.: (212) 261-4102
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, NY 10112
Attention: John J. Suydam, Esq.
Telecopy No.: (212) 408-2420
and
if to the Company, to
Alliance Imaging, Inc.
1065 PacifiCenter Drive
Suite 200 Anaheim, CA 92806
Attention: Richard N. Zehner
Telecopy No.: (714) 688-3377
with a copy to:
Irell & Manella LLP
333 South Hope Street
Suite 3300
Attention: Anthony T. Iler, Esq.
Telecopy No.: (213) 229-0515
A-I-39
<PAGE>
9.3 INTERPRETATION.
When a reference is made in this Agreement to an Article or a Section, such
reference shall be to an Article or a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Unless the context otherwise
requires, words importing the singular shall include the plural, and vice
versa. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. As used in this Agreement, the
term "subsidiary" of any person means another person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first
person. As used in this Agreement, "material adverse effect" means, when used
in respect of the Company, any effect or condition that, individually or in
the aggregate with any other effect or condition, is materially adverse to the
assets, properties, business, financial condition, results of operations or
prospects of the Company and its Subsidiaries, taken as a whole. As used in
this Agreement, "material adverse change" means, when used in respect of the
Company, any change or event that, individually or in the aggregate with any
other change or event, is materially adverse to the assets, properties,
business, financial condition, results of operations or prospects of the
Company and its Subsidiaries, taken as a whole. As used in this Agreement,
except where expressly indicated otherwise, the phrase "knowledge" with
respect to the Company, means to the actual knowledge of the Company, its
Subsidiaries, and each of their respective directors and officers, after due
inquiry (i.e., the amount of inquiry that would be undertaken by a reasonably
prudent business person given like facts and circumstances). As used in this
Agreement, the term "person" shall be interpreted broadly and shall include
any person, individual, corporation, limited partnership, limited liability
company, trust, association or other entity or business organization of any
kind or division thereof.
9.4 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES.
This Agreement (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, and (b) except as provided in Section
6.5 is not intended to confer upon any person other than the parties hereto
any rights or remedies hereunder.
9.5 GOVERNING LAW.
This Agreement shall be governed and construed in accordance with the laws
of the State of Delaware.
9.6 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
9.7 ASSIGNMENT.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties,
which consent will not be unreasonably withheld. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
A-I-40
<PAGE>
9.8 ENFORCEMENT.
The parties agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions of this Agreement in any court of the United States located in the
State of Delaware or in a Delaware state court, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit such party to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that such party will not
bring any action relating to this Agreement or any of the transactions
contemplated hereby in any court other than a Federal court sitting in the
state of Delaware or a Delaware state court and (iv) waives any right to trial
by jury with respect to any claim or proceeding related to or arising out of
this Agreement or any of the transactions contemplated hereby.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
A-I-41
<PAGE>
IN WITNESS WHEREOF, Investor and the Company have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
NEWPORT INVESTMENT LLC, A DELAWARE
LIMITED LIABILITY COMPANY
By /s/ Michael Gross
NAME: MICHAEL GROSS
TITLE: PRESIDENT
Alliance Imaging, Inc., A
Delaware Corporation
/s/ Richard N. Zehner
By _________________________________
NAME: RICHARD N. ZEHNER
TITLE: CEO
A-I-42
<PAGE>
EXHIBITS
Exhibit A: Form of Employment Agreements: Zehner and Pino
Exhibit B: Financing Letters
SCHEDULES
Company Disclosure Statement: Schedules to the following sections of the
Agreement (names of Schedules are for descriptive purposes only):
<TABLE>
<C> <S>
3.3 Subsidiaries
3.5 Consents and Approvals
3.6(b) Indebtedness
3.6(c) Fixed Assets; Commitments List
3.6(d) GMIC financial statements
3.8 Absence of Certain Changes
3.9 Litigation
3.10 Contracts
3.11 Permits
3.12 Environmental
3.13 Absence of Changes in Benefits Plans
3.14(a) Salary and Options
3.14(b) Outstanding options and warrants
3.14(c) Affiliate transactions
3.15(a) ERISA plans
3.15(b) 401(a) plans
3.15(d) Welfare Benefits/Group health
3.15(e) Benefits in connection with Merger
3.16 Taxes
3.18 Liens on Assets
3.19 Intellectual Property
3.20 Non-competes
3.23 Disclosure of Fees/Expenses letter
3.28 Insurance
5.1 Covenants/Anticipated Commitments List
</TABLE>
Schedule 4.7: Terms of Junior Notes
Schedule 7.3(f): Required Consents
Schedule 7.3(h): Certain Debt
A-I-43
<PAGE>
AMENDMENT NO. 1 TO AGREEMENT AND
PLAN OF MERGER, dated as of August
13, 1997 (this "Amendment"), to that
certain AGREEMENT AND PLAN OF MERGER
(the "Agreement"), dated as of July
23, 1997, between ALLIANCE IMAGING,
INC., a Delaware corporation (the
"Company") and Newport Investment
LLC, a Delaware limited liability
company (the "Investor").
WHEREAS, the Company and the Investor have entered into the Agreement;
WHEREAS, the Company and the Investor agree that it is in the best interest
of each of them and their respective stockholders or equity holders, as the
case may be, to make certain amendments to the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereby agree as follows:
ARTICLE I
AMENDMENTS
1.1 Section 1.4 of the Agreement is amended by deleting Section 1.4(a) in
its entirety and replacing it with the following new Section 1.4(a):
"(a) The Amended and Restated Certificate of Incorporation of the
Company, in substantially the form attached as Exhibit 1.4(a), shall be the
certificate of incorporation of the Surviving Corporation, until thereafter
changed or amended as provided therein or by applicable law."
1.2 Section 2.2 (a) of the Agreement is amended and restated in its entirety
as follows:
"(a) Each person who is a record holder of Shares, or a record holder of
any option, warrant or security convertible, exercisable or exchangeable
for Shares pursuant to the terms of such option, warrant or security as of
the record date for the Special Meeting (the "Election Date") will be
entitled to make an election to retain Shares as set forth in, and subject
to the provisions of this Section 2.2, with respect to all or any portion
of (i) Shares held by such holder as of the record date and (ii) Shares
held by such holder at the time an election is made to the extent such
Shares have been issued pursuant to the conversion, exercise or exchange of
options, warrants or other securities held as of the record date.
1.3 Section 2.2(b) of the Agreement is amended by deleting the third
sentence thereof in its entirety.
1.4 Sections 2.2(b), 2.2(c), 2.2(d), and 5.7 of the Agreement are amended by
deleting the words "Election Date" each time they appear therein and replacing
them with the words "date of the Special Meeting."
1.5 Section 3.1 of the Agreement is amended by deleting the last sentence
thereof in its entirety and replacing it with the following sentence:
"The Company has made available to Investor or Newco or their respective
counsel, representatives or advisors, complete and correct copies of its
Restated Certificate of Incorporation (the "Certificate of Incorporation"),
as in effect on the date hereof and in effect immediately prior to the
Effective Time, and the By-Laws, as amended to the date hereof."
ARTICLE II
MISCELLANEOUS
2.1 EFFECT OF AMENDMENT.
Except as amended hereby, the Agreement remains in full force and effect in
accordance with its terms.
A-II-1
<PAGE>
2.2 Entire Agreement; Third Party Beneficiaries.
This Amendment and the Agreement constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, and is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
2.3 Governing Law.
This Amendment shall be governed and construed in accordance with the laws
of the State of Delaware.
2.4 Counterparts.
This Amendment may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
2.5 Assignment.
Neither this Amendment nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties,
which consent will not be unreasonably withheld. Subject to the preceding
sentence, this Amendment will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
[Remainder of this page intentionally left blank; next page is signature page]
A-II-2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
ALLIANCE IMAGING, INC., A
Delaware corporation
/s/ Terrence M. White
By: _________________________________
Name: Terrence M. White
Title: Senior Vice President,
Chief Financial Officer and
Secretary
NEWPORT INVESTMENT LLC, a
Delaware limited liability company
/s/ Josh Harris
By: _________________________________
Name:Josh Harris
Title:Vice President
A-II-3
<PAGE>
[EXHIBIT 1.4(A) TO AMENDMENT NO. 1 TO THE RECAPITALIZATION MERGER AGREEMENT]
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ALLIANCE IMAGING, INC.
A DELAWARE CORPORATION
ONE: The name of this corporation is Alliance Imaging, Inc.
TWO: The address of this corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THREE: The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law ("DGCL").
FOUR: The total number of shares of all classes of stock which this
corporation shall have authority to issue is Ten Million Five Hundred Thousand
(10,500,000), consisting of:
(i) Ten Million (10,000,000) shares of Common Stock (hereinafter referred
to as "Common Stock") consisting of:
(a) Nine Million Five Hundred Thousand (9,500,000) shares of voting
common stock of the par value of one cent ($.01) (hereinafter referred
to as "Voting Common"); and
(b) Five Hundred Thousand (500,000) shares of non-voting common stock
of the par value of one cent ($.01) (hereinafter referred to as "Non-
Voting Common") each.
(ii) Five Hundred Thousand (500,000) shares of preferred stock of the par
value of one cent ($.01) (hereinafter referred to as the "Preferred
Stock"), the rights, preferences and limitations of which shall be
determined by the Board of Directors.
A. Common Stock
Except where otherwise provided by law, by this Amended and Restated
Certificate of Incorporation, or by resolution of the Board of Directors
pursuant to this Article FOUR, all shares of Common Stock shall be identical
in all respects and shall entitle the holders thereof to the same rights and
privileges, subject to the same qualifications, limitations and restrictions.
All holders of Common Stock issued and outstanding shall have and possess the
exclusive right to notice of stockholders' meetings.
1. Voting Rights
Except as otherwise required by applicable law or as set forth herein, the
holders of shares Non-Voting Common shall not be entitled to vote and the
holders of shares of Voting Common shall be entitled to vote as a single class
on all matters to be voted on by this corporation's shareholders. Except as
otherwise set forth herein or required by applicable law, each share of Voting
Common shall entitle the holder thereof to cast one vote.
2. Conversion Rights
The holders of shares of Voting Common shall be entitled, at their option,
to convert their Voting Common to Non-Voting Common at any time and from time
to time, on a one-for-one basis.
3. Distributions
Subject to all of the rights of the Preferred Stock, dividends may be paid
on the Common Stock, as and when declared by the Board of Directors, out of
any funds of this corporation legally available for the payment of such
dividends.
B. Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of the shares of Preferred Stock in one or
more series, and by filing a certificate pursuant to the
A-II--Exhibit-1
<PAGE>
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote
of the holders of a majority of the Common Stock, without a vote of the
holders of the Preferred Stock, or of any series thereof, unless a vote of any
such holders is required pursuant to the certificate or certificates
establishing the series of Preferred Stock.
FIVE: The following provisions are inserted for the management of the
business and the conduct of the affairs of this corporation, and for further
definition, limitation and regulation of the powers of this corporation and of
its directors and stockholders:
A. The business and affairs of this corporation shall be managed by or under
the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by the DGCL or by this Amended and
Restated Certificate of Incorporation or the Bylaws of this corporation, the
directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by this corporation.
B. The Board of Directors may adopt, amend or repeal the Bylaws of this
corporation.
C. Election of directors need not be by written ballot.
SIX: The officers of this corporation shall be chosen in such a manner,
shall hold their offices for such terms and shall carry out such duties as are
determined solely by the Board of Directors, subject to the right of the Board
of Directors to remove any officer or officers at any time with or without
cause.
SEVEN: No director of this corporation shall be personally liable to this
corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such a director as a director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent provided by applicable law
(i) for any breach of the director's duty of loyalty to this corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the DGCL or (iv) for any transaction from which such
director derived an improper personal benefit. This Article SEVEN is also
contained in Article V, Section 5.1 of this corporation's Bylaws. No amendment
to or repeal of this Article SEVEN shall apply to or have any effect on the
liability or alleged liability of any director of this corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal. If the DGCL is amended hereafter to further eliminate or
limit the personal liability of directors, the liability of a director of this
corporation shall be limited or eliminated to the fullest extent permitted by
the DGCL, as amended.
EIGHT: A. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
to or is threatened to be made a party to or is involuntarily involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he or she is or was
a director or officer of this corporation, or is or was serving (during his or
her tenure as director and/or officer) at the request of this corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, whether the basis of
such Proceeding is an alleged action or inaction in an official capacity as a
director or officer or in any other capacity while serving as a director or
officer, shall be indemnified and held harmless by this corporation to the
fullest extent authorized by the DGCL (or other applicable law), as the same
exists or may hereafter be amended, against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered
by such person in connection with such Proceeding. Such director or officer
shall have the right to be paid by this corporation for expenses incurred in
defending any such Proceeding in advance of its final disposition; provided,
however, that, if the DGCL (or other applicable law) requires, the payment of
A-II--Exhibit-2
<PAGE>
such expenses in advance of the final disposition of any such Proceeding shall
be made only upon receipt by this corporation of an undertaking by or on
behalf of such director or officer to repay all amounts so advanced if it
should be determined ultimately that he or she is not entitled to be
indemnified under this Article EIGHT or otherwise.
B. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph A of this
Article EIGHT is not paid in full by this corporation within ninety (90) days
after a written claim has been received by this corporation, the claimant may
at any time thereafter bring suit against this corporation to recover the
unpaid amount of the claim, together with interest thereon, and, if successful
in whole or in part, the claimant shall also be entitled to be paid the
expense of prosecuting such claim, including reasonable attorneys' fees
incurred in connection therewith. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to this
corporation) that the claimant has not met the standards of conduct which make
it permissible under the DGCL (or other applicable law) for this corporation
to indemnify the claimant for the amount claimed, but the burden of proving
such defense shall be on this corporation. Neither the failure of this
corporation (or of its full Board of Directors, its directors who are not
parties to the Proceeding with respect to which indemnification is claimed,
its stockholders, or independent legal counsel) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in the DGCL (or other applicable law), nor an
actual determination by any such person or persons that such claimant has not
met such applicable standard of conduct, shall be a defense to such action or
create a presumption that the claimant has not met the applicable standard of
conduct.
C. NON-EXCLUSIVITY OF RIGHTS. The rights conferred by this Article EIGHT
shall not be exclusive of any other right which any director, officer,
representative, employee or other agent may have or hereafter acquire under
the DGCL or any other statute, or any provision contained in this
corporation's Amended and Restated Certificate of Incorporation or Bylaws, or
any agreement, or pursuant to a vote of stockholders or disinterested
directors, or otherwise.
D. INSURANCE AND TRUST FUND. In furtherance and not in limitation of the
powers conferred by statute:
(1) this corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of this
corporation, or is serving at the request of this corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not this corporation would have the power to
indemnify him against such liability under the provisions of law; and
(2) this corporation may create a trust fund, grant a security interest
and/or use other means (including, without limitation, letters of credit,
surety bonds and/or other similar arrangements), as well as enter into
contracts providing indemnification to the fullest extent permitted by law
and including as part thereof provisions with respect to any or all of the
foregoing, to ensure the payment of such amount as may become necessary to
effect indemnification as provided therein, or elsewhere.
E. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THIS CORPORATION. This
corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, including the right to be paid by
this corporation the expenses incurred in defending any Proceeding in advance
of its final disposition, to any employee or agent of this corporation to the
fullest extent of the provisions of this Section or otherwise with respect to
the indemnification and advancement of expenses of directors and officers of
this corporation.
A-II--Exhibit-3
<PAGE>
F. AMENDMENT. This Article EIGHT is also contained in Article V, Sections
5.2 through 5.7 of this corporation's Bylaws. Any repeal or modification of
this Article EIGHT shall not change the rights of an officer or director to
indemnification with respect to any action or omission occurring prior to such
repeal or modification.
NINE: This corporation reserves the right to alter, amend, rescind or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this
reservation.
A-II--Exhibit-4
<PAGE>
AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER, dated as
of October 13, 1997 (this "Amendment"), to that certain
AGREEMENT AND PLAN OF MERGER, dated as of July 23, 1997,
between ALLIANCE IMAGING, INC., a Delaware corporation
(the "Company") and Newport Investment LLC, a Delaware
limited liability company (the "Investor"), as amended by
Amendment No. 1 To Agreement and Plan of Merger, dated as
of August 13, 1997 between the Company and the "Investor"
(collectively, the "Agreement").
WHEREAS, the Company and the Investor have entered into the Agreement;
WHEREAS, the Company and the Investor agree that it is in the best interest
of each of them and their respective stockholders or equity holders, as the
case may be, to make certain amendments to the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereby agree as follows:
ARTICLE I
AMENDMENTS
1.1 A new Section 2.4(d) is hereby added to the Agreement which shall read
in its entirety as follows:
"(d) In the event that a stockholder is allocated Non-Elected Retained
Shares or Non-Elected Cash Shares, such stockholder shall be entitled to
designate which Shares held by such stockholder shall be deemed to
constitute such Non-Elected Retained Shares or Non-Elected Cash Shares."
1.2 Section 4.7 of the Agreement is amended and restated in its entirety as
follows:
"4.7 Financing.
Investor has sufficient sources of liquid capital funds, and concurrently
with the Effective Time will fund, in cash, to the Company at least (i) an
amount of equity capital equal to $35,061,926, plus (ii) if the
SMT/Alliance Combination does not occur concurrently with the Effective
Time, $35 million in subordinated PIK notes of the Company having
substantially the terms and conditions reflected on Schedule 4.7 attached
hereto (the "Junior Notes"). Investor has delivered to the Company true and
correct copies of signed letters received by Investor with respect to the
balance of the financing (the "Financing Letters") required for the
consummation of the transactions contemplated hereby. A copy of each
Financing Letter is set forth in EXHIBIT B. Assuming satisfaction of all
applicable conditions set forth in the Financing Letters and full funding
thereunder, such financing, together with the equity capital in Newco and
proceeds from the issuance of the Junior Notes, will provide sufficient
funds to (i) pay the aggregate Cash Merger Price with respect to all
outstanding Shares, on a fully diluted basis, (ii) prepay, redeem,
refinance or renegotiate the Company's existing indebtedness, if required
to consummate the Merger and the other transactions contemplated hereby,
and pay any and all fees, expenses, costs and penalties in connection with
any such prepayment, redemption, refinancing or renegotiation and in
connection with obtaining of the financing contemplated by the Financing
Letter, (iii) pay the fees and expenses of the Financial Advisor and the
Company's legal counsel (subject to Section 3.23 hereof), (iv) consummate
all of the other transactions contemplated by this Agreement, and (v)
provide sufficient working capital needs of the Company following the
Merger (as determined by Investor).
A-III-1
<PAGE>
1.3 Section 5.9 of the Agreement is amended and restated in its entirety as
follows:
"5.9 MATTERS INVOLVING SMT
(a) The Company (and where applicable, the Investor) covenants and agrees
that, prior to the Effective Time, it shall (i) cause the formation of a
new Delaware corporation, all of the capital stock of which shall be owned
by the Company ("SMT Acquisition") and (ii) if Three Rivers Acquisition
Corp., a Delaware corporation ("Three Rivers Acquisition"), becomes the
owner of all of the shares of common stock, par value $.01, of SMT Health
Services Inc., a Delaware corporation ("SMT"), the Company shall (subject
to the performance by the Investor of its covenants set forth in Section
5.9(d)) cause SMT Acquisition to enter into an Agreement (the "SMT/Alliance
Combination Agreement") among Three Rivers Holding Corp. and the Company
pursuant to which, if Three Rivers Acquisition is merged (the "SMT/Three
Rivers Merger") with and into SMT on the terms and conditions set forth in
the Agreement and Plan of Merger dated as of June 24, 1997 (the "SMT/Three
Rivers Merger Agreement"), among SMT, Three Rivers Holding Corp., a
Delaware corporation ("Three Rivers Holding Corp.") and Three Rivers
Acquisition, and the other conditions set forth in Section 5.9(c) shall
have been satisfied or waived then, promptly after the Effective Time,
either (i) (A) SMT Acquisition and Three Rivers Holding Corp. shall be
merged (the "SMT/Alliance Combination"), (B) each share of SMT Acquisition
issued and outstanding as of the effective time of the SMT/Alliance
Combination will be converted into one fully paid and non-assessable share
of common stock, par value $.01, of Three Rivers Holding Corp., as the
surviving corporation, and (C) the shares of common stock, par value $.01,
of Three Rivers Holding Corp. outstanding immediately prior to the
effective time of the SMT/Alliance Combination would be converted into, in
the aggregate, 3,181,818 fully paid and non-assessable Shares of the
Company as the Surviving Corporation of the merger or (ii) the Investor
shall cause all of the issued and outstanding shares of common stock, par
value $.01, of Three Rivers Holdings Corp. to be contributed to the Company
by the holder thereof in exchange for 3,181,818 fully paid and non-
assessable Shares of the Company.
(b) The Company further covenants and agrees that (i) if the SMT/Alliance
Combination Agreement is executed prior to the mailing of the Proxy
Statement/Prospectus, it shall, if requested by the Investor, submit the
SMT/Alliance Combination Agreement and the SMT/Alliance Combination to its
shareholders for the shareholders' approval at the Special Meeting and (ii)
it will cause SMT Acquisition to consummate the transactions contemplated
by the SMT/Alliance Combination Agreement, pursuant to the terms and
subject to the conditions set forth therein.
(c) Notwithstanding anything to the contrary contained herein, the
consummation of the transactions contemplated by the SMT/Alliance
Combination Agreement shall be subject to reasonable and customary terms
and conditions, including the satisfaction or waiver of the following
conditions:
(i) the SMT/Three Rivers Merger shall have been consummated in
accordance with the terms and conditions of the SMT/Three Rivers Merger
Agreement;
(ii) the Merger shall have been consummated in accordance with the
terms of this Agreement;
(iii) the waiting period applicable to the consummation of the
SMT/Alliance Combination under the HSR Act, if applicable, shall have
expired or shall have been terminated;
(iv) no statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by
any court or Governmental Authority that prohibits or materially
restricts the consummation of the SMT/Alliance Combination or makes
such consummation illegal (each party agreeing to use commercially
reasonably efforts to have any such prohibition lifted);
(v) SMT shall have outstanding no options, warrants or other rights
to acquire shares of common stock, par value $.01, of SMT; and
(vi) the number of outstanding options, warrants or other rights to
acquire shares of common stock, par value $.01, of Three Rivers Holding
Corp. shall be as follows (assuming 335,600 shares of
A-III-2
<PAGE>
Three Rivers Holding Corp. outstanding following the SMT/Three Rivers
Merger and no subsequent stock splits, stock dividends or similar
changes to the capital structure of Three Rivers Holding Corp.):
Options attributable to rollover of SMT Options, with an average
exercise price of $36.00 per share: 22,500 shares.
Options attributable to new Three Rivers option plan, with an
exercise price of $100.00 per share: not to exceed 35,000 shares.
(d) The Investor covenants and agrees that if Three Rivers Acquisition
becomes the owner of all of the shares of common stock, par value $.01, of
SMT, the Investor shall (x) (subject to the performance by the Company of
its covenants set forth in Section 5.9(a)) cause Three Rivers Holding Corp.
to enter into the SMT/Alliance Combination Agreement with SMT Acquisition
and to consummate the transactions contemplated thereby; and (y) if such
consummation does not occur concurrently with the Effective Time, cause the
Company to redeem, concurrently with such consummation, all Junior Notes
then outstanding for the unpaid principal amount thereof plus accrued
interest and otherwise in accordance with the terms thereof
(e) Concurrently with the SMT/Alliance Combination, each option to
purchase common stock, par value $.01, of Three Rivers Holding Corp. shall
be convertible into options to purchase Alliance Shares only as set forth
in this paragraph: each such option shall be convertible into an option to
purchase 9.0909 Shares of Alliance and the exercise price for each such
option to purchase Alliance Shares shall be equal to 0.11 times the
exercise price of the corresponding option to purchase common stock, par
value $.01, of Three Rivers Holding Corp. (such procedure assumes 335,600
shares of Three Rivers Holding Corp. outstanding following the SMT/Three
Rivers Merger and no subsequent stock splits, stock dividends or similar
changes to the capital structure of Three Rivers Holding Corp.). If,
following such conversion, any holder of such an option holds an option to
purchase a fractional Alliance Share, the portion of the option
representing the right to purchase a fractional Alliance Share shall be
cancelled in exchange for the payment by the Company to the holder thereof
of an amount equal to the Cash Merger Price times such fraction. The
Investor shall make reasonable efforts to cause all outstanding options to
purchase common stock, par value $.01, of Three Rivers Holding Corp. to be
converted into options to purchase Alliance Shares on the basis described
above.
1.4 Sections 6.4(a) and (b) of the Agreement are amended and restated in
their entirety as follows:
"(a) As soon as practicable following the date hereof but in no event
later than the Effective Time, the Company (or, if appropriate, the Board
of Directors of the Company or any committee administering the Stock Option
Plans (as defined below)) shall (except as set forth in the last sentence
of Section 6.4(b) below) take action, including by adopting resolutions or
taking any other actions, so as to allow each outstanding option to
purchase Shares (a "Company Stock Option") heretofore granted under any
stock option, stock appreciation rights or stock purchase plan, program or
arrangement of the Company (collectively, the "Stock Option Plans") and
each outstanding warrant or other right or option to purchase Shares (a
"Warrant") in each case outstanding immediately prior to the date hereof,
whether or not then exercisable, either (i) shall be canceled at the
Effective Time in exchange for an amount in cash, payable at the time of
such cancellation, equal to the product of (x) the number of Shares subject
to such Company Stock Option or Warrant immediately prior to the Effective
Time and (y) the excess of the Cash Merger Price over the per Share
exercise price of such Company Stock Option or Warrant (the "Net Amount")
or (ii) shall be converted immediately prior to the Effective Time into the
right solely to receive the Net Amount; provided, that no such cash payment
has been made. The Company shall not make, or agree to make, any payment of
any kind to any holder of a Company Stock Option or a Warrant (except for
the payment described above) without the consent of Investor (which consent
will not be unreasonably withheld).
(b) All Stock Option Plans (except for the Company's 1991 Amended and
Restated Stock Option Plan, as amended) shall be terminated as of the
Effective Time and the provisions in any other Benefit Plan providing for
the issuance, transfer or grant of any capital stock of the Company or any
interest in respect
A-III-3
<PAGE>
of any capital stock of the Company shall be terminated as of the Effective
Time. The Company shall ensure that following the Effective Time, no holder
of a Company Stock Option or Warrant or any participant in any Stock Option
Plan shall have any right thereunder to acquire any capital stock of the
Company, Investor or the Surviving Corporation, except as set forth in the
next sentence or as agreed to otherwise by the Investor. Notwithstanding
the foregoing, stock options representing the right to purchase Alliance
Shares shall remain outstanding following the Effective Time as follows:
(i) 150,581 of the Company Stock Options with an exercise price of $3.5625
shall remain outstanding; (ii) 53,878 of the Company Stock Options with an
exercise price of $0.4375 shall remain outstanding; and (iii) 56,122 of the
Company Stock Options with an exercise price of $6.5625 shall remain
outstanding.
ARTICLE II
MISCELLANEOUS
2.1 Effect of Amendment.
Except as amended hereby, the Agreement remains in full force and effect in
accordance with its terms.
2.2 Entire Agreement; Third Party Beneficiaries.
This Amendment and the Agreement constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, and is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
2.3 Governing Law.
This Amendment shall be governed and construed in accordance with the laws
of the State of Delaware.
2.4 Counterparts.
This Amendment may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
2.5 Assignment.
Neither this Amendment nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties,
which consent will not be unreasonably withheld. Subject to the preceding
sentence, this Amendment will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
[Remainder of this page intentionally left blank; next page is signature page]
A-III-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
ALLIANCE IMAGING, INC.,
a Delaware corporation
By:
----------------------------------
Name:
Title:
NEWPORT INVESTMENT LLC,
a Delaware limited liability company
By:
----------------------------------
Name:
Title:
A-III-5
<PAGE>
AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF MERGER, dated as
of November 10, 1997 (this "Amendment"), to that certain
AGREEMENT AND PLAN OF MERGER, dated as of July 23, 1997,
between ALLIANCE IMAGING, INC., a Delaware corporation
(the "Company") and NEWPORT INVESTMENT LLC, a Delaware
corporation (the "Investor"), as amended by AMENDMENT NO.
1 TO THE AGREEMENT AND PLAN OF MERGER, dated as of August
13, 1997, and AMENDMENT NO. 2 TO THE AGREEMENT AND PLAN
OF MERGER, dated as of October 13, 1997 (as amended, the
"Agreement").
WHEREAS, the Company and the Investor have entered into the Agreement; and
WHEREAS, the Company and the Investor agree that it is in the best interest
of each of them and their respective stockholders or equity holders, as the
case may be, to make certain amendments to the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereby agree as follows:
ARTICLE FIRST
AMENDMENTS
1.1. Proration. Section 2.4(a) of the Agreement is amended by deleting the
number "727,273" contained therein and replacing it with the number "411,358."
1.2. Conversion of Common Stock of Newco. Section 2.5(a) of the Agreement is
amended by deleting the number "3,363,364" contained therein and replacing it
with the number "3,632,222."
1.3. Financing. Section 4.7 of the Agreement is amended and restated in its
entirety to read as follows:
"4.7 Financing.
Investor has sufficient sources of liquid capital funds, and concurrently
with the Effective Time will fund or cause to be funded, in cash, to the
Company (i) an amount of common equity capital equal to $40 million, plus
(ii) $15 million of redeemable preferred stock having substantially the
terms and conditions set forth on Schedule 1.4 attached hereto (the
"Preferred Stock"). Investor has delivered to the Company true and correct
copies of signed letters received by Investor with respect to the balance
of the financing (the "Financing Letters") required for the consummation of
the transactions contemplated hereby. A copy of each Financing Letter is
set forth in EXHIBIT B. Assuming satisfaction of all conditions set forth
in the Financing Letters and full funding thereunder, such financing,
together with the equity capital in Newco and proceeds from the issuance of
the Preferred Stock and pursuant to a senior bank term loan facility, will
provide sufficient funds to (i) pay the aggregate Cash Merger Price with
respect to all outstanding Shares, on a fully diluted basis, (ii) prepay,
redeem, refinance or renegotiate the Company's existing indebtedness, if
required to consummate the Merger and the other transactions contemplated
hereby, and pay any and all fees, expenses, costs and penalties in
connection with any such prepayment, redemption, refinancing, renegotiation
and in connection with obtaining of the financing contemplated by the
Financing Letters, (iii) pay the fees and expenses of the Financial Advisor
and the Company's legal counsel (subject to Section 3.23 hereof), (iv)
consummate all of the other transactions contemplated by this Agreement,
and (v) provide sufficient working capital needs of the Company following
the Merger (as determined by the Investor)."
1.4 SMT.
Section 5.9 of the Agreement is hereby amended and restated to read in its
entirety as follows:
"5.9 [INTENTIONALLY OMITTED]"
A-IV-1
<PAGE>
1.5. Options. Sections 6.4 (b) of the Agreement is amended and restated in
its entirety as follows:
"(b) All Stock Option Plans (except for the Company's 1991 Amended and
Restated Stock Option Plan, as amended) shall be terminated as of the
Effective Time and the provisions in any other Benefit Plan providing for
the issuance, transfer or grant of any capital stock of the Company or any
interest in respect of any capital stock of the Company shall be terminated
as of the Effective Time. The Company shall ensure that following the
Effective Time, no holder of a Company Stock Option or Warrant or any
participant in any Stock Option Plan shall have any right thereunder to
acquire any capital stock of the Company, Investor or the Surviving
Corporation, except as set forth in the next sentence or as agreed to
otherwise by the Investor. Notwithstanding the foregoing, Company Stock
Options representing the right to purchase Alliance Shares shall remain
outstanding following the Effective Time as set forth in Exhibit 6.4(b).
Exhibit 6.4(b) also sets forth the exercise price of each such option and
the holder thereof."
1.6. Restated Certificate of Incorporation. Exhibit 1.4(a) to the Agreement
will be amended and restated to contain a class of preferred stock with the
terms and conditions set forth in Exhibit 1.6 hereto.
ARTICLE SECOND
MISCELLANEOUS
2.1. Effect of Amendment.
Except as amended hereby, the Agreement remains in full force and effect in
accordance with its terms.
2.2. Entire Agreement; Third party Beneficiaries.
This Amendment and the Agreement constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, and is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
2.3. Governing Law.
This Amendment shall be governed and construed in accordance with the laws
of the State of Delaware.
2.4. Counterparts.
This Amendment may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
2.5. Assignment.
Neither this Amendment nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties,
which consent will not be unreasonably withheld. Subject to the preceding
sentence, this Amendment will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
[Remainder of this page intentionally left blank; next page is signature page]
A-IV-2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
ALLIANCE IMAGING, INC.,
a Delaware corporation
By: _________________________________
Name:
Title:
NEWPORT INVESTMENT LLC,
a Delaware limited liability company
By: _________________________________
Name:
Title:
A-IV-3
<PAGE>
EXHIBIT A TO AMENDMENT NO. 3 TO MERGER AGREEMENT
EXHIBIT 1.4(A) TO MERGER AGREEMENT
A-IV-4
<PAGE>
EXHIBIT 6.4(b) TO MERGER AGREEMENT
A-IV-5
<PAGE>
EXHIBIT 1.4
TERM SHEET
PREFERRED STOCK OF ALLIANCE IMAGING, INC.
ISSUER Alliance Imaging, Inc.
- --------------------------------------------------------------------------------
PURCHASERS Apollo and BT.
- --------------------------------------------------------------------------------
TITLE Series F Preferred Stock.
- --------------------------------------------------------------------------------
INITIAL LIQUIDATION $15,000,000
PREFERENCE
- --------------------------------------------------------------------------------
MANDATORY REDEMPTION 2007 (10 years)
- --------------------------------------------------------------------------------
DIVIDENDS 13 1/2% per annum, payable quarterly in arrears.
Payable in kind for the first 5 years.
- --------------------------------------------------------------------------------
OPTIONAL REDEMPTION Redeemable at the following premiums (as a percentage
of accreted face value):
On or before the end of
Year 1 113.500%
Year 2 112.000
Year 3 110.500
Year 4 109.000
Year 5 107.500
Year 6 106.000
Year 7 104.500
Year 8 103.000
Year 9 101.000
Year 10 100.000
- --------------------------------------------------------------------------------
PRIORITY Preferred Stock will rank senior to all capital stock.
- --------------------------------------------------------------------------------
LIQUIDATION Preferred Stock entitled to distribution of Issuer's
assets prior to any payment to other equity holders.
Sale of the Issuer (whether by sale of assets, sale of
stock, merger or otherwise) will constitute a
liquidation event.
- --------------------------------------------------------------------------------
VOTING RIGHTS None.
- --------------------------------------------------------------------------------
CONVERSION RIGHTS None.
A-IV-6
<PAGE>
OTHER Registration rights.
- --------------------------------------------------------------------------------
FINANCING FEE 4.0% of the gross proceeds payable to Apollo and BT.
- --------------------------------------------------------------------------------
AMENDMENTS Requiring approval of holders of 2/3 of preferred.
A-IV-7
<PAGE>
ANNEX B
STOCKHOLDER AGREEMENT
<PAGE>
ANNEX B
STOCKHOLDER AGREEMENT, dated as of July 23,
1997, among NEWPORT INVESTMENT LLC, a
Delaware limited liability company (the
"Investor") and the individuals listed on
SCHEDULE A attached hereto (each, a
"Stockholder" and, collectively, the
"Stockholders").
Whereas, the Investor and Alliance Imaging, Inc. (the "Company") propose to
enter into an Agreement and Plan of Merger dated as of the effective date
hereof (as the same may be amended or supplemented, the "Merger Agreement")
providing for the merger with and into the Company of a corporation to be
formed and wholly owned by the Investor (the "Merger"), upon the terms and
subject to the conditions set forth in the Merger Agreement, a copy of which
is attached hereto as Exhibit I;
Whereas, each Stockholder owns (a) the number of shares of common stock, par
value $.01 per share, of the Company (the "Common Stock") set forth opposite
his or its name on SCHEDULE A attached hereto and/or (b) shares of Series D
Cumulative Redeemable Convertible Preferred Stock, par value $.01 per share,
of the Company (the "Series D Stock" and collectively with the Common Stock,
the "Capital Stock"), which are convertible into the number of shares of
Common Stock set forth opposite his or its name on SCHEDULE A attached hereto
(such shares of Capital Stock, together with any other shares of Capital Stock
of the Company acquired by such Stockholders after the date hereof and during
the term of this Agreement (including, without limitation, through the
conversion of any convertible securities or through the exercise of any
Company Stock Options or Warrants), being collectively referred to herein as
the "Subject Shares");
Whereas, each Stockholder owns Company Stock Options or Warrants pursuant to
which such Stockholder has the right to acquire the number of shares of Common
Stock set forth opposite his or its name on SCHEDULE A attached hereto;
Whereas, as a condition to its willingness to enter into the Merger
Agreement, the Investor has requested that each Stockholder enter into this
Agreement;
Now, Therefore, to induce the Investor to enter into, and in consideration
of its entering into, the Merger Agreement, and in consideration of the
premises and the representations, warranties and agreements contained herein,
the parties agree as follows (capitalized terms used herein but not defined
herein have the meanings set forth in the Merger Agreement):
1. REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER.
Each Stockholder hereby represents and warrants, severally and not jointly,
to the Investor as of the date hereof in respect of himself or itself as
follows:
(A) Authority. The Stockholder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by the
Stockholder, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary action on the part of the
Stockholder. This Agreement has been duly executed and delivered by the
Stockholder and constitutes a valid and binding obligation of the
Stockholder enforceable against the Stockholder in accordance with its
terms. Except for the expiration or termination of the waiting periods
under the HSR Act, informational filings wit h the SEC, and compliance with
any applicable state securities laws, the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated
hereby and compliance with the terms hereof will not, (i) conflict with, or
result in any violation of, or default (with or without notice or lapse of
time or both) under any provision of, any certificate or articles of
incorporation, bylaws, certificate or articles of limited partnership,
limited partnership agreement, trust agreement, loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument,
permit, concession, franchise, license, judgment, order, notice, decree,
statute,
B-1
<PAGE>
law, ordinance, rule or regulation applicable to the Stockholder or to the
Stockholder's property or assets, including the Subject Shares, (ii) to
such Stockholder's knowledge, require any filing with, or permit,
authorization, consent or approval of, or notice to, any federal, state or
local government or any court, tribunal, administrative agency or
commission or other governmental or regulatory authority or agency,
domestic, foreign or supranational, or (iii) to such Stockholder's
knowledge, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Stockholder or any of the Stockholder's
properties or assets, including the Subject Shares. If the Stockholder is a
natural person and is married, and the Stockholder's Subject Shares
constitute community property or otherwise need spousal or other approval
for this Agreement to be legal, valid and binding, this Agreement has been
duly authorized, executed and delivered by, and constitutes a valid and
binding agreement of, the Stockholder's spouse, enforceable against such
spouse in accordance with its terms. No trust of which such Stockholder is
a trustee requires the consent of any beneficiary to the execution and
delivery of this Agreement or to the consummation of the transactions
contemplated hereby.
(B) The Subject Shares. The Stockholder is the record and beneficial
owner of, and has good and marketable title to, the Subject Shares, Company
Stock Options and/or Warrants set forth opposite his or its name on
SCHEDULE A. attached hereto, free and clear of any Liens (except for any
Subject Shares that are held of record by the Depositary Trust Company, or
its nominee, for the benefit of any Stockholder, which shall be transferred
into record ownership of such Stockholder as soon as practicable after the
date hereof). The Stockholder does not own, of record or beneficially, any
shares of capital stock of the Company or any Subsidiary or any option,
warrants, rights or other securities convertible into or exercisable for
shares of capital stock of the Company other than the Subject Shares,
Company Stock Options and Warrants set forth opposite his or its name on
Schedule A attached hereto, and other than the Company's Senior Notes which
are convertible into shares of the Company's Series E Cumulative Redeemable
Convertible Preferred Stock, par value $.01, none of which Senior Notes are
so convertible prior to January 1, 1998. Except as set forth on Schedule
1(b), the Stockholder has the sole right to vote Subject Shares owned by
it, and, none of such Subject Shares is subject to any voting trust or
other agreement, arrangement or restriction with respect to the voting of
such Subject Shares, except as contemplated by this Agreement.
(C) Brokers. No broker, finder, investment banker or other person
retained by such Stockholder is entitled to any brokerage, finder's or
other fee or commission in connection with the execution of this Agreement
by such Stockholder or the performance by such Stockholder of its
obligations hereunder (it being understood that Salomon Brothers Inc may be
entitled to certain fees and expenses in connection with the transactions
contemplated by the Merger Agreement, which fees and expenses shall be paid
by the Company as set forth in the Merger Agreement).
2. OPTION TO PURCHASE SHARES.
Each Stockholder hereby severally grants to the Investor an option to
purchase (the "Option"), in the Investor's sole discretion, all Subject Shares
set forth opposite such Stockholder's name on SCHEDULE A hereto, at a price
per Share equal to the Cash Merger Price or, in respect of a share of Series D
Stock, an amount in cash equal to the Cash Merger Price for each Share that
would have been received had such share of Series D Stock been converted into
Shares immediately prior to such purchase (the "Exercise Price"). The Option
shall be exercisable by the Investor, as to all Stockholders, at any time
prior to the termination of this Agreement, by delivery of a notice of
exercise to all Stockholders at the address of each Stockholder set forth in
SCHEDULE A. The Subject Shares shall be delivered (with any appropriate
executed stock power) by each Stockholder to Irell & Manella (the "Escrow
Agent"), which shall hold the Subject Shares in escrow pending receipt by the
Stockholder of the purchase price payable therefor; upon such receipt the
Subject Shares shall be delivered by the Escrow Agent to Investor. Within ten
business days after delivery of such notice, the Investor shall pay to each
Stockholder a cash amount equal to the aggregate Exercise Price payable in
respect of such Stockholder's Subject Shares against delivery of certificates
representing such Subject Shares.
B-2
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
(A) Authority. The Investor has all requisite power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by the Investor, and
the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary action on the part of the Investor. This Agreement
has been duly executed and delivered by the Investor and constitutes a valid
and binding obligation of the Investor, enforceable against the Investor in
accordance with its terms. Except for the expiration or termination of the
waiting periods under the HSR Act, informational filings with the SEC, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the terms hereof will
not, (i) conflict with, or result in any violation of, or default (with or
without notice or lapse of time or both) under any provision of, any
certificate or articles of incorporation, bylaws, certificate or articles of
limited partnership, limited partnership agreement, trust agreement, loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license, judgment, order, notice,
decree, statute, law, ordinance, rule or regulation applicable to the Investor
or to the Investor's property or assets, (ii) require any filing with, or
permit, authorization, consent or approval of, or notice to, any federal,
state or local government or any court, tribunal, administrative agency or
commission or other governmental or regulatory authority or agency, domestic,
foreign or supranational, or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Investor or any of the
Investor's properties or assets.
(B) Brokers. No broker, finder, investment banker or other person is
entitled to any brokerage, finder's or other fee or commission for which any
Stockholder will be liable in connection with the execution of this Agreement
by the Investor or the performance by the Investor of its obligations
hereunder.
(C) Complete Agreement; Additional or Side Agreements. This Agreement
represents the complete agreement between the Investor and each Stockholder,
and there are no additional or side agreements between the Investor and any
Stockholder with respect to any matter referenced herein.
(D) No Registration Requirement. No registration under the Securities Act
(as defined below) is required in connection with the grant of the Option or
the sale of Subject Shares pursuant to the exercise of the Option.
4. COVENANTS OF EACH STOCKHOLDER.
Each Stockholder, severally and not jointly, agrees, subject to the terms
and conditions of this Agreement, as follows:
(A) In connection with any closing of a purchase and sale pursuant to the
exercise of an Option, each Stockholder agrees to deliver to the Escrow
Agent promptly after receipt of a notice of exercise, all certificates
evidencing the Subject Shares held by such Stockholder, duly endorsed in
blank for transfer, or accompanied by stock powers and such other documents
as may be necessary in the Investor's judgment to transfer record ownership
of the Subject Shares being sold pursuant to such exercise to or as
directed by the Investor.
(B) At any meeting of stockholders of the Company called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval (including
by written consent) with respect to the Merger and the Merger Agreement is
sought, the Stockholder shall vote (or cause to be voted) the Subject
Shares (except for the Series D Stock, unless it shall first have been
converted into Common Stock) in favor of the Merger and the adoption by the
Company of the Merger Agreement.
(C) At any meeting of stockholders of the Company or at any adjournment
thereof or in any other circumstances upon which the Stockholder's vote,
consent or other approval is sought, the Stockholder shall vote (or cause
to be voted) the Subject Shares (except for the Series D Stock, unless it
shall first have been converted into Common Stock) against (i) any
Alternative Transaction as such term is defined in Section 5.2 of the
Merger Agreement, (ii) any amendment of the Company's certificate of
incorporation or by-laws
B-3
<PAGE>
or other proposal or transaction involving the Company, which amendment or
other proposal or transaction would be reasonably likely to impede,
frustrate, prevent or nullify the Merger, the Merger Agreement or any of
the other transactions contemplated by the Merger Agreement or change in
any manner the voting rights of any class of Company Common Stock, or (iii)
any action that would cause the Company to breach any representation,
warranty or covenant contained in the Merger Agreement. Subject to Section
11, the Stockholder further agrees not to enter into any agreement or take
any action inconsistent with the foregoing.
(D) The Stockholder shall not, prior to the earliest of (i) the Effective
Time and (ii) the termination of this Agreement in accordance with its
terms, (A) sell, transfer, give, pledge, assign or otherwise dispose of
(including by gift) (collectively, "Transfer"), or consent to any Transfer
of, any or all of such Subject Shares or any interest therein or enter into
any contract, option or other arrangement (including any profit sharing
arrangement) with respect to the Transfer of, the Subject Shares to any
person (unless such person agrees in writing to be bound by all of the
terms of this Agreement and written notice of such Transfer is given
promptly to Investor) other than pursuant to the terms of the Merger or (B)
enter into any voting arrangement, directly or indirectly, whether by
proxy, voting agreement or otherwise, in respect of the Subject Shares, and
the Stockholder agrees not to commit or agree to take any of the foregoing
actions.
(E) Subject to the terms of Section 11, during the term of this
Agreement, the Stockholder shall not, nor shall it permit any investment
banker, financial advisor, attorney, accountant or other representative
retained by it, to, directly or indirectly, (i) solicit, initiate or
encourage (including by way of furnishing information), or take any other
action to facilitate, any inquiries or the making of any proposal that may
lead to an Alternative Transaction or (ii) participate in any discussions
or negotiations regarding any proposed Alternative Transaction.
(F) [intentionally left blank]
(G) Such Stockholder, and any beneficiary of a revocable trust for which
such Stockholder serves as trustee, shall not take any action to revoke or
terminate such trust or take any other action which would restrict, limit
or frustrate in any way the transactions contemplated by this Agreement.
(H) Each Stockholder agrees that to the extent he or it receives notice,
pursuant to Section 2, of Investor's exercise of its Option, he or it will,
in accordance with applicable law, promptly (x) convert such shares of
Preferred Stock owned by it into Common Stock (provided that any such
conversion shall be contemporaneous with the purchase pursuant to such
exercise of the Option) and (y) exercise such Warrants and Company Stock
Options owned by it. With respect to Warrants and Company Stock Options
that are not exercised prior to the Effective Time, it is agreed that each
Stockholder shall be entitled to a "cashless net proceeds" exercise of such
Warrants and Company Stock Options at the Effective Time.
5. GRANT OF IRREVOCABLE PROXY; APPOINTMENT OF PROXY.
Each Stockholder hereby irrevocably grants to, and appoints, the Investor
and Josh Harris, in his capacity as an officer of the Investor, and any
individual who shall hereafter succeed to any such office of the Investor,
such Stockholder's proxy and attorney-in-fact (with full power of
substitution), for and in the name, place and stead of such Stockholder, (i)
to vote such Stoc kholder's Subject Shares (except for the Series D Stock,
unless it shall first have been converted into Common Stock), or grant a
consent or approval with respect to the Merger and the adoption by the Company
of the Merger Agreement and (ii) to vote such Stockholder's Subject Shares
(except for the Series D Stock, unless it shall first have been converted into
Common Stock), against (x) any Alternative Transaction, as such term is
defined in Section 5.2 of the Merger Agreement, (y) any amendment of the
Company's certificate of incorporation or by-laws or other proposal or
transaction involving the Company, which amendment or other proposal or
transaction would be reasonably likely to impede, frustrate, prevent or
nullify the Merger, the Merger Agreement or any of the other transactions
contemplated by the Merger Agreement or change in any manner the voting rights
of any class of Company Common Stock, or (z) any action that would cause the
Company to breach any representation, warranty or covenant contained in the
Merger Agreement. The proxy granted pursuant to this Section (i) shall not
affect the Stockholder's ability to make an election, pursuant to the terms
and conditions of the Merger Agreement, to receive cash or stock as
consideration
B-4
<PAGE>
in the Merger, (ii) shall terminate upon the termination of this Agreement
pursuant to Section 9 and (iii) is subject to the Investor's compliance with
Section 14.
(A) Each Stockholder represents that there are no proxies heretofore
given in respect of such Stockholder's Subject Shares.
(B) Each Stockholder hereby affirms that each irrevocable proxy granted
pursuant to this Section 5 is given in connection with the execution of the
Merger Agreement, and that each such irrevocable proxy is given to secure
the performance of the duties of the Stockholder under this Agreement. Such
Stockholder hereby further affirms that each such irrevocable proxy is
coupled with an interest and may under no circumstances be revoked. Each
Stockholder hereby ratifies and confirms all that the holder of each
irrevocable proxy may lawfully do or cause to be done by virtue hereof.
Each such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 212(e) of the Delaware General
Corporation Law (the "DGCL"); provided, that each such irrevocable proxy
shall terminate upon termination of this Agreement pursuant to Section 9.
6. FURTHER ASSURANCES.
Each Stockholder will, at the Investor's expense, from time to time, execute
and deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as the Investor may reasonably
request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
7. CERTAIN EVENTS.
Each Stockholder agrees that this Agreement and the obligations hereunder
shall attach to such Stockholder's Subject Shares and shall be binding upon
any person or entity to which legal or beneficial ownership of such Subject
Shares shall pass, whether by operation of law or otherwise, including without
limitation such Stockholder's heirs, guardians, administrators or successors.
In the event of any stock split, stock dividend, merger, reorganization,
recapitalization or other change in the capital structure of the Company
affecting the Company Common Stock, or the acquisition of additional shares of
Company Common Stock or other voting securities of the Company by any
Stockholder, the number of Subject Shares listed in Schedule A beside the name
of such Stockholder shall be adjusted appropriately and this Agreement and the
obligations hereunder shall attach to any additional shares of Company Common
Stock or other voting securities of the Company issued to or acquired by such
Stockholder.
8. ASSIGNMENT.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties without the prior written
consent of the other parties, except that (i) the Investor may assign any or
all of its rights, interests and obligations hereunder to the extent it
assigns its rights, interests or obligations pursuant to Section 9.7 of the
Merger Agreement, and (ii) the Investor may assign, in its sole discretion,
any and all of its rights, interests and obligations hereunder to any direct
or indirect wholly owned subsidiary of the Investor, provided that the
Investor will continue to remain primarily liable for its obligations
hereunder in the event of any assignment pursuant to this clause (ii). Subject
to the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors
and permitted assigns.
9. TERM; TERMINATION.
This Agreement shall become effective upon execution and delivery by all of
the parties hereto (provided that Investor has received options from the
parties hereto and, if applicable, the Company to purchase more than 50% of
the Common Stock, on a fully diluted basis), and this Agreement and all rights
and obligations of the parties hereunder, shall terminate on the earlier of
(a) December 31, 1997 (unless a notice pursuant to Section 2 shall have been
sent within 10 business days prior to such date and the sale of Shares
pursuant to such notice shall not have been consummated), (b) the date on
which the Merger Agreement is terminated in accordance
B-5
<PAGE>
with its terms, unless within 15 business days of such date the Investor
delivers the notice in connection with the Option as set forth in Section 2;
provided, however, that if, in such event, the Investor sells, or agrees to
sell, any Shares acquired pursuant to the exercise of the Option within 60
days of the date of such exercise, all proceeds from such sale in excess of
$11.00 per Share shall be paid by the Investor to the Stockholders pro rata,
based on their percentage ownership of Subject Shares (with Series D Stock
deemed converted to Common Stock for this purpose), (c) subject to clause (b)
above, the date on which a notice of termination is delivered by the Investor
to the Stockholders or (d) the date on which the Investor breaches any of the
covenants set forth in Section 14.
10. GENERAL PROVISIONS.
(A) Amendments. This Agreement may not be amended except by an instrument in
writing signed by each of the parties hereto.
(B) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered by facsimile (with
confirmation of delivery) or personally or sent by overnight courier
(providing proof of delivery) to the Investor in accordance with Section 9.2
of the Merger Agreement and to the Stockholders at their respective addresses
and facsimile numbers set forth on Schedule A attached hereto (or at such
other address and facsimile number for a party as shall be specified by like
notice).
(C) Interpretation. When a reference is made in this Agreement to an Article
or a Section, such reference shall be deemed made to an Article or a Section
of this Agreement, unless otherwise indicated. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Unless the context otherwise
requires, words importing the singular shall include the plural, and vice
versa. Wherever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." Capitalized terms used and not otherwise defined in this
Agreement shall have the respective meanings assigned to them in the Merger
Agreement.
(D) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed
by each of the parties and delivered to the other party, it being understood
that each party need not sign the same counterpart.
(E) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof and (ii) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
(F) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof.
(G) Voidability. If prior to the execution hereof, the Board of Directors of
the Company shall not have duly and validly authorized and approved by all
necessary corporate action, this Agreement, the Merger Agreement and the
transactions contemplated hereby and thereby, so that by the execution and
delivery hereof the Investor would become, or could reasonably be expected to
become an "interested stockholder" with whom the Company would be prevented
for any period pursuant to Section 203 of the DGCL from engaging in any
"business combination" (as such terms are defined in Section 203 of the DGCL),
then this Agreement shall be void and unenforceable until such time as such
authorization and approval shall have been duly and validly obtained.
(H) Expenses. Except as otherwise provided herein, all costs and expenses
incurred in connection with the transactions contemplated by this Agreement
shall be paid by the party incurring such expenses.
B-6
<PAGE>
11. STOCKHOLDER CAPACITY.
No person executing this Agreement who is or becomes during the term hereof
a director or officer of the Company makes any agreement or understanding
herein in his capacity as such director or officer. Each Stockholder signs
solely in his capacity as the record holder and beneficial owner of, or the
trustee of a trust whose beneficiaries are the beneficial owners of, such
Stockholder's Subject Shares and nothing herein (including, without
limitation, the provisions of Section 4(e)) shall limit or affect any actions
taken by a Stockholder in his capacity as an officer or director of the
Company.
12. ENFORCEMENT.
The parties agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions of this Agreement in any court of the United States located in the
State of Delaware or in a Delaware state court, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit such party to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of
Delaware or a Delaware state court and (iv) waives any right to trial by jury
with respect to any claim or proceeding related to or arising out of this
Agreement or any of the transactions contemplated hereby.
13. PUBLIC ANNOUNCEMENT.
Neither the Investor nor any Stockholder shall issue any press release or
make any public statement without the prior written consent of the other
parties hereto, except as may be re quired by applicable law, court process or
by obligations pursuant to any listing agreement with any national securities
exchange.
14. INVESTOR COVENANTS.
Investor covenants and agrees that without terminating this Agreement:
(A) Neither the Merger Agreement nor this Agreement will be amended, and
no condition in the Merger Agreement will be waived, so as to: (i) reduce
the value of the consideration payable in the Merger, (ii) materially
adversely affect the timing of the closing of the Merger, (iii) reduce the
Cash Merger Price, or (iv) otherwise adversely affect the interests of the
Stockholders.
(B) Upon its formation, Newco will execute and deliver a joinder to the
Merger Agreement, rendering it a party thereto, and obligating it to
perform thereunder.
15. PIGGYBACK REGISTRATION RIGHTS.
From and after the Effective Time, the Investor shall cause the Company to
grant to each Stockholder piggyback registration rights (subject to standard
cutbacks) with respect to any offering of Common Stock made by the Investor
that is registered pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). Such piggyback registration rights shall be available only
to the extent that, and so long as, such Stockholder's Subject Shares are not
freely tradable (e.g., subject to Rule 145 or Rule 144) under the Securities
Act.
B-7
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: /s/ Michael Gross
______________________________
Name: Michael Gross
Title: President
STOCKHOLDERS:
_____________________________________
Print Name of Stockholder
_____________________________________
Signature
_____________________________________
Name of Authorized Person Signing
_____________________________________
Title of Authorized Person Signing
B-8
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
Richard N. Zehner; Barbara Zehner;
Richard N. Zehner, Trustee
_____________________________________
Print Name of Stockholder
/s/ Richard N. Zehner; Barbara Zehner;
/s/ Richard N. Zehner
_____________________________________
Signature
_____________________________________
Name of Authorized Person Signing
_____________________________________
Title of Authorized Person Signing
B-9
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
Vincent S. Pino, Custodian
Vincent S. Pino
Rosemary G. Pino
_____________________________________
Print Name of Stockholder
/s/ Vincent S. Pino, Custodian
/s/ Vincent S. Pino
/s/ Rosemary G. Pino
_____________________________________
Signature
Vincent S. Pino, Custodian
Vincent S. Pino
Rosemary G. Pino
_____________________________________
Name of Authorized Person Signing
_____________________________________
Title of Authorized Person Signing
B-10
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
CIG & Co.
_____________________________________
Print Name of Stockholder
/s/ James R. Kuzemchak
_____________________________________
Signature
James R. Kuzemchak
_____________________________________
Name of Authorized Person Signing
Partner
_____________________________________
Title of Authorized Person Signing
BENEFICIAL OWNERS:
Connecticut General Life Insurance
Company, CIGNA Property and
Casualty Insurance Company, Life
Insurance Company of North America
and Century Indemnity Company
By CIGNA Investments, Inc.
By: /s/ James R. Kuzemchak
_________________________________
Name: James R. Kuzemchak
Title: Managing Director
B-11
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By __________________________________
Name:
Title:
STOCKHOLDERS:
Meridian Trust Company as Voting
Trustee under Agreement dated
12/29/88
-------------------------------------
Print Name of Stockholder
/s/ Hans F. Hass
-------------------------------------
Signature
Hans F. Hass
-------------------------------------
Name of Authorized Person Signing
Assistant Vice President
-------------------------------------
Title of Authorized Person Signing
B-12
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
Northwestern Mutual Life Insurance
Company
-------------------------------------
Print Name of Stockholder
/s/ Gary A. Poliner
-------------------------------------
Signature
Gary A. Poliner
-------------------------------------
Name of Authorized Person Signing
Vice President
-------------------------------------
Title of Authorized Person Signing
B-13
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By___________________________________
Name:
Title:
STOCKHOLDERS:
Bedrock Asset Trust I
By: Wilmington Trust Company, not in
its individual capacity but
solely as owner trustee
-------------------------------------
Print Name of Stockholder
/s/ Ann E. Roberts
-------------------------------------
Signature
Ann E. Roberts
-------------------------------------
Name of Authorized Person Signing
Senior Financial Services Officer
-------------------------------------
Title of Authorized Person Signing
B-14
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: Lincoln Investment Management,
Inc., Its Attorney-in-Fact
_____________________________________
Print Name of Stockholder
/s/ Richard L. Corwin
_____________________________________
Signature
Richard L. Corwin
_____________________________________
Name of Authorized Person Signing
Vice President
_____________________________________
Title of Authorized Person Signing
B-15
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By:_____________________________ ____
Name:
Title:
STOCKHOLDERS:
THE TRAVELERS INSURANCE COMPANY
_____________________________________
Print Name of Stockholder
/s/ A. William Carnduff
_____________________________________
Signature
A. William Carnduff
_____________________________________
Name of Authorized Person Signing
Second Vice President
_____________________________________
Title of Authorized Person Signing
TRAL & CO, as nominee for the
Travelers Insurance Company
By: /s/ Frank G. Pattison
_________________________________
Attorney-in-Fact
B-16
<PAGE>
In Witness Whereof, the Investor and the Stockholders have caused this
Agreement to be duly executed and delivered effective as of the date of the
Merger Agreement.
NEWPORT INVESTMENT LLC
By: _________________________________
Name:
Title:
STOCKHOLDERS:
THE GE FUND
-------------------------------------
Print Name of Stockholder
/s/ Philip D. Ameen
-------------------------------------
Signature
Philip D. Ameen
-------------------------------------
Name of Authorized Person Signing
Attorney-in-Fact
-------------------------------------
Title of Authorized Person Signing
B-17
<PAGE>
SCHEDULE 1(B)
Amended and Restated Standstill Agreement dated as of December 31, 1996,
between the Registrant and Connecticut General Life Insurance Company, CIGNA
Property and Casualty Insurance Company, Insurance Company of North America
and Life Insurance Company of North America
Amended and Restated Standstill Agreement, dated as of December 31, 1996,
between Richard N. Zehner and Alliance Imaging, Inc.
Amended and Restated Standstill Agreement, dated as of December 31, 1996,
between each of The Northwestern Mutual Life Insurance Company, The Travelers
Indemnity Company, The Travelers Insurance Company, The Travelers Life and
Annuity Company, The Lincoln National Life Insurance Company and Bedrock Asset
Trust I and Alliance Imaging, Inc.
Amended and Restated Standstill Agreement, dated as of December 31, 1996,
between DLJ Capital Corporation and Alliance Imaging, Inc.
Voting Trust Agreement between Meridian Trust company, as voting trustee,
and DLJ Capital corporation dated as of December 29, 1988
B-18
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
Richard N. Zehner............ 257,139* 460,000
9881 Orchard Lane
Villa Park, CA 92667
</TABLE>
- --------
* Includes 196,593 shares as community property, 30,273 owned by Matthew
Zehner, a minor son, and 30,273 shares owned by Michelle Zehner, a minor
daughter. Richard N. Zehner is Trustee of the Zehner Children's Trusts for
his children.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
Vincent S. and Rosemary G.
Pino......................... 364,045* 205,025
31441 Island Drive
Evergreen, CO 80439
</TABLE>
- --------
* Includes 302,800 shares held as community property, 37,027 in Vincent Pino's
self-directed IRA account, 3,218 in Rosemary Pino's self-directed IRA
account, 10,500 shares owned by Michael Pino, a minor son and 10,500 shares
owned by Tiffany Pino, a minor daughter. Mr. Pino is custodian for his minor
children.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
Bedrock Asset Trust I........ 385,150 8,880
(Street)
(City, State, Zip)
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF EXERCISE OF
NUMBER OF SHARES OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------- --------------
<S> <C> <C> <C>
GE Fund..................... 18,000 3,000,000
c/o General Electric Com- (reflecting
pany convertibility of
3135 Easton Turnpike Series D Stock)
Fairfield, CT 06431
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
The Northwestern Mutual Life
Insurance Company............ 1,988,200 41,683
720 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
Meridian Trust Company as Vot-
ing Trustee under
agreement dated 12/29/88..... 933,435
600 Penn Street
Reading, PA 19602
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
CIG & Co. ................... 485,000 11,200
(Street)
(City, State, Zip)
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
The Travelers Insurance Compa-
ny........................... 431,385 10,986
One Tower Square
Hartford, CT 06138-2030
Attn: A. William Carnduff
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
The Travelers Indemnity Compa-
ny........................... 372,123 9,501
One Tower Square
Hartford, CT 06138-2030
Attn: A. William Carnduff
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
The Travelers Life and Annuity
Company...................... 195,620 4,884
One Tower Square
Hartford, CT 06138-2030
Attn: A. William Carnduff
</TABLE>
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
SUBJECT SHARES
PURSUANT TO
NUMBER OF SHARES EXERCISE OF
NUMBER OF OF COMPANY COMPANY STOCK
NAME AND ADDRESS OF SHARES OF COMMON STOCK OPTIONS AND
STOCKHOLDER SERIES D STOCK BENEFICIALLY OWNED WARRANTS
- ------------------- -------------- ------------------ --------------
<S> <C> <C> <C>
The Lincoln National Life In-
surance Company............. 537,285 12,686
200 E. Berry Street (2R-02)
Fort Wayne, IN 46802
</TABLE>
<PAGE>
ANNEX C
SALOMON BROTHERS INC OPINION
<PAGE>
November 10, 1997
Board of Directors
Alliance Imaging, Inc.
1065 Pacific Center Drive
Suite 200
Anaheim, CA 92806
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of shares of common stock, par
value $.01 per share ("Company Common Stock"), of Alliance Imaging, Inc. (the
"Company") of the consideration to be received and retained by such
stockholders in connection with the proposed merger of the Company with
Newport Acquisition Corp. ("Newco"), a new corporation to be incorporated and
wholly owned by Newport Investment LLC ("Investor"), pursuant to the Agreement
and Plan of Merger (the "Agreement"), dated as of July 23, 1997, between
Investor and the Company, as amended through the date hereof.
As more specifically set forth in the Agreement, and subject to the terms
and conditions thereof, Newco will merge with and into the Company (the
"Proposed Merger"), and all but 411,358 of the outstanding shares of Company
Common Stock (other than shares held by Investor, Newco or any of their
subsidiaries, shares held in treasury of the Company, or shares as to which
appraisal rights have been properly exercised under applicable law) will be
converted in the Proposed Merger into the right to receive $11.00 per Share in
cash and the remaining 411,358 outstanding Shares will remain outstanding as
stock of the Company upon consummation of the Proposed Merger ("Surviving
Common Stock") and will represent approximately 10.2% of the Surviving Common
Stock. Prior to the consummation of the Proposed Merger all shares of
convertible preferred stock of the Company will be redeemed or converted into
Company Common Stock, in which case such shares will be converted in the
Proposed Merger as set forth in the preceding sentence, and all options and
warrants of the Company shall be cashed out for, or converted into the right
to receive, an amount equal to the net value of $11.00 per share less the
exercise price of such option or warrant. The actual consideration received
and retained by each individual holder of Company Common Stock will depend on
whether such holder elects, and whether other holders elect, to retain Shares
and the application of pro rationing provisions contained in the Agreement. As
part of the Proposed Merger, the shares of capital stock of Newco will be
converted into an aggregate of 3,632,222 shares of Surviving Common Stock,
representing the approximately 89.8% of the remaining outstanding shares of
Surviving Common Stock.
As you are aware, Salomon Brothers Inc has acted as financial advisor to the
Company in connection with the Proposed Merger and will receive a fee for our
services, a substantial portion of which is contingent upon consummation of
the Proposed Merger. In addition, as you are aware Salomon Brothers Inc may
propose to participate as syndication agent and as a member of the syndicate
providing senior debt financing, and to participate as co-manager in the
offering of high yield debt financing, to fund the cash payments to be made in
the Proposed Merger. Additionally, Salomon Brothers Inc has previously
rendered certain investment banking and financial advisory services to the
Company and certain affiliates of Investor, for which we have received
customary compensation. In addition, in the ordinary course of business, we
may actively trade the debt and equity securities of the Company for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
In connection with rendering our opinion we have reviewed and analyzed, and
relied solely upon, the following: (i) the Agreement, including the amendments
thereto; (ii) certain publicly available information concerning the Company,
including the Annual Reports on Form 10-K of the Company for each of the years
in the three year period ended December 31, 1996 and the Quarterly Report on
Form 10-Q of the Company for the quarter ended September 30, 1997; (iii)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company furnished
to us by the Company for purposes of our analysis; (iv) certain publicly
available information concerning the trading of, and the trading market for,
C-1
<PAGE>
the Company Common Stock; (v) certain publicly available information with
respect to certain other companies that we believe to be comparable to the
Company and the trading markets for certain of such other companies'
securities; and (vi) certain publicly available information concerning the
nature and terms of certain other transactions that we consider relevant to
our inquiry. We have also considered such other information, financial
studies, analyses, investigations and financial, economic and market criteria
that we deemed relevant. We have also discussed the foregoing, as well as
other matters we believe relevant to our inquiry, with the management of the
Company and officers of Investor.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and
other information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties or facilities of the Company, nor have we made or obtained or
assumed any responsibility for making or obtaining any independent evaluations
or appraisals of any of such properties or facilities. With respect to
projections, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Company and officers of the Investor as to the future
financial performance of the Company and we express no view with respect to
such projections or the assumptions on which they were based. We have assumed
that the definitive Agreement will not, when executed, contain any terms or
conditions that differ materially from the terms and conditions contained in
the draft of such document we have reviewed, the conditions precedent to the
Proposed Merger contained in the Agreement will be satisfied and the Proposed
Merger will be consummated in accordance with the terms of the Agreement.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following:
(i) the historical and current financial position and results of operations of
the Company; (ii) the business prospects of the Company; (iii) the historical
and current market for the Company Common Stock and for the equity securities
of certain other companies that we believe to be comparable to the Company;
and (iv) the nature and terms of certain other acquisition transactions that
we believe to be relevant. We have also taken into account our assessment of
general economic, market and financial conditions as well as our experience in
connection with similar transactions and securities valuation generally. We
have also considered the process that resulted in the negotiation of the
Agreement, including discussions with other potential acquirors. Our opinion
necessarily is based upon conditions as they exist and can be evaluated on the
date hereof and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof. Our
opinion as expressed below does not constitute an opinion or imply any
conclusion as to the likely trading range for the Surviving Common Stock
following consummation of the Proposed Merger. Our opinion is, in any event,
limited to the fairness, from a financial point of view, of the consideration
to be received and retained by the holders of Company Common Stock in the
Proposed Merger and does not address the Company's underlying business
decision to effect the Proposed Merger or constitute a recommendation to any
holder of Company Common Stock as to how such holder should vote with respect
to the Proposed Merger, or what election such holder should make with respect
to the retention of such holder's shares of Company Common Stock.
This opinion is intended solely for the benefit and use of the Company
(including its management and directors) in considering the transaction to
which it relates and may not be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose, without the prior written consent of Salomon Brothers Inc.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that the consideration to be received and retained by holders of
Company Common Stock in the Proposed Merger is fair, from a financial point of
view, to such stockholders.
Very truly yours,
SALOMON BROTHERS INC
C-2
<PAGE>
ANNEX D
APPRAISAL RIGHTS
<PAGE>
ANNEX D
(S) 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the work "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the word
"stock" and "share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal fights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by me terms or an agreement of merger or consolidation pursuant to (S)(S)
251,252, 254, 257, 258, 263 or 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all
D-1
<PAGE>
or substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal fights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise
D-2
<PAGE>
entitled to appraisal right, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mall to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and in the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Courts decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
D-3
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation, Bylaws and
indemnification agreements with the Company's officers and directors provide
for indemnification to the fullest extent permitted by the laws of the State
of Delaware against and with respect to threatened, pending or completed
actions, suits or proceedings arising from or alleged to arise from, a party's
actions or omissions as a director, officer, employee or agent of the Company
or of any other corporation, partnership, joint venture, trust or other
enterprise serving in such capacity at the request of the Company if such acts
or omissions occurred or were or are alleged to have occurred, while said
party was a director or officer of the Company; provided, however, the Company
shall not indemnify any director or officer in an action against the Company
unless the Company shall have consented to such action. Generally, under
Delaware law, indemnification will only be available where an officer or
director can establish that he/she acted in good faith and in a manner which
was reasonably believed to be in or not opposed to the best interests of the
Company.
Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made a party to an action by reason of
the fact that such person was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation against expenses
actually incurred by such person in connection with such action if such person
acted in good faith and in a manner such person reasonably believed to be in,
or not opposed to, the best interest of the corporation with respect to any
criminal action, and had no reasonable cause to believe his conduct was
unlawful. Delaware Law does not permit a corporation to eliminate a director's
duty of care, and the provisions of the Company's Amended and Restated
Certificate of Incorporation have no effect on the availability of equitable
remedies such as injunction or rescission, based upon a director's breach of
the duty of care. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions and agreements, the Company
has been informed that in the opinion of the Staff of the Securities and
Exchange Commission such indemnification is against policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION
----------- ---- -------------------
<C> <C> <S>
2.1 (13) Agreement and Plan of Merger dated as of July 23, 1997 between Alliance
and Newport Investment LLC (the "Recapitalization Merger Agreement").
2.2 (13) Amendment No. 1 dated as of August 13, 1997 to the Recapitalization Merger
Agreement.
2.3 (13) Amendment No. 2 dated as of October 13, 1997 to the Recapitalization
Merger Agreement.
2.4 (13) Amendment No. 3 dated as of November 10, 1997 to the Recapitalization
Merger Agreement.
2.5 (14) Guaranty Letter dated July 22, 1997, from AIF III to Alliance.
3.1 (8) Restated Certificate of Incorporation of Alliance.
3.2 (14) Amendment to Restated Certificate of Incorporation of Alliance.
3.3 (12) Form of Amended and Restated Certificate of Incorporation of Alliance.
3.4 (14) Form of By-Laws of Alliance, as amended.
4.1 (14) Commitment Letter from Bankers Trust Company, dated November 10, 1997.
5 (11) Opinion of Irell & Manella LLP re: Legality of Retained Shares.
8 (11) Opinion of Irell & Manella LLP re: Certain Tax Matters.
9.1 (1) Amended and Restated Voting Trust Agreement between Donaldson, Lufkin &
Jenrette Capital Corporation and Meridian Trust Company dated December 29,
1988.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION
- ----------- ---- -------------------
<S> <C> <C>
10.1 (10) Stockholder Agreement dated as of July 23, 1997 among Newport Investment
LLC and the stockholders of Alliance party thereto.
10.2 (4) Registration Rights Agreement dated as of December 31, 1994 among the
Registrant, the Senior Noteholders and the Senior Subordinated
Debentureholders.
10.3 (7) Amended and Restated 1991 Stock Option Plan of Alliance, including forms
of agreement used thereunder.
10.4 (1) Form of Indemnification Agreement between Alliance and its directors
and/or officers.
10.5 (2) Georgia Magnetic Imaging Center, Ltd. Limited Partnership Agreement dated
as of March 22, 1985.
10.6 (2) Amendment to Georgia Magnetic Imaging Center, Ltd., Limited Partnership
Agreement, dated as of July 1, 1993.
10.7 (3) Employment Agreement dated as of September 9, 1993 between Alliance and
Terry A. Andrues.
10.8 (3) Employment Agreement dated as of September 9, 1993 between Alliance and
Jay A. Mericle.
10.9 (9) Amended and Restated Employment Agreement dated as of May 15, 1997 between
Alliance and Terrence M. White.
10.10 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Neil M.
Cullinan.
10.11 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Cheryl
A. Ford.
10.12 (5) Employment Agreement dated July 7, 1995 between Alliance and Michael W.
Grismer.
10.13 (14) Employment Agreement dated as of July 23, 1997 between Alliance and
Richard N. Zehner.
10.14 (14) Employment Agreement dated as of July 23, 1997 between Alliance and
Vincent S. Pino.
10.15 (14) Agreement Not to Compete dated as of July 23, 1997 among Newport
Investment LLC, Alliance, Richard N. Zehner and Vincent S. Pino.
10.16 (9) Amended and Restated Long-Term Executive Incentive Plan dated as of July
22, 1997.
10.17 (6) Agreement and Plan of Merger, dated as of April 16, 1996, among Alliance,
Alliance Imaging of Pennsylvania, Inc. and Royal Medical Health Services
Inc.
10.18 (6) Acquisition Agreement, among Alliance, A&M Trucking Inc. and each of Mark
J. Graham and Albert F. Calfo, II, dated April 16, 1996.
10.19 (8) Stock Purchase Agreement, dated as of March 25, 1997, between Alliance and
General Electric Company.
10.20 (14) Form of Registration Rights Agreement dated as of November , 1997,
between Alliance and the Investor.
10.21 (15) Acquisition Agreement dated as of October 17, 1997 among Medical
Consultants Imaging Corp., Bondcat Corp., Chip-Cat Corp., Medical
Consultants Scanning Systems,
Inc., Alliance Imaging of Ohio, Inc., Alliance Imaging of Michigan, Inc.,
and Alliance Imaging, Inc.
11 (14) Statement of Computation of Per Share Earnings.
12.1 (11) Ratio of Earnings to Fixed Charges.
21.1 (14) List of Subsidiaries.
23.1 (11) Consent of Ernst & Young LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION
----------- ---- -------------------
<S> <C> <C>
23.3 Consent of Irell & Manella LLP re: Legality of Retained Shares (included
in Exhibit 5).
23.3.1 Consent of Irell & Manella LLP re: Certain Tax Matters (included in
Exhibit 8).
23.4 (14) Consent of Industry Consultant.
23.5 (14) Consent of Salomon Brothers Inc.
24.1 (14) Power of Attorney.
27.1 (14) Financial Data Schedule.
99.1 (14) Election Form.
99.2 (14) Proxy Card.
99.3 (13) Opinion of Salomon Brothers Inc.
</TABLE>
- --------
(1) Incorporated by reference herein to the indicated exhibits filed in
response to Item 16, "Exhibits" of Alliance's Registration Statement on
Form S-1, No. 33-40805, initially filed on May 24, 1991.
(2) Incorporated by reference herein to the indicated exhibits filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
(3) Incorporated by reference herein to the indicated exhibit filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.
(4) Incorporated by reference herein to Exhibit 4.5 filed in response to Item
7, "Exhibits" of Alliance's Form 8-K Current Report dated January 25,
1995.
(5) Incorporated by reference herein to Exhibit 10.36 filed in response to
Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(6) Incorporated by reference herein to the indicated Exhibit filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(7) Incorporated by reference herein to Exhibits filed with Alliance's
Registration Statement on Form S-1, No. 33-40805, initially filed on May
24, 1991 and Alliance's definitive Proxy Statement with respect to its
Annual Meeting of Shareholders held May 16, 1996.
(8) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of Alliance's Annual Report on Form 10-K for
the year ending December 31, 1996.
(9) Incorporated by reference to indicated exhibits filed in response to Item
6, "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
(10) Incorporated by reference herein to the indicated exhibits filed in
response to Item 5, "Exhibits" of Alliance's Form 8-K Current Report
dated August 1, 1997.
(11) Filed herewith.
(12) To be filed by amendment.
(13) Annexed to this Registration Statement.
(14) Previously filed.
(15) Incorporated by reference herein to Exhibit 10.48 filed in response to
Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(b) Financial Statement Schedules
Report of Independent Auditors on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS.
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
Securities Act of 1933;
II-3
<PAGE>
(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 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) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or nay
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, 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.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than 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
Securities Act and will be governed by the final adjudication of such issue.
(5) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the 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.
(6) 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.
(7) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(8) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information
II-4
<PAGE>
required to be presented by Article 3 of Regulation S-X is not set forth in
the prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(9) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(10) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (6) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, 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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANAHEIM
STATE OF CALIFORNIA, ON THIS 21ST DAY OF NOVEMBER, 1997.
ALLIANCE IMAGING, INC.
/s/ Terrence M. White
By: _________________________________
Name: Terrence M. White
Title: Senior Vice President,
Chief Financial
Officer and Secretary
II-6
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 4 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS 21ST DAY OF NOVEMBER, 1997,
BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
* Chairman of the Board of Directors,
_____________________________________ President and Chief Executive
RICHARD N. ZEHNER Officer (Principal Executive
Officer)
* Executive Vice President, Chief
_____________________________________ Operating Officer and Director
VINCENT S. PINO
/s/ Terrence M. White Senior Vice President, Chief
_____________________________________ Financial Officer and Secretary
TERRENCE M. WHITE (Principal Financial Officer)
* Controller (Principal Accounting
_____________________________________ Officer)
MICHAEL W. GRISMER
* Director
_____________________________________
JAMES E. BUNCHER
* Director
_____________________________________
DOUGLAS M. HAYES
Director
_____________________________________
ROBERT B. WALEY-COHEN
* Director
_____________________________________
JOHN C. WALLACE
/s/ Terrence M. White
_____________________________________
*BY: TERRENCE M. WHITE, ATTORNEY-
IN-FACT
II-7
<PAGE>
INDEPENDENT AUDITORS REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Alliance Imaging, Inc.
We have audited the consolidated financial statements of Alliance Imaging,
Inc. as of December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 21, 1997, except for Note 4, as to which the date is March 26, 1997,
and Note 9, as to which the date is July 23, 1997 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(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 audits.
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
February 21, 1997, except for Note 4, as to
which the date is March 26, 1997, and Note 9,
as to which the date is November 21, 1997
S-1
<PAGE>
ALLIANCE IMAGING, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE DEDUCTIONS BALANCE
AT ADDITIONS (BAD DEBT AT END
BEGINNING CHARGED TO WRITE- OF
OF PERIOD EXPENSE OFFS) PERIOD
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for Doubtful Accounts....... $360,000 $609,000 $(581,000) $388,000
======== ======== ========= ========
Year ended December 31, 1995
Allowance for Doubtful Accounts....... $388,000 $ -- $ (21,000) $367,000
======== ======== ========= ========
Year ended December 31, 1996
Allowance for Doubtful Accounts....... $367,000 $567,000 $(421,000) $513,000
======== ======== ========= ========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION
----------- ---- -------------------
<C> <C> <S>
2.1 (13) Agreement and Plan of Merger dated as of July 23, 1997 between Alliance
and Newport Investment LLC (the "Recapitalization Merger Agreement").
2.2 (13) Amendment No. 1 dated as of August 13, 1997 to the Recapitalization Merger
Agreement.
2.3 (13) Amendment No. 2 dated as of October 13, 1997 to the Recapitalization
Merger Agreement.
2.4 (13) Amendment No. 3 dated as of November 10, 1997 to the Recapitalization
Merger Agreement.
2.5 (14) Guaranty Letter dated July 22, 1997, from AJF III to Alliance.
3.1 (8) Restated Certificate of Incorporation of Alliance.
3.2 (14) Amendment to Restated Certificate of Incorporation of Alliance.
3.3 (12) Form of Amended and Restated Certificate of Incorporation of Alliance.
3.4 (14) Form of By-Laws of Alliance, as amended.
4.1 (14) Commitment Letter from Bankers Trust Company, dated November 10, 1997.
5 (11) Opinion of Irell & Manella LLP re: Legality of Retained Shares.
8 (11) Opinion of Irell & Manella LLP re: Certain Tax Matters.
9.1 (1) Amended and Restated Voting Trust Agreement between Donaldson, Lufkin &
Jenrette Capital Corporation and Meridian Trust Company dated December 29,
1988.
10.1 (10) Stockholder Agreement dated as of July 23, 1997 among Newport Investment
LLC and the stockholders of Alliance party thereto.
10.2 (4) Registration Rights Agreement dated as of December 31, 1994 among the
Registrant, the Senior Noteholders and the Senior Subordinated
Debentureholders.
10.3 (7) Amended and Restated 1991 Stock Option Plan of Alliance, including forms
of agreement used thereunder.
10.4 (1) Form of Indemnification Agreement between Alliance and its directors
and/or officers.
10.5 (2) Georgia Magnetic Imaging Center, Ltd. Limited Partnership Agreement dated
as of March 22, 1985.
10.6 (2) Amendment to Georgia Magnetic Imaging Center, Ltd., Limited Partnership
Agreement, dated as of July 1, 1993.
10.7 (3) Employment Agreement dated as of September 9, 1993 between Alliance and
Terry A. Andrues.
10.8 (3) Employment Agreement dated as of September 9, 1993 between Alliance and
Jay A. Mericle.
10.9 (9) Amended and Restated Employment Agreement dated as of May 15, 1997 between
Alliance and Terrence M. White.
10.10 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Neil M.
Cullinan.
10.11 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Cheryl
A. Ford.
10.12 (5) Employment Agreement dated July 7, 1995 between Alliance and Michael W.
Grismer.
10.13 (14) Employment Agreement dated as of July 23, 1997 between Alliance and
Richard N. Zehner.
10.14 (14) Employment Agreement dated as of July 23, 1997 between Alliance and
Vincent S. Pino.
10.15 (14) Agreement Not to Compete dated as of July 23, 1997 among Newport
Investment LLC, Alliance, Richard N. Zehner and Vincent S. Pino.
10.16 (9) Amended and Restated Long-Term Executive Incentive Plan dated as of July
22, 1997.
10.17 (6) Agreement and Plan of Merger, dated as of April 16, 1996, among Alliance,
Alliance Imaging of Pennsylvania, Inc. and Royal Medical Health Services
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION
----------- ---- -------------------
<S> <C> <C>
10.18 (6) Acquisition Agreement, among Alliance, A&M Trucking Inc. and each of Mark
J. Graham and Albert F. Calfo, II, dated April 16, 1996.
10.19 (8) Stock Purchase Agreement, dated as of March 25, 1997, between Alliance and
General Electric Company.
10.20 (14) Form of Registration Rights Agreement dated as of November , 1997,
between Alliance and the Investor.
10.21 (15) Acquisition Agreement dated as of October 17, 1997 among Medical
Consultants Imaging Corp., Bondcat Corp., Chip-Cat Corp., Medical
Consultants Scanning Systems,
Inc., Alliance Imaging of Ohio, Inc., Alliance Imaging of Michigan, Inc.,
and Alliance Imaging, Inc.
11 (14) Statement of Computation of Per Share Earnings.
12.1 (11) Ratio of Earnings to Fixed Charges.
21.1 (14) List of Subsidiaries.
23.1 (11) Consent of Ernst & Young LLP.
23.3 Consent of Irell & Manella LLP re: Legality of Retained Shares (included
in Exhibit 5).
23.3.1 Consent of Irell & Manella LLP re: Certain Tax Matters (included in
Exhibit 8).
23.4 (14) Consent of Industry Consultant.
23.5 (14) Consent of Salomon Brothers Inc.
24.1 (14) Power of Attorney.
27.1 (14) Financial Data Schedule.
99.1 (14) Election Form.
99.2 (14) Proxy Card.
99.3 (13) Opinion of Salomon Brothers Inc.
</TABLE>
- --------
(1) Incorporated by reference herein to the indicated exhibits filed in
response to Item 16, "Exhibits" of Alliance's Registration Statement on
Form S-1, No. 33-40805, initially filed on May 24, 1991.
(2) Incorporated by reference herein to the indicated exhibits filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
(3) Incorporated by reference herein to the indicated exhibit filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.
(4) Incorporated by reference herein to Exhibit 4.5 filed in response to Item
7, "Exhibits" of Alliance's Form 8-K Current Report dated January 25,
1995.
(5) Incorporated by reference herein to Exhibit 10.36 filed in response to
Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(6) Incorporated by reference herein to the indicated Exhibit filed in
response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(7) Incorporated by reference herein to Exhibits filed with Alliance's
Registration Statement on Form S-1, No. 33-40805, initially filed on May
24, 1991 and Alliance's definitive Proxy Statement with respect to its
Annual Meeting of Shareholders held May 16, 1996.
(8) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of Alliance's Annual Report on Form 10-K for
the year ending December 31, 1996.
(9) Incorporated by reference to indicated exhibits filed in response to Item
6, "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
(10) Incorporated by reference herein to the indicated exhibits filed in
response to Item 5, "Exhibits" of Alliance's Form 8-K Current Report
dated August 1, 1997.
(11) Filed herewith.
(12) To be filed by amendment.
(13) Annexed to this Registration Statement.
(14) Previously filed.
(15) Incorporated by reference herein to Exhibit 10.48 filed in response to
Item 6(a), "Exhibits of Alliance's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF IRELL & MANELLA LLP]
November 25, 1997
Alliance Imaging, Inc.
1065 North PacifiCenter Drive, Suite 200
Anaheim, California 92806
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by you
with the Securities and Exchange Commission on November 25, 1997 (the
"Registration Statement"), in connection with the registration of 411,358
shares (the "Shares") of the Common Stock, $.01 par value, of Alliance
Imaging, Inc. (the "Company") to be retained by Company shareholders in
connection with the recapitalization merger described therein (the "Merger").
As your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken in connection with the retention of Shares in
connection with the Merger.
Based on these examinations, it is our opinion that upon completion of the
Merger, the Shares to be retained in the manner referred to in the
Registration Statement will be legally and validly issued, fully paid and non-
assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name, whenever appearing in
the Registration Statement, including the Proxy Statement/Prospectus
constituting a part thereof and any amendments thereto.
Sincerely yours,
/s/ Irell & Manella LLP
<PAGE>
Exhibit 8
[IRELL & MANELLA LLP LETTERHEAD]
November 25, 1997
Alliance Imaging, Inc.
1065 North PacifiCenter Drive
Suite 200
Anaheim, California 92806
Gentlemen:
We have acted as counsel for Alliance Imaging, Inc., a Delaware corporation
(the "Company"), in connection with the preparation, execution and delivery of
the Agreement and Plan of Merger, as amended to date (the "Merger Agreement"),
dated as of July 23, 1997, between Newport Investment LLC and the Company
(collectively, the "Parties"), and certain documents related or incidental
thereto and transactions to be effected thereunder. You have requested our
opinion concerning certain United States federal income tax ("U.S. federal
income tax") consequences of the transactions to be effected pursuant to the
Merger Agreement (the "Recapitalization"). Unless otherwise defined, capitalized
terms used herein have the meanings assigned to them in the Merger Agreement.
In connection with this opinion, we have reviewed such documents as we have
found necessary or appropriate, including the Proxy Statement/Prospectus
included in the Registration Statement of which this opinion is an exhibit, the
Merger Agreement, and related documents pertaining to the Merger. In expressing
our opinion, we are relying upon, and the opinion stated in this letter is
expressly based upon, the information and representations contained in the
documents provided to us by the Parties and the information and representations
provided in our discussions with representatives of the Parties. We assume that
the documents and information provided to us present an accurate and complete
description of all of the facts relevant to the Merger.
Based upon the foregoing, and assuming that the transactions contemplated
by the documents referred to above are consummated in accordance with their
terms and descriptions, we are of the opinion that, subject to all the
qualifications, limitations, the assumptions set forth herein, the material U.S.
federal income tax considerations generally applicable to the Recapitalization
are as set forth herein.
Our opinion does not address all aspects of U.S. federal income tax that
may be applicable to Alliance stockholders in light of their status or personal
investment circumstances including, without limitation, the alternative minimum
tax. In particular, it does not address the U.S. federal income tax consequences
of the Recapitalization that are applicable to
<PAGE>
Alliance's stockholders subject to special U.S. federal income tax treatment
including (without limitation) persons who are not United States citizens or
residents, foreign persons, insurance companies, tax-exempt entities, retirement
plans, dealers in securities, persons who acquired their Alliance Common Stock
pursuant to the exercise of employee stock options or otherwise as compensation
and persons who hold their Alliance Common Stock as part of a "straddle,"
"hedge" or "conversion transaction." Moreover, our opinion does not take into
account the particular facts and circumstances of each stockholder's tax status
and attributes. As a result, the U.S. federal income tax consequences addressed
in our opinion may not apply to each of Alliance's stockholders. Our opinion
addresses neither the effect of any applicable state, local or foreign tax laws,
nor the effect of any federal tax laws other than those pertaining to the U.S.
federal income tax. Accordingly, we recommend that each stockholder consult its
own tax advisors regarding the specific tax consequences of the
recapitalization, including the application and effect of federal, state, local
and foreign tax laws and the possible effects of changes in federal and other
tax laws.
Our opinion is based on certain customary assumptions regarding the factual
circumstances that will exist at the Recapitalization Effective Time. If any of
these factual assumptions is inaccurate, the U.S. federal income tax
consequences of the Recapitalization could differ from those described herein.
Our opinion assumes that shares of Alliance Common Stock are held as capital
assets (within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the "Code")) at the Recapitalization Effective Time.
Characterization of the Recapitalization for U.S. Federal Income Tax
--------------------------------------------------------------------
Purposes. For U.S. federal income tax purposes, Newco will be disregarded as a
- --------
transitory entity, and the merger of Newco with and into Alliance will be
treated as a sale of a portion of a stockholder's Alliance Common Stock to the
Investor in connection with the Recapitalization and as a redemption of a
portion of such stockholder's Alliance Common Stock by Alliance. The number of
shares of Alliance Common Stock disposed of by a stockholder pursuant to the
Recapitalization that will be treated as sold in the Recapitalization will be
equal to the total number of shares surrendered by the stockholder multiplied by
(a) the amount of cash contributed to Newco by the Investor in exchange for
Newco stock (or otherwise) prior to the Recapitalization Effective Time (and not
attributable to expenses) divided by (b) the aggregate amount of cash paid to
stockholders pursuant to the Recapitalization. The remainder of the
stockholder's shares of Alliance Common Stock disposed of in the
Recapitalization will be treated as redeemed by Alliance.
Stockholders Receiving Cash. As described more fully below, the U.S.
---------------------------
federal income tax consequences of the Recapitalization with respect to a
particular stockholder who
2
<PAGE>
receives cash (including cash paid to dissenters and cash paid in lieu of
fractional shares) will depend upon, among other things, (i) the extent to which
a stockholder is deemed to have sold its Alliance Common Stock in the
Recapitalization or is deemed to have had its shares of Alliance Stock redeemed
by Alliance and (ii) whether the deemed redemption of a holder's Alliance Common
Stock by Alliance will qualify as a sale or exchange under Section 302 of the
Code. First, to the extent that a stockholder is considered to have sold
Alliance Common Stock in the Recapitalization, such stockholder will recognize
either capital gain or loss in an amount equal to the difference between (x) the
number of shares treated as sold in the Recapitalization multiplied by $11.00
and (y) the stockholder's adjusted tax basis in such shares. Such gain or loss
generally will be mid-term capital gain or loss, currently taxable at a maximum
rate of 28% (for individuals), in respect of Alliance Common Stock held by the
stockholder for more than one year and long-term capital gain or loss, currently
taxable at a maximum rate of 20% (for individuals; which rate may be 10% for
individuals in lower tax brackets), in respect of Alliance Common Stock held by
the stockholder for more than 18 months. Second, a stockholder also will
recognize either capital gain or loss equal to the difference between (x) the
number of shares treated as redeemed by Alliance multiplied by $11.00 and (y)
the stockholder's adjusted tax basis in such Common Stock, if such redemption is
treated as a sale or exchange under Section 302 of the Code with respect to such
stockholder. Such gain or loss will also generally be mid-term or long-term
capital gain or loss in respect of Alliance Common Stock held by an individual
stockholder for more than one year or 18 months, respectively.
Under Section 302 of the Code, a redemption of Alliance Common Stock
pursuant to the Recapitalization will, as a general rule, be treated as a sale
or exchange if the redemption (a) results in a "complete termination" of the
stockholder's interest in Alliance, (b) is "substantially disproportionate" with
respect to the stockholder or (c) is "not essentially equivalent to a dividend"
with respect to the stockholder. In determining whether any of these Section
302 tests is satisfied, stockholders must take into account not only Alliance
Common Stock that they actually own, but also any Alliance Common Stock they are
"deemed" to own under the constructive ownership rules set forth in Section 318
of the Code. Pursuant to these constructive ownership rules, a stockholder will
be deemed to own stock that is actually or constructively owned by certain
members of his or her family (spouse, children, grandchildren and parents) and
other related parties including, for example, certain entities in which such
stockholder has a direct or indirect interest (including partnerships, estates,
trusts and corporations), as well as shares of stock that such stockholder (or a
related person) has the right to acquire upon exercise of an option or
conversion right. In addition, if a stockholder lives in a community property
state, the community property laws of that
3
<PAGE>
state may have an effect on the constructive ownership rules. Section 302(c)(2)
of the Code provides certain exceptions to the family attribution rules for the
purpose of determining a "complete termination." If a stockholder intends to
rely upon these exceptions, the stockholder must file a "waiver of family
attribution" statement with his tax return and must comply with certain other
requirements set forth in the Code and the Income Tax Regulations promulgated
thereunder (the "Regulations").
The redemption of a stockholder's shares of Alliance Common Stock will
result in a "complete termination" of a stockholder's interest in Alliance if
either (a) all Alliance Common Stock actually and constructively owned by the
stockholder is redeemed or sold pursuant to the Recapitalization or (b) all of
the Alliance Common Stock actually owned by the stockholder is redeemed or sold
pursuant to the Recapitalization and the stockholder is eligible to waive, and
does effectively waive in accordance with Section 302(c) of the Code,
attribution of all Alliance Common Stock which otherwise would be considered to
be constructively owned by such stockholder. Such waiver of attribution applies
only to Alliance Common Stock that would be attributed to a stockholder from
members of such stockholder's family.
The redemption of a stockholder's Alliance Common Stock will be
"substantially disproportionate" with respect to such stockholder if the
percentage of Alliance Common Stock actually and constructively owned by such
stockholder immediately following the Recapitalization is less than 80% of the
percentage of Alliance Common Stock actually and constructively owned by such
stockholder immediately prior to the Recapitalization and is less than 50% of
the total Alliance Common Stock outstanding after the Recapitalization. Waiver
of family attribution is not available in applying the "substantially
disproportionate" test.
Even if the redemption of a stockholder's Alliance Common Stock fails to
satisfy the "complete termination" test and the "substantially disproportionate"
test described above, the redemption of a stockholder's Alliance Common Stock
may nevertheless satisfy the "not essentially equivalent to a dividend" test if
the stockholder's redemption of Alliance Common Stock pursuant to the
Recapitalization results in a "meaningful reduction" in such stockholder's
proportionate Alliance Common Stock interest in Alliance. Whether the receipt
of cash by a stockholder will be considered "not essentially equivalent to a
dividend" will depend upon such stockholder's particular facts and
circumstances. No general guidelines indicating the facts and circumstances
under which a redemption will be considered to produce a meaningful reduction in
proportionate interest have been provided by the courts or issued by the
Internal Revenue Service (the "Service"). However, the Service has clearly
stated its position that if no reduction in percentage interest occurs,
4
<PAGE>
none of the Section 302 tests will be satisfied. Waiver of family attribution is
not available in the context of the "not essentially equivalent to a dividend"
test.
In assessing whether the redemption of a stockholder's shares of Alliance
Common Stock satisfies the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test described above, it should be
emphasized that the Recapitalization will substantially reduce the number of
outstanding shares of Alliance Common Stock. As a result, if a stockholder
elects to retain a portion of its Alliance Common Stock, the stockholder's
percentage interest in Alliance Common Stock of Alliance may not be reduced even
if the stockholder receives cash for a substantial portion of its Alliance
Common Stock.
With respect to shares of Alliance Common Stock treated as redeemed, if a
stockholder cannot satisfy any of the three tests described above and to the
extent Alliance has sufficient current and/or accumulated earnings and profits,
such stockholder will be treated as having received a dividend which will be
includible in gross income (and treated as ordinary income) in an amount equal
to that portion of the cash received with respect to the deemed redemption of
the Alliance Common Stock. In addition, the stockholder's basis in such
Alliance Common Stock disposed of will not offset the amount of cash received,
but instead will be reallocated to shares of Alliance Common Stock still held by
such stockholder or, although the matter is not free from doubt, if no shares
are actually owned, reallocated to those shares constructively owned, under
certain circumstances. To the extent that a portion of the cash received with
respect to the deemed redemption of the shares of Alliance Common Stock exceeds
the current and/or accumulated earnings and profits of Alliance attributable to
the retained and (deemed) redeemed shares of Alliance Common Stock, such excess
will first be treated as a non-taxable return of capital to the extent of the
basis attributable to such retained and (deemed) redeemed shares and then as a
capital gain. Such capital gain will be short-term, mid-term or long-term
depending on the holding period for the retained shares. If a stockholder
acquired shares of Alliance Common Stock at different times and/or at different
prices, the application of the rules for basis reduction, gain recognition and
type of capital gain is unclear.
To the extent that one of the three tests described above is satisfied, a
stockholder will be treated as having sold its Alliance Common Stock, which will
generally give rise to mid-term or long-term capital gain or loss in respect of
Alliance Common Stock held by the individual stockholder for more than 12 or 18
months, respectively. While the marginal tax rates for dividends and capital
gains are the same for corporate stockholders, the current maximum U.S. federal
income tax rate on ordinary income and short-term capital gains of individuals
(39.6%) exceeds the maximum tax rate on mid-term capital gains
5
<PAGE>
(28%) and on long-term capital gains (20%). In addition, capital gain can
generally be offset by any capital loss that an individual stockholder may have
incurred, whereas capital loss of a corporation may not offset ordinary income,
and capital loss of an individual can only offset ordinary income to the extent
of $3,000 per year (subject to carryover).
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, such dividend income may be eligible for the 70% (or 80% if more than
20% of the vote and value of Alliance Common Stock is held by such corporate
stockholder) dividends-received deduction. The dividends-received deduction is
subject to certain limitations, and may not be available if the corporate
stockholder does not satisfy certain holding period requirements with respect to
Alliance Common Stock or if Alliance Common Stock is treated as "debt financed
portfolio Stock" within the meaning of Code Section 246A(c). Additionally, if a
dividends-received deduction is available, the dividend may be treated as an
"extraordinary dividend" under Section 1059(a) of the Code, in which case a
corporate stockholder's adjusted tax basis in Alliance Common Stock retained by
such stockholder would be reduced, but not below zero, by the amount of the
nontaxed portion of such dividend. Any amount of the nontaxed portion of the
dividend in excess of the corporate stockholder's adjusted tax basis generally
will be subject to taxation when the extraordinary dividend is received.
Stockholders Retaining Alliance Common Stock and Receiving No Cash. The
------------------------------------------------------------------
Recapitalization will have no U.S. federal income tax consequences for
stockholders who retain their Alliance Common Stock and receive no cash.
Accordingly, a stockholder will not recognize any gain or loss on any Alliance
Common Stock retained by such stockholder.
Stockholders Retaining a Portion of their Alliance Common Stock and
-------------------------------------------------------------------
Receiving Cash. To the extent that a stockholder elects to retain a portion of
- --------------
its Alliance Common Stock and exchange a portion of its Alliance Common Stock
for cash and does receive cash, or to the extent a stockholder receives cash in
exchange for some portion of its Alliance Common Stock as a result of proration,
the tax treatment of the stockholder's receipt of such cash will be the same as
set forth above under "Stockholders Receiving Cash."
Information Reporting and Backup Withholding. Alliance must report
--------------------------------------------
annually to the Service and to each stockholder the amount of dividends paid to
such stockholder and the backup withholding tax, if any, withheld with respect
to such dividends. Backup withholding is a withholding tax imposed at the rate
of 31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements. Payment of the
proceeds of a sale of Alliance Common Stock by or through a United States office
of a broker is subject to both backup
6
<PAGE>
withholding and information reporting unless the beneficial owner establishes an
exemption. Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against the holder's U.S. federal income tax
liability provided the required information is furnished to the Service.
In expressing our opinion, we mean that, if the Service were to assert a
position contrary to the conclusions described herein, the conclusions described
herein, if properly presented to a court, should prevail. The Service may take
positions contrary to the conclusions expressed herein, and there is a risk that
such positions of the Service might ultimately be sustained by the courts. Our
opinion is not binding on the Service or the courts, and should not be construed
as a guarantee of ultimate results.
We hereby consent to the use of the name of our firm under the caption
"Certain Tax Consequences of the Recapitalization" and "Legal Matters" in the
Registration Statement and the related Proxy Statement/Prospectus and consent to
the filing of this opinion as an exhibit to the Registration Statement.
In giving the above consents, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission promulgated
thereunder.
The opinion set forth herein is based on our interpretation of the
applicable provisions of the Code, the Regulations and administrative and
judicial interpretations of the Code and the Regulations, all as currently in
effect. Any and all of these could change, and any such change could require a
conclusion or conclusions different from the opinion expressed herein. We do
not undertake to advise you as to any future changes in the Code, the
Regulations, or administrative or judicial interpretations of either that may
affect our opinion unless we are specifically retained to do so.
Very truly yours,
/s/ Irell & Manella LLP
7
<PAGE>
Exhibit 12.1
<TABLE>
<CAPTION>
Alliance Imaging, Inc.
Ratio of Earnings to Fixed Charges
(Dollars in thousands)
Years ended December 31, Nine months ended
---------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 9/30/96 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
income taxes and
extraordinary gains $ 1,819 $ (19,992) $ (17,966) $ 4,829 $ 7,561 $ 6,006 $ 10,231
Add:
Fixed charges 12,343 11,815 11,685 5,694 6,885 4,913 6,036
---------------------------------------------------------------------------------------------------------
Earnings $ 14,162 $ (8,177) $ (6,281) $ 10,523 $14,446 $ 10,919 $ 16,267
=========================================================================================================
Fixed charges:
Interest $ 10,846 $ 10,507 $ 10,758 $ 5,053 $ 5,758 $ 4,184 $ 5,315
Interest portion
of rent expense
(33%) 1,497 1,308 927 641 1,127 730 721
---------------------------------------------------------------------------------------------------------
Total fixed charges $ 12,343 $ 11,815 $ 11,685 $ 5,694 $ 6,885 $ 4,913 $ 6,036
=========================================================================================================
Ratio of earnings to fixed
charges (1) 1.2 - - 1.9 2.1 2.2 2.7
</TABLE>
<TABLE>
<CAPTION>
Proforma Combined
Year ended Nine months ended
--------------------------------------------
12/31/96 9/30/97
<S> <C> <C>
Income (loss) before income
taxes and extraordinary
gains $ (8,309) $ (675)
Add:
Fixed charges 21,263 15,823
--------------------------------------------
Earnings $ 12,954 $ 15,148
============================================
Fixed charges:
Interest $ 20,136 $ 15,102
Interest portion of
rent expense (33%) 1,127 721
--------------------------------------------
Total fixed charges $ 21,263 $ 15,823
============================================
Ratio of earnings to fixed
charges (1) - -
</TABLE>
(1) Earnings were insufficient to cover fixed charges by $19,992, $17,966,
$8,307 and $675 in the years ended December 31, 1993, 1994, 1996 (pro forma)
and nine months ended September 30, 1997 (pro forma), respectively.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Historical Financial Information," "Selected Historical Consolidated Financial
Information" and "Experts" and to which the use of our reports dated
February 21, 1997, except for Note 4, as to which the date is March 26, 1997,
and Note 9, as to which the date is November 21 1997, in the Registration
Statement (Form S-4 No. 333-33787) and related Prospectus of Alliance Imaging,
Inc. to be filed with the Securities and Exchange Commission on or about
November 21, 1997.
/S/ ERNST & YOUNG LLP
Orange County, California
November 21, 1997
