<PAGE>
PURSUANT TO RULE NO. 424(a)
REGISTRATION NO. 333-33817
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 26, 1997
PROSPECTUS
$165,000,000
ALLIANCE IMAGING, INC.
% SENIOR SUBORDINATED NOTES DUE 2005
----------
Alliance Imaging, Inc. ("Alliance" or the "Company") is offering $165,000,000
(the "Offering") aggregate principal amount of its % Senior Subordinated
Notes due 2005 (the "Notes"). The Offering is part of the financing that will
be used to consummate the recapitalization of Alliance (the
"Recapitalization"). The Recapitalization will be effected pursuant to an
Agreement and Plan of Merger (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 upon the completion of the Offering, with Alliance as the
surviving corporation. The consummation of the Offering, the Recapitalization
and the transactions contemplated thereby will be concurrent, and the Offering
is conditioned upon the other Transactions (as defined).
Interest on the Notes will be payable semi-annually on each and , commencing
, 1998, at the rate of % per annum. The Notes will be redeemable, in whole
or in part, at the option of the Company on or after , 2001 at the redemption
prices set forth herein plus accrued interest to the date of redemption. In
addition, on or prior to , 2000, the Company may, at its option, redeem up to
40% of the aggregate principal amount of the Notes with the net cash proceeds
of one or more Equity Offerings (as defined), at the redemption price set forth
herein plus accrued interest to the date of redemption; provided, however, that
after any such redemption, 60% of the aggregate principal amount of the Notes
issued must remain outstanding.
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all Senior Debt (as defined) of the
Company, including indebtedness under the Credit Agreement (as defined). The
Notes will be unconditionally guaranteed (the "Guarantees") on a senior
subordinated basis by substantially all of Alliance's domestic subsidiaries
(the "Guarantors"). The Guarantees will be general unsecured obligations of the
Guarantors and will be subordinated in right of payment to all Guarantor Senior
Debt (as defined) of the Guarantors. As of September 30, 1997, after giving pro
forma effect to the Transactions, the Company would have had approximately
$56.9 million of Senior Debt outstanding (excluding unused commitments of $75.0
million under the Credit Agreement).
Upon a Change of Control (as defined), each holder will have the right to
require the Company to repurchase such holder's Notes at a price equal to 101%
of their principal amount plus accrued interest to the date of repurchase.
There can be no assurance that the Company will have the financial ability or
will be permitted by the Credit Agreement to repurchase the Notes. See "Risk
Factors--Repurchase of Notes upon a Change of Control." In addition, the
Company will be obligated to offer to repurchase the Notes at 100% of their
principal amount plus accrued interest to the date of repurchase in the event
of certain asset sales.
There is no existing market for the Notes, and there can be no assurance as
to the liquidity of any markets that may develop for the Notes, the ability of
the holders of the Notes to sell their Notes or the price at which such holders
would be able to sell their Notes. The Company does not intend to apply for
listing of the Notes on any securities exchange. See "Risk Factors--Absence of
Public Market."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
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 COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) THE COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................. % % %
- --------------------------------------------------------------------------------
Total.................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of original issuance of the
Notes.
(2) The Company and the Guarantors have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Company estimated
at $ .
The Notes are offered, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters, and subject to various other conditions,
including the Underwriters' right to reject orders in whole or in part. It is
expected that delivery of the Notes will be made in book-entry form through the
facilities of The Depository Trust Company on or about , 1997.
JOINT BOOK-RUNNING MANAGERS
BT ALEX. BROWN SMITH BARNEY INC.
----------
SALOMON BROTHERS INC
The date of this Prospectus is , 1997
<PAGE>
[PHOTO]
Mobile MRI system in operation at hospital location
[PHOTO]
Technologist places patient in MRI tube for examination
[PHOTO]
MRI image of brain
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes being offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations promulgated by the Commission. Statements made in this Prospectus,
or in any document incorporated in this Prospectus by reference, as to the
contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or other document
filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description
of the matter involved, and each such statement is qualified in its entirety
by such reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium 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 may also be obtained at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
Such materials can also be inspected on the Internet at http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by the
Company with the Commission can be inspected and copied at the places, and in
the manner, set forth above.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so
long as the Notes remain outstanding, it will 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. Such financial information will
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed
with the Commission pursuant to the Exchange Act:
I Alliance's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
II Alliance's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and
III Alliance's Current Report on Form 8-K dated August 1, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
i
<PAGE>
THIS 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 AFTER THE MERGER AND SUCH FORWARD LOOKING
STATEMENTS IS INCLUDED IN THE SECTION HEREIN ENTITLED "RISK FACTORS".
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
ii
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
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 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 consummation of the Offering is conditioned upon, among other
things, the simultaneous consummation of the other Transactions.
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.
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 (as defined
herein) 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.
INDUSTRY OVERVIEW
The diagnostic imaging industry, which involves the use of non-surgical
techniques to generate representations of internal structures and organs on
film or video, generates annual revenues in excess of $50 billion in the United
States, or 5% to 6% of total health care spending. MRI services, which involve
the use of high strength magnetic fields to produce cross-sectional images of
the anatomy, constituted approximately $6 to $7 billion of the diagnostic
imaging industry in 1996. The approximately 4,000 MRI systems in the United
States include approximately 2,400 hospital owned systems, 1,000 independent
fixed site systems and 600 mobile systems.
MRI facilitates the early diagnosis of diseases and disorders, often
minimizing the cost and amount of care needed and frequently eliminating the
need for invasive diagnostic procedures. MRI is the preferred imaging modality
for the brain, the spine and soft tissue because it produces a superior image
and does not expose patients to ionizing radiation. As a result of the cost
efficiency and clinical effectiveness of MRI, hospitals and other health care
providers are facing competitive pressures to provide MRI technology and
related services despite budgetary limitations. Increasingly, such providers
are utilizing third parties such as the Company to provide the necessary
imaging systems and related services to avoid substantial equipment and
operating costs. Mobile MRI operators employ systems housed in specially
designed trailers and typically enter into long-term contracts to provide a
specified schedule 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 system utilization.
1
<PAGE>
The MRI services industry has experienced substantial growth in demand as
measured by total scan volumes, which 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. Growth in the MRI industry is attributable to increased
physician acceptance, 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.
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 total MRI systems in the United
States.
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 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.
2
<PAGE>
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 days sales outstanding
("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 Transactions 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.
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.
3
<PAGE>
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 new 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 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 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 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, 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.
4
<PAGE>
THE TRANSACTIONS
In connection with the completion of the Offering, Alliance intends to
consummate the Recapitalization pursuant to the Recapitalization Merger
Agreement. In connection with the Transactions, the Company expects to enter
into an agreement (the "Credit Agreement") providing for a $50 million term
loan facility (the "Term Loan Facility") and a $75 million revolving loan
facility (the "Revolving Loan Facility"), which will be available for the
Company's working capital requirements and to finance acquisitions.
In connection with the Transactions, Apollo will invest $37.3 million and BT
Capital Partners, an affiliate of BT Alex. Brown Incorporated (the "BT
Investor"), will invest $2.7 million of cash equity in the Company
(collectively, the "Equity Investment"). Immediately following consummation of
the Transactions, Apollo will own approximately 84% of the outstanding common
stock of the Company (approximately 74% on a fully diluted basis) and the BT
Investor will own approximately 6% of the outstanding common stock of the
Company (approximately 5% on a fully diluted basis). In addition, Apollo and
the BT Investor will purchase $14.1 million and $0.9 million, respectively, of
the Company's Series F Preferred Stock. As part of the Recapitalization, common
stock of Alliance with a value of approximately $4.5 million will be retained
by existing stockholders of the Company, representing approximately 10% of the
outstanding common stock of the Company. In addition, immediately following
consummation of the Transactions, through a combination of (i) the continuation
of existing options (having an option value of approximately $0.5 million) to
purchase common stock of Alliance and (ii) the issuance of options pursuant to
the Company's new option plan (the "New Option Plan"), management will own in
excess of 11% of the equity of the Company on a fully-diluted basis.
The Offering, the Recapitalization, the Equity Investment and the related
borrowings under the Credit Agreement are collectively referred to herein as
the "Transactions." The consummation of the Transactions will be concurrent,
and the Offering is conditioned upon the other Transactions. The approximate
sources and uses 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
Equity Investment(1).............................................. 40.0
------
Total Sources................................................... $270.0
======
USES 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 common stock of Alliance having a value of
approximately $0.5 million.
(2) Comprised of (a) payment for shares of common stock of Alliance
(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.
5
<PAGE>
THE OFFERING
Issuer...................... Alliance Imaging, Inc.
Securities Offered.......... $165,000,000 in aggregate principal amount of
% Senior Subordinated Notes due 2005.
Maturity Date............... , 2005.
Payment Dates............... Interest on the Notes will accrue from the date
of issuance and will be payable semiannually on
each and , commencing , 1998.
Ranking..................... The Notes will be general unsecured obligations
of the Company and will be subordinated in right
of payment to all Senior Debt of the Company,
including the indebtedness under the Credit
Agreement. The Guarantees will be general
unsecured obligations of the Guarantors and will
be subordinated in right of payment to all
Guarantor Senior Debt of the Guarantors. As of
September 30, 1997, after giving pro forma effect
to the Transactions, the Company would have had
approximately $56.9 million of Senior Debt
outstanding (excluding unused commitments of
$75.0 million under the Credit Agreement).
Guarantees.................. The Notes will be unconditionally guaranteed on a
senior subordinated basis by the Guarantors.
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Company, at any time
on or after , 2001, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time on or prior to ,
2000, the Company may redeem up to 40% of the
aggregate principal amount of the Notes with the
net proceeds of one or more Equity Offerings at
the redemption price set forth herein plus
accrued and unpaid interest, if any, to the date
of redemption; provided, however, that after any
such redemption 60% of the aggregate principal
amount of the Notes issued must remain
outstanding. See "Description of the Notes--
Redemption."
Change of Control........... Upon the occurrence of a Change of Control, the
Company will be required to offer to purchase all
outstanding Notes at a price in cash equal to
101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the
date of purchase. In the event of a Change of
Control, there can be no assurance that the
Company will have the financial resources or be
permitted under the terms of its other
indebtedness to repurchase the Notes. In
addition, the Credit Agreement will restrict the
Company's ability to repurchase the Notes,
including pursuant to a Change of Control Offer.
The occurrence of a default under the Indenture
(as defined) will also cause a default under the
Credit Agreement. See "Description of the Notes--
Change of Control."
6
<PAGE>
The indenture pursuant to which the Notes will be
Certain Covenants........... issued (the "Indenture") will contain certain
covenants that, among other things, limit the
ability of the Company and its Restricted
Subsidiaries (as defined) 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 Restricted Subsidiary to pay certain
dividends or make certain payments to the
Company. See "Description of the Notes--Certain
Covenants."
Offers to Purchase.......... In the event of certain asset sales, the Company
will be required to offer to repurchase the Notes
at a price equal to 100% of their principal
amount plus accrued interest to the date of
purchase. See "Description of the Notes--Certain
Covenants--Limitation on Asset Sales."
Use of Proceeds.............
The Company intends to use the net proceeds from
the Offering to partially fund the Transactions.
See "Use of Proceeds."
For more complete information regarding the Notes, including the definitions
of certain capitalized terms used above, see "Description of the Notes."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the information
set forth under the caption "Risk Factors," and all other information set forth
in this Prospectus, in evaluating an investment in the Notes.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary historical consolidated financial information 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
months and the 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 months and
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
summary historical consolidated financial information provided below should be
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this Prospectus. See "Index to Consolidated
Financial Statements."
<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)
<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
<CAPTION>
AS OF SEPTEMBER 30,
1997
---------------------
AS
ACTUAL ADJUSTED(2)
-------- -----------
<S> <C> <C> <C> <C> <C> <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)
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------- ---------------------
1994 1995 1996 1996 1997 1996 1997
-------- ------- ------- ------- ------- -------- -----------
<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 ex-
pense, 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)
8
<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.
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the
information set forth below as well as all other information set forth in this
Prospectus, in evaluating an investment in the Notes.
SUBSTANTIAL LEVERAGE
After giving effect to the Transactions, the Company's consolidated
indebtedness will be approximately $221.9 million. This high level of
indebtedness in comparison to historical indebtedness may reduce the
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 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 Transactions 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.
RESTRICTIVE DEBT COVENANTS
The Indenture will contain certain covenants that, among other things, limit
the ability of the Company and its Restricted 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, incur indebtedness that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the Notes, merge or consolidate
with any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all of or substantially all of the assets of the Company and impose
restrictions on the ability of a Restricted Subsidiary to pay certain
dividends or make certain payments to the Company. See "Description of the
Notes--Certain Covenants." In addition, 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
10
<PAGE>
ratio; (ii) a 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 "Description of the Credit Agreement."
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 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.
11
<PAGE>
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."
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.
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,
12
<PAGE>
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.
SUBORDINATION OF NOTES AND THE GUARANTEES
The Notes and the Guarantees will be unsecured and subordinated to the prior
payment in full of all Senior Debt of the Company and all Guarantor Senior
Debt of the Guarantors, respectively. As of September 30, 1997, on a pro forma
basis after giving effect to the Transactions, the aggregate outstanding
principal amount of all Senior Debt would have been approximately $56.9
million. In the event of a bankruptcy, liquidation or reorganization of the
Company, the assets of the Company or the Guarantors will be available to pay
obligations on the Notes only after all Senior Debt of the Company or all
Guarantor Senior Debt of the Guarantors, as the case may be, has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
any or all of the Notes. In addition, the Company may not pay principal or
premium, if any, or interest on the Notes if any Senior Debt is not paid when
due or any other default on any Senior Debt occurs and the maturity of such
Senior Debt is accelerated in accordance with its terms, unless, in either
case, such amount has been paid in full or the default has been cured or
waived and such acceleration has been rescinded. In addition, if any default
occurs with respect to certain Senior Debt and certain other conditions are
satisfied, the Company may not make any payments on the Notes for a designated
period of time. Finally, if any judicial proceeding is pending with respect to
any such default in payment on any Senior Debt or other default with respect
to certain Senior Debt, or if the maturity of the Notes is accelerated because
of a default under the Indenture and such default constitutes a default with
respect to any Senior Debt, the Company may not make any payment on the Notes.
See "Description of the Notes--Subordination."
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 Guarantees) 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.
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
13
<PAGE>
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.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Notes at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest,
if any, to the repurchase date. The Credit Agreement will prohibit the
repurchase of the Notes upon a Change of Control unless and until the
indebtedness under the Credit Agreement is repaid in full. There can be no
assurance that the Company will have sufficient funds available or will be
permitted by the Credit Agreement and any other indebtedness to repurchase the
Notes upon the occurrence of a Change of Control. The Change of Control
purchase feature of the Notes may in certain circumstances make more difficult
or discourage a takeover of the Company and, thus, the removal of incumbent
management. See "Description of the Notes--Change of Control."
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 employment agreements and an agreement not to compete with Alliance which
will become effective at the effective time of the Recapitalization. See
"Management--Employment and Related Agreements."
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.
CONTROL BY APOLLO; POTENTIAL CONFLICTS OF INTEREST
Upon consummation of the Transactions, Apollo will own approximately 84% of
the outstanding common stock of the Company (approximately 74% on a fully
diluted basis). Accordingly, Apollo and its general partner will control the
Company 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 the
Company's certificate of incorporation and approving mergers or sales of
substantially all of the Company'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.
ABSENCE OF PUBLIC MARKET
The Notes are a new issue of securities which have no established trading
market. It is expected that the Notes will be sold to a limited number of
investors. The Company has been advised by the Underwriters that they intend
to make a market in the Notes after the consummation of this Offering;
however, the Underwriters are not obligated to do so, and any such market-
making, if commenced, may be terminated at any time without notice. No
assurance can be given as to the liquidity of the trading market, if any, that
may develop for the Notes.
14
<PAGE>
THE TRANSACTIONS
In connection with the completion of the Offering, Alliance intends to
consummate the Recapitalization pursuant to the Recapitalization Merger
Agreement. In connection with the Transactions, the Company expects to enter
into the Credit Agreement providing for the $50 million Term Loan Facility and
the $75 million Revolving Loan Facility which will be available to provide for
the Company's working capital requirements and to finance acquisitions.
In connection with the Transactions, Apollo will invest $37.3 million and
the BT Investor will invest $2.7 million of cash equity in the Company.
Immediately following consummation of the Transactions, Apollo will own
approximately 84% of the outstanding common stock of the Company
(approximately 74% on a fully diluted basis) and the BT Investor will own
approximately 6% of the outstanding common stock of the Company (approximately
5% on a dully diluted basis). As part of the Recapitalization, common stock of
Alliance with a value of approximately $4.5 million will be retained by
existing stockholders of the Company, representing approximately 10% of the
outstanding common stock of the Company. In addition, immediately following
consummation of the Transactions, through a combination of (i) the
continuation of existing options (having an option value of approximately $0.5
million) to purchase common stock of Alliance and (ii) the issuance of options
pursuant to the Company's New Option Plan, management will own in excess of
11% of the equity of the Company on a fully-diluted basis.
Also in connection with the Transactions, Apollo and the BT Investor will
purchase $14.1 million and $0.9 million, respectively, of the Company's Series
F Preferred Stock. The Series F Preferred Stock has a dividend rate of 13.50%
per annum, payable quarterly in arrears, is redeemable at the option of the
Company at stated redemption premiums and matures in 2007. Dividends on the
Series F Preferred Stock are payable in kind for the first five years and
thereafter in cash, subject to compliance with the Company's then-existing
debt agreements. Apollo and the BT Investor will receive financing fees equal
to 4% of their respective investments in the Series F Preferred Stock.
A more detailed description of the Transactions is contained in Alliance's
registration statement on Form S-4 (File No. 333-33787). See "Available
Information."
15
<PAGE>
USE OF PROCEEDS
The net proceeds of the Company from the sale of the Notes are estimated to
be $160.0 million. The Company intends to use the net proceeds, together with
borrowings under the Credit Agreement, to fund the Transactions, to repay
certain outstanding indebtedness and to pay fees and expenses relating to the
Transactions. The indebtedness being repaid consists of approximately $76.2
million (comprising Alliance's senior notes and debt incurred to purchase
equipment) that bears interest at rates of 8.0% to 11.4% per annum and matures
from 1997 to 2002. See Note 4 of Notes to Alliance's Consolidated Financial
Statements.
The approximate sources and uses 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 USES 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
======
USES 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 common stock of Alliance having a value of
approximately $0.5 million.
(2) Comprised of (a) payment for shares of common stock of Alliance
(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.
16
<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 "Use of
Proceeds," "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 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 "Description of the 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.
17
<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 Prospectus. See "Index to Consolidated Financial Statements."
18
<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.
19
<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>
20
<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. 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%.
21
<PAGE>
ALLIANCE IMAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<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 fi-
nancing fees........................... (1,616)(f)
-------
Loss before extraordinary gain attribut-
able to Common Stock................... $(2,291)
=======
Ratio of earnings to fixed charges...... -- (g)
</TABLE>
See accompanying notes.
22
<PAGE>
ALLIANCE IMAGING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<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)
========
Ratio of earnings to fixed charges....... -- (g)
</TABLE>
See accompanying notes.
23
<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
Transactions. 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) 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.
24
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information 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
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 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
======== ======== ======== ======== ======== ======== ========
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)
25
<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.
26
<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
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
Transactions." 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 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.
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 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.
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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.
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
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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.
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
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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.
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 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 at the rate per annum set forth
on the cover page of this Prospectus, 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
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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%. 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
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own MRI systems rather than renewing a contract with a mobile provider. As of
September 30, 1997, the 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 Transactions 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.
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.
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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 for approximately eight years in a high
demand market 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
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changes will be delayed until January 1, 1999, with a three year transition
period for implementing the new 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.
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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 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.
43
<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.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth information concerning the individuals who
will be the executive officers and directors of the Company upon consummation
of the Transactions.
<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.
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.,
45
<PAGE>
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") and who will serve as executive officers of the Company
upon consummation of the Transactions.
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 Transactions.
<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.
46
<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.
NEW OPTION PLAN
After the consummation of the Recapitalization, the Company will adopt an
employee option plan pursuant to which options with respect to a total of
454,545 shares of Alliance common stock will be available for grant, and Mr.
Zehner and Mr. Pino will be granted options to purchase 145,000 and 130,000
shares of Alliance common stock, respectively. Fifty percent of the option
shares will vest in equal increments over four years. Fifty percent of the
option shares will vest after seven and one half years (subject to
acceleration if certain per share equity targets are achieved). Vesting of the
options occurs only during an employee's term of employment. The exercise
price for the options is $11.00 per share and the options will expire ten
years from the date of grant.
47
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options during 1996 to
Alliance's Named Executive Officers pursuant to Alliance's 1991 Stock Option
Plan. No stock appreciation rights have ever been granted to Alliance's Named
Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
PERCENTAGE OF ASSUMED ANNUAL RATE OF STOCK
NUMBER OF OPTIONS/SARS EXERCISE OR PRICE APPRECIATION FOR
SHARES GRANTED TO BASE RICE OPTION TERM(3)
UNDERLYING EMPLOYEES IN PER SHARE EXPIRATION ------------------------------
NAME OPTIONS/SARS(1) FISCAL YEAR ($/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.
(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
48
<PAGE>
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.
Pursuant to the terms of the LTIP, at the effective time of the
Recapitalization, Messrs. Zehner, Pino, White, Andrues and Mericle will be
paid $543,750, $435,000 and $326,250, $217,500 and $217,500, respectively
(before federal and state income taxes) earned by them pursuant to the LTIP
through the date of the Recapitalization.
EMPLOYMENT AND RELATED AGREEMENTS
Payments Under Existing Employment Agreements. Each of the Named Executive
Officers has an employment agreement with Alliance. The Recapitalization will
constitute a "change of control" for the purposes of such employment
agreements.
The employment agreements for Messrs. Andrues and Mericle 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 existing 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) 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. Prior to 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.
49
<PAGE>
Each 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, 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
Recapitalization pursuant to the existing employment agreements (prior to
federal and state income taxes) will be reduced to approximately $850,000,
$500,000 and $420,000, respectively.
New Employment Agreements for Messrs. Zehner and Pino. Alliance has entered
into employment agreements 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 "New Employment Agreements"). Base compensation under
the New 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 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). In connection with the New
Employment Agreements, Mr. Zehner and Mr. Pino are entitled to receive 145,000
and 130,000 options, respectively, under the New Stock Option Plan.
The term of each New Employment Agreement is initially three years. After
the first year, the New Employment 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.
Agreements Not to Compete. Mr. Zehner and Mr. Pino have also entered into an
agreement not to compete with Alliance. Pursuant to such agreement, Mr. Zehner
and Mr. Pino have each agreed that they will not, prior to the later of five
years following the Recapitalization 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 his
termination 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 of their respective terminations of employment or
the date of ceasing to receive payments under the agreements 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. In consideration of the
non-competition and non-solicitation agreements of Mr. Zehner and Mr. Pino,
Alliance has agreed to make certain payments to Mr. Zehner and Mr. Pino
following the termination of their employment. However, in the event of a
termination with cause or a resignation without good reason (as defined in the
New Employment Agreements), Alliance will be under no obligation to make such
payments.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
Immediately after the Transactions, Apollo will own approximately 84% of the
outstanding shares of common stock of the Company (the "Company Common Stock")
(approximately 74% on a fully diluted basis) and the BT Investor will own
approximately 6% of the outstanding shares of Company Common Stock
(approximately 5% on a fully diluted basis). In addition, immediately
following consummation of the Transactions, through a combination of (i) the
rollover of existing options to purchase shares of Company Common Stock and
(ii) the issuance of options pursuant to the Company's New Option Plan,
management will own in excess of 11% of the shares of Company Common Stock on
a fully diluted basis.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the effective time of the Recapitalization, 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 $14.1
million of the Company's Series F Preferred Stock and will receive a financing
fee of $564,000.
Pursuant to an engagement letter, Alliance will pay Salomon Brothers Inc
("Salomon") 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's
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
will be a lender under the Credit Agreement.
Smith Barney Inc. ("Smith Barney") acted as an advisor to an affiliate of
Apollo with respect to the Recapitalization of Alliance, for which Smith
Barney will receive a fee of $1.75 million.
The BT Investor, an affiliate of BT Alex. Brown Incorporated, will invest
approximately $2.7 million in the Company's Common Stock concurrently with the
consummation of the Transactions. Bankers Trust Company, also an affiliate of
BT Alex. Brown Incorporated, will be an agent and lender under the Credit
Agreement. In connection with the Transactions, the BT Investor will purchase
$0.9 million of the Company's Series F Preferred Stock and will receive a
financing fee of $36,000.
For a description of certain management arrangements in connection with the
Transactions, see "Management--Employment and Related Agreements."
52
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
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.
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 Transactions 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 with respect to the Term Loan Facility 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.
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<PAGE>
(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 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.
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DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture (the "Indenture"), to be dated
as of , 1997 by and among Alliance Imaging, Inc., the Guarantors and
, as Trustee (the "Trustee"). The following summary of certain provisions
of the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Trust Indenture Act of 1939, as
amended (the "TIA"), and to all of the provisions of the Indenture (a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part), including the definitions of certain terms therein and
those terms made a part of the Indenture by reference to the TIA as in effect
on the date of the Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "--Certain
Definitions." For purposes of this section, references to the "Company"
include only Alliance Imaging, Inc. and not its Subsidiaries.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
the Notes (the "Holders"). The Company will pay principal (and premium, if
any) on the Notes at the Trustee's corporate office in New York, New York. At
the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $265.0 million, of
which $165.0 million will be issued in the Offering, and will mature on ,
2005. Interest on the Notes will accrue at the rate of % per annum and will
be payable semiannually in cash on each and commencing on ,
1998, to the persons who are registered Holders at the close of business on
the and immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from and including the date of
issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after , 2001,
upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof)
if redeemed during the twelve-month period commencing on of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any,
to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... %
2002........................................................... %
2003........................................................... %
2004........................................................... 100.000%
</TABLE>
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to , 2000, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings (as defined below) to redeem up
to 40% in aggregate principal amount of the Notes at a redemption price equal
to % of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date
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of redemption; provided, however, that after any such redemption the aggregate
principal amount of the Notes outstanding must equal at least 60% of the
aggregate amount of the Notes issued in the Offering plus any additional Notes
issued after the Issue Date pursuant to the Indenture. In order to effect the
foregoing redemption with the net cash proceeds of any Equity Offering, the
Company shall make such redemption not more than 120 days after the
consummation of any such Equity Offering.
As used in the preceding paragraph, "Equity Offering" means a public or
private offering of Qualified Capital Stock (other than public offerings with
respect to the Company's Common Stock on Form S-8) of the Company for
aggregate net cash proceeds to the Company of at least $25.0 million.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which such Notes are listed or, if such Notes are not
then listed on a national securities exchange, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be
redeemed in part; provided, further, that if a partial redemption is made with
the net cash proceeds of an Equity Offering, selection of the Notes or
portions thereof for redemption shall be made by the Trustee only on a pro
rata basis or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly
provided for to the satisfaction of the holders of Senior Debt, before any
payment or distribution of any kind or character is made on account of any
Obligations on the Notes, or for the acquisition of any of the Notes for cash
or property or otherwise. If any default occurs and is continuing in the
payment when due, whether at maturity, upon any redemption, by declaration or
otherwise, of any principal of, interest on, unpaid drawings for letters of
credit issued in respect of, or regularly accruing fees with respect to, any
Senior Debt, no payment of any kind or character shall be made by or on behalf
of the Company or any other Person on its or their behalf with respect to any
Obligations on the Notes or to acquire any of the Notes for cash or property
or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default
have been cured or waived or have ceased to exist or the Trustee receives
notice from the Representative for the respective issue of Designated
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Senior Debt terminating the Blockage Period (as defined below), during the 180
days after the delivery of such Default Notice (the "Blockage Period"),
neither the Company nor any other Person on its behalf shall (x) make any
payment of any kind or character with respect to any Obligations on the Notes
or (y) acquire any of the Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 180 days from the date the payment on the Notes was due
and only one such Blockage Period may be commenced within any 360 consecutive
days. No event of default which existed or was continuing on the date of the
commencement of any Blockage Period with respect to the Designated Senior Debt
shall be, or be made, the basis for commencement of a second Blockage Period
by the Representative of such Designated Senior Debt whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days (it being
acknowledged that any subsequent action, or any breach of any financial
covenants for a period commencing after the date of commencement of such
Blockage Period that, in either case, would give rise to an event of default
pursuant to any provisions under which an event of default previously existed
or was continuing shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt,
including the Holders of the Notes, may recover less, ratably, than holders of
Senior Debt.
After giving effect to the Transactions, on a pro forma basis, at September
30, 1997, the Company would have had approximately $56.9 million of Senior
Debt outstanding.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally, to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal of and interest on the Notes. The
Guarantees will be subordinated to Guarantor Senior Debt on the same basis as
the Notes are subordinated to Senior Debt. The obligations of each Guarantor
are limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in
the obligations of such Guarantor under the Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in an amount pro rata,
based on the net assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of
the Company without limitation, or with other Persons upon the terms and
conditions set forth in the Indenture. See "Certain Covenants--Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Guarantor is sold by the Company and the sale complies with the provisions set
forth in "Certain Covenants--Limitation on Asset Sales," the Guarantor's
Guarantee will be released.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis. Accordingly, management has determined that separate
financial statements of each Guarantor would not provide any material
information to prospective purchasers of the Notes.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described
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below (the "Change of Control Offer"), at a purchase price equal to 101% of
the principal amount thereof plus accrued interest to the date of purchase.
The Indenture will provide that, prior to the mailing of the notice referred
to below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement
and all other such Senior Debt and to repay the Indebtedness owed to each
lender which has accepted such offer or (ii) obtain the requisite consents
under the Credit Agreement and all other Senior Debt to permit the repurchase
of the Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Notes pursuant to the provisions described below. The Company's
failure to comply with the covenant described in the immediately preceding
sentence shall constitute an Event of Default described in clause (iii) and
not in clause (ii) under "Events of Default" below.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to
a Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Restricted Subsidiaries by
the management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company. With respect to the disposition of property or assets,
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<PAGE>
the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law
under the Indenture) and is subject to judicial interpretation. Accordingly,
in certain circumstances, there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear whether a Change of Control has occurred and whether the Company is
required to make an offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible
for payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of the Guarantors may
incur Indebtedness (including, without limitation, Acquired Indebtedness) and
Restricted Subsidiaries of the Company may incur Acquired Indebtedness, in
each case if on the date of the incurrence of such Indebtedness, after giving
effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio
of the Company is greater than 1.75 to 1.0 if such incurrence is on or prior
to December 31, 1999 and 2.0 to 1.0 if such incurrence is thereafter.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock, (c) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire
or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company
that is subordinate or junior in right of payment to the Notes or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions
set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after
giving effect thereto, (i) a Default or an Event of Default shall have
occurred and be continuing or (ii) the Company is not able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant or (iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative
Consolidated Net Income (or if cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss) of the Company earned subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs (the "Reference
Date") (treating such period as a single accounting period); plus (x) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Capital Stock of
the Company; plus (y) without duplication of any amounts included in clause
(iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock; plus (z) without duplication, the sum of (1) the aggregate amount
returned in cash on or with respect to Investments (other than Permitted
Investments) made subsequent to the Issue Date whether through interest
payments, principal payments, dividends or other distributions or payments,
(2) the net cash proceeds received by the Company or any Restricted Subsidiary
of the Company from the disposition of all or any portion of such Investments
(other than to a Subsidiary of the Company) and (3) upon redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the fair market value of
such Subsidiary; provided, however, that the sum
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of clauses (1), (2) and (3) above shall not exceed the aggregate amount of all
such Investments made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of any shares
of Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no
Default or Event of Default shall have occurred and be continuing, repurchases
by the Company of Common Stock of the Company from employees of the Company or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees, in an amount not to
exceed $5.0 million in any calendar year or $15.0 million in the aggregate;
(5) so long as no Default or Event of Default shall have occurred or be
continuing, the declaration and payment of dividends to holders of any class
or series of Preferred Stock (other than Disqualified Capital Stock) issued
after the Issue Date, provided that after giving effect to such issuance on a
pro forma basis, the Company would have had a Consolidated Fixed Charge
Coverage Ratio of at least 1.75 to 1.00; (6) the payment of dividends on the
Company's Common Stock, following the first public offering of the Company's
Common Stock after the Issue Date, of up to 6% per annum of the net proceeds
received by the Company in such public offering, other than public offerings
with respect to the Company's Common Stock registered on Form S-8; (7) the
repurchase, retirement or other acquisition or retirement for value of equity
interests of the Company in existence on the Issue Date and from the persons
holding such equity interests on the Issue Date and which are not held by
Apollo or any of its Affiliates or members of management of the Company and
its Subsidiaries on the Issue Date (including any equity interests issued in
respect of such equity interests as a result of a stock split,
recapitalization, merger, combination, consolidation or similar transaction),
provided, however, that the Company shall be permitted to make Restricted
Payments under this clause only if after giving effect thereto, the Company
would be permitted to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the "Limitation on Incurrence of
Additional Indebtedness" covenant; (8) so long as no Default or Event of
Default shall have occurred and be continuing, the repurchase, retirement or
other acquisition or retirement for value of the Company's Series F Preferred
Stock, provided that after giving effect to such repurchase, retirement or
other acquisition or retirement for value on a pro forma basis, the Company
would have had a Consolidated Fixed Charge Coverage Ratio of at least 2.5 to
1.0; and (9) other Restricted Payments in an aggregate amount not to exceed
$5.0 million. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2), (4), (5), (6), (7), (8) and (9) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations
may be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is
received at the time of such disposition; provided that the amount of (a) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms
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subordinated to the Notes) that are assumed by the transferee of any such
assets, and (b) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash within 180 days after such
Asset Sale (to the extent of the cash received) shall be deemed to be cash for
the purposes of this provision; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply,
the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt
thereof either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in
the case of any Senior Debt or Guarantor Senior Debt under any revolving
credit facility, effect a permanent reduction in the availability under such
revolving credit facility, (B) to make an Investment in properties and assets
that replace the properties and assets that were the subject of such Asset
Sale or in properties and assets that will be used in the business of the
Company and its Restricted Subsidiaries as existing on the Issue Date or in
businesses the same, similar or reasonably related thereto ("Replacement
Assets"), or (C) a combination of prepayment and investment permitted by the
foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale
or such earlier date, if any, as the Board of Directors of the Company or of
such Restricted Subsidiary determines not to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Proceeds Offer Trigger Date as permitted in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on
a pro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be,
in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed
to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall
be applied in accordance with this covenant. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5.0 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $5.0 million, shall be applied as required
pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold
the properties and assets of the Company and its Restricted Subsidiaries not
so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such properties and assets
of the Company or its Restricted Subsidiaries deemed to be sold shall be
deemed to be Net Cash Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
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Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement;
(4) customary non-assignment provisions of any contract or any lease governing
a leasehold interest of any Restricted Subsidiary of the Company; (5) any
instrument governing Acquired Indebtedness, which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person or the properties or assets of the Person so acquired;
(6) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (7) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions
of the nature discussed in clause (c) above on the property so acquired; (8)
contracts for the sale of assets, including, without limitation, customary
restrictions with respect to a Restricted Subsidiary of the Company pursuant
to an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Restricted
Subsidiary; (9) secured Indebtedness otherwise permitted to be incurred
pursuant to the covenants described under "Limitation on Incurrence of
Additional Indebtedness" and "Limitation on Liens" that limit the right of the
debtor to dispose of the assets securing such Indebtedness; (10) customary
provisions in joint venture agreements and other similar agreements entered
into in the ordinary course of business; (11) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or
incurred pursuant to an agreement referred to in clauses (1) through (10)
above; provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are no less favorable to the
Company in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in agreements referred
to in such clauses; or (12) an agreement governing Indebtedness permitted to
be incurred pursuant to the "Limitation on Incurrence on Additional
Indebtedness" covenant; provided that the provisions relating to such
encumbrance or restriction contained in such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions contained in the Credit Agreement as in effect on the Issue Date.
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries
whether owned on the Issue Date or acquired after the Issue Date, or any
proceeds therefrom, or assign or otherwise convey any right to receive income
or profits therefrom unless (i) in the case of Liens securing Indebtedness
that is expressly subordinate or junior in right of payment to the Notes, the
Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens and (ii) in all other cases, the Notes are
equally and ratably secured, except for (A) Liens existing as of the Issue
Date to the extent and in the manner such Liens are in effect on the Issue
Date; (B) Liens securing Senior Debt and Liens securing Guarantor Senior Debt;
(C) Liens securing the Notes and the Guarantees; (D) Liens of the Company or a
Wholly Owned Restricted Subsidiary of the Company on assets of any Restricted
Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which
is incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with
the provisions of the Indenture; provided, however, that such Liens (A) are no
less favorable to the Holders and are not more favorable to the lienholders
with respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (B) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company and the
Guarantors will not incur or suffer to exist Indebtedness that is senior in
right of payment to the Notes or the Guarantees, as the case may be, and
subordinate in right of payment by its terms to any other Indebtedness of the
Company or such Guarantor, as the case may be.
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Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the
Company and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and
of the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, and premium, if
any, and interest on all of the Notes and the performance of every covenant of
the Notes and the Indenture on the part of the Company to be performed or
observed; (ii) immediately after giving effect to such transaction on a pro
forma basis and the assumption contemplated by clause (i)(2)(y) above
(including giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred in connection with or in respect of
such transaction), the Company or such Surviving Entity, as the case may be,
shall be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "Limitation on Incurrence of
Additional Indebtedness" covenant; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
and any Lien granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred or be continuing; and (iv) the
Company or the Surviving Entity, as the case may be, shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in
the Indenture relating to such transaction have been satisfied.
Notwithstanding the foregoing, the merger of the Company with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction shall be permitted.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the
Company in accordance with the foregoing, in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the Notes with
the same effect as if such Surviving Entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or
any other Guarantor unless (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State
thereof or the District of Columbia; (ii) such entity assumes by supplemental
indenture all of the obligations of the Guarantor on the Guarantee; (iii)
immediately after giving
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effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; and (iv) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis,
the Company could satisfy the provisions of clause (ii) of the first paragraph
of this covenant. Any merger or consolidation of a Guarantor with and into the
Company (with the Company being the surviving entity) or another Guarantor
that is a Wholly Owned Restricted Subsidiary of the Company need only comply
with clause (iv) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $1.0 million shall be approved by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If
the Company or any Restricted Subsidiary of the Company enters into an
Affiliate Transaction (or a series of related Affiliate Transactions related
to a common plan) that involves an aggregate fair market value of more than
$10.0 million, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to the Company
or the relevant Restricted Subsidiary, as the case may be, from a financial
point of view, from an Independent Financial Advisor and file the same with
the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board
of Directors; (ii) transactions exclusively between or among the Company and
any of its Wholly Owned Restricted Subsidiaries or exclusively between or
among such Wholly Owned Restricted Subsidiaries, provided such transactions
are not otherwise prohibited by the Indenture; (iii) any agreement as in
effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; (iv) Restricted
Payments permitted by the Indenture; (v) transactions in which the Company or
any of its Restricted Subsidiaries, as the case may be, delivers to the
Trustee a letter from an Independent Financial Advisor stating that such
transaction is fair to the Company or such Restricted Subsidiary from a
financial point of view or meets the requirements of the first sentence of
paragraph (a) above; (vi) the existence of, or the performance by the Company
or any of its Restricted Subsidiaries of its obligations under the terms of,
any stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter; provided,
however, that the existence of, or the performance by the Company or any of
its Restricted Subsidiaries of obligations under, any future amendment to any
such existing agreement or under any similar agreement entered into after that
Issue Date shall only be permitted by this clause to the extent that the terms
of any such, amendment or new agreement are not otherwise disadvantageous to
the holders of the Notes in any material respect; (vii) loans to employees of
the Company and its Subsidiaries which are approved by the Board of Directors
of the Company in good faith; (viii) the payment of all fees and expenses
related to the Transactions; and (ix) transactions with customers, clients,
suppliers, or purchasers or sellers of goods or services, in each case in the
ordinary course of business and otherwise in compliance with the terms of the
Indenture, which are fair to the Company or its Restricted Subsidiaries, in
the reasonable determination of the Board of Directors of the Company or the
senior management thereof, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party.
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Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any domestic Restricted
Subsidiary that is not a Guarantor, or if the Company or any of its Restricted
Subsidiaries shall organize, acquire or otherwise invest in another domestic
Restricted Subsidiary having total equity value in excess of $1.0 million,
then such transferee or acquired or other Restricted Subsidiary shall (i)
execute and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Guarantor for all purposes of the Indenture.
Reports to Holders. The Indenture will provide that the Company will deliver
to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA (S) 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes;
(iv) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final stated maturity or which has
been accelerated, aggregates $5.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared to be null and void and unenforceable or any
of the Guarantees is found to be invalid or any of the Guarantors denies
its liability under its Guarantee (other than by reason of release of a
Guarantor in accordance with the terms of the Indenture).
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If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding
Notes may declare the principal of and accrued interest on all the Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit
Agreement, shall become immediately due and payable upon the first to occur of
an acceleration under the Credit Agreement or 5 business days after receipt by
the Company and the Representative under the Credit Agreement of such
Acceleration Notice. If an Event of Default specified in clause (vi) above
with respect to the Company occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid interest on all of
the outstanding Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Notes may
rescind and cancel such declaration and its consequences (i) if the rescission
would not conflict with any judgment or decree, (ii) if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration, (iii) to the extent
the payment of such interest is lawful, interest on overdue installments of
interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) if the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements and advances and (v) in the event of the cure or
waiver of an Event of Default of the type described in clause (vi) of the
description above of Events of Default, the Trustee shall have received an
officers' certificate and an opinion of counsel that such Event of Default has
been cured or waived. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest
on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default
or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
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means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes, except for (i) the rights
of Holders to receive payments in respect of the principal of, premium, if
any, and interest on the Notes when such payments are due, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest on the Notes on the stated
date for payment thereof or on the applicable redemption date, as the case may
be; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior Debt,
including, without limitation, those arising under the Indenture and (B)
assuming no intervening bankruptcy of the Company between the date of deposit
and the 91st day following the date of the deposit and that no Holder is an
insider of the Company, after the 91st day following the date of the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; and (ix) certain other customary conditions precedent are
satisfied. Notwithstanding the foregoing, the opinion of counsel required by
clause (ii) above need not be delivered if all Notes not theretofore delivered
to the Trustee for cancellation (x) have become due and payable, (y) will
become due and payable on the maturity date within one year or (z) are to be
called for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration or transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified
purposes, including curing ambiguities, defects or inconsistencies, so long as
such change does not, in the opinion of the Trustee, adversely affect the
rights of any of the Holders in any material respect. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion
of counsel. Other modifications and amendments of the Indenture may be made
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may (i) reduce the amount of
Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (iii) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or
change the date on which any Notes may be subject to redemption or repurchase,
or reduce the redemption or repurchase price therefor; (iv) make any Notes
payable in money other than that stated in the Notes; (v) make any change in
provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default;
(vi) amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control which has occurred or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify any
of the provisions or definitions with respect thereto after a Change of
Control has occurred or the subject Asset Sale has been consummated; (vii)
modify or change any provision of the Indenture or the related definitions
affecting the subordination or ranking of the Notes or any Guarantee in a
manner which adversely affects the Holders; or (viii) release any Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise
than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of
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Default, the Trustee will exercise such rights and powers vested in it by the
Indenture, and use the same degree of care and skill in its exercise as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions; provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or at the time it merges or consolidates with the Company or
any of its Restricted Subsidiaries or assumed in connection with the
acquisition of assets from such Person and in each case not incurred by such
Person in connection with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other
than a Restricted Subsidiary of the Company) which constitute all or
substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary of the Company; or (b) any other property or assets of the Company
or any Restricted Subsidiary of the Company other than in the ordinary course
of business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $1.0
million, (ii) the sale or exchange of equipment in connection with the
purchase or other acquisition of other equipment, in each case used in the
business of the Company and its Restricted Subsidiaries and (iii) the sale,
lease, conveyance, disposition or other transfer of all or substantially all
of the assets of the Company as permitted under "Merger, Consolidation and
Sale of Assets."
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
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"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Services ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250.0
million; (v) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (i) above entered
into with any bank meeting the qualifications specified in clause (iv) above;
and (vi) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (i) through (v)
above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person or group of related Persons for purposes of Section
13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture)
other than to the Permitted Holders; (ii) the approval by the holders of
Capital Stock of the Company of any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of the Indenture); (iii) any Person or Group (other than the
Permitted Holders) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the
aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the
Board of Directors of the Company over a two-year period from the directors
who constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by the Permitted
Holders or a vote of at least a majority of the Board of Directors of the
Company then still in office who either were members of such Board of
Directors at the beginning of such period or whose election as a member of
such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
of such Person and its Restricted Subsidiaries paid or accrued in accordance
with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses), (B) Consolidated
Interest Expense and (C) Consolidated Non-cash Charges less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
accordance with GAAP.
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"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the two full
fiscal quarters (the "Two Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges
of such Person for the Two Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence or repayment of any Indebtedness of such Person or any of its
Restricted Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof), other than
the incurrence or repayment of Indebtedness in the ordinary course of business
for working capital purposes pursuant to working capital facilities, occurring
during the Two Quarter Period or at any time subsequent to the last day of the
Two Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Two Quarter Period and
(ii) any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of such Person or one of its Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA (including any pro forma expense and
cost reductions and other operating improvements as determined in good faith
by a responsible financial or accounting officer of the Company) attributable
to the assets which are the subject of the Asset Acquisition or Asset Sale
during the Two Quarter Period) occurring during the Two Quarter Period or at
any time subsequent to the last day of the Two Quarter Period and on or prior
to the Transaction Date, as if such Asset Sale or Asset Acquisition (including
the incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Two Quarter Period. If such Person or any of
its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of
a third Person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of
such Person had directly incurred or otherwise assumed such guaranteed
Indebtedness. For purposes of calculating the Company's Consolidated Fixed
Charge Coverage Ratio, 50% of the Consolidated Fixed Charges and 50% of the
Consolidated EBITDA of any joint venture in which the Company or any of its
Restricted Subsidiaries has a 50% ownership interest shall be included in
determining the Company's Consolidated Fixed Charges and Consolidated EBITDA,
respectively. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense
(excluding amortization or write-off of deferred financing costs), plus (ii)
the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period
times (y) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal, state and
local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-
off of deferred financing costs (including the amortization of costs relating
to interest rate caps or other similar agreements), (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest
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component of Capitalized Lease Obligations paid, accrued and/or scheduled to
be paid or accrued by such Person and its Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP, minus
interest income for such period.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales (without regard to the $1.0 million limitation set
forth in the definition thereof) or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains or
losses, (c) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of
the referent Person or is merged or consolidated with the referent Person or
any Restricted Subsidiary of the referent Person, (d) the net income (but not
loss) of any Restricted Subsidiary of the referent Person to the extent that
the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is restricted by a contract, operation of law or
otherwise, (e) the net income of any Person, other than a Restricted
Subsidiary of the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Wholly Owned Restricted
Subsidiary of the referent Person by such Person, (f) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), and (g) in the case of a successor to the
referent Person by consolidation or merger or as a transferee of the referent
Person's assets, any earnings of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"Credit Agreement" means the Credit Agreement to be dated as of the Issue
Date, between the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as administrative agent,
together with the related documents thereto (including, without limitation,
any guarantee agreements and security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing, replacing or otherwise restructuring
(including increasing the amount of available borrowings thereunder (provided
that such increase in borrowings is permitted by the "Limitation on Incurrence
of Additional Indebtedness" covenant above) or adding Restricted Subsidiaries
of the Company as additional borrowers or guarantors thereunder) all or any
portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt
which, at the time of determination, has an aggregate principal amount of at
least $25.0 million and is specifically designated in the instrument
evidencing such Senior Debt as "Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the sole option of the holder thereof on or prior to the
final maturity date of the Notes.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of
the Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor" means (i) each of Royal Medical Health Services, Inc., Alliance
Imaging of Ohio, Inc., Alliance Imaging of Michigan, Inc. and Alliance Imaging
of Central Georgia, Inc. and (ii) each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which
such Restricted Subsidiary agrees to be bound by the terms of the Indenture as
a Guarantor; provided that any Person constituting a Guarantor as described
above shall cease to constitute a Guarantor when its respective Guarantee is
released in accordance with the terms of the Indenture.
"Guarantor Senior Debt" means with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for
in the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of a Guarantor,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting the generality of
the foregoing, "Guarantor Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on, and all other amounts owing by any Guarantor
in respect of, (x) all monetary obligations of every nature of a Guarantor
under, or with respect to, the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities, (y) all
Interest Swap Obligations (including guarantees thereof) and (z) all
obligations under Currency Agreements (including guarantees thereof), in each
case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include (i)
any Indebtedness of such Guarantor to a Restricted Subsidiary of such
Guarantor, (ii) Indebtedness to, or guaranteed on behalf of, any director,
officer or employee of such Guarantor or any Restricted Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation),
(iii) Indebtedness to trade creditors and other amounts incurred in connection
with obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or
other taxes owed or owing by such Guarantor, (vi) that portion of any
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness" (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of this
clause (vi) if the holder(s) of such obligation or their representative and
the Trustee shall have received an officers' certificate of the Company to the
effect that the incurrence of such Indebtedness does not (or, in the case of
revolving credit Indebtedness, that the incurrence of the entire committed
amount thereof at the date on which the initial borrowing thereunder is made
would not) violate such provisions of the Indenture), (vii) Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of Title 11, United States Code, is without recourse to the Company or any
Guarantor and (viii) any Indebtedness which is, by its express terms,
subordinated in right of payment to any other Indebtedness of such Guarantor.
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"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all
Obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all Obligations under any title
retention agreement (but excluding trade accounts payable and other accrued
liabilities arising in the ordinary course of business), (v) all Obligations
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction, (vi) guarantees and other contingent
obligations in respect of Indebtedness referred to in clauses (i) through (v)
above and clause (viii) below, (vii) all Obligations of any other Person of
the type referred to in clauses (i) through (vi) which are secured by any lien
on any property or asset of such Person, the amount of such Obligation being
deemed to be the lesser of the fair market value of such property or asset or
the amount of the Obligation so secured, (viii) all Obligations under currency
agreements and interest swap agreements of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price, but excluding accrued dividends, if any. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined reasonably and in good faith
by the Board of Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified
to perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit
by the Company and its Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be. For purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary of the
Company at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary of the Company and shall exclude the fair market value
of the net assets of any Unrestricted Subsidiary of the Company at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the
Company and (ii) the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by the Company or
any of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment, reduced by the payment of dividends or distributions in
connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions
or receipt of any such other amounts shall reduce the amount of any Investment
if such payment of dividends or distributions or receipt of any such amounts
would be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of
any
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<PAGE>
direct or indirect Restricted Subsidiary of the Company such that, after
giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, 100% of the outstanding Common Stock of such
Restricted Subsidiary, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Common Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking
into account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Permitted Holders" means Apollo Management, L.P. and its affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes and the Guarantees issued in the
Offering;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $125.0
million less the amount of all repayments and permanent commitment
reductions under the Credit Agreement with Net Cash Proceeds of Asset Sales
applied thereto as required by the "Limitation on Asset Sales" covenant;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations covering Indebtedness of the Company or
any of its Restricted Subsidiaries; provided, however, that such Interest
Swap Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred
in accordance with the Indenture to the extent the notional principal
amount of such Interest Swap Obligation does not, at the time of the
incurrence thereof, exceed the principal amount of the Indebtedness to
which such Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; provided that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
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(vi) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Wholly Owned Restricted Subsidiary of the Company for so
long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien held
by a Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company; provided that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company owns or
holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company and is subject to no Lien; provided
that (a) any Indebtedness of the Company to any Wholly Owned Restricted
Subsidiary of the Company is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (b) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such Indebtedness or
any Person holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(x) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $25.0 million at
any one time outstanding; provided that all or a portion of the $25.0
million permitted to be incurred under this clause (x) may, at the option
of the Company, be incurred under the Credit Agreement instead of pursuant
to Capitalized Lease Obligations or Purchase Money Indebtedness;
(xi) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided, however, that (a) such Indebtedness
is not reflected on the balance sheet of the Company or any Restricted
Subsidiary of the Company (contingent obligations referred to in a footnote
to financial statements and not otherwise reflected on the balance sheet
will not be deemed to be reflected on such balance sheet for purposes of
this clause (a)) and (b) the maximum assumable liability in respect of all
such Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time it is received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business;
(xiii) Refinancing Indebtedness; and
(xiv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $15.0 million
at any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement).
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"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company, provided that such Wholly Owned
Restricted Subsidiary of the Company is not restricted from making dividends
or similar distributions by contract, operation of law or otherwise; (ii)
Investments in the Company by any Restricted Subsidiary of the Company;
provided that any Indebtedness evidencing such Investment is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) Investments in cash and Cash
Equivalents; (iv) loans and advances to employees and officers of the Company
and its Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes not to exceed $1.0 million at any one time outstanding;
(v) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or its Restricted Subsidiaries' businesses
and otherwise in compliance with the Indenture; (vi) additional Investments
(including joint ventures) not to exceed $20.0 million at any one time
outstanding; (vii) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; (viii)
Investments made by the Company or its Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance
with the "Limitation on Asset Sales" covenant; and (ix) Investments of a
Person or any of its Subsidiaries existing at the time such Person becomes a
Restricted Subsidiary of the Company or at the time such Person merges or
consolidates with the Company or any of its Restricted Subsidiaries, in either
case in compliance with the Indenture; provided that such Investments were not
made by such Person in connection with, or in anticipation or contemplation
of, such Person becoming a Restricted Subsidiary of the Company or such merger
or consolidation.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or asset
which is not leased property subject to such Capitalized Lease Obligation;
(vii) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to clause (x) of the definition of
"Permitted Indebtedness"; provided, however, that in the case of
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Purchase Money Indebtedness (A) the Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any property or
assets of the Company or any Restricted Subsidiary of the Company other
than the property and assets so acquired or constructed and (B) the Lien
securing such Indebtedness shall be created within 180 days of such
acquisition or construction or, in the case of a refinancing of any
Purchase Money Indebtedness, within 180 days of such refinancing;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens in the ordinary course of business not exceeding $5.0 million
at any one time outstanding that (a) are not incurred in connection with
borrowing of money and (b) do not materially detract from the value of the
property or materially impair its use;
(xiii) Liens by reason of judgment or decree not otherwise resulting in
an Event of Default;
(xiv) Liens securing Indebtedness permitted to be incurred pursuant to
clause (xiv) of the definition of "Permitted Indebtedness";
(xv) Liens securing Indebtedness under Currency Agreements permitted
under the Indenture; and
(xvi) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
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"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred or existing in
accordance with the "Limitation on Incurrence of Additional Indebtedness"
covenant (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii),
(ix), (x), (xi), (xii) or (xiv) of the definition of Permitted Indebtedness),
in each case that does not (1) result in an increase in the aggregate
principal amount of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such
Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y)
if such Indebtedness being Refinanced is subordinate or junior to the Notes,
then such Refinancing Indebtedness shall be subordinate to the Notes at least
to the same extent and in the same manner as the Indebtedness being
Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the
generality of the foregoing, "Senior Debt" shall also include the principal
of, premium, if any, interest (including any interest accruing subsequent to
the filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on, and all other amounts owing by the Company in
respect of, (x) all monetary obligations of every nature of the Company under
the Credit Agreement, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit,
fees, expenses and indemnities, (y) all Interest Swap Obligations (including
guarantees thereof) and (z) all obligations under Currency Agreements
(including guarantees thereof), in each case whether outstanding on the Issue
Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt"
shall not include (i) any Indebtedness of the Company to a Subsidiary of the
Company, (ii) Indebtedness to, or guaranteed on behalf of, any director,
officer or employee of the Company or any Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or
other taxes owed or owing by the Company, (vi) that portion of any
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness" (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of this
clause (vi) if the holder(s) of such obligation or their representative and
the Trustee shall have received an officers' certificate of the Company to
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the effect that the incurrence of such Indebtedness does not (or, in the case
of revolving credit Indebtedness, that the incurrence of the entire committed
amount thereof at the date on which the initial borrowing thereunder is made
would not) violate such provisions of the Indenture), (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of
Title 11, United States Code, is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment
to any other Indebtedness of the Company.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"Subsidiary", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided that (x) the Company
certifies to the Trustee that such designation complies with the "Limitation on
Restricted Payments" covenant and (y) each Subsidiary to be so designated and
each of its Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant to
which the lender has recourse to any of the assets of the Company or any of its
Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an officers' certificate certifying that such
designation complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement") among Alliance, the Guarantors and BT Alex.
Brown Incorporated, Smith Barney Inc. and Salomon Brothers Inc (collectively,
the "Underwriters"), the Underwriters have severally agreed to purchase from
Alliance, and Alliance has agreed to sell to the Underwriters severally, the
entire principal amount of the Notes offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature
of each Underwriter's obligation is such that each is committed to purchase
the aggregate principal amount of Notes set forth opposite its name if any
Notes are purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
<S> <C>
BT Alex. Brown Incorporated................................. $
Smith Barney Inc............................................
Salomon Brothers Inc .......................................
------------
Total..................................................... $165,000,000
============
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain
dealers at such price less a concession not in excess of % of the principal
amount of the Notes offered hereby. After the public offering of the Notes
offered hereby, the public offering price and other selling terms may be
changed.
Alliance does not intend to apply for listing of the Notes on a national
securities exchange. Alliance has been advised by the Underwriters that they
presently intend to make a market in the Notes, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Notes, and any such market making may be discontinued at any
time in the sole discretion of the Underwriters. There can be no assurance
that an active public market for the Notes will develop.
Alliance and the Guarantors have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, will be
an agent and lender under the Credit Agreement. See "Description of the Credit
Agreement." The BT Investor, also an affiliate of BT Alex. Brown Incorporated,
will invest approximately $3.6 million in the Company concurrently with the
consummation of the Transactions, and will receive a financing fee of $36,000
in connection with the Company's issuance of Series F Preferred Stock. Smith
Barney acted as an advisor to an affiliate of Apollo with respect to the
Recapitalization of Alliance, for which Smith Barney will receive a fee of
$1.75 million. Salomon Brothers Inc has acted as financial advisor to Alliance
in connection with the Recapitalization for which it will receive certain fees
and be reimbursed for certain of its expenses. In addition, Salomon Brothers
Inc will be a lender under the Credit Agreement. See "Certain Relationships
and Related Transactions."
In connection with the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Notes. Specifically, the Underwriters may bid for and
purchase Notes in the open market to stabilize the price of the Notes. The
Underwriters may also overallot the Offering, creating a syndicate short
position, and may bid for and purchase Notes in the open market to cover the
syndicate short position. In addition, the Underwriters may bid for and
purchase the Notes in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of the Notes above
market levels that may otherwise prevail. The Underwriters are not required to
engage in these activities, and may end these activities at any time.
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LEGAL MATTERS
The validity of the Notes offered hereby are being passed upon for the
Company by O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal
matters relating to the Notes are being passed upon for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York. Cahill Gordon & Reindel has represented in the past and
continues to represent Apollo and its affiliates with respect to various
matters.
EXPERTS
The consolidated financial statements 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 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.
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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-20
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 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
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.
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>
[MAP]
States currently served by
Alliance Imaging
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE SUCH DATE.
-----------------
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
Available Information...................................................... i
Incorporation of Certain Documents by Reference............................ i
Prospectus Summary......................................................... 1
Risk Factors............................................................... 10
The Transactions........................................................... 15
Use of Proceeds............................................................ 16
Pro Forma Capitalization................................................... 17
Unaudited Pro Forma Consolidated Financial Information..................... 18
Selected Historical Consolidated Financial Information..................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 27
Industry................................................................... 34
Business................................................................... 36
Management................................................................. 45
Principal Stockholders..................................................... 51
Certain Relationships and Related Transactions............................. 52
Description of the Credit Agreement........................................ 53
Description of the Notes................................................... 55
Underwriting............................................................... 81
Legal Matters.............................................................. 82
Experts.................................................................... 82
Index to Consolidated Financial Statements................................. F-1
</TABLE>
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--------------
PROSPECTUS
--------------
$165,000,000
ALLIANCE IMAGING, INC.
% SENIOR SUBORDINATED NOTES DUE 2005
JOINT BOOK-RUNNING MANAGERS
BT ALEX. BROWN
SMITH BARNEY INC.
-----------------
SALOMON BROTHERS INC
, 1997
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