AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1996
REGISTRATION NO.333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
U.S. DIAGNOSTIC LABS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3164389
(Jurisdiction of (I.R.S. employer I.D.
Incorporation) number)
------------------------------------
U.S. DIAGNOSTIC LABS INC.
777 S. FLAGLER DRIVE
WEST PALM BEACH, FLORIDA 33140
(407) 832-0006
(Address and telephone number of principal executive offices)
------------------------------------
JEFFREY GOFFMAN, CHAIRMAN
U.S. DIAGNOSTIC LABS INC.
777 S. FLAGLER DRIVE
WEST PALM BEACH, FLORIDA 33140
(407) 832-0006
(Address and telephone number of agent for service)
------------------------------------
Copies to:
MICHAEL D. KARSCH, ESQ.
BACHNER, TALLY, POLEVOY & MISHER LLP
380 MADISON AVENUE
NEW YORK, NEW YORK 10017
(212) 687-7000
------------------------------------
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box.[x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering. |_|
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED UNIT(1) OFFERING PRICE (1) FEE
---------------- ---------- ------- ------------------ ---
<S> <C> <C> <C> <C>
9% Convertible Subordinated Debentures Due
2003 $57,500,000 $1,000.00 $57,500,000 $19,828
Common Stock (2) 6,388,879(2)
Common Stock (3) 880,445 $12.563 $11,060,590 3,814
Total $23,642
</TABLE>
================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
(2) Issuable upon conversion of the Debentures. Pursuant to Rule 416, there are
also being registered such additional shares as may become issuable pursuant
to anti-dilution provisions of the Debentures.
(3) Registered for resale by selling security holders.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
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
EFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFER TO SELL OR THE
SOLICITATION TO 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 THYE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 6, 1996
PROSPECTUS
U.S. DIAGNOSTIC LABS INC.
$57,500,000 PRINCIPAL AMOUNT OF 9% SUBORDINATED CONVERTIBLE DEBENTURES DUE 2003
7,269,324 SHARES OF COMMON STOCK
This Prospectus relates to the resale (the "Offering") by certain
securityholders (the "Selling Securityholders") of U.S. Diagnostic Labs Inc.
(the "Company") of up to $57,500,000 aggregate principal amount of the Company's
9% Subordinated Convertible Debentures Due 2003 (the "Debentures"). Interest on
the Debentures is payable semi-annually on March 31 and September 30 of each
year, commencing September 30, 1996. The Debentures are convertible, in the
aggregate, into 6,388,879 shares of the Company's Common Stock, par value $.01
per share ("Common Stock") at a conversion price of $9.00 per share, subject to
adjustment under certain circumstances. This Prospectus relates to resales of
Debentures by the Selling Securityholders identified herein, resales by such
holders of Common Stock acquired upon conversion of the Debentures and 880,445
shares of Common Stock held by three additional Selling Securityholders.
The Common Stock is quoted on the Nasdaq National Market (the "NNM") under the
symbol "USDL". On June 4, 1996, the last reported sale price of the Common Stock
on the NNM was $14 per share. Prior to this Offering, there has been no public
market for the Debentures.
The securities offered by this Prospectus may be sold from time to time
by the Selling Securityholders, or by their transferees. The distribution of the
securities offered hereby may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders.
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Act"), with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Act.
All expenses of the registration of securities covered by this
Prospectus, estimated to be $75,000, will be borne by the Company, except that
Selling Securityholders will pay any commissions and fees applicable to
Debentures and Common Stock sold by a Selling Securityholder and fees of others
employed by a Selling Securityholder, including attorneys' fees.
The Company will not receive any of the proceeds from the sale of the
Debentures or Common Stock offered hereby.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
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.
The date of this Prospectus is , 1996
-1-
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "SEC"), a Registration Statement on Form S-3 under the
Act, covering the securities offered by this Prospectus. For further information
with respect to the Company and the securities offered, reference is made to the
Registration Statement and the exhibits filed as part thereof, which may be
examined without charge and copies of such material can be obtained at
prescribed rates from the Public Reference Section maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete. In each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports and other information with the SEC. The
Company is also required to file proxy statements with the SEC. Such reports and
other information filed by the Company with the SEC in accordance with the
Exchange Act may be inspected, without charge, at the Public Reference Section
of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of all or any portion of the material may be obtained
from the Public Reference Section of the SEC upon payment of the prescribed
fees. Materials can also be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange
Commission (File No. 1-13392) pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act") are incorporated herein by reference, except as
superseded or modified herein: the Company's Annual Report on Form 10-KSB and
10KSB/A for the year ended December 31, 1995, including any documents or
portions thereof incorporated by reference therein and all amendments thereto;
the Company's Reports on Form 8-K dated March 29, 1996 and May 28, 1996; the
Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996;
the Company's Registration Statement on Form 8-A declared effective on October
20, 1994, registering the Common Stock under the Exchange Act; and all documents
filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of this offering.
Any statement contained in any 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 or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person,
including any beneficial owner, to whom this Prospectus is delivered, upon
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference (other than exhibits to such
documents which are not specifically incorporated by reference into such
documents). Requests for such documents should be directed to the Company, 777
S. Flagler Drive, West Palm Beach, Florida 33401, Attention: President,
telephone (407) 832-0006.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of: (i) the Initial
Purchaser's over-allotment option; (ii) outstanding Class A and Class B Warrants
("Warrants"); (iii) the Unit Purchase Options (as defined herein); (iv) warrants
to purchase 1,324,442 shares of Common Stock issued in connection with
acquisitions and financings ("Financing Warrants"); or (v) options to purchase
1,627,000 shares of Common Stock granted under the Company's Stock Option Plans
("Stock Options"). Unless the context otherwise requires, all references in this
Prospectus to the "Company" include U.S. Diagnostic Labs Inc. and its
consolidated subsidiaries.
THE COMPANY
U.S. Diagnostic Labs Inc. is a physician practice management ("PPM")
provider specializing in the acquisition, operation and management of
multi-modality diagnostic imaging centers ("Imaging Centers") and related
medical facilities. Diagnostic imaging procedures are used to diagnose various
diseases and physical injuries through the use of magnetic resonance imaging,
computed axial tomography, mammography, X-ray, ultrasound and other
technologies. The use of non-invasive diagnostic imaging has grown rapidly in
recent years because it allows physicians to quickly and accurately diagnose a
wide variety of diseases and injuries without exploratory surgery or other
invasive procedures, which are usually more expensive, risky and debilitating
for patients.
The Company's objective is to become the leading network provider of
outpatient imaging services in the United States. The Company believes that the
highly fragmented nature of the diagnostic imaging industry provides a
significant opportunity to build rapidly through acquisitions a multi-regional
PPM company focused primarily on this industry. The Company believes that
managed care and other third-party payors will increasingly prefer to contract
for service on a national or regional basis, and that the Company's development
of a multi-regional network of centers will permit it to obtain such contracts
on favorable terms. Industry sources estimate that there are over 2,200 Imaging
Centers currently operating in the U.S., the substantial majority of which are
owned and operated on an independent basis. The Company believes that there are
and will continue to be many attractive acquisition opportunities because
Imaging Center operators are finding it more difficult to compete independently
as managed care becomes more prevalent.
Since October 1993, the Company has acquired 27 Imaging Centers in 12
states, as well as three radiation oncology therapy centers ("Therapy Centers"),
it currently has letters of intent to acquire additional Imaging Centers, and is
in active discussions to acquire several additional Imaging Centers and Therapy
Centers. The Company believes that the acquisition of Therapy Centers, which are
operationally similar to Imaging Centers, will provide cross referral
opportunities and increase the Company's overall PPM expertise. The Company also
operates a clinical laboratory business in the Philadelphia metropolitan area.
The Imaging Centers acquired by the Company generally are the dominant
or sole non-hospital- affiliated outpatient facility in their geographic markets
and have a strong physician referral base and/or numerous managed care
contracts. Following acquisition, the Company provides management and
administrative systems, marketing and technical support, centralized billing,
collection and payable services, and often is able to renegotiate debt,
equipment leasing, radiology and supply agreements to increase cash flow and
operating efficiency at its Imaging Centers. Each acquired Imaging Center has
been profitable immediately following acquisition and the Company is typically
able to increase the profit level of acquired facilities over historical levels.
The Company offers state-of-the-art diagnostic imaging technologies, has
upgraded the imaging equipment at several locations following acquisitions, and
is adding new modalities and procedures at most locations.
The Company generally acquires Imaging Centers from (i) radiologist
owner/operators seeking management expertise, access to managed care contracts
and/or other resources offered by PPM companies, (ii) physicians who may be
required by law to divest such facilities, and (iii) owners seeking to leave the
imaging business for various reasons. The Company also has joint ventures, and
may enter into additional joint ventures, with hospitals or other entities which
desire access to diagnostic imaging technologies but lack sufficient financial
or managerial resources. To date, the Company has evaluated only a fraction of
the potential acquisition candidates in the industry and intends to pursue
additional acquisition opportunities with the proceeds of this offering.
The Company was incorporated in Delaware on June 17, 1993. The
Company's executive offices are located at 777 S. Flagler Drive, Suite 1006
West, West Palm Beach, Florida 33401 and its telephone number is (407)
832-0006/(800) 7 USDLAB.
-3-
<PAGE>
SUMMARY FINANCIAL INFORMATION
-----------------------------
<TABLE>
ACTUAL PRO FORMA
--------------------------------------------------- --------------------------
PERIOD
FROM THREE MONTHS THREE MONTHS
JUNE 17, 1993 YEAR ENDED ENDED YEAR ENDED ENDED
TO DECEMBER DECEMBER 31, MARCH 31 DECEMBER MARCH 31,
31, 1993(1) 1994 1995 1995 1996 31, 1995(2) 1996
----------- ---- ---- ------ ---- ------------ ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 338 $ 5,082 $ 28,839 $ 4,798 $ 12,074 $ 79,117 $ 21,590
Net income (loss) before extraordinary
item.................................. (194) (640) 3,025 598 1,542 6,825 2,167
Net income (loss) after extraordinary
item.................................. (194) (640) 3,331 598 1,542 7,131 2,167
PER SHARE (3)(4):
Primary:
Earnings before extraordinary
item............................. $ (.29) $ (.48) $ .61 $ .15 $ .25 $ .86 $ .25
Extraordinary item............... -- -- .06 -- -- .04 --
--------- ---------- --------- ---------- -------- ---------- ----------
Net earnings (loss).............. $ (.29) $ (.48) $ .67 $ .15 $ .15 $ .90 $ .25
========= ========= ========= ========== ======== ========== ==========
Fully diluted:
Earnings (loss) before extraordinary
item............................. $ (.29) $ (.48) $ .57 $ .16 $ .71 $ .17
Extraordinary item............... -- -- .03 - .02 -
--------- --------- -------- -------- ---------- ---------
Net earnings (loss).............. $ (.29) $ (.48) $ .60 $ .16 $ .73 $ .17
========= ========= ======== ======== ========== =========
Weighted average shares outstanding:
Primary............................... 674,542 1,328,033 4,996,021 4,031,961 6,218,847 7,882,247 8,851,847
Fully diluted......................... 674,542 1,328,033 11,761,427 4,031,961 17,491,361 20,509,947 25,986,630
Supplementary fully diluted...........
OTHER OPERATIONS DATA:
EBITDA(6)............................. $ -- $ 784 $ 9,002 $ 1,236 $ 4,516 $ 29,385 $ 8,469
Ratio of earnings to fixed charges (7)(8) -- -- 3.22x 4.14x 4.37x 1.98x 2.36x
</TABLE>
DECEMBER 31, 1995 MARCH 31, 1996
ACTUAL ACTUAL PRO FORMA(10)
------ ------ -------------
BALANCE SHEET DATA:
Working Capital.............. $ 5,946 $ 54,832 $ 50,314
Total assets................. 57,279 111,639 160,099
Long-term liabilities........ 21,653 72,207 91,975
Minority interest............ 716 812 3,363
Stockholders' equity......... 24,493 27,530 44,965
- ---------------------------
(1) The Company commenced operations on June 17, 1993.
(2) Assumes all 1995 acquisitions, pending acquisitions to be completed in
1996 and this offering were completed as of January 1, 1995. See "Pro
Forma Condensed Combined Financial Statements."
(3) Share information excludes 1,163,853 Escrow Shares (as defined herein).
See "Principal Stockholders - Escrow Arrangements."
(4) No cash dividends have been declared or paid by the Company.
(5) See Note H of Notes to Unaudited Pro Forma Condensed Combined Statements
of Operations.
(6) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is a widely accepted financial indicator of a company's ability to
service or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows or other consolidated income or cash
flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(7) Earnings used in computing the ratio of earnings to fixed charges consist
of earnings before income taxes plus fixed charges. Fixed charges consist
of interest expense and amortization of debt issuance costs.
(8) Earnings were inadequate to cover fixed charges by approximately $173,000
in 1993 and approximately $189,000 in 1994 (excluding the effect of a non-
cash finance charge of $854,000).
(9) Assumes all pending acquisitions to be completed in 1996 were completed as
of the balance sheet date and adjusted to reflect the sale of the
Debentures.
RECENT DEVELOPMENTS
On June 4, 1996, the Company announced that it had entered into a letter of
intent to enter into a joint venture with a wholly-owned subsidiary of Phycor,
Inc. to lease outpatient imaging equipment and facilities to affiliated
providers in southern Georgia and northern Florida through a new entity. The
joint venture will initiate operations in the north Florida area with both the
Company and the Phycor subsidiary contributing their outpatient imaging and
nuclear medicine facilities to the new venture in return for equal interests in
the joint venture. In addition, a new facility in the Riverside area of
Jacksonville is expected to be completed and open August 30, 1996. The
facilities will then be leased to an affiliate of the Company and First Coast
Medical Group, a clinic managed by the Phycor subsidiary, which physician group
will actually provide the services.
-4-
<PAGE>
THE OFFERING
Securities Offered by the Company...... None.
Common Stock Offered by the Selling
Securityholders...................... 880,445 shares.
Debentures Offered by the
Selling Securityholders............... $57,500,000 principal amount of 9%
Subordinated Convertible Debentures
Due 2003.
Terms of the Debentures
Maturity Date.......................... March 31, 2003.
Interest Payment Dates................. March 31 and September 30, commencing
September 30, 1996.
Interest............................... 9% per annum.
Conversion............................. The Debentures are convertible at the
option of the Holder into Common
Stock at any time prior to maturity,
unless previously redeemed or
repurchased, at a conversion price of
$9.00 per share, subject to
adjustment in certain circumstances.
Redemption at the Option
of the Company....................... The Company may redeem the Debentures
, in whole or in part, at any time on
or after March 31, 1999, upon not
less than 30 nor more than 60 days'
notice, at the redemption prices set
forth herein plus accrued but unpaid
interest to the date of redemption.
See "Description of the Debentures--
Redemption."
Redemption at the Option
of the Holders....................... Upon a Change of Control (as defined
herein), the Company will offer to
repurchase the Debentures at 100% of
the principal amount thereof plus
accrued but unpaid interest to the
date of repurchase. See "Description
of the Debentures-Change of Control."
In the event the Company's
Consolidated Net Worth (as defined
herein) at the end of any two
consecutive fiscal quarters is below
$18.0 million (a "Net Worth
Deficiency"), the Company will offer
to repurchase up to 12.5% of the
aggregate principal amount of
Debentures at 100% of the principal
amount thereof plus accrued but
unpaid interest to the date of
repurchase. See "Description of the
Debentures--Maintenance of
Consolidated Net Worth."
Ranking................................ The Debentures are subordinated to
all Senior Indebtedness (as defined
herein) and will be effectively
subordinated to certain obligations
of the subsidiaries of the Company.
At March 31, 1996, Senior
Indebtedness (as defined herein) was
approximately $28.1 million. See
"Description of the Debentures
--Ranking.
Restrictive Covenants.................. The indenture under which the
Debentures are issued (the
"Indenture") limits (i) the issuance
of additional debt by the Company,
(ii) the payment of dividends on the
capital stock of the Company and
investments by the Company, (iii)
certain transactions with affiliates,
(iv) the creation of liens, (v) the
issuance of Disqualified Stock (as
defined herein) by the Company and
(vi) the lines of business of the
Company. The Indenture also prohibits
certain restrictions on distributions
from subsidiaries. However, all these
limitations and prohibitions are
subject to a number of important
qualifications. See "Description of
the Debentures--Certain Covenants of
the Company."
Common Stock Outstanding at
May 31, 1996.......................... 8,696,876 shares (1)(2)
Nasdaq National Market Symbol.......... Common Stock - USDL
Use of Proceeds........................ All of the proceeds from the sale of
the Debentures, the underlying Common
Stock and the Common Stock offered
hereby will be received by the
Selling Securityholders.
- -------------------------
(1) 1,163,853 shares of Common Stock are being held in escrow (the "Escrow
Shares") and are subject to forfeiture and will be contributed to the
capital of the Company if the Company does not attain certain earnings
levels or the market price of the Company's Common Stock does not achieve
certain targets, by March 31, 1997. See "Description of Securities --
Escrow Shares."
(2) On May 28, 1996, the Company called for redemption on June 28, 1996 its
Class A Warrants, which will result in the issuance of up to 3,571,649
additional shares if all outstanding Class A Warrants are exercised.
-5-
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following considerations
before purchasing the Debentures offered hereby.
No Assurance of Continued Rapid Growth. The Company commenced
operations in June 1993, completed its first clinical laboratory acquisition in
October 1993 and its first imaging acquisition in June 1994. The Company has
grown primarily through acquisitions, of which 10 were completed in 1995 and
several of which are expected to be completed by June 30, 1996. The Company's
ability to meet its objective to become the leading network provider of imaging
services is dependent to a large extent upon its continuing ability to continue
to consummate acquisitions of Imaging Centers and Therapy Centers and to
increase revenues after completion of each such acquisition. The process of
identifying suitable acquisition candidates and proposing, negotiating and
completing acquisitions is lengthy and complex. In certain markets there is
substantial competition for potential acquisitions. There can be no assurance
that the Company will be able to sustain its rapid rate of growth.
Management of Planned Rapid Growth. The Company's financial performance
is substantially dependent upon its ability to integrate the operations of
acquired Imaging Centers and Therapy Centers into the Company's infrastructure,
reduce operating expenses of acquired entities, its ability to deliver
equivalent service to clients immediately after an acquisition without
significant interruption or inconvenience and various other risks associated
with the acquisition of businesses, including expenses associated with the
integration of the acquired businesses. In order to manage its planned
continuing rapid growth, the Company will be required to hire additional
management and implement new systems. Although to date the acquired entities
have been operated by the Company on a profitable basis and successfully
integrated into the Company, there can be no assurance that the Company will be
able to successfully operate these and other operations that may be acquired in
the future. Several potential acquisitions being considered by the Company are
substantially larger than those acquired in the past, which will substantially
increase revenues but may also pose additional operational issues. If the
Company is unable to manage growth effectively, the Company's operating results
could be materially adversely affected.
Dependence on Third Party Reimbursement. Approximately 95% all of the
Company's revenues are derived from third party payors. For 1995, the Company
derived approximately 69% of its revenues from non-government payors and
approximately 26% from government sponsored healthcare programs (principally,
Medicare and Medicaid). The Company's revenues and profitability may be
materially adversely affected by the current trend in the healthcare industry
toward cost containment as government and private third party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with services providers. Continuing budgetary constraints at both the
federal and state level and the rapidly escalating costs of healthcare and
reimbursement programs have led, and may continue to lead, to significant
reductions in government and other third party reimbursements for certain
medical charges and to the negotiation of reduced contract rates or capitate or
other financial risk-shifting payment systems by third party payors with service
providers. Both the federal government and various states are considering
imposing limitations on the amount of funding available for various healthcare
services. The Company cannot predict whether or when any such proposals will be
adopted or, if adopted and implemented, what effect, if any, such proposals
would have on the Company. In addition, rates paid by private third party
payors, including those that provide Medicare supplemental insurance, are
generally higher than Medicare payment rates. Changes in the mix of the
Company's patients among the non-government payors and government sponsored
healthcare programs, and among different types of non-government payors and
government sponsored healthcare programs, and among different types of
non-government payor sources, could have a material adverse effect on the
Company. Further reductions in payments to physicians or other changes in
reimbursement for healthcare services could have a material adverse effect on
the Company, unless the Company is otherwise able to offset such payment
reductions through cost reductions, increased volume, introduction of new
procedures or otherwise.
Reliance and Restrictions on Patient Referrals. The Company is highly
dependent on referrals from physicians who have no contractual or economic
obligation to refer patients to the Company's facilities. If a sufficiently
large number of physicians elected at any time to stop referring patients to
with the Company, it would have a material adverse effect on the Company's
results of operations. In particular, due to the potential
-6-
<PAGE>
for disruption of the physician relationship in connection with the assumption
of control of a facility, there can be no assurance that the Company will retain
all of the business conducted by that facility at the time of the acquisition.
To date, the Company has experienced a decline in referrals only to its clinical
laboratory business and one Imaging Center, although this Center is still
profitable.
Federal and state laws generally restrict physicians from referring
their patients to entities, including diagnostic testing and radiation oncology
therapy facilities, in which the physicians have a financial interest. This
precludes physicians from referring Medicare patients to the Company if the
physician has any financial relationship with the Company. Violations of the law
may result in denial of payments for the service, requirement to refund payment
for the service, assessment of civil monetary penalties, and exclusion of the
physicians from the Medicare and Medicaid programs. Such self-referral
prohibitions apply in certain states to additional third party payors, including
private insurance companies and workers' compensation programs. Further, the
federal anti-kickback statute prohibits persons or entities from offering or
receiving remuneration for the referral of patients or the inducement of the
purchase of a service covered by Medicare, Medicaid or other state healthcare
programs, including payments for the referral of patients to clinical
laboratories or radiology centers.
Federal and state self-referral and anti-kickback laws may also affect
the Company's ability to structure future acquisitions of physician-owned
businesses. Although these laws have created new business opportunities in that
physicians must divest their financial interests in imaging centers and therapy
centers, these laws also may have an adverse impact on the Company's ability to
acquire new operations while maintaining the former physician-owners as part of
the referral base. Many of these restrictions will no longer apply if the
Company meets certain size criteria, which it expects to reach in 1997. In the
past, Congress has considered legislation that could expand the self-referral
ban from Medicare and Medicaid to all payors. There can be no assurance that
such legislation will not be adopted or if adopted will not have a material
adverse effect on the Company.
Violations of the anti-kickback and other statutes could result in
significant civil or criminal penalties, which could have a material adverse
effect on the Company. The Company is unaware of any current regulatory
investigations or regulatory or judicial proceedings pending against it or any
of its facilities alleging material violations of any such laws. Nevertheless,
while the Company endeavors to comply with all laws, regulations and other legal
requirements applicable to its operations, there is no assurance that applicable
statutes and regulations might not be interpreted by a regulatory or judicial
authority in a manner that would adversely affect the Company.
Effect of Cost Containment on Referrals. In an effort to control costs,
non-governmental healthcare payors have implemented cost containment programs
which could limit the ability of physicians to refer patients to the Company's
facilities. For example, persons enrolled in prepaid healthcare plans, such as
health maintenance organizations ("HMOs"), often are not free to choose where to
obtain imaging, laboratory or radiation oncology therapy services. Rather, the
health plan provides these services directly or contracts with providers at
favorable rates and requires its enrollees to obtain such services only from
such providers. Some insurance companies and self-insured employers also limit
testing services to contracted providers. Such "closed" payment systems are now
common to combat the rising cost of healthcare. As a result, the Company
actively seeks and has obtained managed care contracts to provide imaging and
clinical testing services. The Company seeks acquisitions in geographic areas in
which in currently has Imaging Centers in order to create networks which it
believes will make it more attractive to obtain exclusive contracts with managed
care providers. There can be no assurance that the Company will be able to
compete successfully in the managed care arena against larger companies with
greater resources.
Exercise of Outstanding Warrants; Dilution. At May 31, 1996, the
Company had outstanding 3,571,649 Class A Warrants and 4,477,851 Class B
Warrants. On May 28, 1996, the Company called the Class A Warrants for
redemption and expects that substantially all of such warrants will be exercised
prior to the June 28, 1996 redemption date. The exercise of Class A Warrants
will result in the issuance of up to 3,571,649 additional Class B Warrants. In
addition, the Company has outstanding (i) Unit Purchase Options relating to
331,500 Units, each Unit consisting of one share of Common Stock, one Class A
Warrant and one Class B Warrant ("Units") held by ("Unit Purchase Options"), of
which 170,000 have an exercise price of $7.25 per Unit and 161,500 have an
exercise price of $7.82 per Unit, (ii) 1,324,442 warrants with exercise prices
ranging from $2.50 to $9.00 (of which the shares underlying 719,445 of which are
being offered hereby), and (iii) 1,627,000 Stock Options with
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<PAGE>
exercise prices ranging from $2.00 to $6.50. The Company is unable to predict
the timing of the exercise of any of the above securities, although they are
likely to be exercised at such time as the market price of the Common Stock is
substantially above the exercise price of the Warrants, which will result in
dilution to existing stockholders. Further, there can be no assurance that the
Company will be able to effectively utilize the proceeds from any warrant
exercises, which proceeds could be substantial.
Future Sales of Common Stock. Of the 8,696,867 shares of Common Stock
outstanding at May 31, 1996, approximately 1.8 million shares are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act, and under certain circumstances may be sold without registration pursuant
to such Rule. Such shares are eligible for sale under Rule 144 at varying
periods, although a substantial portion of such shares are subject to an
underwriter's lock-up through September 11, 1996. The Company is unable to
predict the effect that sales made under Rule 144 or otherwise may have on the
then prevailing market price of the Common Stock although any substantial sale
of restricted securities pursuant to Rule 144 may have an adverse effect. An
additional 1,163,853 shares of Common Stock, all of which are "restricted
securities," are in escrow (the "Escrow Shares") and will be released on March
31, 1997 only if an earnings target for 1996 is met. In addition, in connection
with acquisitions, the Company has granted to certain stockholders piggyback
registration rights with respect to approximately one million shares of Common
Stock, approximately 900,000 warrants and the securities underlying the Unit
Purchase Options. The sale, or the availability for sale, of substantial amounts
of the Company's securities in the public market at any time could adversely
affect the prevailing market price of such securities. See "Description of
Capital Stock."
Possible Issuance of Additional Common Stock in Acquisitions; Charge to
Earnings for Amortization of Goodwill from Acquisitions. A major element of the
Company's business strategy is to acquire additional medical service facilities.
The consideration for these acquisitions may involve cash, notes and a
significant number of shares of Common Stock, depending on the size of the
acquisition. In connection with acquisitions, on a pro forma basis at March 31,
1996 the Company had approximately $42.7 million of goodwill and other
intangibles on its balance sheet, which will be amortized over varying periods
of up to 20 years and will result in annual charges to income of approximately
$2.5 million for the next two years and lesser amounts in future years. Future
acquisitions will most likely result in additional amortization charges. There
can be no assurance that the value of such goodwill will ever be realized by the
Company.
Broad Discretionary Use of Proceeds; Absence of Substantive Disclosure
Relating to Acquisitions. The Company has broad discretion with respect to the
specific application of its working capital, which are intended to be used for
acquisitions of Imaging Centers and Therapy Centers and for working capital. The
Company also intends to use excess working capital for acquisitions. Although
the Company will endeavor to evaluate the risks inherent in any particular
facility, there can be no assurance that the Company will properly ascertain all
such risks. The Company will have virtually unrestricted flexibility in
identifying and selecting a prospective acquisition candidate. The Company does
not intend to seek stockholder approval for any acquisitions unless required by
applicable law or regulations and stockholders will most likely not have an
opportunity to review financial information on an acquisition candidate prior to
consummation of an acquisition. See "Use of Proceeds."
Substantial Competition. The market for imaging services is highly
fragmented, with over 2,200 outpatient diagnostic Imaging Centers nationwide and
no dominant national or regional imaging services provider. Competition varies
by market and is generally higher in larger metropolitan areas where there is
likely to be more facilities and more managed care organizations putting pricing
pressure on the market. The Company competes with larger healthcare providers,
such as hospitals, as well as other private clinics and radiology practices that
own diagnostic imaging equipment. Competition often focuses on physician
referrals at the local market level. Successful competition for referrals is a
result of many factors, including participation in healthcare plans, quality and
timeliness of test results, type and quality of equipment, facility location,
convenience of scheduling and availability of patient appointment times.
Competition in the radiation oncology therapy market is similar to the
competition in the imaging market. Competition in the clinical laboratory
industry in the Philadelphia area, the location of the Company's laboratory
operations, is intense. Many competitors are larger and have greater financial
resources than the Company. The Company competes primarily on the basis of
quality of equipment and service. There can be no assurance that competition in
existing or new markets of the Company will not have a material adverse effect
on the Company's results of operations. In addition, changes in the regulatory
environment in which the Company operates and governmental and private
reimbursement policies have increased
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<PAGE>
competition in the industry and could thereby have a material adverse effect on
the Company's results of operations.
Dependence on Key Personnel. The Company's success depends upon the
continued contributions of its executive officers and key operating personnel.
The Company has entered into employment agreements with each of its executive
officers. The loss of services of, or a material reduction in the amount of time
devoted to the Company by either of such individuals or certain other key
personnel could adversely affect the business of the Company. Dr. Robert Burke,
M.D., the Company's President, devotes a portion of his time to his clinical
radiology practice, and conflicts may arise with respect to his allocation of
time. The Company has obtained key-man life insurance on the lives of each of
all of its executive officers naming the Company as beneficiary. The Company has
also entered into agreements with key operating personnel, including the
directors of operations for each of its Imaging Centers.
Governmental Regulation, Quality Assurance and Licenses. There are
numerous federal and state laws that regulate Imaging Centers and clinical
laboratories and require certification by the federal government and various
state and local instrumentalities. The Company believes that it is in compliance
with all relevant federal and state rules and regulations. Imaging Centers
performing mammography services must meet federal, and in some jurisdictions
state, standards for quality, as well as certification requirements, in order to
receive reimbursement. Each of the Company's facilities have received federal
certification ,as well as any required state certification. Under the Clinical
Laboratory Improvements Amendments Act of 1988 ("CLIA"), all laboratories must
be certified by the government, meet the government's quality and personnel
standards, undergo proficiency testing, be subject to biennial inspections and
remit certain fees. The Company's laboratory facility has been certified by the
College of American Pathologists as meeting CLIA requirements for the
performance of highly complex testing.
In some instances, the Company is also subject to licensing and/or
regulation under federal and/or state laws relating to the handling and disposal
of medical specimens, infectious and hazardous waste and radioactive materials,
as well as to the safety and health of laboratory employees. In addition, the
Company is subject to state regulation, such as personnel licensing
requirements, which may include qualifying examinations and continuing education
requirements. The failure of the Company to remain in compliance with applicable
laws and regulations could have a material adverse effect on its business and
financial condition.
Potential Liability and Insurance. The provision of medical services
entails an inherent risk of professional malpractice and other similar claims.
The Company believes that it does not engage in the practice of medicine;
however, the Company could be implicated in a medical malpractice action through
one of its providers, and there can be no assurance that claims, suits or
complaints relating to services delivered by a radiologist or medical service
provider will not be asserted against the Company. Although the Company
maintains insurance it believes is adequate both as to risks and amounts, there
can be no assurance that any claim asserted against the Company for professional
or other liability will be covered by, or will not exceed the coverage limits
of, such insurance. In addition, the availability and cost of professional
liability insurance has been affected by various factors, many of which are
beyond the control of the Company. The Company currently maintains liability
coverage and requires all of its affiliated physicians to maintain malpractice
and other liability coverage. There can be no assurance that the Company will be
able to maintain insurance in the future at a cost that is acceptable to the
Company or at all. Any claim made against the Company not fully covered by
insurance could have a material adverse effect on the Company.
Possible Volatility of Stock Price. Market prices for the Company's
securities are influenced by a number of factors, including quarterly variations
in the financial results of the Company and any competitors, changes in
earnings, estimates by analysts, conditions in the digital information market,
the overall economy and the financial markets.
Substantial Indebtedness. As a result of the issuance of the Debentures
and notes in connection with acquisitions, the Company has indebtedness that is
substantial in relation to its stockholder's equity. See "Capitalization." The
indenture relating to the Debentures imposes significant operating and financial
restrictions on the Company. Such restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
to incur additional indebtedness and pay dividends. These restrictions, in
combination with the leveraged nature of the Company, could limit the ability of
the Company to effect future financings or
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<PAGE>
otherwise may restrict corporate activities. The indenture permits the Company
to incur additional indebtedness under certain conditions, and the Company
expects to obtain additional indebtedness as so permitted.
The Company's leverage could have important consequences including the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Company for other purposes; (iii) the Company's leverage may hinder its
ability to adjust rapidly to changing market conditions; and (iv) the leverage
could make the Company more vulnerable in the event of a downturn in general
economic conditions or its business.
Control by Insiders. The executive officers, directors and principal
stockholders of the Company beneficially own approximately 32% of the
outstanding Common Stock of the Company (including voting proxies for shares
issued in recent acquisitions) and are able to influence the election of the
Company's directors and thereby direct the policies of the Company. Further, as
a result of being granted voting proxies with respect to shares of Common Stock
to be issued in pending acquisitions, such persons will have voting control over
additional shares of Common Stock.
Possible Adverse Effects of Authorization of Preferred Stock;
Anti-Takeover Provisions. The Company's Certificate of Incorporation authorizes
the issuance of 5,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval (but subject to applicable government regulatory
restrictions), to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. The issuance of such preferred stock could make the possible
takeover of the Company or the removal of management of the Company more
difficult, discourage hostile bids for control of the Company in which
stockholders may receive premiums for their shares of Common Stock or otherwise
dilute the rights of holders of Common Stock and the market price of the Common
Stock. The Company's Certificate of Incorporation and Bylaws also contains
certain provisions which could discourage a hostile bid for the Company.
Further, the Company is subject to the Delaware General Corporation Law
provisions that may have the effect of discouraging persons from pursuing a
non-negotiated takeover of the Company and preventing certain changes of
control. As a result, potential acquirors may be discouraged from seeking to
acquire control of the Company through the purchase of Common Stock, which could
have a negative effect on the price of the Company's securities.
Holding Company Structure; Subordination. The Debentures are a direct
obligation of the Company, which derives substantially all of its revenues from
the operations of its subsidiaries. The ability of the Company to make interest
payments on or redeem the Debentures and to pay dividends, if any, on the Common
Stock will be primarily dependent upon the receipt of dividends or other
distributions from such subsidiaries. The payment of dividends from the
subsidiaries to the Company and the payment of any interest on or the repayment
of any principal of any loans or advances made by the Company to any of its
subsidiaries may be subject to statutory or contractual restrictions and are
contingent upon the earnings of such subsidiaries. Although the Company believes
that distributions and dividends from its subsidiaries will be sufficient to pay
interest on the Debentures as well as to meet the Company's other obligations,
there can be no assurance they will be sufficient.
The Debentures are subordinated in right of payment to all existing and
future Senior Indebtedness of the Company. By reason of such subordination, in
the event of an insolvency, liquidation or other reorganization of the Company,
the Senior Indebtedness must be paid in full before the principal of, premium if
any, and interest on the Debentures may be paid. At March 31, 1996, Senior
Indebtedness was approximately $28.1 million, substantially all of which was
incurred by subsidiaries. Because substantially all of the Company's operations
are conducted through subsidiaries, claims of the creditors of such subsidiaries
will have priority with respect to the assets and earnings of such subsidiaries
over the claims of the creditors of the Company, including holders of the
Debentures, except to the extent the Company is itself recognized as a creditor
of such subsidiary or such other
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<PAGE>
creditors have agreed to subordinate their claims to the payment of the
Debentures. Pursuant to the Indenture, the Company's subsidiaries will be
prohibited from incurring Debt which is not Senior Indebtedness.
The Debentures are not be secured by any of the assets of the Company
or its subsidiaries. In addition, certain obligations of the Company, primarily
acquisition and equipment indebtedness, are secured by pledges of certain assets
of the Company or its subsidiaries.
Funding of Repurchase Obligations; Absence of Sinking Fund. There is no
sinking fund with respect to the Debentures, and at maturity the entire
outstanding principal amount thereof will become due and payable by the Company.
Also, upon the occurrence of certain events the Company will be required to
offer to repurchase all or a portion of the outstanding Debentures. The source
of funds for any such payment at maturity or earlier repurchase will be the
Company's available cash or cash generated from operating or other sources,
including, without limitation, borrowings or sales of assets or equity
securities of the Company. There can be no assurance that sufficient funds will
be available at the time of any such event to pay such principal or to make any
required repurchase. See "Description of the Debentures."
Dividends Unlikely. The Company does not intend to declare or pay cash
dividends in the foreseeable future. Earnings are expected to be retained to
finance and expand the Company's business. The Company's revolving line of
credit prohibits the payment of dividends without the consent of the lender. See
"Dividend Policy."
Forward-Looking Statements. Prospective investors are cautioned that
the statements in this Prospectus that are not descriptions of historical facts
may be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified under "Risk Factors" and elsewhere
in this Prospectus or documents incorporated by reference herein.
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<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization as adjusted
to give effect to the sale of the Debentures and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
MARCH 31, 1996
--------------
ACTUAL PRO FORMA(1)
------ ------------
(In thousands)
<S> <C> <C>
Long-term Liabilities (excluding current portion) (2)........... 72,207 79,986
Stockholders' Equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued............................... -- --
Common Stock, $.01 par value, 50,000,000
shares authorized; 7,662,099 shares issued and
outstanding actual; 8,665,591 pro forma (3) (4)............ 77 103
Additional Paid-in Capital...................................... 24,328 41,737
Deferred Charges................................................ (913) (913)
Retained Earnings............................................... 4,038 4,038
------- ---------
Total Stockholders' Equity................................. $27,530 $ 44,965
------- ---------
Total Capitalization....................................... $99,737 $136,940
======= ========
</TABLE>
- ------------------
(1) Pro forma for the six acquisitions completed subsequent to March 31,
1996 and to be completed by June 30, 1996. Assumes the issuance of
approximately 1,632,969 shares of Common Stock in connection with
such acquisitions. See "Pro Forma Condensed Combined Financial
Statements."
(2) Includes the Debentures.
(3) Does not include: (i) 4,237,250 shares issuable on exercise of the
Class A Warrants and 8,049,500 shares issuable upon exercise of the
outstanding Class B Warrants and the Class B Warrants issuable upon
exercise of the Class A Warrants (of which 665,601 Class A Warrants
have been exercised as of May 31, 1996); (ii) 331,500 shares issuable
upon exercise of the Unit Purchase Options or 994,500 shares issuable
upon exercise of the Class A or Class B Warrants included in or
underlying such Units; (iii) 1,324,442 shares issuable upon exercise
of the Finance Warrants (having exercise prices of $2.50 to $9.00 and
expiring at various times in through 2001); (iv) 1,627,000 shares
issuable upon exercise of outstanding Stock Options (having exercise
prices of $2.00 to $6.50). See "Management--Stock Option Plans,"
"Certain Transactions," "Description of Capital Stock" and "Plan of
Distribution."
(4) Includes the Escrow Shares. See "Principal Stockholders--Escrow
Arrangements."
DIVIDEND POLICY
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends on its Common Stock in the foreseeable future as
earnings are expected to be retained to finance the Company's growth. Subject to
applicable regulations, declaration of dividends in the future will be at the
discretion of the Company's Board of Directors, which will review its dividend
policy from time to time.
The Indenture limits the Company's ability to pay dividends or make
other distributions on its Common Stock. In addition, the Company has a
revolving line of credit which prohibits the payment of dividends without the
consent of the lender. See "Description of Debentures--Certain Covenants--
Limitation on Restricted Payments and Investments."
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded under the symbol USDL on the NNM
since October 9, 1995 and prior to that on the Nasdaq SmallCap Market since
October 20, 1994. The following table sets forth the high and low last sale
prices for the Common Stock for the periods commencing October 20, 1994 as
reported by Nasdaq. These prices do not reflect retail mark-ups, markdowns or
commissions.
HIGH LOW
---- ---
1994
October 20, 1994 through December 31, 1994.. 5 1/4 4 1/4
1995
January 1 through March 31, 1995............ 5 3/8 3 3/4
April 1 through June 30, 1995............... 5 3 9/16
July 1 through August 10, 1995.............. 5 3/4 4 3/4
October 1 through December 31, 1995......... 7 13/16 5 3/8
1996
January 1, 1996 through March 31, 1996...... 8 9/16 6 3/8
April 1, 1996 through June 3, 1996......... 14 7 1/4
The closing bid price of the Common Stock as of June 4, 1996 as
reported by Nasdaq was $14 per share.
As of March 1, 1996, there were approximately 168 record holders and in
excess of 2,000 beneficial holders of Common Stock.
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<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated historical information covering the period
ended December 31, 1993, the two years ended December 31, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 has been derived from, and should be
read in conjunction with, the audited Consolidated Financial Statements for the
two years ended December 31, 1995 included elsewhere in this Prospectus. The pro
forma financial information for the year ended December 31, 1995 and the three
months ended March 31, 196 has been derived from the unaudited Pro Forma
Condensed Combined Financial Statements of the Company. The Company's unaudited
financial statements include all adjustments, consisting of only normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. The results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. The information below should be read in conjunction with the
historical and pro forma financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein.
<TABLE>
ACTUAL PRO FORMA
------------------------------------------------ -------------------------
PERIOD
FROM THREE MONTHS THREE MONTHS
JUNE 17, 1993 YEAR ENDED ENDED YEAR ENDED ENDED
TO DECEMBER DECEMBER 31, MARCH 31 DECEMBER MARCH 31,
31, 1993(1) 1994 1995 1995 1996 31, 1995 (2) 1996
----------- ---- ---- ------ ---- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $338 $5,082 $28,839 $4,798 $12,074 $79,117 $21,590
Operating Expenses:
General and administrative........... 470 4,298 20,339 3,562 7,558 49,732 13,121
Depreciation and amortization........ 46 515 3,003 396 1,304 8,824 2,344
Other (income) expense............... (4) (80) (227) (26) (2) (428) (42)
Interest expense (net)............... 19 538 1,276 194 693 9,691 2477
Non-cash financing charge............ -- 854 414 -- --
Minority interest.................... -- -- 280 62 184 1,281 312
Total expenses........................ 531 6,125 25,085 4,188 9,737 69,030 18,212
Net income (loss) before income
taxes and extraordinary item........ (193) (1,043) 3,754 10,087 3,378
Income tax expense (benefit).......... 1 (403) 729 12 795 3,262 1,211
Net income (loss) before
extraordinary item.................. (194) (640) 3,025 598 1,542 6,825 2,167
Extraordinary item.................... -- -- 306 -- -- 306 --
Net income (loss) after
extraordinary item.................. $(194) $(640) $3,331 $598 $1,542 $7,131 $2,167
PER SHARE(4)(5):
Primary:
Earnings before
extraordinary item.................. $(29) $(.48) $.61 $.15 $.25 $.86 $.25
Extraordinary item................... -- -- .06 - - .04 -
-- -- --- ------- ------- --- -------
Net earnings (loss).................. $(.29) $(.48) $.67 $.15 $.25 $.90 $.25
Fully diluted:
Earnings (loss) before
extraordinary item.................. $(.29) $(.48) $.57 $.15 $.16 $.71 $.17
Extraordinary item................... -- -- .03 - - .02 -
------- ------- ----- -------
Net earnings (loss).................. $(.29) $(.48) $.60 $.15 $.16 $.73 $.17
Weighted average shares outstanding:
Primary.............................. 674,542 1,328,033 4,996,021 4,031,961 6,218,847 7,882,247 8,851,847
Fully diluted........................ 674,542 1,328,033 11,761,427 4,031,961 17,491,361 20,509,947 25,986,630
</TABLE>
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<PAGE>
<TABLE>
ACTUAL PRO FORMA
----------------------------------------------------- ---------------------
PERIOD
FROM THREE MONTHS THREE MONTHS
JUNE 17, 1993 YEAR ENDED ENDED YEAR ENDED ENDED
TO DECEMBER DECEMBER 31, MARCH 31 DECEMBER MARCH 31,
31, 1993(1) 1994 1995 1995 1996 31, 1996(2) 1996
----------- ---- ---- ---- ---- ----------- ------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATIONS DATA:
EBITDA(6)............................. $-- $784 $9,002 1,236 4,516 $29,385 8,469
Ratio of Earnings to Fixed
Charges (7)(8)...................... -- -- 3.22x 4.14x 4.37x 1.98x 2.36x
</TABLE>
<TABLE>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
ACTUAL ACTUAL PRO FORMA(10)
------ ------ -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.............................................. $ 5,946 $ 53,832 $ 50,317
Total assets................................................. 57,279 111,639 160,099
Long-term liabilities........................................ 21,653 72,207 91,975
Minority interest............................................ 716 812 3,363
Stockholders' equity......................................... 24,493 27,530 44,965
</TABLE>
- ---------------------------------
(1) The Company commenced operations on June 17, 1993.
(2) Assumes all acquisitions completed in 1995 were completed as of January 1,
1995. See "Pro Forma Condensed Combined Financial Statements."
(3) Assumes all 1995 acquisitions, pending acquisitions to be completed in
1996 and this offering were completed as of January 1, 1995. See "Pro
Forma Condensed Combined Financial Statements."
(4) Share information excludes 1,163,853 Escrow Shares. See "Principal
Stockholders--Escrow Arrangements."
(5) No cash dividends have been declared or paid by the Company.
(6) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA is a widely accepted financial indicator of a
company's ability to service or incur debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
or other consolidated income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
(7) Earnings used in computing the ratio of earnings to fixed charges
consist of earnings before income taxes plus fixed charges. Fixed
charges consist of interest expense and amortization of debt issuance
costs.
(8) Earnings were inadequate to cover fixed charges by approximately
$173,000 in 1993 and approximately $189,000 in 1994 (excluding the
effect of a one-time non-cash finance charge of $854,000)
(9) Total number of procedures performed at Imaging Centers that were acquired
in 1994 and 1995.
(10) Assumes all pending acquisitions to be completed in 1996 were completed
as of March 31, 1996 and adjusted to reflect the sale of the Debentures
in April 1996.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company did not commence operations until the completion of its first
acquisition in October 1993. The acquisitions completed by the Company to date
are as follows: (i) Havertown Medical Lab in October 1993, (ii) Computerized
Medical Imaging in June 1994, (iii) Columbus Diagnostic Center in August 1994,
(iv) Alpha Laboratory in November 1994, (v) Morton Clinical Laboratory in
December 1994, (vi) Santa Fe Imaging Center in January, 1995, (vii) Laborde
Diagnostic Center in February 1995, effective January 2, 1995 (80% owned),
(viii) Community Radiology of Virginia in February 1995, (ix) Arrow Clinical
Laboratories in March 1995, (x) Salisbury Imaging Center effective April 1995
(80% owned), (xi) Orange Park Diagnostic Center effective June 1995, (xii) San
Francisco Magnetic Resonance Center in September 5, 1995, (xiii) Advanced
Medical Imaging Center in October 1995, (xiv) Modesto Imaging Center effective
September 1995, (xv) FutureCare Affiliates, Inc. in November 1995, (xvi)
Radiation Oncology Centers, Inc. effective March 31, 1996, (xvii) Heights
Imaging Center effective June 1, 1996, (xviii) South Coast Radiologists in June
1996 and (xix) U.S. Imaging in June 1996. The following acquisitions are
expected to close in June 1996: (i) DISC Imaging and (ii) Allegheny Imaging. The
Company's ability to meet its objective to become the leading network provider
of imaging services is dependent to a large extent upon its continuing ability
to consummate acquisitions of Imaging Centers and Therapy Centers and to
increase revenues after completion of each acquisition.
As a result of the acquisitions, the Company will have recorded
approximately $35.4 million of goodwill and other intangibles on its pro forma
balance sheet which will be amortized over varying periods of up to 20 years and
will result in annual charges to income of approximately $2.5 million for the
next two years and lesser amounts in future years. The Company recognized
approximately $834,000 on a historical basis and approximately $2,000,000 on a
pro forma basis of goodwill and other intangibles amortization in 1995 and
approximately $192,000 in 1994.
Future acquisitions will likely result in additional amortization charges.
The Company's financial performance is substantially dependent upon its
ability to integrate the operations of acquired Imaging Centers and Therapy
Centers into the Company's infrastructure and reduce operating expenses of
acquired entities, its ability to deliver equivalent service to clients
immediately after an acquisition without significant interruption or
inconvenience and various other risks associated with the acquisition of
businesses, including expenses associated with the integration of the acquired
businesses. In order to manage its planned continuing rapid growth, the Company
will be required to hire additional management and implement new systems.
Although to date the acquired entities have been operated by the Company on a
profitable basis and successfully integrated into the Company, there can be no
assurance that the Company will be able to successfully operate these and other
operations that may be acquired in the future. Several potential acquisitions
being considered by the Company are substantially larger than those acquired in
the past, which will substantially increase revenues but may also pose
additional operational issues. If the Company is unable to manage growth
effectively, the Company's operating results could be materially adversely
affected.
Approximately 95% all of the Company's revenues are derived from third
party payors. For 1995, the Company derived approximately 69% of its revenues
from non-government payors and approximately 26% from government sponsored
healthcare programs (principally, Medicare and Medicaid). The Company's revenues
and profitability may be materially adversely affected by the current trend in
the healthcare industry toward cost containment as government and private third
party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with services providers. Continuing
budgetary constraints at both the federal and state level and the rapidly
escalating costs of healthcare and reimbursement programs have led, and may
continue to lead, to significant reductions in government and other third party
reimbursements for certain medical charges and to the negotiation of reduced
contract rates or capitate or other financial risk-shifting payment systems by
third party payors with service providers. In addition, rates paid by private
third party payors, including those that provide Medicare supplemental
insurance, are generally higher than Medicare payment rates. Changes in the mix
of the Company's patients among the non-government payors and government
sponsored healthcare programs, and among different types of non-government
payors and government sponsored healthcare programs, and among different types
of non-government payor sources, could have a material adverse effect on the
Company. Further reductions in payments to physicians or other changes in
reimbursement for healthcare services could have a material adverse effect on
the Company, unless the Company is otherwise able to offset such payment
reductions through cost reductions, increased volume, introduction of new
procedures or otherwise.
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<PAGE>
The Company reports revenue at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated prospectively determined adjustments under reimbursement agreements
with third-party payors. These adjustments are accrued on an estimated basis in
the period the related services are rendered and adjusted in future period as
final settlements are determined. As a result, the Company does not have any
significant bad debt expense.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995.
Net patient revenue for the three months ended March 31, 1996 increased
$7,275,422 from $4,798,153 to $12,073,575 as compared to the comparable 1995
period. Net income for the three months ended March 31, 1996 increased $994,664
from $597,774 to $1,542,438 as compared to 1995. The revenue increase reflects
(i) primarily the acquisition of nine Imaging Centers, which accounted for
approximately $6.6 million of the increase, (ii) enhanced marketing efforts by
the Company and (iii) recapture of certain Medicare business which former
physician-owners were previously prohibited from referring to Imaging Centers
until the sale of such Imaging Centers to the Company. The net income increase
reflects the direct relationship of such acquisitions, the implementation of
internal controls over administrative functions and the consolidation of
administrative and accounting functions.
Upon acquisition of an Imaging Center, the Company initiates a process to
improve operating performance through the implementation of marketing programs
and the consolidation of accounting and administrative functions. It generally
requires three to six months for the benefits form such programs to be reflected
in operating results. As a result, actual and pro forma results of operations
for the three months ended March 31, 1996 do not fully reflect such benefits
with respect to the acquisition of two Imaging Centers completed in late 1995.
The Company's clinical laboratory operations have continued to experience
intense competitive and pricing pressures since 1995 as a result of managed care
and independent physician practice competition. Clinical laboratory revenues
accounted for approximately $569,000 or 4.7% of the Company's revenues for the
three months ended March 31, 1996 (2.6% on a pro forma basis). The Company has
not been seeking additional clinical laboratory acquisitions.
Selling, general and administrative expenses for the three months ended
March 31, 1996 increased $3,995,617 from $3,561,891 in the 1995 period to
$7,557,508 in the 1996 period, but declined as a percentage of net revenues from
approximately 74.2% to 62.6%. The increase relates to (i) the increase in net
revenues from the acquisitions described above, (ii) the increase in corporate
overhead as the Company consolidated or commenced consolidation of most
administrative operations at its headquarters and (iii) legal, accounting and
other general expenses related to a public entity.
Amortization resulting from the goodwill and other intangibles for the
three months ended March 31, 1996 increased approximately $276,000 from $116,000
to $392,000 as compared to 1995. The increase was due to the acquisitions.
Income tax expense for the three months ended March 31, 1996 increased
$782,283 from $12,306 to $794,589 as compared to 1995. The increase relates to
the increase in net income at applicable tax rates and the use of the Company's
remaining net operating loss carryforwards in 1995.
Primary earnings per share for the three months ended March 31, 1996 as
compared to March 31,1995 increased from $0.15 to $0.25 on an additional
2,186,886 weighted average number of shares outstanding. Fully diluted earnings
per share were $.15 on 17,491,361 weighted average number of shares outstanding.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Revenues increased $23,757,103 from $5,082,274 in 1994 to $28,839,377 in
1995. Net income for 1995 was $3,330,631 compared to a loss of $640,342 in 1994.
The revenue increase reflects (i) primarily the acquisition of 12 Imaging
Centers, which accounted for approximately $19.0 million of the increase, (ii)
enhanced marketing efforts by the Company and (iii) recapture of certain
Medicare business which former physician-owners were previously prohibited from
referring to Imaging Centers until the sale of such Imaging Centers to the
Company. The net income increase reflects the direct relationship of such
acquisitions, the implementation of internal controls over administrative
functions and the consolidation of administrative and accounting functions.
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<PAGE>
Upon acquisition of an Imaging Center, the Company initiates a process to
improve operating performance through the implementation of marketing programs
and the consolidation of accounting and administrative functions. It generally
requires three to six months for the benefits form such programs to be reflected
in operating results. As a result, actual and pro forma results of operations
for 1995 do not fully reflect such benefits with respect to the acquisition of
five Imaging Centers completed since September 1995.
The Company's clinical laboratory operations experienced intense
competitive and pricing pressures during 1995 as a result of managed care and
independent physician practice competition. Clinical laboratory revenues
accounted for approximately $2.3 million or 8% of the Company's 1995 revenues
(3% on a pro forma basis). The Company has not been seeking additional clinical
laboratory acquisitions.
Selling, general and administrative expenses for 1995 increased
$15,538,945 from $4,298,019 in 1994 to $19,386,964 in 1995, but declined as a
percentage of net revenues from approximately 85% to 70%. The increase relates
to (i) the increase in net revenues from the acquisitions described above, (ii)
the increase in corporate overhead as the Company consolidated or commenced
consolidation of most administrative operations at its headquarters and (iii)
legal, accounting and other general expenses related to a public entity.
Amortization resulting from the goodwill and other intangibles arising
from acquisitions increased $640,000 from $192,000 ($.15 per share) in 1994 to
$834,000 in 1995 ($.17 per share).
The Company incurred non-cash charges of $414,375 and $854,000 in 1995 and
1994, respectively, in connection with bridge financings in such periods.
Interest expense increased $737,256 from $538,248 in 1994 to $1,275,504 in 1995
primarily as a result of equipment and other debt associated with the
acquisitions.
Earnings per share for the year ended December 31, 1995 were $ 0.67 as
compared to a loss of $(0.48) the prior year, on an additional 3,667,988
weighted average number of shares outstanding. Included in such 1995 earnings
per share was $0.06 for an extraordinary item which reflects a gain from a debt
restructuring, net of taxes.
Pro Forma Three Months Ended March 31, 1996 Compared with Three Months Ended
March 31, 1995
Pro forma results for the three months ended March 31, 1996 reflects
operations as if all acquisitions had occurred on January 1, 1996. The Pro forma
net patient revenue and expense reflect operations of South Coast Radiologists,
Allegheny Imaging, Heights Imaging, DISC Imaging, Radiation Oncology and U.S.
Imaging from January 1, 1996 to March 31,1996.
Pro forma net patient revenues for the three months ended March 31, 1996
were approximately $21,590,000. Pro forma general and administrative expenses
for the three months ended March 31, 1996 were approximately $13,161,000, pro
forma interest expense was approximately $2,294,000 and pro forma depreciation
and amortization was approximately $2,344,000. Pro forma net income for the
three months ended March 31, 1996 was approximately $2,252,000 or $ .25 per
primary share and $.17 per fully diluted share. The pro forma revenue increase
reflects enhanced marketing efforts and the recapture of certain Medicare
business which former physician- owners were previously prohibited from
referring to Imaging Centers until the sale of such facility to the Company. The
Company believes that had all the acquisitions included in the 1996 pro forma
results actually been consummated prior to January 1, 1996, and the Company had
implemented its marketing programs for the full year, revenue growth would have
been higher than that set forth in the pro forma statement of operations. The
pro forma increase in net income reflects the cost savings from (i)
consolidating administrative and accounting controls, (ii) large purchase
discounts, and (iii) other significant savings from finance, radiology and
maintenance contract renegotiations.
Pro Forma Year Ended December 31, 1995 Compared with Year Ended December 31,
1994
The pro forma net patient revenues for 1995 increased $2.8 million from
$65.6 million in 1994 to $79.1 million in 1995. Pro forma net income increased
$2.8 million from $2.8 million in 1994 to $7.1 million in 1995. The pro forma
revenue increase reflects enhanced marketing efforts and the recapture of
certain Medicare business which former physician-owners were previously
prohibited from referring to Imaging Centers until the sale of such facility to
the Company. The Company believes that had all the acquisitions included in the
1995 pro forma results actually been consummated prior to January 1, 1995, and
the Company had implemented its marketing programs for the full year, revenue
growth would have been substantially higher than that set forth in the pro forma
statement of operations. The pro forma increase in net income reflects the cost
savings from (i) consolidating administrative and
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<PAGE>
accounting controls, (ii) large purchase discounts, and (iii) other significant
savings from finance, radiology and maintenance contract renegotiations.
Pro forma selling, general and administrative expenses increased $1.3
million from $42.5 million in 1994 to $49.7 million in 1995 and remained
relatively constant as a percentage of revenues. Pro forma interest expense for
1995 includes approximately $5.1 million for interest and amortization related
to the Debentures.
Same center revenues for Imaging Centers open more than one year increased
approximately 8% from 1994 to 1995 from $35.1 million in 1994 to $37.9 million
in 1995. Additionally, the total number of procedures performed increased
approximately 23% from 143,916 in 1994 to 177,220 in 1995. The total number of
procedures increased more than revenues primarily due to decreases in
reimbursement rates as well as the change in the mix of procedures performed.
The Company added new modalities, such as nuclear medicine, ultrasound and
mammography, at certain centers that typically have revenues per procedure that
are lower than the revenues from MRI and CT procedures. In general, these new
modalities do not affect the revenues from existing modalities.
In May 1996, the Company received net proceeds of approximately $6.9
million from the exercise of the overallotment option on the Debentures.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public offering ("IPO") in October 1994,
the Company funded its activities primarily through a private placement of
613,680 shares of Common Stock which yielded net proceeds of approximately $1.1
million and an aggregate of $4.7 million ($4.2 million net) of bridge loans
which were repaid upon the consummation of the IPO. The Company used
approximately $4.59 million for acquisitions and approximately $800,000 for due
diligence and professional fees related to acquisitions and working capital. The
net proceeds of the IPO, after deducting underwriting discounts, commissions and
other offering expenses, were approximately $6.8 million, of which $4.8 million
was used to repay all of the outstanding bridge notes and accrued interest, and
the balance of $2.0 million was used for acquisitions. In June 1995, the Company
completed an $850,000 bridge financing, the net proceeds of which were
approximately $725,000 and were utilized by the Company for an acquisition. The
net proceeds of a secondary offering in August 1995, after deducting
underwriting discounts, commissions and other offering expenses, were
approximately $9.0 million, of which $875,000 were used to repay principal and
accrued interest on the bridge notes and the balance for acquisitions.
As of March 31, 1996, the Company had approximately $51.3 million in cash
and cash equivalents and working capital of $54,832,454, primarily as a result
of the offering of the Debentures. In May 1996, the Company received net
proceeds of approximately $6.9 million from the exercise of the overallotment
option on the Debentures. For the year ended December 31, 1995, the Company
generated $1,549,436 in cash. The Company generated $5,959,945 from operations
primarily due to net income and non-cash amortization, used $11,421,084 in
investing activities (primarily acquisitions) and generated $7,020,575 from
financing activities, primarily from a public offering and the refinancing of
certain notes and capital leases. For the three months ended March 31, 1996, the
Company generated approximately $47.0 million in cash. The Company generated
$511,428 from operations primarily due to net income and non-cash amortization
and generated $46,448,337 from financing activities, primarily from the
Debentures, offset by the repayment of notes and capital leases. The Company
generally collects its receivables within 60 days, although, in accordance with
industry practice, it keeps a large allowance for doubtful accounts
(approximately one-third of gross receivables) as many third party payors do not
reimburse for the full amount of bills.
The Company expects to realize additional savings and revenue at the
Imaging Centers it acquired in 1995 as a result of (i) further consolidation of
billing and collections in 1996, and (ii) implementing a regional "Open-MRI"
marketing program targeted towards print and television advertising in an effort
to enhance patient referrals.
The Company's facilities are generally cash flow positive from the date of
acquisition, and as such the Company's capital needs primarily relate to the
acquisition of additional facilities. Acquisitions will be funded through cash,
notes, equity securities issued by the Company, or any combinations of the
foregoing. The Company has used approximately $12.2 million of the proceeds from
the Debentures for acquisitions and intends to use an additional approximately
$25.0 million within the next 30 days for additional acquisitions. The Company
will use the remaining proceeds along with the proceeds form the exercise of the
Class A Warrants for future acquisitions and for working capital and general
corporate purposes.
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The Company has outstanding 3,571,649 Class A Warrants and 4,477,851
Class B Warrants. Each Class A Warrant entitles the holder to purchase one share
of Common Stock and one Class B Warrant at an exercise price of $6.25 at any
time until October 20, 1999. Each Class B Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $8.00 at any time
until October 20, 1999. The Class A Warrants were called for redemption on June
28, 1996 and the Company expects to receive net proceeds of approximately $23.5
million upon the exercise of the Class A Warrants. In addition, the Company has
outstanding (i) Unit Purchase Options relating to 331,500 Units, each Unit
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant ("Units") held by the underwriter of the Company's public offerings, of
which 170,000 have an exercise price of $7.25 per Unit and 161,500 have an
exercise price of $7.82 per Unit, (ii) [1,194,865] Finance Warrants with
exercise prices ranging from $2.50 to $9.00, and (iii) 1,007,000 Stock Options
with exercise prices ranging from $2.00 to $6.50. The Company is unable to
predict the timing of the exercise of any of the above securities, although they
are likely to be exercised at such time as the market price of the Common Stock
is substantially above the exercise price of the Warrants, which will result in
dilution to existing stockholders. Further, there can be no assurance that the
Company will be able to effectively utilize the proceeds from any warrant
exercises, which proceeds could be substantial.
The Company has an unused line of credit of $1 million at the prime
interest rate with a bank, and has been negotiating to increase the size of such
line.
As of March 31, 1996, the Company had an aggregate of approximately $20.5
million of notes payable, of which approximately $4.5 million are classified as
current. Substantially all of these amounts relate to notes issued in connection
with acquisitions. At that date, the Company also had $7.8 million of capital
lease obligations, of which approximately $2.5 million are due in 1996.
Substantially all of these obligations are related to equipment for the
Company's Imaging Centers acquired pursuant to completed acquisitions. The
Company's monthly payments for capitalized lease obligations aggregate
approximately $200,000. The Company also pays aggregate annual rent of
approximately $2.1 million for its 14 facilities. The Company has employment and
consulting agreements with its executive officers and consultants providing for
annual compensation of approximately $980,000 in 1996. The Company also has
employment agreements with radiologists at its facilities who generally receive
a percentage of net collected revenues at their center.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES
In connection with the IPO, stockholders of the Company deposited the
Escrow Shares, which will be released to such stockholders if the Company
attains certain earnings before taxes of at least $14 million in 1996. In the
event the 506,853 Escrow Shares beneficially owned by current officers,
directors, employees or consultants of the Company are released from escrow,
compensation expense will be recorded for financial reporting purposes for 1996
and such release will be deemed additional compensation expense of the Company.
If incurred, such compensation expense for 1996 will likely be substantial and
would have the effect of substantially reducing or eliminating reportable
earnings. Although the amount of compensation expense recognized by the Company
will not affect the Company's total stockholder's equity or its working capital
and is not expected to have a material effect on the Company's operations, it
may have a negative effect on the market price of the Company's securities. See
"Principal Stockholders--Escrow Arrangements."
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<PAGE>
BUSINESS
The Company is a PPM provider focused on the acquisition, operation and
management of multi-modality diagnostic Imaging Centers and similar facilities.
Diagnostic imaging procedures are used to diagnose various diseases and physical
injuries through the use of magnetic resonance imaging ("MRI"), computed axial
tomography ("CT"), mammography, X-ray, ultrasound and other technologies. The
use of non-invasive diagnostic imaging has grown rapidly in recent years because
it allows physicians to quickly and accurately diagnose a wide variety of
diseases and injuries without exploratory surgery or other invasive procedures
which are more expensive, risky and debilitating for patients.
Since October 1993 the Company has acquired 14 Imaging Centers in nine
states, three Therapy Centers, it currently has letters of intent to acquire
additional Imaging Centers and it is in active discussions to acquire several
additional Imaging Centers and Therapy Centers. The Company is acquiring the
Therapy Centers because the businesses are operationally similar and
complementary to Imaging Centers, provide cross referral opportunities and will
increase the Company's overall PPM expertise. The Company also operates a
clinical laboratory business in the Philadelphia metropolitan area.
STRATEGY
The Company's objective is to become the leading network of diagnostic
Imaging Centers in the United States. Key elements of the Company's strategy
include:
Focus Primarily on Diagnostic Imaging. The Company believes that a
significant opportunity exists to build a multi-regional or national PPM company
focusing primarily on diagnostic imaging because there is little significant
competition in this industry on a national or regional basis. The Company
currently has the ability to offer managed care providers quality services at
competitive prices at multiple regional locations and through further
acquisitions it expects its ability to increase accordingly.
Acquire Additional Imaging Centers. The Company seeks to acquire Imaging
Centers from (i) radiologist owner/operators seeking management expertise,
access to managed care contracts and/or other resources offered by PPM
companies, (ii) physicians who may be required by law to divest such facilities
and (iii) owners seeking to leave the imaging business for various reasons. The
Company also has joint ventures, and may enter into additional joint ventures
with hospitals or other entities which desire access to diagnostic imaging
technologies but lack sufficient financial or managerial resources. In
evaluating an acquisition candidate, the Company analyzes several strategic
characteristics, including the client and payor mix, the nature of services
demanded in the market and currently provided by the candidate, the presence and
strength of local competition, net revenues, operating income, payor
reimbursement, referral patterns and volume levels of the candidate. The Company
believes that there are and will continue to be many attractive acquisition
opportunities because Imaging Center operators are finding it more difficult to
compete independently as managed care becomes more prevalent. As the Company has
grown, it has been seeking multiple-facility acquisitions to accelerate its
growth rate.
Achieve Operating Efficiencies. The Company utilizes its PPM expertise and
infrastructure to manage Imaging Centers which previously lacked professional
management. The Company consolidates certain aspects of operations, such as
accounting, administration, billing, collections, marketing and purchasing, and
believes that it can realize significant operating efficiencies from
consolidation. By rendering support and management functions, the Company
enables its radiologists to spend more time with their practices and marketing
for the Imaging Centers, thereby increasing revenues and utilization of imaging
equipment.
Contract with Managed Care Providers. The Company actively pursues
contractual arrangements with managed care organizations. The Company believes
that third-party payors will increasingly prefer to contract for service on a
national or regional basis, and that the Company's development of a national
network of centers will permit it to obtain such contracts on favorable terms.
Senior management of the Company actively markets the Company's services to
administrators of managed care organizations in regions where the Company
operates Imaging Centers.
Offer New Technologies. The Company offers state-of-the-art diagnostic
imaging technologies at its Imaging Centers. The Company has upgraded the MRI,
CT and nuclear medicine equipment at several locations following acquisitions,
resulting in improved image quality and increased referring physician
satisfaction. The Company also has begun installing new high quality "Open MRI"
equipment at certain locations, enabling its Imaging Centers to offer MRI
services to patients who would otherwise forego this procedure due to obesity or
claustrophobia. In
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addition, the Company is adding new modalities and procedures at most locations.
Most of the new technologies are designed to shorten the examination time,
resulting in increased capacity and profitability.
Professional Marketing. In order to expand referral sources, the Company
provides marketing training and materials to Imaging Center personnel in order
to effectively market to area physicians and third-party payors such as managed
care organizations. Most Imaging Centers have previously focused their marketing
efforts only on physician-owners and not managed care organizations. The Company
utilizes a variety of marketing techniques in the community where it does
business, including meetings between the administrators or account executives
and physicians or their staffs, financial and social seminars, mailings of
technical case studies and clinical articles, and regular contacts between a
center's radiologist, management and the referring physician communities and
local managed care organizations.
Expand to Related Businesses. The Company has recently been evaluating
acquisitions of closely related medical businesses where it can apply its PPM
expertise and potentially increase its diagnostic imaging business. The Company
has recently acquired a majority interest in a radiation oncology therapy
company that owns three Therapy Centers, which the Company believes will
complement its existing business because of the similar economics and referral
bases, particularly in Modesto, California, which will have an Imaging Center
and Therapy Center in close proximity.
Provide PPM Services to Unaffiliated Centers. In addition to providing
physician practice management services to its own facilities, the Company
recently began offering its PPM services to independent diagnostic centers and
radiologist practices and hospital radiology practices. The Company believes
that its expertise will be useful for practices that have not had the benefit of
professional management. Each client is able to contract for individual or a
full range of services, including accounting, billing, collections, debt
consolidation, management information systems, purchasing and human resources.
The Company anticipates that it will price its services using a number of
methods, including fee-for-services, percentage of revenue or savings,
capitation or on a project basis. The Company believes that providing such PPM
services will increase the Company's profile in the industry and give it access
to additional acquisition candidates.
INDUSTRY OVERVIEW
Imaging Centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as MRI, CT, X-ray and mammography in an
outpatient setting. Diagnostic imaging procedures are used to diagnose various
diseases and physical injuries through the use of MRI, CT, mammography, X-ray,
ultrasound and other technologies. The use of non-invasive diagnostic imaging
has grown rapidly in recent years because it allows physicians to quickly and
accurately diagnose a wide variety of diseases and injuries without exploratory
surgery or other invasive procedures, which are usually more expensive, risky
and debilitating for patients. While conventional X-ray continues to be the
primary imaging modality in the number of procedures performed, the use of the
more sophisticated MRI and CT procedures has grown due to increased diagnostic
capabilities. Industry analysts estimate that imaging centers performed over 22
million procedures in 1994, a 10.9% increase over 1993. Utilization continues to
grow because there is increased demand for services as well as new procedures
being introduced.
The number of non-hospital-affiliated Imaging Centers has grown from
approximately 700 in 1984 to over 2,200 at the end of 1995 due to a number of
factors. First, the enactment of new government reimbursement programs in 1983
put strict controls on inpatient reimbursement, which led to the expansion of
all types of freestanding outpatient services, including outpatient surgery,
ambulatory and imaging centers. Second, the use of MRI, CT and other equipment
became more prevalent due to quality and quantity of diagnostic information,
technological improvements and increased government and third- party
reimbursement. Although MRI was developed in the late 1970s, it was not approved
for Medicare reimbursement until 1984 and ultrasound and low-dose mammography
technology improved in the late 1980s. New technologies and procedures continue
to be developed, although some, such as positron emission tomography ("PET")
scanners, are relatively expensive and are not considered cost-effective for
most procedures. Third, the number of hospital and physician joint ventures
increased in the 1980s as hospitals were eager to minimize their financial
exposure for expensive equipment and physicians were seeking investments at a
time when traditional tax shelters were being eliminated.
Imaging Centers are typically independently owned and managed. The
industry is highly fragmented, which is reflected in the fact that at December
31, 1994 there was no dominant national imaging services provider. At December
31, 1995, no entity owned more than 55 centers and the ten largest operators
owned a total of approximately 200 centers, or less than 10% of the total number
of Imaging Centers. Generally, these companies
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have not performed well in recent years because they have not adapted well to
the managed care environment, utilize aging equipment or have poor locations,
suffer from decreased reimbursement and have been restricted by the
self-referral and anti-kickback restrictions. Accordingly, the Company believes
that these companies have not been actively seeking additional acquisitions.
ACQUISITIONS
The following is a summary of the Company's completed and pending
acquisitions.
<TABLE>
DATE NAME LOCATION BUSINESS OWNERSHIP %
- ---- ---- -------- -------- -----------
<S> <C> <C> <C> <C>
10/93 Havertown Medical Laboratory Havertown, PA Clinical Blood Lab 100%
6/94 Computerized Medical Imaging Center Sherman Oaks, CA Multi-Modality Imaging 100
8/94 Columbus Diagnostic Center Columbus, GA Multi-Modality Imaging 100
11/94 Alpha Laboratory Havertown, PA Clinical Blood Lab 100
12/94 Morton Clinical Laboratory Morton, PA Clinical Blood Lab 100
1/95 Santa Fe Imaging Center Santa Fe, NM Multi-Modality Imaging 100
2/95 Laborde Diagnostic Center Lafayette, LA Multi-Modality Imaging 80
Southern Diagnostic Center Lafayette, LA Multi-Modality Imaging 80
2/95 Community Radiology of Virginia Bluefield, VA Multi-Modality Imaging 100
Princeton, WV Multi-Modality Imaging 100
3/95 Arrow Medical Clinical Laboratory Philadelphia, PA Clinical Blood Lab 100
7/95 Salisbury Imaging Center Jacksonville, FL Multi-Modality Imaging 80
8/95 Orange Park Diagnostic Center Jacksonville, FL Multi-Modality Imaging 100
9/95 San Francisco MRC San Francisco, CA MRI 100
10/95 Advanced Medical Imaging Center Montgomery, AL Multi-Modality Imaging 100
11/95 FutureCare Affiliates, Inc. 100
Valley Presbyterian MRC Van Nuys, CA MRI 59.9
San Luis Obispo Diagnostic Center San Luis Obispo, CA Multi-Modality Imaging 60
12/95 Modesto Imaging Center Modesto, CA Multi-Modality Imaging 100
5/96 Heights Imaging Center Haddon Heights, NJ Multi-Modality Imaging 100
5/96 Radiation Oncology (3 Therapy Modesto, CA Radiation Therapy 50.1
Centers)
5/96 South Coast Radiologists Coos Bay, OR Multi-Modality Imaging 100
6/96 U.S. Imaging (6 Imaging Centers) Houston/San Antonio, Multi-Modality 100
Texas
Pending DISC Imaging Charleston, SC Multi-Modality Imaging 80
Pending Allegheny MRI (4 Imaging Centers) Pittsburgh, PA MRI 100
</TABLE>
On June 4, 1996, the Company announced that it had entered into a letter
of intent to enter into a joint venture with a wholly-owned subsidiary of
Phycor, Inc. to lease outpatient imaging equipment and facilities to affiliated
providers in southern Georgia and northern Florida through a new entity. The
joint venture will initiate operations in the north Florida area with both the
Company and the Phycor subsidiary contributing their outpatient imaging and
nuclear medicine facilities to the new venture in return for equal interests in
the joint venture. The Company will contribute its Salisbury and Orange Park
facilities. In addition, a new facility in the Riverside area of Jacksonville is
expected to be completed and open August 30, 1996. The facilities will then be
leased to an affiliate of the Company and First Coast Medical Group, a clinic
managed by the Phycor subsidiary, which physician group will actually provide
the services.
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<PAGE>
In addition, the Company is a 60% general partner in a partnership
operating an Imaging Center in Wilkes Barre, Pennsylvania which opened in May
1996. The Company also has an agreement to build an Imaging Center in Nassau,
Bahamas and expects to open the Nassau facility by July 1996.
The Imaging Centers acquired by the Company generally are the dominant or
sole non-hospital-affiliated outpatient facility in their geographic market and
have a strong physician referral base and/or numerous managed care contracts.
Following an acquisition, the Company provides management and administrative
systems, marketing and technical support, centralized billing, collection and
payable services and often is able to renegotiate debt, equipment leasing,
radiology and supply agreements to immediately increase cash flow and operating
efficiency at its Centers. The Company has also added additional modalities and
new technologies to many of its centers in order to further increase revenues.
The Company has financed its acquisitions with cash, notes, equipment
leases, assumption of indebtedness, equity securities issued by the Company, or
any combination of the foregoing and expects to finance future acquisitions
similarly. The Company generally seeks to acquire at least an 80% interest in a
Center, but in certain cases only purchases a majority interest. In certain of
the acquisitions, a portion of the Common Stock issued is held in escrow pending
the attainment of certain revenue or earnings targets of the acquired Center.
The Company also has entered into long-term radiology agreements with
radiologists who were owners of centers purchased by the Company. In connection
with certain acquisitions, the Company also entered into property leases at fair
market value for the facility, many of which are with the physician partnership
that was the seller of the facility.
IMAGING OPERATIONS
Prior to completing the acquisition of an Imaging Center, the Company
closely evaluates the efficiency of operations. The Company believes it can
utilize its management expertise and purchasing power to more efficiently manage
and increase the cash flow of Imaging Centers while maintaining the highest
level of service to physicians and managed care organizations. By centralizing
such functions as payables, payroll, maintenance, collections, accounting and
purchasing after an acquisition, the Company is able to realize economies of
scale while allowing Imaging Centers to place more emphasis on providing
efficient and quality care. The Company is also able to utilize its credit
quality to receive preferential rates from major equipment vendors and lessors
and the Company's volume of business permits it to qualify for discounts for
equipment maintenance and film, which are substantial operating expenses of
Imaging Centers.
Diagnostic imaging services are performed on an outpatient basis by
experienced radiological technicians. After the diagnostic procedures are
completed, the images are reviewed by radiologists under contract to the
Company, who prepare a report of the tests and their findings, which are then
delivered to the referring physician. Additionally, upon request, a report of
any critical abnormality, or "stat report," is provided by phone as soon as the
test is completed and evaluated.
Each of the Company's facilities have agreements with radiologists as
independent contractors under long-term agreements to provide all radiology
services to the Imaging Center. Radiologist compensation averages 15% of net
collections attributable to radiology services performed by the radiologist. The
interpreting physicians are board-certified or board eligible specialists in
radiology, cardiology or neurology as appropriate. The centers bill and collect
globally for their technical services and the professional services of the
interpreting physicians.
Imaging revenues generally are dependent to a large extent upon the
acceptance of outpatient diagnostic imaging procedures as covered benefits under
various third-party payor programs. The Company's experience is that payment for
these services are approved by both private insurers and the Medicare and
Medicaid reimbursement programs. Although the Company intends to continue
participation in such reimbursement programs, there can be no assurance that its
imaging procedures will continue to qualify for reimbursement.
RADIATION THERAPY
Radiation oncology therapy, the treatment of cancer with high energy
radiation, is commonly used to destroy localized tumors and to reduce pain and
other symptoms. This therapy is typically provided under the care of a radiation
oncologist, a physician with additional subspecialty training in radiation
oncology. Due to cost-containment initiatives, the trend in cancer therapy, like
that of diagnostic imaging, has been to provide this treatment in an outpatient
setting. The Company believes that radiation oncology services are complementary
to the
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<PAGE>
imaging services business currently conducted by the Company and that there are
significant acquisition opportunities in this area. The Company believes that
its PPM expertise is directly applicable to Therapy Centers because of the
operational similarity to Imaging Centers and because of the similar referral
base.
In May 1996, the Company purchased a 50.1% interest in Radiation Oncology
Centers, Inc. ("ROC") from its two existing stockholders. ROC owns and operates
three Therapy Centers in northern California, one of which is next to the
Company's Modesto Imaging Center facility.
CLINICAL LABORATORY OPERATIONS
The clinical laboratory tests performed by the Company measure the levels
of chemical and cellular components in human body fluids and tissue. These
include procedures in the area of blood chemistry, hematology, urine chemistry,
immunology, virology, serology, microbiology, endocrinology, toxicology, tissue
pathology and cytology. Commonly ordered individual tests include red and white
blood cell counts, pap smears, and procedures to measure blood glucose levels
and to determine pregnancy. The Company processes approximately 57,000
procedures per year, most of which consist of multiple tests. Many of the
referred tests are specialized tests that the Company's laboratory does not
perform because there is not sufficient demand to do these tests economically
in-house. The clinical laboratory business currently accounts for less than 5%
of the Company's revenues on a pro forma basis and the Company has been seeking
to sell this operation.
MANAGEMENT SERVICES
In addition to providing practice management services to its own
facilities, the Company recently began offering its PPM services to independent
diagnostic centers and radiology practices. The Company believes that its
expertise will be useful for practices that have not had the benefit of
professional management. Each client is able to contract for individual or a
full range of services, including accounting, billing, collections, management
information systems, purchasing and human resources. The Company anticipates
that it will price its services using a number of methods, including
fee-for-services, percentage of revenue or savings, capitation or on a project
basis.
TELERADIOLOGY
In 1995, the Company began installation of a teleradiology system for use
at selected Imaging Centers. This system is designed to permit MRI, CT and other
digital images to be electronically transmitted from the Imaging Center where
the procedure was performed if the radiologist is unavailable to another Imaging
Center for reading by a radiologist. The Company believes that this system will
permit it to utilize the specialized expertise of certain of its affiliated
radiologists, offer radiology services to joint ventures and at times permit it
to reallocate readings during periods of high demand at certain centers.
CLIENTS AND PAYORS
Each facility currently receives referrals from several hundred
physicians. In 1995, revenues from Blue Cross/Blue Shield and other insurance
carriers accounted for approximately 41% of the Company's revenues, Medicare and
Medicaid accounted for approximately 26% of revenues, managed care for
approximately 21% of revenues and the remainder was derived directly from
patients and worker's compensation cases.
The Company has over 300 managed care contracts in place to provide
services on a fixed-fee for service basis. All facilities are attempting to
obtain additional managed care contracts.
The Company has centralized billings and collections for the four western
U.S. Imaging Centers at Sherman Oaks, California and for the two Jacksonville
Imaging Centers at one of such centers. During 1996 the Company plans to
centralize the remaining locations, which are currently responsible for their
own collections. Due to cash flow and technical considerations, the Company
generally takes several months to consolidate billings of an Imaging Center
after its acquisition. None of the facilities has experienced any significant
collection problems and receivables are typically collected over a 30 to 90 day
period. The collection period has remained relatively constant over recent
periods. Medicare receivables are usually collected over an approximately 45 to
60 day period.
-25-
<PAGE>
COMPETITION
The market for diagnostic imaging services is highly competitive. The
market is highly fragmented, with over 2,200 outpatient diagnostic Imaging
Centers nationwide and no dominant national imaging services provider.
Competition varies by market and is generally higher in larger metropolitan
areas where there is likely to be more facilities and more managed care
organizations putting pricing pressure on the market. The Company competes with
larger healthcare providers, such as hospitals, as well as other private clinics
and radiology practices that own diagnostic imaging equipment. Competition often
focuses on physician referrals at the local market level. Successful competition
for referrals is a result of many factors, including participation in healthcare
plans, quality and timeliness of test results, type and quality of equipment,
facility location, convenience of scheduling and availability of patient
appointment times. Most of the Company's Imaging Centers are the largest
non-hospital-affiliated outpatient diagnostic imaging facility in their
geographic area. Competition in the radiation oncology therapy market is similar
to the competition in the imaging market.
The Company believes that the Philadelphia clinical laboratory market is
dominated by a few large independent clinical laboratory companies, all of which
have substantially greater financial resources and managed care affiliations
than the Company. The Company's clinical laboratory market share in the
Philadelphia market is very small and this line of business represents less than
5% of the Company's business. The Company competes primarily on the basis of the
quality of its testing, reporting and information services, its reputation in
the medical community and price.
REGULATION AND REIMBURSEMENT
Overview. The healthcare industry is highly regulated and is undergoing
significant change as third- party payors, such as Medicare and Medicaid and
Blue Cross/Blue Shield plans, increase efforts to control the cost, utilization
and delivery of healthcare services. Legislation has been proposed or enacted at
both the federal and state levels to regulate healthcare delivery in general and
radiology and clinical laboratories services in particular. The Company believes
that reductions in reimbursement for Medicare services may be implemented from
time to time, which may lead to reductions in the reimbursement rates of other
third-party payors as well. The Company cannot predict the effect healthcare
reforms may have on its business, and there can be no assurance that such
reforms will not have a material adverse effect on the Company's operations. All
of the Company's facilities are subject to governmental regulation at the
federal, state and local levels.
Regulation of Outpatient Imaging Services. The operation of outpatient
Imaging Centers requires a number of licenses, including licenses for technical
personnel and certain equipment. The Company believes that it is in compliance
with applicable licensure requirements. The Company further believes that
diagnostic testing will continue to be subject to intense regulation at the
federal and state levels and cannot predict the scope and effect thereof.
Diagnostic Imaging Centers performing mammography services must meet
federal, and in some jurisdictions, state standards for quality as well as
certification requirements. Under interim regulations issued by the Food and
Drug Administration the ("FDA"), all mammography facilities are required to be
accredited; undergo an annual mammography facility physics survey; be inspected
annually and pay an annual inspection fee; meet qualification standards for
interpreting physicians, mammography technologists, and medical physicists; meet
certification requirements for adequacy and training and experience of
personnel; meet quality standards for equipment and practices; and meet various
requirements governing record keeping of patient files. In addition, the FDA has
proposed regulations governing standards for mammography X-ray equipment,
medical physicists standards and minimum quality standards for mammography
facilities including personnel standards and quality control. Sanctions for
violating the Mammography Quality Standards Act of 1992 ("MQSA") are varied,
ranging from civil monetary penalties, suspension or revocation of certificates
and injunctive relief. Moreover, the MQSA requires conformance with these
standards to obtain payment for Medicare services. Although all of the Company's
facilities are currently accredited by the Mammography Accreditation Program of
the American College of Radiology and the Company anticipates continuing to meet
the requirements for accreditation, the withdrawal of such accreditation could
result in the revocation of certification, if FDA so determines. All of
facilities have received their FDA certifications.
Reimbursement for Radiology Services. In general, Medicare reimburses
radiology services under a physician fee schedule which covers services provided
not only in a physician's office, but also in freestanding Imaging Centers,
Therapy Centers, portable X-ray suppliers, hospitals and other entities. The
scheduled amount is based on a resource-based relative value scale, recognizing
three separate components of the physician's services: professional, technical
and malpractice. For radiology there are separate Medicare scheduled amounts for
the
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<PAGE>
professional component of a service or procedure (i.e., the physician's time)
and the technical component of the service or procedure (i.e., services and
supplies necessary to perform the procedure).
Congress and the Department of Health and Human Services ("HHS") have
taken various actions over the years to reduce reimbursement rates for radiology
services and proposals to reduce rates further are anticipated. There have been
many proposals discussed within the last few years to further modify
reimbursement. The Company is unable to predict which, if any, proposals will be
adopted. Any reductions in Medicare reimbursement for radiology services could
have a material adverse effect on the Company. In 1990, Congress extended
Medicare benefits to include coverage of screening mammography. To receive
Medicare reimbursement for such services, mammography facilities must meet
existing prescribed quality standards for screening mammography. The regulations
apply to diagnostic mammography and image quality examination as well as
screening mammography. The Company's facilities meet all prescribed quality
standards.
Reimbursement for Radiation Oncology Therapy Services. Radiation therapy
services are regulated on the federal level similar to imaging services and
Medicare reimbursement for treatment is calculated using a similar physician fee
schedule.
Regulation of Clinical Laboratories. Under CLIA, all laboratories must be
certified by the federal government, meet governmental standards, undergo
proficiency testing, be subject to inspections and remit fees. Most states,
including Pennsylvania, also maintain clinical laboratory licensing programs.
These licensing and certification programs set standards in areas such as
quality control, record keeping and personnel qualifications, including, in
varying measure from state to state, educational experience and licensure
requirements for various levels of personnel responsible for testing. Compliance
with these standards is verified by periodic inspections by the appropriate
federal, state or local agency. In addition, licensing and certification entail
proficiency testing which involves testing of actual specimens that have been
specifically prepared by the regulatory authority or designated agency for
testing by the laboratory. The Company's clinical laboratory operation is CLIA
certified, state licensed and Medicare-certified.
Sanctions for violating CLIA are varied, and, depending upon the
violation, may be severe. The sanctions range from mandating a directed plan of
correction to imposition of criminal sanctions. CLIA provides that a state may
require more stringent regulations than the federal law. Violation of federal or
state licensing or certification standards or other statutes or regulations
affecting clinical laboratories may result in suspension or revocation of
licenses, recoupment of payments by Medicare or Medicaid, exclusion from the
Medicare and Medicaid programs, and criminal and civil penalties.
Reimbursement for Clinical Laboratory Services. Containment of healthcare
costs, including reimbursement for clinical laboratory services, has been a
focus of ongoing governmental activity. Approximately 65% of the Company's
revenues for the year ended December 31, 1995 from its clinical laboratory
testing business were derived from tests performed for Medicare patients
(principally patients 65 and older). In 1984, Congress established a Medicare
fee schedule for clinical laboratory services performed in most outpatient
laboratories, adjusted annually to reflect inflation, which imposes a national
ceiling on the amount that can be paid under the fee schedule. For Medicare
patients, laboratories must accept the scheduled amount as payment in full and
must bill the program directly. Clinical laboratory services furnished to
Medicare beneficiaries who are hospital inpatients are included in the
diagnosis- related group ("DRG") payment for hospital service under Medicare's
prospective payment system. Since 1987, Congress has taken a variety of actions
to either lower or reduce the increase in reimbursement rates for clinical
laboratories. In addition, a number of other proposals for legislation or
regulation have been discussed which, if adopted, could have had the effect of
substantially reducing Medicare reimbursements to clinical laboratories.
Regulation of Radiology and Laboratory Ownership. Medicare payment rules
discourage physicians from maintaining an investment interest in laboratory and
radiology operations. The Omnibus Budget Reconciliation Act of 1989 ("OBRA 89")
included two provisions designed to discourage physicians from referring their
patients to clinical laboratories in which the physicians have an economic
interest. First, Congress acted to prohibit "shell labs" by requiring that at
least 70 percent of the testing procedures billed to Medicare is provided
on-site. Similarly, Medicare has adopted a "purchased services" limitation under
which physicians may not bill Medicare a marked-up amount for diagnostic testing
services purchased from outside vendors. In addition, in order to avoid shell
lab status, the entity performing the service, and not the referring facility,
must bill for such services. In order to bill Medicare for such services, the
physician must own or lease the equipment and employ the technician. Like the
"shell" laboratory rule, this payment limitation also has resulted in fewer
physicians' billing Medicare for radiology and other diagnostic services and a
reduction in facility discounts to physicians.
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<PAGE>
Second, effective January 1, 1992, a provision of OBRA 89, commonly known
as the "Stark Law," prohibits, with certain exceptions, physicians from
referring Medicare patients to clinical laboratories in which the physician has
an economic interest. Physicians and group practices will, however, continue to
be reimbursed by Medicare for testing performed in their own offices under the
direction of the physicians under specified conditions. In 1993, Congress
extended the physician self-referral prohibition, effective January 1, 1995, to
other entities, including radiology or other diagnostic services and radiation
therapy services. In October 1994, Congress passed legislation deleting "or
other diagnostic services" from the federal self-referral law, and inserted
instead "including magnetic resonance imaging, CAT scans and ultrasound
services." Also, effective January 1, 1995, physicians are prohibited from
referring Medicaid patients to clinical and diagnostic laboratories in which the
doctors have an ownership interest. Violations of the law may result in denial
of payments for the service, an obligation to refund payment for the service,
payment of civil monetary penalties and/or exclusion from the Medicare and
Medicaid programs.
The Company has structured its acquisitions of physician-owned ventures in
a manner which it believes does not raise significant issues under the
anti-kickback and self-referral regulations.
In addition to federal restrictions, a number of states have enacted
prohibitions against physicians referring to entities in which they have an
ownership interest. California law, for example, prohibits a physician from
referring a patient for diagnostic imaging services if the physician has a
financial interest in the entity that receives the referral. The statute
provides several exceptions. One exception permits a physician to refer patients
to an entity with which the physician has a lease agreement for equipment if
certain specific terms are met. The Company believes that it has structured its
acquisitions involving leases to ensure that the lease arrangement complies with
these requirements. Other acquisitions were structured so that no ongoing
financial relationship exists with referring physicians.
Infectious Wastes. The Company is also subject to licensing and regulation
under federal and state laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. The sanctions for failure to
comply with these regulations may be denial of the right to conduct business,
significant fines and criminal penalties, any of which, if imposed, could have a
material adverse effect on the Company. The Company believes that it is in
substantial compliance with all applicable laws and regulations relating to
these materials.
INSURANCE
The Company could be subject to legal actions arising out of the
performance of its testing services. Damages assessed in connection with, and
the cost of defending, any such actions could be substantial. The Company has
readily obtained and currently maintains liability insurance which it believes
is adequate for its present operations. There can be no assurance that the
Company will be able to continue or increase such coverage or to do so at an
acceptable cost, or that the Company will have other resources sufficient to
satisfy any liability or litigation expense that may result from any uninsured
or underinsured claims. The Company also requires all of its affiliated
physicians to maintain malpractice and other liability coverage.
EMPLOYEES
At May 1, 1996, the Company had approximately 350 full time employees,
none of whom are represented under union contracts. The Company considers its
relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings which, if adversely
determined, would have a material adverse effect on its operations or financial
condition.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Jeffrey A. Goffman........... 38 Chairman of the Board and Chief
Financial Officer
Robert D. Burke, M.D......... 40 President and Director
Amos F. Almand, III.......... 47 Senior Vice President and Director
David Cohen.................. 43 Senior Vice President--West Coast
Operations
Todd R. Smith................ 32 Vice President--Chief Information
Officer
Andrew J. Anello............. 40 Director
William M. Harper, IV, M.D... 43 Director
Charles J. Jacobson.......... 56 Director
Gordon Rausser............... 51 Director
Jeffrey A. Goffman founded the Company in 1993 and has served as the
Chairman of the Board and Chief Executive Officer since its inception. Mr.
Goffman was one of the founding partners of Goffman and Associates, CPA, PC, an
accounting firm in Valley Stream, New York. From 1988 to 1992, Mr. Goffman was
managing partner of such firm. Mr. Goffman is a certified public accountant
licensed in New York and Florida and holds a B.S. degree in Accounting from The
University of Hartford.
Robert D. Burke, M.D. has been President since June 1994 and a Director
since January 1994. Dr. Burke has been a practicing Neuroradiologist in Palm
Beach County, Florida since 1986 and was Chairman and Director of the Department
of Radiology at Wellington Regional Medical Center, an acute care hospital in
Palm Beach County, Florida from 1988 to March 1995. Dr. Burke is also Chairman
and President of Midtown Imaging, P.A., an outpatient diagnostic facility in
West Palm Beach, Florida. Dr. Burke is a board certified radiologist with
fellowship training in neuroradiology. Dr. Burke received his M.D. from the
University of Louisville School of Medicine and completed his residency training
at the University of Chicago, Michael Reese Hospital and performed fellowship
training at Strong Memorial Hospital, University of Rochester, Rochester, New
York.
Amos F. Almand, III was elected Senior Vice President and a Director in
May 1995. Mr. Almand has been a developer and operator of medical facilities in
the Jacksonville, Florida area for over ten years and was responsible for the
development and syndication of eight medical properties since 1983 and numerous
other residential and commercial developments. Mr. Almand organized and was the
owner of the general partner of Salisbury Imaging Ltd. from its founding in 1990
until its acquisition by the Company in 1995. Mr. Almand has a B.A. and a
Masters in Finance from the University of Georgia.
David Cohen has been Senior Vice President--West Coast Operations since
September 1995. Mr. Cohen has been responsible for and/or involved with the
development of diagnostic imaging centers for the past 13 years. Prior to
joining the Company, Mr. Cohen was an independent consultant since October 1994.
From November 1992 to September 1994, Mr. Cohen was the President of FutureCare
Affiliates, Inc. ("FCA"), a company which he co-founded and that is the majority
owner of two Imaging Centers in California and which was acquired by the Company
in November 1995. During 1991 and 1992, he was the Western Regional Manager for
New Ventures and Acquisitions for DVI Health Services, Inc., a publicly traded
national health services organization. From 1986 to 1991 he served as a Magnetic
Resonance Imaging Consultant for Diasonics/Toshiba America Medical Systems. Mr.
Cohen has a degree from the University of Montreal, School of Business.
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<PAGE>
Todd R. Smith was elected Vice President effective January 1, 1996. From
October 1992 until its acquisition by the Company in November 1995, Mr. Smith
was the Vice President and then President of FCA, which he co-founded in 1992.
From June 1991 to October 1992 he was an assistant Vice President of DVI Health
Services Corp., a publicly traded national health services organization, where
he directed the acquisition and development of six healthcare service
businesses. From 1986 to 1991 he was Director of Project Development of TME,
Inc., a national venture-backed privately-held health services organization,
where he directed the development of outpatient diagnostic imaging center
limited partnerships. Mr. Smith has a B.B.A. from the University of Texas at
Austin.
Andrew J. Anello has been a director since November 1993. Since January
1996, Mr. Anello has been a consultant for Simione Central Inc., a home
healthcare consulting firm. From 1988 to January 1996, Mr. Anello was the Vice
President of Reimbursement and Finance of Staff Builders, Inc., a publicly
traded company involved in the ownership and management of certified home
healthcare agencies. From 1978 to 1988 he was an audit supervisor for Empire
Blue Cross and Blue Shield. Mr. Anello has a B.S. in Accounting from Queens
College.
William M. Harper, IV, M.D. has been a director since May 1995. Dr. Harper
has been a practicing urologist since 1982. Dr. Harper was a founding partner of
the former owner of Columbus Diagnostic Center ("CDC") and has been a consultant
to CDC since its acquisition by the Company in August 1994. Dr. Harper has a
B.S. from Georgia Southwestern College and an M.D. from the Medical College of
Georgia.
Charles Jacobson has been a director since June 1995. Since 1983, Mr.
Jacobson has been the Chairman and Chief Executive Officer of Jacobson,
Abernathy & Associates, Inc., a diversified healthcare consulting firm with
headquarters in the Tampa Bay area that provides management and consulting
services to hospitals, physician groups, independent practice associations and
other ancillary service organizations throughout the southeastern United States.
Mr. Jacobson has over 25 years of healthcare- related experience in the
development of new healthcare ventures. He serves on the board of directors of
St. John's River Rural Health Network, all of which are in the greater
Jacksonville area. He is also the president of Manatee Medical Enterprises
Incorporated, a durable medical equipment provider that distributes throughout
the southeastern United States. Mr. Jacobson has a B.S. from Christian Brothers
University and an M.B.A. from DePaul University.
Gordon Rausser, Ph.D. has been a director since September 1994. Dr.
Rausser is a principal of the Law & Economics Consulting Group, Inc., an
economics consulting group that provides consulting and litigation support
services primarily to Fortune 500 companies. Dr. Rausser has served as the Dean
of the College of Natural Resources since 1994 and has been the Robert Gordon
Sproul Distinguished Professor at the University of California at Berkeley since
1986. He was also the Chairman of the Department of Agricultural Resource
Economics from 1979 to 1985. Dr. Rausser served on the Council of Economic
Advisors from 1986 to 1987 and as Chief Economist of the Agency for
International Development from 1988 to 1990. Dr. Rausser has a B.S. from
California State University at Fresno and a Ph.D. from the University of
California, Davis.
SELLING SECURITYHOLDERS
The following securities are covered by this Prospectus:
1. The resale by the holders identified herein of up to 57,500,000
principal amount of Debentures.
2. The resale by the holders identified herein of up to 6,388,889
shares of Common Stock issuable upon the conversion of the Debentures.
3. The resale by the holders identified herein of up to 880,445 shares
of Common Stock.
The table below provides certain information with respect to the
principal amount of Debentures and the number of shares of Common Stock of the
Company (i) beneficially owned by Selling Securityholders as of April 30, 1996,
and registered for sale. Except as otherwise indicated, the principal amount of
Debentures and the number of shares of Common Stock reflected in the table has
been determined in accordance with Rule 13d-3 promulgated under the Exchange
Act. Under such Rule each Selling Securityholder is deemed to beneficially own
the number of securities of the Company issuable upon the exercise of options,
warrants, or rights to purchase securities of the Company, which rights are
exercisable within sixty days.
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<PAGE>
Each Selling Securityholder is registering for sale all Debentures held
by it and all shares issuable upon a conversion of the Debentures. Upon the sale
by each Selling Securityholder of the Debentures registered for sale, such
holder will not hold any Debentures.
The Debentures were originally sold by the Company in a private
placement that closed in April and May 1996. Each Selling Securityholder either
acquired the Debentures directly in such private placement or by a private
purchase subsequent to closing of such private placement. Selling
Securityholders also may have purchased shares of the Company's Common Stock
from time to time in the open market or in private transactions not involving
the Company. Except as set forth below, the Company has no other relationships
with and has not engaged in any other transactions with any of the Selling
Securityholders.
The following table includes information furnished to the Company on
behalf of the Selling Securityholders which hold Debentures. Based on such
information, after the sale by it of the Debentures and shares of Common Stock
hereby registered for sale, no Selling Securityholder will own, as of May 31,
1996, any shares of Common Stock.
<TABLE>
DEBENTURES DEBENTURES SHARES
OWNED AS OF REGISTERED REGISTERED
SELLING SECURITYHOLDER MAY 31, 1996 FOR SALE FOR SALE
- ---------------------------------------- ------------ ------------- -----------
<S> <C> <C> <C>
Allstate Insurance $ 1,500,000 $ 1,500,000 166,666
American Capital 2,000,000 2,000,000 222,222
Cincinnati Financial 1,500,000 1,500,000 166,666
CNA Insurance 1,000,000 1,000,000 111,111
Dean Witter Asset 1,500,000 1,500,000 166,666
Eagle Asset Management 200,000 200,000 22,222
Fidelity Investments 6,000,000 6,000,000 666,666
Forest Investments 1,050,000 1,050,000 116,667
Franklin Funds 6,500,000 6,500,000 722,222
Fred Alger, Inc. 500,000 500,000 55,555
Froley Revy, Inc. 1,250,000 1,250,000 138,888
General Motors Pension Fund 5,000,000 5,000,000 555,555
Guardian Life 5,250,000 5,250,000 583,333
IDS/American Express 2,000,000 2,000,000 222,222
JMG Capital 500,000 500,000 55,555
Laterman & Co. 1,000,000 1,000,000 111,111
Lynch & Mayer 4,000,000 4,000,000 444,444
Merrill Lynch Asset Management 2,500,000 2,500,000 277,777
New York Life 4,500,000 4,500,000 500,000
Oaktree Capital Management 5,000,000 5,000,000 555,555
Putnam Management 4,000,000 4,000,000 444,444
Zazove & Assoc. 750,000 750,000 83,333
------- ------- ------
Total $57,500,000 $57,500,000 6,388,879
</TABLE>
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<PAGE>
The following table sets forth certain information concerning stock
ownership of Selling Securityholders which hold Common Stock.
<TABLE>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE SHARES TO OWNED AFTER
SELLING STOCKHOLDER THE OFFERING BE OFFERED THE OFFERING
- ------------------- --------------------------- ---------- --------------------------
NUMBER PERCENTAGE(1) NUMBER PERCENTAGE(1)
------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Gordon Rausser (2) 640,000 (3) 7.0 400,000 240,000 2.6
Forum Capital Markets, L.P.(4) 319,445 3.5 319,445 0 *
Errington Capital, Ltd. 100,000 (5) 1.1 18,000 82,000 *
Coyote Consulting &
Financial Services LLC(6) 185,000 (7) 2.1 75,000 110,000 1.3
Erins, Bryce & Cole Inc. 68,000 * 68,000 0 0
</TABLE>
- ------------------------
* less than 1%.
(1) Based on 8,695,867 shares outstanding on May 1, 1996.
(2) Dr. Rausser is a director of and consultant to the Company.
(3) Includes 125,000 shares of Common Stock, 80,000 Escrow Shares, 22,000
Acquisition Warrants, 10,000 options to purchase Common Stock currently
exercisable and 400,000 warrants to purchase Common Stock underlying
the shares offered hereby.
(4) Forum Capital Markets, L.P. ("Forum") was the initial purchaser of the
Debentures in the private placement.
(5) Includes 82,000 Escrow Shares.
(6) Coyote Consulting & Financial Services LLC is a consultant to the Company.
(7) Includes 125,000 shares of Common Stock and 60,000 Escrow Shares owned
by an affiliate. Does not include 150,000 options to purchase Common
Stock not currently exercisable.
DESCRIPTION OF THE DEBENTURES
The Debentures have been issued under an indenture (the "Indenture")
dated as of March 29, 1996 hereof between the Company and American Stock
Transfer & Trust Company, as trustee (the "Trustee"). The statements under this
caption address the material terms of the Debentures but are summaries and do
not purport to be complete. The summaries make use of terms defined in the
Indenture and are qualified in their entirety by reference to the Indenture, a
copy of which is filed as an exhibit to the registration statement of which this
Prospectus forms a part.
GENERAL
The Debentures are general unsecured subordinated obligations of the
Company and mature on March 31, 2003. The Debentures bear interest at the rate
of 9% per annum from the date of original issue, or from the most recent
Interest Payment Date (as defined below) to which interest has been paid or duly
provided for, and accrued but unpaid interest be payable semi-annually on March
31 and September 30 of each year commencing September 30, 1996 (each, an
"Interest Payment Date"). Interest will be paid to Debentureholders of record
("Holders") at the close of business on the March 15 or September 15,
respectively, immediately preceding the relevant Interest Payment Date (each, a
"Regular Record Date"). Interest is computed on the basis of a 360-day year of
twelve 30-day months.
Principal of and premium, if any, and interest on the Debentures is
payable, the transfer of the Debentures is registrable and the Debentures will
be exchangeable at the office or agency of the Company maintained for that
purpose in New York, New York (which initially will be the corporate trust
office of the Trustee), except that, at the option of the
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Company, payment of interest may be made by check mailed to the address of the
Holder entitled thereto as it appears in the Debenture Register on the related
record date.
The Debentures will be issued in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any transfer or exchange of Debentures, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
All monies paid by the Company to the Trustee or any Paying Agent for
the payment of principal of and premium, if any, and interest on any Debenture
which remain unclaimed for two years after such principal, premium or interest
became due and payable may be repaid to the Company. Thereafter the Holder of
such Debenture may, as an unsecured general creditor, look only to the Company
for payment thereof.
The Trustee is acting as paying agent and registrar of the Debentures.
The Company may change any paying agent and registrar without notice.
CONVERSION RIGHTS
Holders are entitled, at any time and from time to time prior to
maturity (subject to earlier redemption or repurchase, as described below), to
convert their Debentures (or any portion thereof that is an integral multiple of
$1,000), at 100% of the principal amount thereof, into Common Stock of the
Company at the conversion price of $9.00 shares, subject to adjustment under
certain circumstances as described below. After a call for redemption of
Debentures, through optional redemption or otherwise, the Debentures or portion
thereof called for redemption will be convertible if duly surrendered on or
before the date fixed for redemption.
The conversion price is subject to adjustment upon certain events,
including: (i) the issuance of Common Stock (including a distribution of Common
Stock held in the Company's treasury) as a dividend or distribution on any class
of Capital Stock of the Company or any Subsidiary which is not wholly owned by
the Company; (ii) a subdivision, combination or reclassification of outstanding
shares of Common Stock; (iii) the issuance or distribution of Capital Stock of
the Company or of options, rights or warrants to acquire Capital Stock of the
Company at less than the Current Market Price (as defined below) on the date of
issuance or distribution (provided that the issuance of Capital Stock upon the
exercise of warrants or options will not cause an adjustment in the conversion
price if no such adjustment would have been required at the time such warrant or
option was issued and that certain issuances of Common Stock to fund business
acquisitions will not cause an adjustment in the conversion price); and (iv) the
distribution to the holders of any class of Capital Stock of the Company
generally and to holders of Capital Stock of any Subsidiary which is not wholly
owned by the Company of evidences of indebtedness or assets (including cash and
securities, but excluding dividends or distributions payable in shares of Common
Stock and rights, warrants and options for which adjustment is made as described
above and further excluding cash dividends paid with respect to any calendar
year which are paid within 180 days after the end of such year and are not in
excess of 50% of the Company's Consolidated Net Income with respect to such
year).
Notwithstanding the foregoing, (a) if the options, rights or warrants
described in clause (iii) of the preceding paragraph are exercisable only upon
the occurrence of certain triggering events, then the conversion price will not
be adjusted until such triggering events occur and (b) if options, rights or
warrants expire unexercised, the conversion price shall be readjusted to take
into account only the actual number of such options, rights or warrants which
were exercised. In addition, the provisions of the preceding paragraph will not
apply to the issuance of Common Stock upon the exercise of the Company's
outstanding stock options under the 1993 Plan and 1995 Plan or warrants or
convertible notes issued by the Company prior to the date hereof, unless the
exercise or conversion price thereof is changed after the date of the Indenture
(other than solely by operation of the anti-dilution provisions thereof).
No adjustment will be made to the conversion price until cumulative
adjustments to the conversion price amount to at least 1% of the conversion
price, as last adjusted. Except as stated above, the conversion price will not
be adjusted for the issuance of Common Stock, or any securities convertible into
or exchangeable for Common Stock or carrying the right to purchase any of the
foregoing, or the payment of dividends on the Common Stock.
Fractional shares of Common Stock will not be issued upon conversion. A
Holder otherwise entitled to a fractional share of Common Stock upon conversion
shall receive cash equal to the equivalent fraction of the Current Market Price
of a share of Common Stock on the business day prior to conversion. The Company
from time to time may reduce the conversion price if the Board of Directors of
the Company has made a determination that such reduction would be in the best
interests of the Company, which determination shall be conclusive.
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<PAGE>
A Holder who surrenders a Debenture (or portion thereof) for conversion
between the close of business on a Regular Record Date and the next Interest
Payment Date will receive interest on such Interest Payment Date with respect to
such Debenture (or portion thereof) so converted through such Interest Payment
Date. Subject to such payments in the event of conversion after the close of
business on a Regular Record Date, no payment or adjustment shall be made upon
any conversion on account of any interest accrued but unpaid on the Debentures
surrendered for conversion.
Subject to any applicable right of the Holders to cause the Company to
purchase Debentures upon a Change of Control (as described below), in case of
any consolidation or merger to which the Company is a party, other than a
transaction in which the Company is the continuing corporation, or in case of
any sale or conveyance to another corporation of the property of the Company as
an entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation or other entity, there will be
no adjustment of the conversion price, but each Holder will have the right
thereafter to convert such Holder's Debentures into the kind and amount of
securities, cash or other property which the Holder would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale or conveyance had such Debenture been converted immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale or
conveyance. In the case of a cash merger of the Company with another corporation
or other entity or any other cash transaction of the type mentioned above, the
effect of these provisions would be that the conversion features of the
Debentures would thereafter be limited to converting the Debentures at the
conversion price then in effect into the same amount of cash that such Holder
would have received had such Holder converted the Debentures into Common Stock
immediately prior to the effective date of such cash merger or transaction.
Depending upon the terms of such cash merger or transaction, the aggregate
amount of cash so received on conversion could be more or less than the
principal amount of the Debentures.
The Company has covenanted under the Indenture to reserve and keep
available at all times out of its authorized but unissued Common Stock, for the
purpose of effecting conversions of Debentures, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Debentures.
REDEMPTION
Optional Redemption by the Company. The Debentures are not redeemable
at the option of the Company prior to March 31, 1999. Thereafter, the Debentures
will be redeemable at any time prior to maturity, at the option of the Company,
in whole or from time to time in part, upon not less than 30 days' nor more than
60 days' prior notice of the redemption date, mailed by first class mail to each
Holder's last address as it appears in the Debenture Register, at the Redemption
Prices established for the Debentures, together with accrued but unpaid
interest, if any, to the date fixed for redemption. The Redemption Prices for
the Debentures (expressed as a percentage of the principal amount) shall be as
follows:
Percentage
----------
AFTER MARCH 31,
---------------
1999................................... 105.00%
2000................................... 103.33
2001................................... 101.67
2002................................... 100.00
Selection of Debentures Redeemed. If less than all the Debentures are
to be redeemed, selection of the Debentures for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Debentures are listed, or, if the Debentures are
not listed, on a pro rata basis, by lot or by such method that complies with
applicable legal requirements and that the Trustee considers fair and
appropriate. The Trustee may select for redemption portions of the principal of
Debentures that have a denomination larger than $1,000. Debentures and portions
thereof will be redeemed in the amount of $1,000 or integral amounts of $1,000.
The Trustee will make the selection from Debentures outstanding and not
previously called for redemption.
CHANGE OF CONTROL
If a Change of Control occurs, the Company shall offer to repurchase
each Holder's Debentures pursuant to an offer as described below (the "Change of
Control Offer") at a purchase price equal to 100% of the principal amount of
such Holder's Debentures, plus accrued but unpaid interest, if any, to the date
of purchase. The Change of Control purchase feature of the Debentures may in
certain circumstances make more difficult or discourage a takeover of the
Company.
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<PAGE>
Under the Indenture, a "Change of Control" means the occurrence of any
of the following events: (i) any person (as the term "person" is used in Section
13(d) or Section 14(d) of the Exchange Act) is or becomes the direct or indirect
beneficial owner of shares of the Company's Capital Stock representing greater
than 50% of the total voting power of all shares of Capital Stock of the Company
entitled to vote in the election of directors under ordinary circumstances; (ii)
the Company sells, transfers or otherwise disposes of all or substantially all
of the assets of the Company; or (iii) during any period of two consecutive
years (or, in the case this event occurs within the first two years after the
date of issue of the Debentures, such shorter period as shall have commenced on
the date of original issue), Continuing Directors cease for any reason to
constitute a majority of the board of Directors of the Company then in office.
Within 30 days after any Change of Control, unless the Company has
previously mailed a notice of optional redemption by the Company of all of the
Debentures, the Company shall mail a notice of the Change of Control Offer to
each Holder by first class mail at such Holder's last address as it appears on
the Debenture Register stating: (i) that a Change of Control has occurred and
that the Company is offering to repurchase all of such Holder's Debentures; (ii)
the circumstances and relevant facts regarding such Change of Control
(including, but not limited to, information with respect to pro forma income,
cash flow and capitalization of the Company after giving effect to such Change
of Control); (iii) the repurchase price; (iv) the expiration date of the Change
of Control Offer, which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed; (v) the date such purchase shall be
effected, which shall be no later than 30 days after expiration date of the
Change of Control Offer; (vi) that any Debentures not accepted for payment
pursuant to the Change of Control Offer shall continue to accrue interest; (vii)
that, unless the Company defaults in the payment of the Change of Control
Payment, all Debentures accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Payment Date;
(viii) the name and address of the paying agent; (ix) that Debentures must be
surrendered to the paying agent to collect the repurchase price; (x) any other
information required by applicable law to be included therein; and (xi) the
procedures determined by the Company, consistent with the Indenture, that a
Holder must follow in order to have such Debentures repurchased.
In the event that the Company is required to make a Change of Control
Offer, the Company will comply with any applicable securities laws and
regulations, including, to the extent applicable, Section 14(e), Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be applicable
in contraction with any offer by the Company to purchase Debentures at the
option of the Holders thereof.
The Company, could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change in Control under the Debentures, but that would increase the amount of
Senior Indebtedness (or any other indebtedness) outstanding at such time. The
Company's ability to create any additional indebtedness is limited as described
in the Debentures and the Indenture although, under certain circumstances, the
incurrence of significant amounts of additional indebtedness could have an
adverse effect on the Company's ability to service its indebtedness, including
the Debentures. If a Change in Control were to occur, there can be no assurance
that the Company would have sufficient funds at the time of such event to pay
the Change in Control purchase price for all Debentures tendered by the Holders.
A default by the Company on its obligation to pay the Change in Control purchase
price could, pursuant to cross-default provisions, result in acceleration of the
payment of other indebtedness of the Company outstanding at that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Debentures
pursuant to the exercise by a Holder of the foregoing option, depending on the
financial circumstances of the Company at the time any such purchase may occur,
because such purchase could cause a breach of certain covenants contained in
such agreements. Such a breach may constitute an event of default under such
indebtedness and thereby restrict the Company's ability to purchase the
Debentures. See "--Ranking."
MAINTENANCE OF CONSOLIDATED NET WORTH
The Company is required to maintain a Consolidated Net Worth of at
least $18 million. The Indenture provides that if the Company's Consolidated Net
Worth is less than $18 million at the end of any fiscal quarter, the Company is
required to furnish to the Trustee an Officer's Certificate within 45 days after
the end of such fiscal quarter (90 days after the end of any fiscal year)
notifying the Trustee that the Company's Consolidated Net Worth has declined
below $18 million. If, at any time or from time to time, the Company's
Consolidated Net Worth at the end of each of any such two consecutive fiscal
quarters (the last day of the second fiscal quarter being referred to as a
"Deficiency Date") is less than $18 million, then the Company shall, in each
such event, no later than 50 days after each Deficiency Date (100 days if a
Deficiency Date is also the end of the Company's fiscal year), mail to the
Trustee and each Holder at such Holder's last address as it appears on the
Debenture Register a notice (the "Deficiency Notice") of the occurrence of such
deficiency, which shall include an offer by the Company (the "Deficiency Offer")
to repurchase Debentures as described below. The Deficiency Notice shall state:
(i) that a deficiency has occurred; (ii) that the Company is offering to
repurchase 12.5% of the aggregate principal amount of Debentures originally
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<PAGE>
issued (or such lesser amount as may be outstanding at the time of the
Deficiency Notice) (the "Deficiency Repurchase Amount"); (iii) that the
repurchase price shall be 100% of the principal amount of the Debentures
repurchased plus accrued but unpaid interest, if any, to the date of purchase;
(iv) the expiration date of the Deficiency Offer, which shall be no earlier than
30 days nor later than 45 days after the date such notice is mailed; (v) the
date such purchase shall be effected, which shall be no later than 20 days after
expiration date of the Deficiency Offer; (vi) that Debentures not accepted for
payment pursuant to the Deficiency Offer shall continue to accrue interest;
(vii) that, unless the Company defaults in payment of the Deficiency Repurchase
Amount, all Debentures accepted for payment pursuant to the Deficiency Offer
shall cease to accrue interest after the Deficiency Payment Date; (viii) that if
any Debenture is repurchased in part, a new Debenture or Debentures in principal
amount equal to the unrepurchased portion will be issued; (ix) the name and
address of the paying agent; (x) that Debentures to be repurchased must be
surrendered to the paying agent to collect the repurchase price; (xi) any other
information required by applicable law to be included therein; and (xii) the
procedures determined by the Company, consistent with the Indenture, that a
Holder must follow in order to have such Debentures repurchased.
The Company shall purchase the Deficiency Repurchase Amount of
Debentures or, if less than the Deficiency Repurchase Amount has been delivered
for repurchase, all Debentures delivered for repurchase in response to the
Deficiency Offer. If the aggregate principal amount of Debentures delivered for
repurchase exceeds the Deficiency Repurchase Amount, the Company will purchase
the Debentures delivered to it pro rata (in $1,000 increments only) among the
Debentures delivered based on principal amount. The Company will comply with all
applicable securities laws and regulations in connection with each Deficiency
Offer. In no event shall the failure to meet the minimum Consolidated Net Worth
requirement set forth above at the end of any fiscal quarter be counted toward
the making of more than one Deficiency Offer.
The Company may credit against the principal amount of Debentures to be
repurchased in any Deficiency Offer 100% of the principal amount (excluding
premium) of Debentures acquired by the Company subsequent to the Deficiency Date
through purchase (otherwise than pursuant to this provision or a Change of
Control Offer), optional redemption, conversion or exchange and surrendered for
cancellation.
If a Consolidated Net Worth deficiency were to occur, there can be no
assurance that the Company would have sufficient funds at the time of such event
to purchase the Deficiency Repurchase Amount of Debentures. A default by the
Company to so purchase the Deficiency Repurchase Amount of Debentures could,
pursuant to cross-default provisions, result in acceleration of the payment of
other indebtedness of the Company outstanding at that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Debentures
pursuant to the exercise by a Holder of the foregoing option, depending on the
financial circumstances of the Company at the time any such purchase may occur,
because such purchase could cause a breach of certain covenants contained in
such agreements. Such a breach may constitute an event of default under such
indebtedness and thereby restrict the Company's ability to purchase the
Debentures. See "--Ranking."
RANKING
The payment of principal of and premium, if any, and interest on the
Debentures is, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined below). Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors or marshalling of assets, whether voluntary, involuntary or in
receivership, bankruptcy, insolvency or similar proceedings, the holders of all
Senior Indebtedness will be first entitled to receive payment in full of all
amounts due or to become due thereon before any payment is made on account of
principal of and premium, if any, and interest on the Debentures or on account
of any other monetary claims under or in respect of the Debentures, and before
any distribution is made to acquire any of the Debentures for any cash, property
or securities. No payments on account of principal of and premium, if any, and
interest on the Debentures shall be made if at the time thereof: (i) there is a
default in the payment of all or any portion of the obligations under any Senior
Indebtedness or (ii) there shall exist a default in any covenant with respect to
the Senior Indebtedness (other than as specified in clause (i) of this
sentence), and, in such event, such default shall not have been cured or waived
or shall not have ceased to exist, the Trustee and the Company shall have
received written notice from any holder of such Senior Indebtedness stating that
no payment shall be made with respect to the Debentures and such default would
permit the maturity of such Senior Indebtedness to be accelerated, provided that
no such default will prevent any payment on, or in respect of, the Debentures
for more than 120 days unless the maturity of such Senior Indebtedness has been
accelerated.
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<PAGE>
The Holders will be subrogated to the rights of the holders of the
Senior Indebtedness to the extent of payments made on Senior Indebtedness upon
any distribution of assets in any such proceedings out of the distributive share
of the Debentures.
"Senior Indebtedness" is defined to mean the principal of and premium,
if any, and interest on (a) the Debt of the Company or any of its Subsidiaries
which has been provided by a bank or by any State or local government or agency
thereof, (b) Capitalized Lease Obligations, (c) Purchase Money Indebtedness and
(d) amendments, renewals, extensions, modifications and refundings of any such
Debt, whether any such Debt described in (a), (b) or (c) is outstanding on the
date of the Indenture or thereafter created, incurred or assumed, unless in any
case, the instrument creating or evidencing any such Debt pursuant to which the
same is outstanding provides that such Debt is not superior in right of payment
to the Debentures. The Company's ability to incur Senior Indebtedness after the
date of the Indenture is limited. See "--Certain Covenants of the
Company--Limitation on Debt." Only indebtedness of the Company that is Senior
Indebtedness will rank senior to the Debentures in accordance with the
provisions of the Indenture. All other Debt of the Company and its Subsidiaries
will be pari passu with the Debentures in right of payment, unless and to the
extent the documents creating such Debt provide that such Debt is subordinated
to the Debentures. The Company has agreed that it will not permit any of its
Subsidiaries to issue or incur any Debt which is not Senior Indebtedness.
The Debentures are unsecured obligations of the Company, and,
accordingly, will rank pari passu with all unsecured trade debt and unsecured
obligations of the Company that arise by operation of law or are imposed by any
judicial or governmental authority. The Debentures are obligations exclusively
of the Company, and accordingly, will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of its Subsidiaries. The right of the Company, and,
therefore, the right of creditors of the Company (including Holders) to receive
assets of any such Subsidiary upon the liquidation or reorganization of such
Subsidiary or otherwise, as a practical matter, will be effectively subordinated
to the claims of such Subsidiary's creditors, except to the extent the Company
is itself recognized as a creditor of such Subsidiary or such other creditors
have agreed to subordinate their claims to the payment of the Debentures, in
which case the claims of the Company would still be subordinate to any secured
claim on the assets of such Subsidiary and any indebtedness of such Subsidiary
senior to that held by the Company. As noted above, the Company has agreed that
it will not permit any of its Subsidiaries to issue or incur Debt which is not
Senior Indebtedness.
At March 31, 1996, Senior Indebtedness was approximately $28.1 million,
substantially all of which was indebtedness of the Company's Subsidiaries. The
Company will from time to time incur additional indebtedness constituting Senior
Indebtedness.
CERTAIN COVENANTS OF THE COMPANY
The Indenture contains, among others, the covenants summarized below,
which will be applicable (unless waived or amended) so long as any of the
Debentures are outstanding.
Limitation on Debt. The Company will not, and will not permit any of
its Subsidiaries to, create, incur, assume or directly or indirectly guarantee
or in any other manner become directly or indirectly liable for ("incur") any
Debt (including Acquired Debt) other than Permitted Debt (as defined); provided,
however, that the Company and, subject to the other limitations set forth
herein, its Subsidiaries may incur Debt or Senior Indebtedness if the Debt to
Operating Cash Flow Ratio of the Company and its Subsidiaries at the time of
incurrence of such Debt, after giving pro forma effect thereto, is 6.5:1 or
less; provided that any such Debt incurred by the Company that is not Senior
Indebtedness or Acquired Debt shall have a Weighted Average Life to Maturity
longer than the Weighted Average Life to Maturity of the Debentures. With
respect to any revolving line of credit, (i) the full amount of available
borrowing thereunder will be deemed to have been incurred at the time such line
of credit is established and (ii) each advance thereunder shall be deemed to be
a separate issuance of Debt, except that for purposes of evaluating whether each
advance under any such line of credit is in compliance with this covenant, only
the then outstanding amount of borrowings under such line of credit (as opposed
to the full amount of available borrowings thereunder) will be deemed to be
outstanding Debt.
For purposes of the foregoing limitations "Permitted Debt" means (i)
Debt evidenced by the Debentures in an aggregate principal amount not to exceed
$57.5 million, (ii) Debt owed by the Company to any wholly owned Subsidiary of
the Company, provided that any such Debt is subordinate in right of payment to
the Debentures, (iii) Debt owed by any wholly owned Subsidiary of the Company to
the Company or any other wholly owned Subsidiary of the Company, provided that
any such Debt is subordinate in right of payment to the Debentures, (iv)
deferred income taxes as defined in accordance with GAAP, (v) Debt constituting
inter-company payables or receivables between or among the Company and its
Subsidiaries incurred in the ordinary course of business and (vi) Refinancing
Debt.
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<PAGE>
A calculation of the Debt to Operating Cash Flow Ratio as required by
this covenant shall be made, in each case, for the period of four full
consecutive fiscal quarters next preceding the date on which Debt is proposed to
be incurred ("Reference Period"). In addition, for purposes of the pro forma
calculations required to be made above, (A) (i) the amount of Debt to be
incurred (plus all other Debt previously incurred during such Reference Period),
and the amount (valued at its liquidation value and including any accrued but
unpaid dividends) of Disqualified Stock to be issued (plus all other
Disqualified Stock previously issued during such Reference Period) will be
presumed to have been incurred or issued on the first day of such Reference
Period and (ii) the amount of any Debt redeemed, refinanced or repurchased with
the proceeds of the Debt referred to in clause (i) will be presumed to have been
redeemed, refinanced or repurchased on the first day of such Reference Period,
(B) if any asset disposition occurred during such Reference Period, the
calculations included in the computation of the Debt to Operating Cash Flow
Ratio shall be adjusted to give effect to such asset disposition on a pro forma
basis as if such asset disposition had occurred on the first day of such
Reference Period, (C) if an acquisition of a business or entity occurred during
such Reference Period, the calculations included in the computation of the Debt
to Operating Cash Flow Ratio will be adjusted to give effect to such acquisition
on a pro forma basis as if such acquisition had occurred on the first day of
such Reference Period and (D) if such new Debt is being incurred in connection
with an acquisition, pro forma effect will be given to the operating cash flow
or losses attributable to the assets or business so acquired, excluding
extraordinary gains or losses related thereto.
Limitation on Additional Debt After Default. Upon the occurrence and
during the continuance of an Event of Default (as defined below), the Company
will not, and will not permit any of its Subsidiaries to, incur any additional
Debt other than Debt which is subordinate to the Debentures or Debt which is
utilized to cure such default and which is not prohibited by the other
provisions of the Indenture.
Limitation on Disqualified Stock. The Company will not, and will not
permit any of its Subsidiaries to, issue any shares of Disqualified Stock.
Limitation on Dividend Restrictions Affecting Subsidiaries. The Company
may not, and may not permit any of its Subsidiaries to, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction of
any kind on the ability of any Subsidiary of the Company to (a) pay to the
Company dividends or make to the Company any other distribution on its Capital
Stock, (b) pay any Debt owed to the Company or any of its Subsidiaries, (c) make
loans or advances to the Company or any of the Company's Subsidiaries or (d)
transfer any of its property or assets to the Company or any of its
Subsidiaries, other than such encumbrances or restrictions existing or created
under or by reason of (i) applicable law, (ii) the Indenture, (iii) covenants or
restrictions contained in any instrument governing Debt of the Company or any of
its Subsidiaries existing on the date of the Indenture or covenants or
restrictions contained in any loan documents relating to Senior Indebtedness
incurred after the date hereof, (iv) customary provisions restricting
subletting, assignment and transfer of any lease governing a leasehold interest
of the Company or any of its Subsidiaries or in any license or other agreement
entered into in the ordinary course of business, (v) any agreement governing
Debt of a person acquired by the Company or any of its Subsidiaries in existence
at the time of such acquisition (but not created in contemplation thereof),
which encumbrances or restrictions are not applicable to any person, or the
property or assets of any person, other than the person, or the property or
assets of the person so acquired, (vi) any restriction with respect to a
Subsidiary imposed pursuant to an agreement entered into in accordance with the
terms of the Indenture for the sale or disposition of Capital Stock or property
or assets of such Subsidiary, pending the closing of such sale or disposition,
or (vii) any Refinancing Debt; provided, however, that the encumbrances or
restrictions contained in the agreements governing any such Refinancing Debt
shall be no more restrictive than the encumbrances or restrictions set forth in
the agreements governing the Debt being refinanced as in effect on the date of
the Indenture.
Limitation on Liens. The Company will not, and will not permit any of
its Subsidiaries, directly or indirectly, to create, incur, assume or permit to
exist any Lien (other than Permitted Liens) upon or with respect to any of the
Property of the Company or any such Subsidiary, whether owned on the date of the
Indenture or thereafter acquired, or on any income or profits therefrom, to
secure any Debt which is pari passu with or subordinate in right of payment to
the Debentures.
Limitation on Restricted Payments and Investments. The Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly, (i)
declare or pay any distribution or dividend on or in respect of any class of its
Capital Stock (except dividends or distributions payable by wholly owned
Subsidiaries of the Company and dividends or distributions payable in Qualified
Stock of the Company or in options, warrants or other rights to purchase
Qualified Stock of the Company); (ii) purchase, repurchase, prepay, redeem,
defease or otherwise acquire or retire for value (other than in Qualified Stock
of the Company or in options, warrants or other rights to purchase Qualified
Stock of the Company) any Capital Stock in the Company or any of its
Subsidiaries (other than a wholly owned Subsidiary of the Company); (iii) make
or permit any Subsidiary to make an Investment (other than Permitted
Investments) in or any payment on a guaranty of any obligation of any Person; or
(iv) repay, prepay, redeem, defease, retire or refinance, prior to scheduled
maturity or scheduled sinking fund payment, any other Debt which is pari passu
with, or subordinate to, the Debentures (other than by the payment
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of Qualified Stock of the Company or of options, warrants or other rights to
purchase Qualified Stock of the Company) except, in the case of this clause
(iv), if the proceeds used for such repayment, prepayment, redemption,
defeasance, retirement or refinancing are generated from the issuance of
Refinancing Debt (any such declaration, payment, distribution, purchase,
repurchase, prepayment, redemption, defeasance or other acquisition or
retirement or Investment referred to in clauses (i) through (iv) above being
hereinafter referred to as a "Restricted Payment"); unless at the time of and
after giving effect to a proposed Restricted Payment (the value of any such
payment, if other than cash, as determined by the Board of Directors, including
the affirmative vote of the Independent Directors, whose determination shall be
conclusive and evidenced by a board resolution) (a) no Event of Default (and no
event that, after notice or lapse of time, or both, would become an Event of
Default) shall have occurred and be continuing, (b) the Company could incur an
additional $1.00 of Debt pursuant to the first sentence under "Limitation on
Debt" above and (c) the Company's stockholders' equity at the end of the most
recent fiscal quarter preceding such payment, less any Restricted Payments made
since such date, is at least $18 million.
Limitation on Line of Business. For so long as any Debentures are
outstanding, the Company and its Subsidiaries will engage solely in the
acquisition, operation and management of multi-modality diagnostic imaging
centers and other medical service facilities.
Transactions with Related Persons. The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with (a)
any beneficial owner of 5% or more of the outstanding voting securities of the
Company (as determined in accordance with Section 13(d) of the Exchange Act) at
the time of such transaction, (b) any officer, director or employee of the
Company, of any of its Subsidiaries or of any such beneficial owner of 5% or
more of the outstanding voting securities of the Company as described in clause
(a) above or (c) any Related Person unless such transaction or series of
transactions (i) involves an amount of $250,000 or less or (ii)(A) is on terms
that are no less favorable to the Company or any such Subsidiary, as the case
may be, than would be available in a comparable transaction with an unrelated
third party and (B)(x) if such transaction or series of related transactions
involve aggregate payments in excess of $400,000, the Company delivers an
officers' certificate to the Trustee certifying that such transaction complies
with clause (ii)(A) above and such transaction or series of transactions is
approved by a majority of the Board of Directors of the Company including the
approval of each of the Independent Directors or (y) if such transaction or
series of related transactions involve aggregate payments in excess of $1.5
million, the Company obtains an opinion as to the fairness to the Company or
such Subsidiary from a financial point of view issued by an investment banking
firm, appraisal firm or accounting firm, in each case of national standing.
Notwithstanding the foregoing, this provision will not apply to (i) any
transaction entered into between the Company and Subsidiaries of the Company
(but excluding transactions with any Subsidiary of which more than 5% of the
outstanding voting securities (as determined in accordance with Section 13(d)
under the Exchange Act) are beneficially owned by Persons who are (a) officers,
directors or employees of the Company, of any of its Subsidiaries or of any
beneficial owner of 5% or more of the outstanding voting securities of the
Company (as determined in accordance with Section 13(d) under the Exchange Act)
at the time of such transaction, (b) a beneficial owner of 5% or more of the
outstanding voting securities of the Company (as determined in accordance with
Section 13(d) under the Exchange Act) or (c) Related Persons), (ii) the payment
of compensation and provision of benefits to officers and employees of the
Company and loans and advances to such officers and employees in the ordinary
course of business, or any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise (including the grant of stock options or
similar rights to officers, employees and directors of the Company or any
Subsidiary) pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans or other benefit plans approved by the
Independent Directors, and (iii) transactions with any Person who is a director
of the Company or of any of its Subsidiaries and, who is not (a) the beneficial
owner of 5% or more of the outstanding voting securities of the Company (as
determined in accordance with Section 13(d) under the Exchange Act) or (b) an
officer or employee of the Company, of any of its Subsidiaries or of any such
beneficial owner of 5% or more of the outstanding voting securities of the
Company at the time of such transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the
Debentures, may consolidate with or merge into any other entity or convey,
transfer, sell or lease its assets substantially as an entirety to any Person,
provided that: (i) either (a) the Company is the continuing corporation or (b)
the Person formed by such consolidation or into which the Company is merged or
the Person to which such assets are conveyed, transferred, sold or leased is
organized under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes all obligations of the Company under
the Debentures and the Indenture, (ii) immediately before and immediately after
giving effect to such merger, consolidation, conveyance, transfer, sale or lease
no Event of Default, and no event which, after notice or lapse of time, would
become an Event of Default, under the Indenture shall have occurred and be
continuing, (iii) upon consummation of such consolidation, merger, conveyance,
transfer, sale or lease, the Debentures and the Indenture will be a valid and
enforceable obligation of the Company or such successor, (iv) immediately before
and immediately after giving effect to such transaction on a pro
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forma basis the Company (or such successor) could incur $1.00 of additional Debt
(other than Permitted Debt) under the Indenture and (v) the Company has
delivered to the Trustee an officer's certificate and an opinion of counsel,
each stating that such consolidation, merger, conveyance, transfer, sale or
lease complies with the provisions of the Indenture.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture: (a) failure to
pay principal of or premium, if any, on any Debenture when due and payable at
maturity, upon redemption, upon a Change of Control Offer, Deficiency Offer or
otherwise, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (b) failure to pay any interest on any Debenture
when due and payable, which failure continues for 30 days, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (c)
failure to perform the other covenants of the Company in the Indenture, which
failure continues for 60 days after written notice as provided in the Indenture;
(d) a default occurs (after giving effect to any applicable grace periods or any
extension of any maturity date) in the payment when due of principal of and or
acceleration of, any indebtedness for money borrowed by the Company or any of
its Subsidiaries in excess of $1.0 million, individually or in the aggregate, if
such indebtedness is not discharged, or such acceleration is not annulled,
within 10 days after written notice as provided in the Indenture; and (e)
certain events of bankruptcy, insolvency or reorganization of the Company or any
Subsidiary of the Company. Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the Holders of a majority in aggregate principal amount of the outstanding
Debentures will 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.
If an Event of Default shall occur and be continuing, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Debentures may accelerate the maturity of all Debentures; provided,
however, that after such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of the
then outstanding Debentures may, under certain circumstances, rescind and annul
such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
For information as to waiver of defaults, see "--Modification and Waivers."
No Holder of any Debenture will have any right to institute any
proceeding with respect to the Indenture or for the appointment of a receiver or
trustee or for any other remedy thereunder unless (i) such Holder shall have
previously given to the Trustee written notice of a continuing Event of Default,
(ii) the Holders of at least 25% in aggregate principal amount of the then
outstanding Debentures shall have made written request, and offered indemnity
satisfactory to the Trustee to institute such proceeding as trustee, (iii) the
Trustee shall have failed to institute such proceeding within 60 days after the
receipt of such notice and (iv) no direction inconsistent with such request
shall have been given to the Trustee during such 60-day period by the Holders of
a majority in aggregate principal amount of the then outstanding Debentures.
The Company is required to furnish annually to the Trustee a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATIONS AND WAIVERS
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the then outstanding Debentures held
by persons other than Affiliates of the Company; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Debenture affected thereby, (i) change the stated maturity of, or
any installment of interest on, any Debenture, (ii) reduce the principal amount
of any Debenture or reduce the rate or extend the time of payment of interest on
any Debenture, (iii) increase the conversion price (other than in connection
with a reverse stock split as provided in the Indenture), (iv) change the place
or currency of payment of principal of, or premium or repurchase price, if any,
or interest on, any Debenture, (v) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debenture, (vi) adversely
affect the right to exchange or convert Debentures, (vii) reduce the percentage
of the aggregate principal amount of outstanding Debentures, the consent of the
Holders of which is necessary to modify or amend the Indenture, (viii) reduce
the percentage of the aggregate principal amount of outstanding Debentures, the
consent of the Holders of which is necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults, (ix)
modify the provisions of the Indenture with respect to the subordination of the
Debentures in a manner adverse to the Holders, (x) modify the provisions of the
Indenture with respect to the right to require the Company to repurchase
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Debentures in a manner adverse to the Holders or (xi) modify the provisions of
the Indenture with respect to the vote necessary to amend this provision.
The Holders of a majority in aggregate principal amount of the
outstanding Debentures held by persons other than Affiliates of the Company may,
on behalf of all Holders, waive any past default under the Indenture or Event of
Default, except a default in the payment of principal, premium, if any, or
interest on any of the Debentures or in respect of a provision which under the
Indenture cannot be modified without the consent of the Holder of each
outstanding Debenture.
DISCHARGE OF INDENTURE
The Indenture provides that the Company may defease and be discharged
from its obligations in respect of the Debentures while the Debentures remain
outstanding (except for certain obligations to convert the Debentures into
Common Stock, register the transfer, substitution or exchange of Debentures, to
replace stolen, lost or mutilated Debentures and to maintain an office or agency
and the rights, obligations and immunities of the Trustee), if all outstanding
Debentures will become due and payable at their scheduled maturity within one
year and the Company has irrevocably deposited, or caused to be deposited, with
the Trustee (or another trustee satisfying the requirements of the Indenture),
in trust for such purpose, (a) money in an amount, (b) U.S. Government
Obligations (as defined below) which through the payment of principal, premium,
if any, and interest in accordance with their terms will provide money in an
amount, or (c) a combination thereof, sufficient in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the outstanding Debentures at maturity or upon
redemption, together with all other amounts payable by the Company under the
Indenture. Such defeasance will become effective 91 days after such deposit only
if, among other things, (x) no Default or Event of Default with respect to the
Debentures has occurred and is continuing on the date of such deposit or occurs
as a result of such deposit or at any time during the period ending on the 91st
day after the date of such deposit, (y) such defeasance does not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company is a party or by which it is bound, and (z) the
Company has delivered to the Trustee (A) either a private Internal Revenue
Service ruling or an opinion of counsel that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to federal income tax on the same
amount, in the same manner, and at the same times, as would have been the case
if such deposit, defeasance and discharge had not occurred, (B) an opinion of
counsel to the effect that the deposit shall not result in the Company, the
Trustee or the trust being deemed to be an "investment company" under the
Investment Company Act of 1940, as amended, and (C) an officers' certificate and
an opinion of counsel, each stating that all conditions precedent relating to a
defeasance have been complied with. Notwithstanding the foregoing, the Company's
obligations to pay principal, premium, if any, and interest on the Debentures
shall continue until the Internal Revenue Service ruling or opinion of counsel
referred to in clause (z) (B) above is provided.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting
requirements of the Exchange Act it will continue to furnish the information
required thereby to the Commission. The Indenture provides that even if the
Company is entitled under the Exchange Act not to furnish such information to
the Commission or to the Holders, it will nonetheless continue to furnish
information under Section 13 of the Exchange Act to the Commission and the
Trustee as if it were subject to such periodic reporting requirements.
GOVERNING LAW
The Indenture and the Debentures are governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
such State's conflicts of law principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and
conduct other banking transactions with the Trustee or its affiliates in the
ordinary course of business, and the Trustee and its affiliates may from time to
time in the future provide the Company and its Subsidiaries with banking and
financial services in the ordinary course of their businesses.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms and for the definitions of other defined terms used in the Prospectus
and not defined below.
"Acquired Debt" of any specified Person means Debt of any other Person
existing at the time such other Person merged with or into or became a
Subsidiary of such specified Person, including Debt incurred in connection with,
or in contemplation of, such other person becoming a Subsidiary of such
specified Person.
"Affiliate" of any specified Person means (i) any other Person who,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such specified Person, (b) of any Subsidiary of such specified
Person or (c) of any Person described in clause (i) above. For purpose of this
definition, control of a person means the power, directly or indirectly, to
direct or cause the direction of the management and policies of such person
whether by contract or otherwise; and the terms "controlling or "controlled"
have meanings correlative to the foregoing.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in the common or preferred equity (however designated) of such Person,
including, without limitation, partnership and membership interests.
"Capitalized Lease Obligation" means, with respect to any Person for
any period, an obligation of such Person to pay rent or other amounts under a
lease that is required to be capitalized for financial reporting purposes in
accordance with GAAP; and the amount of such obligation shall be the capitalized
amount shown on the balance sheet of such Person as determined in accordance
with GAAP.
"Common Stock" as applied to the Capital Stock of any corporation or
other entity, means the common equity (however designated) of such Person.
"Consolidated Net Income" means, for any fiscal period, the Net Income
of the Company and its Subsidiaries as the same would appear on a consolidated
statement of earnings of the Company for such fiscal period prepared in
accordance with GAAP, provided that (i) any extraordinary gain (but not loss)
and any gain (but not loss) on sales of assets outside the ordinary course of
business, in each case together with any related provisions for taxes, realized
during such period shall be excluded, (ii) the results of operations of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iii) Net Income attributable to
any Person other than a Subsidiary that is at least 50% owned by the Company
shall be included only to the extent of the amount of cash dividends or
distributions actually paid to the Company or a Subsidiary of the Company during
such period, (iv) any extraordinary charge or gain resulting from the repurchase
of the Debentures shall be excluded, (v) the cumulative effect of a change in
accounting principles based upon the implementation of a change required by the
Financial Accounting Standards Board shall be excluded, (vi) any gain or loss,
net of taxes, realized from the termination of any employee benefit plan shall
be excluded, (vii) the Net Income of any Subsidiary of the Company to the extent
that the declaration of dividends or similar distributions by such Subsidiary of
such income is not permitted shall be excluded, (viii) any restoration to income
of any contingency reserve, except to the extent provision for such reserve was
made out of income accrued at any time following the date of the Indenture,
shall be excluded, and (ix) any gain arising form the acquisition of securities
or the extinguishment of any Debt of such Person shall be excluded.
"Consolidated Net Worth" means, at any date, the net stockholders'
equity of the Company and its Subsidiaries as the same would appear on the
consolidated balance sheet of the Company as at such date prepared in accordance
with GAAP.
"Continuing Directors" means any member of the Board of Directors of
the Company who (i) is a member of that Board of Directors on the date of the
Indenture or (ii) was nominated for election or elected to the Board of
Directors with the affirmative vote of a majority of the Continuing Directors
who were members of the Board at the time of such nomination or election.
"Current Market Price" means, when used with respect to any security as
of any date, the last sale price, regular way, or, in case no such sale takes
place on such date, the average of the closing bid and asked prices, regular way
for such security, in either case as reported for consolidated transactions on
the New York Stock Exchange or, if the security is not listed or admitted to
trading on the New York Stock Exchange, as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
if
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the security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System or
such other system then in use or, if the security is not quoted by any such
organization, the average of the closing bid and asked prices furnished by a New
York Stock Exchange member firm selected by the Company or, if the security is
not quoted by any such organization and no such New York Stock Exchange member
firm is able to provide such prices, such price as is determined by the
Independent Directors in good faith. "Current Market Price" means, when used
with respect to any property other than a security as of any date, the market
value of such Property on such date as determined by the Board of Directors of
the Company in good faith, which shall be entitled to rely for such purposes on
the advice of any firm of investment bankers or appraisers having familiarity
with such Property.
"Debt" of any Person as of any date means and includes, without
duplication, (i) the principal of and premium, if any, in respect of
indebtedness of such Person, contingent or otherwise, for borrowed money,
including, without limitation, all interest, fees and expenses owed with respect
thereto (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), or evidenced by bonds, notes,
debentures or similar instruments, or representing the deferred and unpaid
balance of the purchase price of any property or interest therein or services,
if and to the extent such indebtedness would appear as a liability (other than a
liability for accounts payable and accrued expenses incurred in the ordinary
course of business) upon a balance sheet of such Person prepared on a
consolidated basis in accordance with GAAP, (ii) all obligations issued or
contracted for as payment in consideration of the purchase by such Person of the
Capital Stock or substantially all of the assets of another Person or as a
result of a merger or a consolidation, (iii) all Capitalized Lease Obligations
of such Person, (iv) all obligations of such Person in respect of letters of
credit or similar instruments or reimbursement of letters of credit or similar
instruments (whether or not such items would appear on the balance sheet of such
Person), (v) all net obligations of such Person in respect of interest rate
protection and foreign currency hedging arrangements, (vi) all guarantees by
such Person of items that would constitute Debt under this definition (whether
or not such items would appear on such balance sheet), (vii) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock, but only to the extent such obligations
arise on or prior to August 1, 2003, (viii) all indebtedness created or arising
under any conditional sale or other title retention agreement and (ix) all Debt
referred to in clauses (i) through (viii) above of other Persons, the payment of
which is secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any Lien upon or with respect to such
property (including without limitation, accounts and contract rights) owned by
the Person with respect to whom this definition is being applied, even though
such Person has not assumed or become liable for the payment of such Debt;
provided, however, that Debt issued at a discount from par shall be treated as
if issued at par. The amount of Debt of any Person at any date shall be the
outstanding balance on such date of all unconditional obligations as described
above and the maximum determinable liability, upon the occurrence of the
liability giving rise to the obligation, of any contingent obligations referred
to in clauses (i), (iv), (vi), (vii), (viii) and (ix) above at such date.
"Debt to Operating Cash Flow Ratio" means, as of any date of
determination, the ratio of (i) (a) the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries as of such date on a
consolidated basis plus (b) the aggregate par or stated value of all outstanding
Preferred Stock of the Company and its Subsidiaries as reflected on the
Company's most recent consolidated balance sheet prepared in accordance with
GAAP (excluding any such Preferred Stock held by the Company or a wholly owned
Subsidiary of the Company) or, if greater with respect to any class of Capital
Stock which is Disqualified Stock, the aggregate redemption amount thereof as
reflected on the Company's most recent consolidated balance sheet (excluding any
such Disqualified Stock held by the Company or a wholly owned Subsidiary of the
Company) to (ii) Operating Cash Flow of the Company and its Subsidiaries on a
consolidated basis for the four most recent full fiscal quarters ending
immediately prior to such date, determined on a pro forma basis as set forth in
the covenant "Limitation on Debt."
"Disqualified Stock" means 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 at the option of the holder thereof or mandatorily (except to the
extent that such exchange or conversion right cannot be exercised or such
mandatory conversion cannot occur prior to August 1, 2003), is, or upon the
happening of an event or the passage of time would be, (a) required to be
redeemed or repurchased by the Company or any of its Subsidiaries, including at
the option of the holder, in whole or in part, or has, or upon the happening of
an event or passage of time would have, a redemption or similar payment due
prior to August 1, 2003 or (b) exchangeable or convertible into debt securities
of the Company or any of its Subsidiaries at the option of the holder thereof or
mandatorily, except to the extent that such exchange or conversion right cannot
be exercised or such mandatory conversion cannot occur on or prior to August 1,
2003.
"GAAP" means, as of any date, generally accepted accounting principles
in the United States and does not include any interpretations or regulations
that have been proposed but that have not become effective.
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"Independent Directors" means directors that (i) are not 5% or greater
stockholders of the Company or the designee of any such stockholder, (ii) are
not officers or employees of the Company, any of its Subsidiaries or of a
stockholder referred to above in clause (i), (iii) are not Related Persons and
(iv) do not have relationships that, in the opinion of the Board of Directors,
would interfere with their exercise of independent judgment in carrying out the
responsibilities of the directors.
"Investment" means any loan or advance to any Person, any acquisition
of any interest in any other Person, any capital contribution to any other
Person, or any other investment in any other Person, other than (a) advances to
officers and employees in the ordinary course of business, (b) creation of
receivables in the ordinary course of business and (c) negotiable instruments
endorsed for collection in the ordinary course of business.
"Lien" means any mortgage, lien, pledge, charge, security interest or
other encumbrance of any nature whatsoever (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Net Income" of any Person means the net income (or loss) of such
Person, determined in accordance with GAAP, excluding, however, from the
determination of Net Income any extraordinary gain (but not loss) and any gain
(but not loss) realized upon the sale or other disposition (including, without
limitation, dispositions pursuant to sale-leaseback transactions) of any real
property or equipment of such Person, which is not sold or otherwise disposed of
in the ordinary course of business, or of any Capital Stock of a Subsidiary of
such person.
"Operating Cash Flow" means, with respect to the Company and its
Subsidiaries for any period, the Consolidated Net Income of the Company and its
Subsidiaries for such period, plus (i) extraordinary net losses and net losses
on sales of assets other than in the ordinary course of business during such
period, to the extent such losses were deducted in computing Consolidated Net
Income, plus (ii) provision for taxes based on income or profits, to the extent
such provision for taxes was included in computing such Consolidated Net Income,
and any provision for taxes utilized in computing the net losses under clause
(i) hereof, plus (iii) to the extent deducted in calculating Consolidated Net
Income, Total Interest Expense of the Company and its Subsidiaries for such
period, plus (iv) depreciation, amortization and all other noncash charges, to
the extent such depreciation, amortization and other non-cash charges (excluding
any such non-cash charges to the extent that they require an accrual of or
reserve for cash charges for any future periods) were deducted in calculating
such Consolidated Net Income (including amortization of goodwill and other
intangibles).
"Permitted Investments" means (i) Investments in the Company or in a
Subsidiary of the Company; (ii) Investments by the Company or any Subsidiary of
the Company in a Person who is not an Affiliate of the Company or who is an
Affiliate of the Company but in which no Affiliate of the Company other than
direct and indirect wholly owned Subsidiaries of the Company have made any
Investment and in which no Related Person has made any Investment, if as a
result of such Investment (a) such Person becomes or is a Subsidiary of the
Company or (b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company but only if the Company and
such subject Subsidiary is in compliance with the covenant regarding the
limitations on the Company's line of business immediately after such
transaction; (iii) U.S. Government Obligations maturing within one year of the
date of acquisition thereof; (iv) certificates of deposit maturing within one
year of the date of acquisition thereof issued by a bank or trust company that
is organized under the laws of the United States or any state thereof having
capital, surplus and undivided profits aggregating in excess of $100,000,000;
(v) Investments in commercial paper rated at least Al or the equivalent thereof
by Standard & Poor's Corporation or P1 or the equivalent thereof by Moody's
Investor Services, Inc. and maturing not more than 90 days from the date of the
acquisition thereof and (viii) money market funds investing principally in the
investments described in clauses (iii), (iv) and (v) having total assets in
excess of $1 billion.
"Permitted Liens" means (i) Liens for taxes, assessments or
governmental charges or claims that either (a) are not yet delinquent or (b) are
being contested in good faith by appropriate proceedings and as to which
appropriate reserves have been established or other provisions have been made in
accordance with GAAP; (ii) statutory Liens of landlords and carriers',
warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other
Liens imposed by law and arising in the ordinary course of business and with
respect to amounts that, to the extent applicable, either (a) are not yet
delinquent by more than 30 days or (b) are being contested in good faith by
appropriate proceedings and as to which appropriate reserves have been
established or other provisions have been made in accordance with GAAP; (iii)
Liens (other than any Lien imposed by the Employee Retirement Income Security
Act of 1974, as amended) incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (iv) judgment or other similar Liens arising in
connection with court proceedings, provided that (a) the execution or
enforcement of each such Lien is effectively stayed within 30 days after entry
of such judgment (or such judgment has been discharged within such 30 day
period), the claims secured thereby are being contested in good faith by
appropriate proceedings timely commenced and diligently prosecuted and the
aggregate amount of the claims secured thereby does not
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exceed $1,000,000 at any time or (b) the payment of which is covered in full by
insurance and the insurance company has not denied or contested coverage
thereof; (v) Liens securing Senior Indebtedness; (vi) Liens existing on property
or assets of an entity at the time it became a Subsidiary of the Company or
existing on property or assets of such entity at the time of the acquisition
thereof by the Company or any of its Subsidiaries, which Liens were not created
or assumed in contemplation of, or in connection with, such entity becoming a
Subsidiary of the Company or such acquisition, as the case may be, and which
attach only to such property or assets, provided that the Debt secured by such
Lien is not thereafter increased; (vii) Liens securing Refinancing Debt,
provided that such Liens only extend to the property or assets securing the Debt
being refinanced, such Refinanced Debt was previously secured by similar Liens
on such property or assets and the Debt or other obligations secured by such
Liens is not increased; (viii) any other Liens existing on the date of the
Indenture and (ix) the Liens created by the Indenture.
"Person" means any individual, corporation, partnership, limited
liability company or other entity.
"Preferred Stock" means, with respect to any Person, Capital Stock of
such person of any class or classes (however designated) which is preferred as
to the payments of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
person, over any other class of the Capital Stock of such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included on the
most recent consolidated balance sheet of such Person in accordance with GAAP.
"Purchase Money Indebtedness" means any Debt incurred or assumed by the
Company or any Subsidiary of the Company, the proceeds of which is used by the
Company or such Subsidiary to finance all or a portion of the purchase price of,
or to reimburse the Company or such Subsidiary, as applicable, for the cost of
purchasing capital stock or assets (including, without limitation, capital
stock, real estate, fixtures and equipment) and which Debt is secured only by
the assets acquired therewith.
"Qualified Stock" means Capital Stock of the Company that is not
Disqualified Stock.
"Refinancing Debt" means Debt that refunds, refinances or extends any
Debentures, or other Debt existing on the date of the Indenture or thereafter
incurred by the Company or its Subsidiaries pursuant to the terms of the
Indenture, but only to the extent that (i) the Refinancing Debt is subordinated
to the Debentures to the same extent as the Debt being refunded, refinanced or
extended, if at all, (ii) the Refinancing Debt is scheduled to mature either (a)
no earlier than the Debt being refunded, refinanced or extended, or (b) after
the maturity date of the Debentures, (iii) the portion, if any, of the
Refinancing Debt that is scheduled to mature on or prior to the maturity date of
the Debentures (if not Senior Indebtedness) has a Weighted Average Life to
Maturity at the time such Refinancing Debt is incurred that is equal to or
greater than the Weighted Average Life to Maturity of the portion of the Debt
being refunded, refinanced or extended that is scheduled to mature on or prior
to the maturity date of the Debentures, (iv) such Refinancing Debt is in an
aggregate principal amount that is equal to or less than the aggregate principal
amount then outstanding under the Debt being refunded, refinanced or extended,
plus customary fees and expenses associated with refinancing and (v) such
Refinancing Debt is incurred by the same Person that initially incurred the Debt
being refunded, refinanced or extended, except that (a) the Company may incur
Refinancing Debt to refund, refinance or extend Debt of any Subsidiary of the
Company, and (b) any Subsidiary of the Company may incur Refinancing Debt to
refund, refinance or extend Debt of any other wholly owned Subsidiary of the
Company.
"Related Person" means an individual related to an officer, director or
employee of the Company or any of its Affiliates which relation is by blood,
marriage or adoption and not more remote than first cousin.
"Subsidiary" of any Person means a corporation or other entity a
majority of whose Capital Stock with voting power, under ordinary circumstances,
entitling holders of such Capital Stock to elect the board of directors or other
governing body, is at the time, directly or indirectly, owned by such Person
and/or a Subsidiary or Subsidiaries of such Person.
"Total Interest Expense" means, for any period, the interest expense of
the Company and its Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP, whether paid or accrued (including amortization
of original issue discount, non-cash interest payments and the interest
component of capital leases, but excluding amortization of debt and Preferred
Stock issuance costs).
"U.S. Government Obligations" means non-callable (i) direct obligations
(or certificates representing an ownership interest in such obligations) of the
United States for which its full faith and credit are pledged and (ii)
obligations of a person controlled or supervised by, and acting as an agency or
instrumentality of, the United States, the payment of which is unconditionally
guaranteed as a full faith and credit obligation of the United States.
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"Weighted Average Life to Maturity" means, when applied to any Debt or
Preferred Stock or portions thereof (if applicable) at any date, the number of
years obtained by dividing (i) the then outstanding principal amount or
liquidation amount of such Debt or Preferred Stock or portions thereof (if
applicable) into (ii) the sum of the products obtained by multiplying (a) 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 (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchaser have entered into a Registration
Rights Agreement (the "Registration Rights Agreement") dated as of April 3, 1996
(the "Closing Date"). Pursuant to the Registration Rights Agreement, the Company
had agreed to file with the SEC a registration statement under the Securities
Act (the "Shelf Registration Statement") to cover public resales of the
Debentures by Holders and of the Common Stock issuable upon conversion of the
Debentures by holders thereof, in each case who satisfy certain conditions
relating to the providing of information in connection with the Shelf
Registration Statement. The Company will use its reasonable best efforts to (a)
cause the Shelf Registration Statement to be declared effective by the SEC by
August 31, 1996; and (b) keep the Shelf Registration Statement effective until
at least April 13, 1999 or such shorter period that will terminate when all the
shares of the Common Stock and the Debentures covered by the Shelf Registration
Statement have been sold pursuant to the Shelf Registration Statement.
Notwithstanding the foregoing, the Company will be permitted to suspend the use
of the Shelf Registration Statement during certain periods under certain
conditions.
If (i) the Shelf Registration Statement is not declared effective by
the SEC by August 31, 1996 or (ii) at any time during which the Shelf
Registration Statement is required to kept effective, it shall cease to be
effective (other than as a result of the effectiveness of a successor
registration statement) and such effectiveness is not restored within 45 days
thereafter (each such event referred to in clause (i) or (ii), a "Registration
Default"), the Company will pay liquidated damages (the "Liquidated Damages") to
each Holder of Debentures or holder of Common Stock which are "restricted"
securities under the Securities Act intended to be eligible for resale under the
Shelf Registration Statement and who has complied with its obligations under the
Registration Rights Agreement. During the first 90-day period immediately
following the occurrence of a Registration Default, such Liquidated Damages
shall be in an amount equal to $.10 per week per $1,000 principal amount of
Debentures and $.001 per week per share (subject to adjustment in the event of
stock splits or consolidations, stock dividends and the like) of Common Stock
constituting restricted securities held by such person. The amount of the
Liquidated Damages will increase by an additional $.10 per week per $1,000
principal amount and $.001 per week per share (subject to adjustment as set
forth above) of Common Stock constituting restricted securities for each
subsequent 90-day period until the applicable Registration Default is cured, up
to a maximum amount of liquidated damages of $.40 per week per $1,000 principal
amount of Debentures and $.004 per week per share (subject to adjustment as set
forth above) of Common Stock constituting restricted securities. All accrued
Liquidated Damages shall be paid by wire transfer of immediately available funds
or by federal funds check by the Company on each Damages Payment Date (as
defined in the Registration Rights Agreement). Following the cure of all
Registration Defaults, the payment of Liquidated Damages will cease.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of (i) 50,000,000
shares of Common Stock, $.01 par value per share, and (ii) 5,000,000 shares of
"blank check" preferred stock, $.01 par value per share. At May 31, 1996 there
were outstanding 7,609,398 shares of Common Stock (held by approximately 2,000
beneficial holders), and no shares of preferred stock. The Company has reserved
for issuance (i) 4,237,250 shares issuable on exercise of the Class A Warrants
and 8,049,500 shares issuable upon exercise of the Class B Warrants; (ii)
1,326,000 shares issuable upon exercise of the Unit Purchase Options including
shares issuable upon exercise of the Class A or Class B Warrants included in or
underlying such Units; (iii) 1,324,442 shares issuable upon exercise of
outstanding warrants (having exercise prices of $2.50 to $9 and expiring at
various times in through 1999); (iv) 1,627,000 shares issuable upon exercise of
outstanding stock options pursuant to the Company's Stock Option Plans. See
"Management--Stock Option Plans," "Certain Transactions" and "Plan of
Distribution."
COMMON STOCK
Holders of Common Stock have the right to cast one vote for each share
held of record on all matters submitted to a vote of holders of Common Stock.
Holders of Common Stock are entitled to dividends, pro rata based on the number
of shares held, when, as and if declared by the Board of Directors, from funds
legally available therefor subject to the rights of holders of any outstanding
Preferred Stock. In the event of the liquidation, dissolution or winding up of
the affairs of the Company, all assets and funds of the Company remaining after
the payment to creditors and to holders of preferred stock, shall be
distributed, pro rata, among the holders of the Common Stock. Holders of Common
Stock are not entitled to preemptive, subscription, cumulative voting or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. All shares of Common Stock to be offered by the
Company hereby, when issued, will be fully paid and non-assessable.
WARRANTS
Class A Warrants. The Class A Warrants have been called for redemption
on June 28, 1996. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.25 at any time until 5:00 P.M., New York City time, on June 28, 1996.
Class B Warrants. Each Class B Warrant entitles the registered holder
to purchase one share of Common Stock at an exercise price of $8.00 at any time
after issuance until 5:00 P.M. New York City time, on October 20, 1999. The
Class B Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Class B Warrant, if the closing price of the
Company's Common Stock for any 30 consecutive trading days ending within 15 days
of the notice of redemption averages in excess of $11.20 per share. All Class B
Warrants must be redeemed if any are redeemed.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York is transfer
agent for the Common Stock and warrant agent for the Warrants.
PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance
of 5,000,000 shares of preferred stock. The Board of Directors, within the
limitations and restrictions contained in the Certificate of Incorporation and
without further action by the Company's stockholders, has the authority to issue
shares of preferred stock from time to time in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights, and
terms of redemption, liquidation preferences and any other preferences, special
rights and qualifications of any such series. Any issuance of preferred stock
could, under certain circumstances, have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of holders
of Common Stock. The Company has no present plans to issue any shares of
preferred stock.
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ESCROW ARRANGEMENTS
In connection with the IPO, the then holders of the Company's Common
Stock placed into escrow on a pro rata basis, an aggregate of 1,163,853 of their
shares. Such stockholders will continue to vote the Escrow Shares; however, the
Escrow Shares are not assignable or transferable.
The Escrow Shares will be released to the stockholders in the event
that the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent public
accountants) (the "Minimum Pretax Income") amounts to at least $16.0 million for
the year ending December 31, 1996. The Minimum Pretax Income has been and will
be increased proportionately, with certain limitations, upon issuance of any
additional shares of Common Stock or securities convertible into, exchangeable
for or exercisable into Common Stock.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If the Minimum Pretax Income is not achieved, the Escrow Shares, as well
as any dividends or other distributions made with respect thereto, will be
contributed to the capital of the Company and cancelled. The Company expects
that the release of the 506,853 Escrow Shares held by officers, directors,
employees and consultants of the Company if made, would be compensatory and,
accordingly, will result in a charge to reportable earnings equal to the fair
market value of such shares on the date of release. Such charge, if incurred,
would substantially reduce or eliminate the Company's net income for financial
reporting purposes for 1996. Although the amount of compensation expense
recognized by the Company will not affect the Company's total stockholder's
equity, it may have a negative effect on the market price of the Company's
securities.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of the Delaware General Corporation Law and of the
Company's Certificate of Incorporation and Bylaws, summarized below, may be
considered to have an antitakeover effect and may delay, deter or prevent a
tender offer, proxy contest or other takeover that a stockholder might consider
to be in such stockholder's best interest, including such an attempt as might
result in payment of a premium over the market price for shares held by
stockholders.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The Company's Bylaws establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before a meeting of stockholders of the Company (the "Business Procedure").
The Nomination Procedure requires that a stockholder give written
notice, delivered to or mailed and received at the principal executive officers
of the corporation not less than 60 days nor more than 90 days prior to the
meeting, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. Detailed requirements as to the form and timing of
that notice are specified in the By-laws. If the Chairman of the Board of
Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give written notice, delivered to
or mailed and received at the principal executive officers of the corporation
not less than 60 days nor more than 90 days prior to the meeting, in proper
form, to the Secretary of the Company. Detailed requirements as to the form and
timing of that notice are specified in the By-laws. If the Chairman of the Board
of Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the By-laws do not give the Board of Directors any power to
approve or disapprove stockholder nominations for the election of directors or
of any other business desired by stockholders to be conducted at an annual or
any other meeting, the By-laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
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Actions by Written Consent. The Company's Certificate of Incorporation
provides that any action taken by written consent of stockholders without a
meeting requires the consent of at least 66 2/3% of the outstanding shares of
Common Stock.
Special Meeting of the Stockholders of the Company. The Company's
Bylaws provide that a special meeting of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the President or by a
majority of the Board of Directors. This provision potentially limits the
stockholders' ability to offer proposals at meetings of stockholders, if no
special meetings are otherwise called by the Chairman of the Board, the
President or the Board of Directors.
Delaware Takeover Statute. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law. That section provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or affiliate or associate of such
person who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person's becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquires 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes it an interested stockholder
(excluding certain employee stock ownership plans); or (iii) on or after the
date the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3 % of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (i) the owner of 15% or more of
the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
These provisions could have the effect of delaying, deferring or
preventing a change of control of the Company. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation or Bylaws of the
Company, may elect not to be governed by Section 203, effective 12 months after
adoption. Neither the Certificate of Incorporation nor the Bylaws of the Company
currently excludes the Company from the restrictions imposed by Section 203.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS AND INDEMNIFICATION
The Certificate of Incorporation limits, to the fullest extent now or
hereafter permitted by the Delaware General Corporation law, liability of the
Company's directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors in certain
circumstances. This provision presently limits a director's liability except
where a director (i) breaches his or her duty of loyalty to the Company or its
stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock purchase or redemption or (iv) obtains an improper
personal benefit. This provision does not prevent the Company or its
stockholders from seeking equitable remedies, such as injunctive relief or
recession. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also authorizes the Company to
indemnify its directors, officers or other persons serving at the request of the
Company against liabilities arising from their services in such capacities to
the fullest extent permitted by law, including payment in advance of a final
disposition of a director's or officer's expenses or attorneys' fees incurred in
defending any action, suit or proceeding, other than in the case of an action,
suit or proceeding brought by the Company on its own behalf against an officer.
Presently, the Delaware General Corporation Law provides that to be entitled to
indemnification an individual must have acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the Company's best
interests. The Company believes that these charter provisions are consistent
with certain provisions of the Delaware General Corporation Law, which are
designed, among other things, to encourage qualified individuals to serve as
directors and officers of Delaware corporations. The Company also believes these
provisions will assist it in maintaining and securing the services of qualified
directors and officers.
The Company believes that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, the provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable. Such limitation of liability also does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers. Each
such Indemnification Agreement will provide that the Company will indemnify the
indemnitee
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against expenses, including reasonable attorneys' fees, judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with any civil or criminal action or administrative proceedings
arising out of his performance of his duties as a director or officer, other
than an action instituted by the director or officer. Such indemnification will
be available if the indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action, had no reasonable cause to believe his conduct
was unlawful. The Indemnification Agreements will also require that the Company
indemnify the director or other party thereto in all cases to the fullest extent
permitted by applicable law. Each Indemnification Agreement will permit the
director or officer who is a party thereto to bring suit to seek recovery of
amounts due under the Indemnification Agreement and to recover the expenses of
such a suit if successful.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 8,696,867 shares Common Stock, and
3,571,649 Class A Warrants and 4,477,851 Class B Warrants. The holders of the
Unit Purchase Options have been granted registration rights with respect to the
shares of Common Stock and Warrants issuable upon exercise of the Unit Purchase
Options and certain stockholders have piggyback registration rights with respect
to approximately 1.8 million shares of Common Stock and 900,000 Finance
Warrants. The remaining shares of Common Stock currently outstanding are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act, and under certain circumstances may be sold without
registration pursuant to such Rule. Such shares are eligible for sale under Rule
144 at varying periods. The Company is unable to predict the effect that sales
made under Rule 144, or otherwise, may have on the then prevailing market price
of the Common Stock although any substantial sale of restricted securities
pursuant to Rule 144 may have an adverse effect. The sale, or the availability
for sale, of substantial amounts of the Company's securities in the public
market at any time subsequent to this offering could adversely affect the
prevailing market price of such securities.
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PLAN OF DISTRIBUTION
The Selling Securityholders who hold their Debentures and their
underlying Common Stock and Selling Securityholders who hold Common Stock may
sell their securities from time to time.
Debentures and shares of Common Stock being sold hereby may be offered
to purchasers directly by any of the Selling Securityholders or through
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may include "block" transactions) on NNM in the
over-the-counter market, or in transactions other than in the over-the-counter
market. Any of such transactions may be at market prices prevailing at the time
of sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the Selling Securityholders or by agreement between the Selling
Securityholders and such underwriters, brokers, dealers or agents or purchasers.
If the Selling Securityholders effect such transactions by selling shares to or
through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers, or agents may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of securities for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The Selling Securityholders and any dealers or agents that
participate in the distribution of securities offered hereby may be deemed to be
underwriters, and any profit on the sale of such securities by them and any
discounts, commissions, or concessions received by any such dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. The Selling Securityholders may also deliver Debentures or
shares of Common Stock to satisfy obligations of the Selling Securityholders,
including, without limitation, covering short sale positions. Each Selling
Securityholder reserves the right to accept and, from time to time, to reject,
in whole or in part, any proposed purchase of securities to be made.
The securities offered hereby may be sold pursuant to this Prospectus
or pursuant to an available exemption from the registration requirements of the
Securities Act, such as the provisions of Rule 144A or 144 promulgated under the
Securities Act, to the extent applicable. Under the securities laws of certain
states, the securities offered hereby may be sold in such states only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless the securities have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
The Company will pay substantially all of the expenses incident to this
Offering, other than commissions and fees and fees of others employed by a
Selling Securityholder, including attorneys' fees. Under agreements entered into
with the Company, certain of the Selling Securityholders and any broker-dealer
they may utilize will be indemnified by the Company against certain civil
liabilities, including liabilities under the Securities Act. The Company will
not receive any of the proceeds from the sale of any of the securities by the
Selling Securityholders.
Each Selling Securityholder will be subject to applicable provisions of
the Exchange Act and rules and regulations thereunder, including, without
limitation, Rules 10b-2, 10b-6 and 10b-7 which provisions may limit the timing
of purchases and sales of any of the securities by the Selling Securityholders.
All of the foregoing may affect the marketability of the securities.
LEGAL MATTERS
The validity of the Securities offered hereby has been passed upon for
the Company by Bachner, Tally, Polevoy & Misher LLP. Michael Karsch, a holder of
50,000 warrants to purchase Common Stock of the Company, is a partner of
Bachner, Tally, Polevoy & Misher LLP.
ACCOUNTANTS
The financial statements of the Company included in this Prospectus
have been audited by Mortenson and Associates, P.C., independent public
accountants, for the periods and to the extent set forth in their reports
appearing elsewhere herein and are included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
-51-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
U.S. DIAGNOSTIC LABS INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Introductory Note................................................. P-1
Pro Forma Balance Sheet as of March 31, 1996 P-2
Notes to Pro Forma Balance Sheet.................................. P-4
Pro Forma Condensed Combined Statement of Operations for the
Year Ended December 31, 1995 and the Three Months Ended
March 31, 1996................................................... P-5
Notes to Pro Forma Statements of Operation........................ P-
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Accountant's Report............................................... F-1
Consolidated Balance Sheet as of December 31, 1995 and
March 31, 1996................................................... F-2
Consolidated Statements of Operations for the Year Ended
December 31, 1994 and 1995....................................... F-4
Consolidated Statement of Shareholders' Equity.................... F-5
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1994 and 1995 and the Months Ended
Ended March 31, 1995 and 1996.................................... F-7
Notes to Consolidated Financial Statements........................ F-9
-52-
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following unaudited pro forma combined condensed balance
sheet as of March 31, 1996 and the unaudited pro forma combined condensed
statement of operations for the year ended December 31, 1995 and the three
months ended March 31, 1996 have been prepared to reflect the completed
acquisitions of 1995 and the probable acquisitions to be consummated during the
second quarter of 1996 giving effect to the transactions under the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the pro forma financial statements. The unaudited pro forma combined
condensed financial statements also give effect to the offering of the
Debentures and the application of the estimated net proceeds therefrom. The
unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1995 and the three months ended March 31, 1996 were prepared
as if all transactions had occurred at the beginning of the periods presented.
The unaudited pro forma combined condensed balance sheet as of March 31, 1996
has been prepared as if the probable acquisitions and the issuance of the
Debentures had occurred as of that date. The historical information provided in
the statement of operations for the year ended December 31, 1995 of the various
acquisitions completed during 1995 represents the periods from January 1, 1995
through the dates of acquisition. The historical statement of operations of the
Company reflects the operations of the various 1995 acquisitions from the
acquisition date to the end of the year presented.
The unaudited pro forma combined condensed financial
statements have been prepared by the Company 's management based upon the
historical financial statements of the Company and the aforementioned acquired
companies. These pro forma financial statements are not necessarily indicative
of the results that would have occurred if the transactions had occurred on the
dates indicated or which may be realized in the future.
P-1
<PAGE>
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED BALANCE SHEET FOR THE THREE MONTHS ENDED MARCH 31,
1996 [IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
HEIGHTS
SOUTH COAST ALLEGHENY IMAGING DISC
USDL RADIOLOGISTS GROUP CENTER IMAGING R.O.C.
---- ------------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 51,334 $ 155 $ 214 $ 296 $ 56 $ 146
Accounts Receivable - Net 12,341 694 1,335 512 1,440 2,598
Other Current Assets 2,248 -- 3 8 4 --
------------- ----------- ------------ ----------- ------------- ------------
TOTAL CURRENT ASSETS 65,923 849 1,552 816 1,500 2,744
------------- ----------- ------------ ----------- ------------- ------------
PROPERTY AND EQUIPMENT - NET 24,527 252 1,471 1,261 513 340
------------- ----------- ------------ ----------- ------------- ------------
OTHER ASSETS:
Other Assets 3,005 -- 30 21 22 3
Goodwill - Net 13,350 -- -- -- -- --
Covenant Not-to-compete - Net 2,136 -- -- -- -- --
Other Intangibles - Net 2,698 -- -- -- -- --
------------- ----------- ------------ ----------- ------------- ------------
TOTAL OTHER ASSETS 21,189 -- 30 21 22 3
------------- ----------- ------------ ----------- ------------- ------------
TOTAL ASSETS $ 111,639 $ 1,101 $ 3,053 $ 2,098 $ 2,035 $ 3,087
============= =========== ============ =========== ============= ============
</TABLE>
P-2 (a)
<PAGE>
***TABLE CONTINUED FROM PREVIOUS PAGE***
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED BALANCE SHEET FOR THE THREE MONTHS ENDED MARCH 31,
1996 [IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
PRO FORMA
AS ADJUSTED
U.S. PRO FORMA MARCH 31,
IMAGING ADJUSTMENTS 1 9 9 6
------- ----------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 444 $ (8,989)[A,E] $ 43,656
Accounts Receivable - Net 5,133 (512) [C] 23,541
Other Current Assets 650 -- 2,913
----------- ----------- -----------
TOTAL CURRENT ASSETS 6,227 (9,501) 70,110
----------- ----------- -----------
PROPERTY AND EQUIPMENT - NET 5,404 9,584 43,352
----------- ----------- -----------
OTHER ASSETS:
Other Assets 462 375 3,918
Goodwill - Net -- 21,385 [B] 34,735
Covenant Not-to-compete - Net -- 1,550 [B] 3,686
Other Intangibles - Net -- 1,600 [B] 4,298
----------- ----------- -----------
TOTAL OTHER ASSETS 462 24,910 46,637
----------- ----------- -----------
TOTAL ASSETS $ 12,093 $ 24,993 $ 160,099
=========== =========== ===========
P-2 (b)
<PAGE>
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED BALANCE SHEET FOR THE THREE MONTHS ENDED MARCH 31,
1996 [IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
HEIGHTS
SOUTH COAST ALLEGHENY IMAGING DISC
USDL RADIOLOGISTS GROUP CENTER IMAGING R.O.C.
---- ------------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 2,037 $ -- $ -- $ 32 $ 95 $ 84
Accrued Expenses 2,071 48 4 346 104 728
Notes Payable 4,590 71 237 308 1,086 --
Obligations under Capital
Leases 2,393 -- -- -- -- --
------------- ----------- ------------ ----------- ------------ -----------
TOTAL CURRENT LIABILITIES: 11,091 119 241 686 1,285 812
------------- ----------- ------------ ----------- ------------ -----------
LONG-TERM LIABILITIES:
Notes Payable 15,453 -- 221 1,685 38 60
Obligations under Capital
Leases 5,717 -- -- -- -- --
Convertible Debentures 50,500 -- -- -- -- --
Deferred Revenue 399 -- -- -- -- --
Deferred Income Taxes 137 -- -- -- -- --
------------- ----------- ------------ ----------- ------------ -----------
TOTAL LONG-TERM LIABILITIES 72,206 -- 221 1,685 38 60
------------- ----------- ------------ ----------- ------------ -----------
MINORITY INTEREST 812 -- -- -- -- --
------------- ----------- ------------ ----------- ------------ -----------
STOCKHOLDERS' EQUITY:
Common Stock 77 1 -- -- 150 48
Additional Paid-in Capital 24,328 -- -- -- -- --
Retained Earnings [Deficit] 4,038 981 2,591 (273) 562 2,167
------------- ----------- ------------ ----------- ------------ -----------
Totals 28,443 982 2,591 (273) 712 2,215
Less: Deferred Charges 913 -- -- -- -- --
------------- ----------- ------------ ----------- ------------ -----------
TOTAL STOCKHOLDERS' EQUITY 27,530 982 2,591 (273) 712 2,215
------------- ----------- ------------ ----------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 111,639 $ 1,101 $ 3,053 $ 2,098 $ 2,035 $ 3,087
============= =========== ============ =========== ============ ===========
</TABLE>
P-3 (a)
<PAGE>
****TABLE CONTINUED FROM PREVIOUS PAGE****
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED BALANCE SHEET FOR THE THREE MONTHS ENDED MARCH 31,
1996 [IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
PRO FORMA
AS ADJUSTED
U.S. PRO FORMA MARCH 31,
IMAGING ADJUSTMENTS 1 9 9 6
------- ----------- -------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 388 $ -- $ 2,636
Accrued Expenses 1,525 -- 4,826
Notes Payable -- 3,649 [D] 9,941
Obligations under Capital
Leases -- -- 2,393
----------- ----------- -----------
TOTAL CURRENT LIABILITIES: 1,913 3,649 19,796
----------- ----------- -----------
LONG-TERM LIABILITIES:
Notes Payable 4,489 5,776 [D] 27,722
Obligations under Capital
Leases -- -- 5,717
Convertible Debentures -- 7,500 [A] 58,000
Deferred Revenue -- -- 399
Deferred Income Taxes -- -- 137
----------- ----------- -----------
TOTAL LONG-TERM LIABILITIES 4,489 13,276 91,975
----------- ----------- -----------
MINORITY INTEREST -- 2,551 3,363
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 6 (179)[B,F,H] 103
Additional Paid-in Capital 2,550 14,859 [B,F,H] 41,737
Retained Earnings [Deficit] 3,135 (9,163) [H] 4,038
----------- ----------- -----------
Totals 5,691 5,517 45,878
Less: Deferred Charges -- -- 913
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,691 5,517 44,965
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 12,093 $ 24,993 $ 160,099
=========== =========== ===========
</TABLE>
P-3 (b)
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
[DOLLARS IN THOUSANDS]
- -------------------------------------------------------------------------------
[A] Assumes the issuance of an additional $7.5 million in Convertible
Debentures to finance the probable and other future acquisitions.
Commissions payable on this issue are assumed to be $.375 million.
[B] Assumes the allocation of purchased cost to acquired assets at fair value
and the resulting goodwill from the Probable Acquisitions.
Cash Paid $ 16,114
Notes 9,425
Stock 18,014
Estimated Acquisition Costs 800
------------
$ 44,353
Allocated To:
Accounts Receivable 11,830
Other Current Assets 1,356
Property and Equipment 18,825
Other Assets 951
Customer Lists 1,600
Covenant Not-to-Compete 1,550
Minority Interest (2,551)
Liabilities Assumed (10,593)
------------
Subtotal 22,968
Goodwill 21,385
$ 44,353
============
[C] To eliminate the assets not being acquired and related liabilities not
being assumed pursuant to the acquisition agreements.
[D] Assumes the issuance of $9.425 million in notes for the Probable
Acquisitions [See Note D] of which $3.649 million is current and $5.776
million is long-term.
[E] Assumes the $16.114 million of cash paid for the Probable Acquisitions
together with $800 thousand in estimated acquisition costs [See Note D].
[F] Assumes the issuance of 2.633 million shares of common stock valued at
$18.014 million for the Probable Acquisitions [See Note D].
[G] Assumes the $.375 million discount in connection with the additional $7.5
million Convertible Debt offering as a deferred charge to be amortized
over the life of the debentures or upon conversion.
[H] Adjusts for the elimination of common stock and retained earnings of the
Probable Acquisitions.
. . . . . . . . . .
P-4
<PAGE>
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 [IN THOUSANDS, EXCEPT PER SHARE DATA][UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
HEIGHTS
SOUTH COAST ALLEGHENY IMAGING DISC
----------- --------- ------- ----
USDL RADIOLOGISTS GROUP CENTER IMAGING R.O.C.
---- ------------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES $ 12,074 $ 970 $ 2,477 $ 885 $ 1,108 $ 1,194
GENERAL AND ADMINISTRATIVE
EXPENSES 7,558 660 1,424 516 793 994
INTEREST EXPENSE 693 2 10 59 29 20
DEPRECIATION AND AMORTIZATION 1,304 46 116 68 27 42
OTHER [INCOME] EXPENSE (2) (7) (3) (3) (15) (12)
MINORITY INTEREST 184 -- -- -- 55 73
------------- ----------- ------------ ----------- ------------ -----------
INCOME BEFORE INCOME TAXES 2,337 269 930 245 219 77
INCOME TAXES PRO FORMA 795 108 372 98 88 31
------------- ----------- ------------ ----------- ------------ -----------
NET INCOME $ 1,542 $ 161 $ 558 $ 147 $ 131 $ 46
============= =========== ============ =========== ============ ===========
EARNINGS PER COMMON SHARE:
Primary .25
=============
Fully Diluted .16
=============
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 6,218,847
=============
Fully Diluted 17,491,361
=============
</TABLE>
P-5 (a)
<PAGE>
***TABLE CONTINUED FROM PREVIOUS PAGE***
U.S. DIAGNOSTICS LABS INC.
- -------------------------------------------------------------------------------
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 [IN THOUSANDS, EXCEPT PER SHARE DATA][UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
PRO FORMA
AS ADJUSTED
U.S. PRO FORMA MARCH 31,
---- --------- ---------
IMAGING ADJUSTMENTS 1 9 9 6
------- ----------- -------
<S> <C> <C> <C>
NET REVENUES $ 2,882 $ -- $ 21,590
GENERAL AND ADMINISTRATIVE
EXPENSES 1,766 (590) [F] 13,121
INTEREST EXPENSE 114 1,550 [E] 2,477
DEPRECIATION AND AMORTIZATION 279 462 [D] 2,344
OTHER [INCOME] EXPENSE -- -- (42)
MINORITY INTEREST -- -- 312
---------- ----------- --------------
INCOME BEFORE INCOME TAXES 723 (1,422) 3,378
INCOME TAXES PRO FORMA 256 (537) 1,211
---------- ----------- --------------
NET INCOME $ 467 $ (885) $ 2,167
========== =========== ==============
EARNINGS PER COMMON SHARE:
Primary .25
==============
Fully Diluted .17
==============
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary 8,851,847
==============
Fully Diluted 25,986,630
==============
</TABLE>
P-5 (b)
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1995. [IN THOUSANDS, EXCEPT PER SHARE DATA]
- -------------------------------------------------------------------------------
<TABLE>
HISTORICALS
ACQUISITIONS
COMPLETED DURING
THE YEAR ENDED (1) (2)
--------------
DECEMBER 31, PRO FORMA PRO FORMA PROBABLE PRO FORMA PRO FORMA
USDL 1 9 9 5 ADJUSTMENTS COMBINED ACQUISITIONS ADJUSTMENTS AS ADJUSTED
---- ------- ----------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
[A] [B] [C]
REVENUES $ 28,839 $ 14,807 $ 90 [F] $ 43,736 $ 35,381 $ -- $ 79,117
GENERAL AND ADMINISTRATIVE
EXPENSES 19,836 10,585 (414)[F] 30,007 22,085 (2,360) [F] 49,732
INTEREST EXPENSE 1,276 863 236 [E] 2,375 1,118 6,198 [E] 9,691
DEPRECIATION AND AMORTIZATION 3,003 1,445 (195)[D] 4,253 2,721 1,850 [D] 8,824
OTHER [INCOME] EXPENSE 276 (308) -- (32) (466) -- (498)
NON-CASH FINANCE CHARGE 414 -- (414)[G] -- -- -- --
MINORITY INTEREST 280 347 -- 627 654 -- 1,281
------------ ---------- --------- ------------ ---------- ---------- ------------
INCOME BEFORE ADJUSTMENT
FOR EXTRAORDINARY ITEM
AND INCOME TAXES 3,754 1,875 877 6,506 9,269 (5,688) 10,087
INCOME TAXES 729 657 351 1,737 3,527 (2,002) 3,262
------------ ---------- --------- -------------- ---------- ---------- ------------
INCOME BEFORE
EXTRAORDINARY ITEM 3,025 1,218 526 4,769 5,742 (3,686) 6,825
EXTRAORDINARY ITEM
[NET OF TAX EFFECT] 306 -- -- 306 -- -- 306
------------ ---------- --------- ------------ ---------- ---------- ------------
NET INCOME $ 3,331 $ 1,218 $ 526 $ 5,075 $ 5,742 $ (3,686) $ 7,131
============ ========== ========= ============ ========== ========== ============
EARNINGS PER COMMON SHARE:
PRIMARY:
Earnings Before
Extraordinary Item $ .61 $ .91 $ .86
Extraordinary Item .06 .06 .04
------------ ------------ ------------
NET EARNINGS $ .67 $ .97 $ .90
============ ============ ============
FULLY DILUTED:
Earnings Before
Extraordinary Item $ .57 $ .73 $ .71
Extraordinary Item .03 .03 .02
------------ ------------ ------------
NET EARNINGS $ .60 $ .76 $ .73
============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND
EQUIVALENT SHARES
OUTSTANDING:
Primary 4,996,021 5,249,278 7,882,247
============ ============ ============
Fully Diluted 11,761,427 12,014,684 20,509,947
============ ============ ============
</TABLE>
P-6
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SUMMARY OF ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1995
[IN THOUSANDS]
- -------------------------------------------------------------------------------
<TABLE>
CROV ARROW SIL OPDC SFMRC AMIC
---- ----- --- ---- ----- ----
FEBRUARY 27, MARCH 31, MARCH 31, JUNE 30, SEPTEMBER 5, SEPTEMBER 30,
------------ --------- --------- -------- ------------ -------------
1 9 9 5 1 9 9 5 1 9 9 5 1 9 9 5 1 9 9 5 1 9 9 5
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 444 $ 199 $ 728 $ 1,139 $ 2,308 $ 1,954
GENERAL AND ADMINISTRATIVE
EXPENSES 361 136 502 876 1,212 1,440
INTEREST EXPENSE 18 -- 54 54 32 219
DEPRECIATION AND AMORTIZATION -- -- 92 90 210 313
OTHER EXPENSE [INCOME] -- -- 9 (2) (10) --
MINORITY INTEREST -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------
INCOME [LOSS] BEFORE INCOME TAXES 65 63 71 121 864 (18)
INCOME TAXES -- -- 11 36 346 --
---------- ---------- ---------- ---------- ---------- ---------
NET INCOME [LOSS] $ 65 $ 63 $ 60 $ 85 $ 518 $ (18)
========== ========== ========== ========== ========== =========
</TABLE>
P-7 (a)
<PAGE>
***TABLE CONTINUED FROM PREVIOUS PAGE***
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SUMMARY OF ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1995
[IN THOUSANDS]
- -------------------------------------------------------------------------------
<TABLE>
MIC FCA TOTAL
--- --- -----
SEPTEMBER 30, NOVEMBER 20, RECENT
------------- ------------ ------
1 9 9 5 1 9 9 5 ACQUISITIONS
------- ------- ------------
<S> <C> <C> <C>
REVENUES $ 3,420 $ 4,615 $ 14,807
GENERAL AND ADMINISTRATIVE
EXPENSES 2,658 3,400 10,585
INTEREST EXPENSE 209 277 863
DEPRECIATION AND AMORTIZATION 537 203 1,445
OTHER EXPENSE [INCOME] (173) (132) (308)
MINORITY INTEREST -- 347 347
---------- ----------- -----------
INCOME [LOSS] BEFORE INCOME TAXES 189 520 1,875
INCOME TAXES 56 208 657
---------- ----------- -----------
NET INCOME [LOSS] $ 133 $ 312 $ 1218
========== =========== ===========
</TABLE>
P-7 (b)
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SUMMARY OF PROBABLE ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
[IN THOUSANDS]
- -------------------------------------------------------------------------------
<TABLE>
HEIGHTS TOTAL
SOUTH COAST ALLEGHENY IMAGING DISC U.S. PROBABLE
RADIOLOGISTS GROUP CENTER IMAGING R.O.C. IMAGING ACQUISITIONS
------------ ----- ------ ------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 3,477 $ 8,763 $ 3,693 $ 3,392 $ 5,348 $ 10,708 $ 35,381
GENERAL AND ADMINISTRATIVE
EXPENSES 2,472 4,574 2,599 2,340 4,028 6,072 22,085
INTEREST EXPENSE 16 58 260 143 113 528 1,118
DEPRECIATION AND AMORTIZATION 185 587 491 109 234 1,115 2,721
OTHER [INCOME] EXPENSE (13) (63) (354) -- (17) (19) (466)
MINORITY INTEREST -- -- -- 160 494 -- 654
--------- ----------- ----------- -------------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES 817 3,607 697 640 496 3,012 9,269
INCOME TAXES 327 1,443 279 256 198 1,024 3,527
--------- ----------- ----------- -------------- ----------- ----------- ------------
NET INCOME $ 490 $ 2,164 $ 418 $ 384 $ 298 $ 1,988 $ 5,742
========= =========== =========== ============== =========== =========== ============
</TABLE>
P-8
<PAGE>
U.S. DIAGNOSTIC LABS INC.
- -------------------------------------------------------------------------------
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS
ENDED MARCH 31, 1996.
[DOLLARS IN THOUSANDS]
- -------------------------------------------------------------------------------
[A] Represents the audited consolidated statement of operations of the
Company for the year ended December 31, 1995.
[B] Represents the historical combined statement of operations of the recent
acquisitions from January 1, 1995 until such acquisitions were completed
by the Company.
[C] Represents the historical combined statement of operations of the
Probable Acquisitions for the year ended December 31, 1995.
[D] Adjusts depreciation and amortization expense to properly reflect the
allocation of the purchase price as required per purchase accounting for
each of the acquisitions.
The property and equipment is to be depreciated over 7 years under the
straight-line method. Goodwill and customer lists are to be amortized
over 20 years and 15 years, respectively, while the covenants
not-to-compete will be amortized over 2 to 10 years.
<TABLE>
ACQUISITIONS PROBABLE ACQUISITIONS
COMPLETED IN 1995 DECEMBER 31, MARCH 31,
------------------- 1 9 9 5 1 9 9 6
------- -------
<S> <C> <C> <C>
Pro Forma $ 1,250 $ 4,571 $ 1,142
Historicals - Acquisitions 1,445 2,721 680
---------------- -------------- -------------
ADJUSTMENTS $ (195) $ 1,850 $ 462
----------- ================ ============== =============
</TABLE>
[E] Adjusts interest expense for the following:
<TABLE>
DECEMBER 31, MARCH 31,
1 9 9 5 1 9 9 6
------- -------
<S> <C> <C>
Issuance of $57.5 million, 9% Convertible Debentures $ 5,175 $ 1,294
Issuance of $9.425 million in notes for Probable Acquisitions
whose interest rates range from 6% - 9% 612 153
Amortization of $2.875 million discount on issuance of
$57.5 million debentures 411 103
-------------- -------------
TOTALS $ 6,198 $ 1,550
------ ============== =============
</TABLE>
The additional interest expense attributed to the 1995 acquisitions
amounted to $236.
[F] Adjusts for the effects of the new employment contracts, radiologists'
agreements, and management fee agreements pursuant to the acquisitions
plus other identifiable elimination of certain expenses.
[G] Adjusts for the elimination of non-recurring non-cash finance charge
incurred in connection with June 1995 bridge financing.
[H] The weighted average number of shares outstanding assumes that all shares
issued, as part of the purchase price of the acquisitions, to be
outstanding as the beginning of the year.
The shares and warrants issued in connection with the Company's second
public offering in August 1995 are included in the weighted average
number from date of issuance.
The fully diluted calculation for the pro forma (2), as adjusted, assumes
a conversion price of $9.00 per share for the convertible debentures.
. . . . . . . . .
P-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
U.S. Diagnostic Labs Inc.
We have audited the accompanying consolidated balance sheet of
U.S. Diagnostic Labs Inc. and its subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1995 and 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 U.S. Diagnostic Labs Inc. and its subsidiaries as of December 31,
1995, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles.
MORTENSON AND ASSOCIATES, P.C.
Certified Public Accountants.
Cranford, New Jersey
February 20, 1996
[Except for Note 22 as to
which the Date is May 10, 1996]
F-1
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
MARCH 31, DECEMBER 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 51,334,141 $ 4,373,876
Accounts Receivable [Net of Estimated Uncollectibles
of $5,290,127 and $5,871,683 ] 12,340,646 10,818,919
Prepaid Expenses 1,967,121 900,619
Other Current Assets 280,861 270,796
------------------ ---------------
TOTAL CURRENT ASSETS 65,922,769 16,364,210
------------------ ---------------
PROPERTY, PLANT AND EQUIPMENT - NET 24,527,165 22,550,884
------------------ ---------------
OTHER ASSETS:
Other Assets 505,480 371,196
Deferred Charges 2,500,000 --
Goodwill - Net 13,349,773 12,941,462
Covenants Not-to-Compete - Net 2,135,951 2,305,639
Customer Lists 2,697,750 2,745,833
------------------ ---------------
TOTAL OTHER ASSETS 21,188,954 18,364,130
------------------ ---------------
TOTAL ASSETS $ 111,638,888 $ 57,279,224
================== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
MARCH 31, DECEMBER 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 2,037,274 $ 1,509,958
Accrued Expenses 2,056,392 1,352,441
Short-Term Borrowings 207,612 667,286
Current Portion of Long-Term Debt 4,382,188 3,831,975
Obligations Under Capital Leases - Current Portion 2,393,715 2,519,982
Other Current Liabilities 13,134 536,759
------------------ ---------------
TOTAL CURRENT LIABILITIES 11,090,315 10,418,401
------------------ ---------------
LONG-TERM LIABILITIES:
Long-Term Debt - Net of Current Portion 15,453,112 15,992,617
Obligations Under Capital Leases - Net of Current Portion 5,716,815 5,072,018
Convertible Debentures 50,500,000 --
Deferred Revenue 399,199 423,500
Deferred Income Taxes 137,444 164,452
------------------ ---------------
TOTAL LONG-TERM LIABILITIES 72,206,570 21,652,587
------------------ ---------------
TOTAL LIABILITIES 83,296,885 32,070,988
------------------ ---------------
MINORITY INTEREST 812,363 715,543
------------------ ---------------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value; Authorized
5,000,000 Shares, None Issued -- --
Common Stock, $.01 Par Value; 50,000,000 Shares
Authorized and 7,662,099 and 7,032,622 Shares Issued and
Outstanding at March 31, 1996. 76,621 70,326
Additional Paid in Capital 24,327,929 22,953,590
Retained Earnings 4,038,116 2,495,678
------------------ ---------------
Totals 28,442,666 25,519,594
Less: Deferred Charges (913,026) (1,026,901)
------------------ ---------------
TOTAL STOCKHOLDERS' EQUITY 27,529,640 24,492,693
------------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,638,888 $ 57,279,224
================== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE - [NET OF ALLOWANCES] $ 12,073,575 $ 4,798,153 $ 28,839,377 $ 5,082,274
---------------- --------------- ---------------- ---------------
OPERATING EXPENSES:
General and Administrative 7,557,508 3,561,891 19,836,964 4,298,019
Depreciation and Amortization 1,304,209 396,106 3,003,099 514,642
---------------- --------------- ---------------- ---------------
TOTAL OPERATING EXPENSES 8,861,717 3,957,997 22,840,063 4,812,661
---------------- --------------- ---------------- ---------------
INCOME FROM OPERATIONS 3,211,858 840,156 5,999,314 269,613
---------------- --------------- ---------------- ---------------
OTHER INCOME [EXPENSE]:
Interest Income 38,567 26,198 227,140 22,335
Interest [Expense] (692,989) (193,907) (1,275,504) (538,248)
Other Income [Expense] (36,243) -- (502,697) 57,527
Non-Cash Finance Charge -- -- (414,375) (854,000)
---------------- --------------- ---------------- ---------------
TOTAL OTHER INCOME [EXPENSE] (690,665) (167,709) (1,965,436) (1,312,386)
---------------- --------------- ---------------- ---------------
INCOME [LOSS] BEFORE MINORITY INTEREST,
PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM 2,521,193 672,447 4,033,878 (1,042,773)
MINORITY INTEREST IN INCOME OF SUBSIDIARIES (184,166) (62,367) (279,907) --
PROVISION [BENEFIT] FOR INCOME TAXES (794,589) (12,306) (729,382) 402,431
---------------- --------------- ---------------- ---------------
INCOME [LOSS] BEFORE EXTRAORDINARY ITEM 1,542,438 597,774 3,024,589 (640,342)
EXTRAORDINARY ITEM - NET OF TAXES -- -- 306,042 --
---------------- --------------- ---------------- ---------------
NET INCOME [LOSS] $ 1,542,438 $ 597,774 $ 3,330,631 $ (640,342)
================ =============== ================ ===============
EARNINGS PER COMMON SHARE:
PRIMARY:
Earnings [Loss] Before Extraordinary
Item $ .25 $ .15 $ .61 $ (.48)
Extraordinary Item -- -- .06 --
---------------- --------------- ---------------- ---------------
NET EARNINGS [LOSS] $ .25 $ .15 $ .67 $ (.48)
================ =============== ================ ===============
FULLY DILUTED:
Earnings [Loss] Before Extraordinary
Item $ .16 $ -- $ .57 $ (.48)
Extraordinary Item -- -- .03 --
---------------- --------------- ---------------- ---------------
NET EARNINGS [LOSS] $ .16 $ -- $ .60 $ (.48)
================ =============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 6,218,847 4,031,961 4,996,021 1,328,033
================ =============== ================ ===============
Fully Diluted 17,491,361 -- 11,761,427 1,328,033
================ =============== ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
COMMON STOCK ADDITIONAL TOTAL
NUMBER PAID-IN DEFERRED RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL CHARGES EARNINGS EQUITY
--------- ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1993 1,848,010 $ 18,480 $ 1,110,750 $ -- $ (194,611) $ 934,619
Transfer of 80,000 Shares
of Stock Owned by One
of the Shareholders to an
Individual for Future
Services - May 1994 -- -- 280,000 (280,000) -- --
Issuance of 244,000 Shares
in Connection with the
$1,300,000 "CMI" Bridge
Note in April 1994 244,000 2,440 851,560 (854,000) -- --
Common Stock Issued in
Connection with
Company's Initial Public
Offering 1,955,000 19,550 6,692,410 -- -- 6,711,960
Warrants to Acquire
192,000 Shares of
Common Stock in
Connection with
CDC Acquisitions -- -- 382,080 (382,080) -- --
Shares Issued - Finder's
Fee - CMI Acquisition 7,150 72 34,928 -- -- 35,000
Shares Issued for
Compensation 24,400 244 79,756 -- -- 80,000
Current Year's Amortization
of Deferred Charges -- -- -- 916,805 -- 916,805
Net [Loss] for the year ended
December 31, 1994 -- -- -- -- (640,342) (640,342)
------------ ----------- ------------- --------------- ------------- -------------
BALANCE - DECEMBER 31, 1994 -
FORWARD 4,078,560 $ 40,786 $ 9,431,484 $ (599,275) $ (834,953) $ 8,038,042
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
COMMON STOCK ADDITIONAL TOTAL
NUMBER PAID-IN DEFERRED RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL CHARGES EARNINGS EQUITY
--------- ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 -
FORWARDED 4,078,560 $ 40,786 $ 9,431,484 $ (599,275) $ (834,953) $ 8,038,042
50,000 Warrants at $2.00 50,000 500 99,500 -- -- 100,000
Issuance of 200,000 Shares -
LDC Acquisition 200,000 2,000 998,000 -- -- 1,000,000
Issuance of 87,313 Shares -
CROV Acquisition 87,313 873 399,127 -- -- 400,000
Issuance of 50,000 Shares -
Arrow Acquisition 50,000 500 249,500 -- -- 250,000
Issuance of 197,750 Shares -
SIL Acquisition 197,750 1,977 536,023 -- -- 538,000
Issuance of 27,600 Shares to
Unrelated Individuals 27,600 276 137,724 (138,000) -- --
70,000 Warrants at $2.00 70,000 700 139,300 -- -- 140,000
Common Stock Issued in
Connection with
Secondary Offering 1,857,250 18,573 9,077,494 -- -- 9,096,067
Issuance of 80,000 Shares -
OPDC Acquisition 80,000 800 399,200 -- -- 400,000
Issuance of 68,817 Shares -
Future Care Acquisition 68,817 688 399,312 -- -- 400,000
Issuance of 150,000 Shares to
Individual for Future Services 150,000 1,500 523,500 (525,000) -- --
Warrants Exercised at Various
Prices 115,332 1,153 563,426 -- -- 564,579
Deferred Charges Amortization -- -- -- 235,374 -- 235,374
Net Income -- -- -- -- 3,330,631 3,330,631
------------ ----------- ------------- --------------- ------------- -------------
BALANCE - DECEMBER 31, 1995 7,032,622 70,326 22,953,590 (1,026,901) 2,495,678 24,492,693
Warrants Exercised at Various
Prices 468,407 4,684 369,262 -- -- 373,946
Shares Issued in Connection
with MIC Acquisition 68,070 681 424,757 -- -- 425,438
Shares Issued in Connection
with Prepayment of CMI
Consulting Agreement. 93,000 930 580,320 -- -- 581,250
Amortization of Deferred Charges -- -- -- 113,875 -- 113,875
Net Income -- -- -- -- 1,542,438 1,542,438
------------ ----------- ------------- --------------- ------------- -------------
BALANCE - MARCH 31, 1996 7,662,099 $ 76,621 $ 24,327,929 $ (913,026) $ 4,038,116 $ 27,529,640
============ =========== ============= =============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income [Loss] $ 1,542,438 $ 597,774 $ 3,330,631 $ (640,342)
---------------- --------------- ---------------- ---------------
Adjustments to Reconcile Net Income
[Loss] to Net Cash Provided [Used] by
Operating Activities:
Depreciation and Amortization Expense 1,304,209 104,750 3,003,099 514,642
Bad Debt Provision -- -- -- 198,148
Deferred Income Taxes (27,008) -- 581,561 (417,109)
Compensation Expense -- -- -- 80,000
Amortization of Non-Cash Financing and
Other Costs -- 291,356 649,749 916,805
Minority Interest in Net Income of
Consolidated Subsidiaries 184,166 114,362 279,907 --
Gain on Extinguishment of Debt -- -- (510,042) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,964,867) (84,264) (2,794,947) (364,348)
Other Receivables -- 430,000 430,000 (430,000)
Other Current Assets (10,065) 19,069 394,995 (2,882)
Subscription Receivable -- -- -- 100,000
Prepaid Expenses (1,066,502) 8,518 (435,589) (140,397)
Deposits (134,284) (5,187) (327,663) (17,647)
Deferred Offering Costs -- -- -- 137,473
Increase [Decrease] in:
Accounts Payable 527,316 (198,754) 1,014,938 469,643
Accrued Expenses 703,951 (680,623) (616,953) (7,379)
Other Current Liabilities (523,625) (8,389) 526,759 --
Deferred Revenue (24,301) -- 423,500 --
---------------- --------------- ---------------- ---------------
Total Adjustments (1,031,010) (9,162) 2,619,314 1,036,949
---------------- --------------- ---------------- ---------------
NET CASH - OPERATING ACTIVITIES -
FORWARD 511,428 588,612 5,949,945 396,607
---------------- --------------- ---------------- ---------------
INVESTING ACTIVITIES:
Intangible Assets -- -- -- (407,730)
Equipment Purchases -- -- (1,746,702) (440,690)
Investment in Pending Acquisitions -- 543,118 543,118 (368,118)
Acquisitions - [Net of Cash Acquired] -- (1,330,000) (10,217,500) (2,387,500)
---------------- --------------- ---------------- ---------------
NET CASH - INVESTING ACTIVITIES -
FORWARD $ -- $ (786,882) $ (11,421,084) $ (3,604,038)
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET CASH - OPERATING ACTIVITIES -
FORWARDED $ 511,428 $ 588,612 $ 5,949,945 $ 396,607
---------------- --------------- ---------------- ---------------
NET CASH - INVESTING ACTIVITIES -
FORWARDED -- (786,882) (11,421,084) (3,604,038)
---------------- --------------- ---------------- ---------------
FINANCING ACTIVITIES:
Proceeds from Bridge Loans -- -- -- 3,920,000
Repayments of Bridge Loans -- -- -- (4,670,000)
Common Stock Issued 1,380,634 100,000 9,900,646 6,711,960
Repayments of Notes Payable and
Obligations Under Capital Leases (2,931,797) (1,761,488) (8,727,997) (470,193)
Proceeds from Notes Payable -- 780,000 5,847,926 480,000
Proceeds from Convertible Debentures 48,000,000 -- -- --
---------------- --------------- ---------------- ---------------
NET CASH - FINANCING ACTIVITIES 46,448,837 (881,488) 7,020,575 5,971,767
---------------- --------------- ---------------- ---------------
NET INCREASE [DECREASE] IN CASH AND
CASH EQUIVALENTS 46,960,265 (1,079,758) 1,549,436 2,764,336
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIODS 4,373,876 2,824,440 2,824,440 60,104
---------------- --------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - END OF
PERIODS $ 51,334,141 $ 1,744,682 $ 4,373,876 $ 2,824,440
================ =============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 682,989 $ 189,552 $ 1,181,004 $ 528,354
Taxes $ -- $ -- $ 514,678 $ --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In May 1994, 80,000 shares of stock were transferred to the new president as
deferred compensation.
During the period ended December 31, 1994, the Company issued common stock in
lieu of paying finders' fees of $35,000.
Issued $2,988,000 of common stock related to various acquisitions consummated
in 1995.
In August 1995, a total of $525,000 of common stock was issued to individuals
related in connection with the Company's Long-Term Incentive Plan.
During the period ended March 31, 1996, the Company entered into several
equipment lease agreements which are stated on the balance sheet at their
capitalized cost of $3,001,361.
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[1] DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
DESCRIPTION OF THE COMPANY - U.S. Diagnostic Labs Inc. ["USDL" or the "Company"]
was incorporated in Delaware on June 17, 1993. Effective June 24, 1993, the
Company merged with Port Chester Distribution Services, Inc., a New York
corporation, pursuant to which the Company was the surviving corporation. The
merger had no material effect on the financial condition of the Company as Port
Chester was inactive and had no assets or liabilities.
The Company is engaged in the acquisition and ownership of medical services
facilities, including clinical laboratories and multi-modality diagnostic
imaging facilities. These facilities are located throughout the United States
and provide a variety of medical diagnostic testing and evaluation services and
procedures, including magnetic resonance imaging, computerized tomography
scanning, ultrasound, cardiology, and various radiological services.
CONSOLIDATION POLICY - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation. Listed below
are each of the subsidiaries and divisions included in the consolidated
financial statements:
<TABLE>
<S> <C>
Havertown Medical Laboratory ["Division"] ["HML"] Salisbury Imaging Center ["SIC"]
Computerized Medical Imaging Center, Inc. ["CMI"] Orange Park Imaging, Ltd. ["OPDC"]
Columbus Diagnostic Center, Inc. ["CDC"] San Francisco Magnetic Resonance Center
Alpha Labs ["Alpha"] ["SFMRC"]
Morton Clinical Labs ["Morton"] Advanced Medical Imaging Center ["AMIC"]
Santa Fe Imaging Center ["SFIC"] Modesto Imaging Center ["MIC"]
Laborde Diagnostic, Inc. ["LDI"] Future Care Affiliates ["FCA"]
Community Radiology of Virginia, Inc. ["CROV"]
Arrow Medical Clinical Laboratory, Inc. ["Arrow"]
</TABLE>
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
carrying amount of cash and cash equivalents approximates their fair value.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION - Property and equipment are
stated at cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets or the remaining lease term. The
equipment used by the Company is technologically sophisticated and subject to
accelerated obsolescence in the event of significant technological change.
INTANGIBLE ASSETS - The cost of intangible assets are amortized on a
straight-line basis over the period the Company expects to receive benefits as
follows:
YEARS
-----
Goodwill 20
Customer List 15
Covenant Not-to-Compete 3 - 5
NET PATIENT SERVICE REVENUE - Net revenues are reported at the estimated net
realizable amounts from patients, third-party payors and others for services
rendered including estimated prospectively determined adjustments under
reimbursement agreements with third-party payors. These adjustments are accrued
on an estimated basis in the period the related services are rendered and
adjusted in future periods as final settlements are determined. It is
management's policy not to require collateral as a condition for service.
For the years ended December 31, 1995 and 1994, contractual adjustments amounted
to approximately $14,238,222 and $3,127,071, respectively.
F-9
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INCOME TAXES - In February 1992, the Financial Standards Board issued Statement
of Financial Accounting Standards No. 109 ["SFAS 109"], "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
EARNINGS [LOSS] PER SHARE - Primary earnings [loss] per share are computed based
upon the weighted average number of common shares outstanding during the period.
Due to the large number of common equivalent shares outstanding, application of
the modified "Treasury Stock Method" was used because the number of common
shares obtainable upon exercise of all options and warrants exceeded 20% of the
number of common shares outstanding at the end of the period. This results in
the assumed exercise of all anti-dilutive options and warrants as well as
dilutive options and warrants. While conventional earnings per share
computational guidance does not give effect to anti-dilution, exceptions are
allowed under the treasury stock method to aggregate all computations and if the
net result is dilutive, all options and warrants are included, and if the net
result is anti-dilutive, all are excluded. The primary earnings per share
calculation followed conventional computational guidance and excluded all
warrants and options because the net result was anti-dilutive.
Fully diluted earnings per share are computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Dilutive common stock equivalents consist of options and warrants
[calculated also using the modified "Treasury Stock Method."] This reason
[dilutive effect in fully diluted calculations and anti-dilutive effect in
primary calculations] is due to the ending market price being 40% above the
average market price, and 50% above the exercise price for a significant number
of the options and warrants.
[3] FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet classifications as
of December 31, 1995:
CARRYING FAIR
AMOUNT VALUE
------ -----
Cash and Cash Equivalents $ 3,889,934 $ 3,889,934
Restricted Cash and Cash Equivalents 483,942 483,942
Short-Term Borrowings 667,286 667,286
Current Portion of Long-Term Debt 3,831,975 3,831,975
Long-Term Debt - Net of Current Portion 15,992,617 15,987,626
In assessing the fair value of these financial instruments, the Company used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, and short-term debt, it was assumed that the carrying
amount approximated fair value for the majority of these instruments because of
their short maturities. The fair value of long-term debt is based on current
rates at which the Company could borrow funds with similar remaining maturities.
F-10
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[4] RESTRICTED CASH
At December 31, 1995, a $483,942 Certificate of Deposit ["CD"] collateralized
several lease obligations of one lessor. These leases were assumed with the
stock purchase of MIC. Release of the CD by the lender will occur at the time of
final settlement of all lease obligations. A provision of the note payable
issued in connection with the MIC acquisition states that upon release of the
CD, the Company shall make a principal payment on the note payable to the value
of such CD, which shall reduce the payments of interest and/or principal.
[5] PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property and equipment as of December 31, 1995:
<TABLE>
ESTIMATED
USEFUL LIFE
-----------
<S> <C> <C>
Land $ 665,000 --
Building 935,000 40 Years
Medical Equipment 7,234,591 7 Years
Furniture and Fixtures 644,628 7-10 Years
Office Equipment 1,362,789 7-10 Years
Leasehold Improvements 2,486,831 10 Years
Equipment under Capital Leases 11,689,503 5-7 Years
---------------
Total 25,018,342
Less: Accumulated Depreciation and Amortization (2,467,458)
NET $ 22,550,884
--- ===============
</TABLE>
Depreciation expense amounted to $2,169,557 and $322,190 for the years ended
December 31, 1995 and 1994, respectively, of which $1,231,827 and $287,641 was
attributed to the equipment under capital leases.
[6] INTANGIBLE ASSETS
Intangible assets are included in other assets on the balance sheet and consist
of the following at December 31, 1995
ACCUMULATED
COST AMORTIZATION NET
---- ------------ ---
Goodwill $ 13,509,674 $ 568,212 $ 12,941,462
Covenant Not-to-Compete 3,045,000 739,361 2,305,639
Customer Lists 2,885,000 139,167 2,745,833
--------------- --------------- ---------------
TOTALS $ 19,439,674 $ 1,446,740 $ 17,992,934
------ =============== =============== ===============
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at dates of acquisition and is being amortized on a
straight-line basis over twenty [20] years. Amortization expense charged to
operations for 1995 and 1994 was $328,154 and $61,953, respectively.
The covenant not-to-compete and customer lists are being amortized on a
straight-line basis over three [3] to five [5] and fifteen [15] years,
respectively. Amortization expense charged to operations for 1995 and 1994 was
$505,388 and $130,500, respectively.
F-11
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[6] INTANGIBLE ASSETS [CONTINUED]
Management of the Company has developed a policy to evaluate the period of
goodwill amortization to determine whether latter events and circumstances
warrant revised estimates of useful lives. Management on a quarterly basis will
evaluate whether the carrying value of goodwill has become impaired. This
evaluation will be done by comparing the carrying value of goodwill to the value
of projected discounted net cash flows from related operations. Impairment will
be recognized if the carrying value of goodwill is less than the projected
discounted net cash flows from related operations.
[7] SHORT-TERM BORROWINGS
Outstanding notes payable to banks and available revolving lines of credit at
December 31, 1995 is as follows:
Revolving line of credit due December 1996 with interest of
approximately 13.25% at December 31, 1995. Secured by
accounts receivables of CMI. $ 274,000
Revolving line of credit due May 1996 with interest of
approximately 9.50% at December 31, 1995. 350,000
Notes payable due on demand or in monthly installments
of $1,606 with interest at 8.50%. 43,286
---------------
TOTAL $ 667,286
----- ===============
The weighted average interest rate on short-term borrowings was 10.36% at
December 31, 1995.
[8] LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
Revolving line of credit, due September 22, 1997 at 13.25%.
Collateralized by accounts receivable of Salisbury Imaging Center. $ 476,051
7.50% to 13.00% notes payable to lending institutions, due in
monthly installments through December 2001. Collateralized
by medical equipment. 10,564,205
6.00% to 10.00% notes payable related to acquisitions, due in monthly
installments through November 2001.
Collateralized by substantially all assets of the Company. 8,784,336
----------------
Total 19,824,592
Less: Current Portion 3,831,975
TOTAL $ 15,992,617
----- ================
Principal payments on long-term debt are as follows:
1996 $ 3,831,975
1997 3,933,638
1998 3,581,438
1999 3,475,948
2000 3,265,656
Thereafter 1,735,937
----------------
TOTAL $ 19,824,592
----- ================
</TABLE>
F-12
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[9] OBLIGATION UNDER CAPITAL LEASES
The Company has entered into leases for equipment originating in the years ended
December 31, 1995 and 1994. Based on the provisions of Statement No. 13, issued
by the Financial Accounting Standards Board, the leases meet the criteria of
capital leases and, accordingly, have been recorded as such. Obligations under
capital leases are stated on the balance sheet at the present value of future
minimum lease payments. These assets are stated on the balance sheet at their
capitalized cost of $11,689,503.
Future minimum lease payments under capital leases, together with the present
value of minimum lease payments subsequent to December 31, 1995, are as follows:
1996 $ 3,260,010
1997 2,980,370
1998 2,199,120
1999 468,407
2000 143,012
---------------
Total 9,050,919
Less: Amount Representing Interest 1,458,919
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS $ 7,592,000
------------------------------------------- ===============
[10] INCOME TAXES
The provision [benefit] for income taxes shown in the consolidated statements of
operations consist of the following:
1 9 9 5 1 9 9 4
------- -------
CURRENT:
Federal $ 122,812 $ --
State 25,009 14,678
--------------- ---------------
Totals 147,821 14,678
--------------- ---------------
DEFERRED:
Federal 494,327 (354,543)
State 87,234 (62,566)
--------------- ---------------
Totals 581,561 (417,109)
--------------- ---------------
TOTALS $ 729,382 $ (402,431)
------ =============== ===============
Significant components of the Company's deferred tax assets and [liabilities] at
December 31, are as follows:
1 9 9 5 1 9 9 4
------- -------
DEFERRED TAX LIABILITIES:
Equipment Basis Difference $ (795,823) $ (117,356)
DEFERRED TAX ASSETS:
Intangible Assets Basis Difference 170,519 32,298
Net Operating Losses 460,852 502,167
--------------- ---------------
NET DEFERRED TAXES $ (164,452) $ 417,109
------------------ =============== ===============
The Company has recorded a deferred tax asset of $460,852 reflecting the benefit
of approximately $1,152,000 in loss carryforwards, which expire in varying
amounts through the year 2010. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforwards period are reduced.
F-13
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[10] INCOME TAXES [CONTINUED]
A reconciliation of the expected total provision [benefit] for income taxes,
computed using the federal statutory rate, to the amount recorded as follows:
<TABLE>
1 9 9 5 1 9 9 4
------- -------
<S> <C> <C>
Computed Expected Provision [Benefit] $ 1,371,519 $ (342,066)
State Income Taxes [Net of Federal Benefit] 242,033 (60,365)
Minority Interests of Subsidiaries (111,963) --
Extraordinary Item (204,000) --
Realization of Benefits of Tax Loss Carryforwards (678,814) --
Other Individually Immaterial Items 110,607 --
--------------- ---------------
TOTALS $ 729,382 $ (402,431)
------ =============== ===============
</TABLE>
[11] CAPITAL TRANSACTIONS
In connection with the IPO, stockholders of the Company deposited the Escrow
Shares, which will be released to such stockholders if the Company attains
certain earnings before taxes of at least $14 million in 1996. In the event the
506,853 Escrow Shares beneficially owned by current officers, directors,
employees or consultants of the Company are released from escrow, compensation
expense will be recorded for financial reporting purposes for 1996 and such
release will be deemed additional compensation expense of the Company. If
incurred, such compensation expense for 1996 will likely be substantial and
would have the effect of substantially reducing or eliminating reportable
earnings. Although the amount of compensation expense recognized by the Company
will not affect the Company's total stockholder's equity or its working capital
and is not expected to have a material effect on the Company's operations, it
may have a negative effect on the market price of the Company's securities.
In February 1995, 50,000 warrants were exercised to purchase 50,000 shares of
the Company's common stock at $2.00 per share.
In connection with the Laborde Diagnostic Center ["LDC"] acquisition, 200,000
shares of common stock were issued.
In February 1995, 87,313 shares of common stock were issued in connection with
the Community Radiology of Virginia ["CROV"] acquisition.
In March 1995, 50,000 shares of common stock were issued in connection with the
Arrow Medical Clinic Laboratory, Inc. ["Arrow"] acquisition.
In June 1995, 197,750 shares of common stock were issued in connection with the
Salisbury Imaging, Ltd. ["SIL"] acquisition.
In August 1995, 70,000 warrants were exercised to purchase 70,000 shares of the
Company's common stock at $2.00 per share.
In August 1995, the Company consummated its secondary public offering in which
1,857,250 shares of stock were issued as part of 9,775 units. Each unit
consisted of 190 Initial Public Offering Units ["IPO"]. Each IPO unit consisted
of one share of common stock, and one Redeemable Class A and B Warrant. Each
Class A Warrant entitles the holder to purchase one share of common stock and
one Class B Warrant at an exercise price of $6.25, subject to adjustments, at
any time until October 20, 1999. Each Class B Warrant entitles the holder to
purchase one share of common stock at an exercise price of $8.00 subject to
adjustment, at any time until October 20, 1999. The net proceeds amounted to
$9,096,067 after offering costs of approximately $531,000.
F-14
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[11] CAPITAL TRANSACTIONS [CONTINUED]
In connection with the Orange Park Diagnostic Center acquisition ["OPDC"],
80,000 shares of the Company's common stock were issued.
In connection with the Future Care Affiliate acquisition ["FCA"], 68,817 shares
of the Company's common stock were issued.
An aggregate of 150,000 shares of restricted common stock were issued equally to
three related parties in connection with the Long-Term Incentive Plan [the
"Plan"].
[12] ACQUISITIONS
Since inception, the Company purchased the businesses of fifteen [15] diagnostic
centers for a cost of approximately $31,500,000. The centers purchased were as
follows:
CENTER LOCATION DATE ACQUIRED
Havertown Havertown, PA October 1993
CMI Sherman Oaks, CA June 1994
CDC Columbus, GA September 1994
Alpha Havertown, PA December 1994
Morton Morton, PA December 1994
SFIC Santa Fe, NM January 1995
Laborde Lafayette, LA February 1995
CROV Princeton, WV February 1995
Bluefield, VA February 1995
Arrow Philadelphia, PA March 1995
SIC Jacksonville, FL June 1995
OPDC Jacksonville, FL July 1995
SFMRC San Francisco, CA September 1995
AMIC Montgomery, AL October 1995
MIC Modesto, CA October 1995
Future Care Van Nuys, CA November 1995
San Luis Obispo, CA November 1995
These acquisitions were accounted for as asset or stock purchases with the
excess purchase price over the fair value of the assets attributed to goodwill.
The results of operations are included with that of the Company from the
acquisition date onward.
[13] NONMONETARY TRANSACTIONS
In 1995, the Company entered into a purchase agreement for medical supplies. In
exchange, the vendor agreed to transfer ownership of related medical equipment
to the Company with an estimated fair value of $486,000 at the end of the
agreement. This amount was recorded as medical equipment and deferred revenue.
No gain or loss resulted from this transactions during 1995.
[14] EMPLOYMENT AND CONSULTING AGREEMENTS
As of January 1, 1995 and amended effective September 1995, the Company entered
into a consulting agreement with an individual to retain his services as an
economic consultant to the Company. The agreement also indicated that the
Company wished to retain this person as a member of the Company's Board of
Directors, and has asked that he make significant time available to assist the
Company, which will require [and has required] him to forego significant other
opportunities. The compensation under the agreement is as follows:
Commencing January 1, 1995 and continuing through December 31, 1999,
$25,000 cash per quarter payable on the first day of each quarter for
which this person offers or agrees to serve on the Company's Board of
Directors and to provide other consulting services to the Company.
F-15
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[14] EMPLOYMENT AND CONSULTING AGREEMENTS [CONTINUED]
In July 1995, the Company entered into a three-year employment agreement with an
individual to serve as a senior-vice president with responsibility over the
Jacksonville, Florida area for a base salary of $120,000 and $100,000 signing
bonus.
In October 1995, the consulting agreement with Coyote Consulting and Financial
Services LLC ["Coyote"] was amended and extended for four years and provides for
a $185,000 base cost, bonus of 35% up to $65,000 based on certain acquisition
growth targets and a 3% finder fee of any acquisitions referred.
Effective October 1, 1995, the employment agreement of the Chairman of the Board
was amended to provide for an annual base compensation of $185,000 and a minimum
annual bonus of $65,000 based upon attainment of performance criteria developed
by management each year. Additional provisions include a payment upon a change
of control of the Company equal to three times the Chairman's highest annual
compensation for the three years preceding the change of control.
The employment agreement of the President of the Company was amended to extend
for a term of an additional two years and provides for annual compensation of
$120,000 and for payment upon a change of control of the Company equal to three
times the President's highest annual compensation preceding the change of
control.
An individual entered into a four-year employment agreement providing for annual
compensation of $120,000 and 100,000 of the Company's common stock options under
the Company's Long-Term Incentive Plan at an exercise price of $5.125 and an
additional 12,500 options at fair market value per year if during each of fiscal
year 1996, 1997 and 1998, the Company's SFMRC subsidiary has income before taxes
of at least $250,000 in each such year. An additional provision provides for a
bonus of 5% of income before taxes of SFMRC with a minimum guarantee of $50,000
per year.
In December 1995, the Company entered into a three-year employment agreement
with an individual pursuant to which he will serve as an executive
vice-president of the Company. The agreement provides for an initial base
compensation of $100,000, plus $10,000 signing bonus and 80,000 options of the
Company's common stock at $6.50, vested over the three year contract period.
Annual compensation will be increased to $120,000 and $125,000 in 1996 and 1997,
respectively.
[15] STOCK OPTION PLANS AND WARRANTS
[A] STOCK OPTION PLANS - In November 1993, the Company adopted the 1993 Stock
Option Plan [the "SOP"] pursuant to which officers, directors and key employees
of the Company are eligible to receive incentive and/or non- qualified stock
options. The SOP, which expires in September 2003, will be administered by the
Board of Directors or a committee designated by the Board of Directors.
Incentive stock options granted under the SOP are exercisable for a period of up
to 10 years from the date of grant at an exercise price which is not less than
the fair market value of the common stock on the date of the grant, except that
the term of an incentive stock option granted under the SOP to a stockholder
owning more than 10% of the outstanding common stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of the
common stock on the date of the grant. As of December 31, 1995, an aggregate of
200,000 options have been issued under the SOP to several employees exercisable
at prices ranging from $2.00 to $5.00 per share.
In July 1995, the Company adopted a Long-Term Incentive Plan [the "Plan"]
pursuant to which officers, directors and key employees of the Company are
eligible to purchase incentive and/or non-qualified stock options. Under the
Plan, an aggregate of 1,000,000 shares of the Company's common stock will be
issued, all exercisable at the fair market value of the common stock on the date
of grant, in equal annual installments on a cumulative basis commencing one year
from the date of grant. Vesting of incentive and non-qualified options are from
one to five and one to three years, respectively.
An aggregate 150,000 shares of restricted common stock were issued equally to
three related parties in connection with the Plan.
F-16
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[15] STOCK OPTION PLANS AND WARRANTS [CONTINUED]
[A] STOCK OPTION PLANS [CONTINUED] - The following table summarizes the activity
in common shares subject to stock option plans for the year ended December 31,
1995:
EXERCISE PRICE SHARES
-------------- ------
OUTSTANDING AT DECEMBER 31, 1994 $ 2.00 - $ 5.00 200,000
Granted $ 4.00 - $ 6.50 807,000
Exercised -- --
Canceled or Expired -- --
----------------- ---------------
OUTSTANDING AT DECEMBER 31, 1995 $ 2.00 - $ 6.50 1,007,000
-------------------------------- ================= ===============
[B] WARRANTS - The Company issued 25,000 and 50,000 five-year warrants to two
individuals at an exercise price of $5.125 per warrant. The Company reserved
75,000 shares of its common stock for issuance upon exercise of such warrants.
Warrants to acquire 400,000 shares of the Company's common stock were issued to
a member of the Company's Board of Directors and are immediately exercisable at
$5.00 per share through December 31, 1999. If the average of the closing bid
price is not at least $10.00 per share for the first 15 days of 1997, then the
Company shall issue this individual an additional 100,000 shares of common
stock.
At December 31, 1995, 4,237,250 and 3,812,250 Class A and B Warrants were
outstanding, respectively. Each Class A Warrant entitles the holder to purchase
one share of common stock and one Class B Warrant at an exercise price of $6.25,
at any time until October 20, 1999. Each Class B Warrant entitles the holder to
purchase one share of common stock at an exercise price of $8.00, at any time
until October 20, 1999.
[16] COMMITMENTS
The Company and its subsidiaries have non-cancelable operating leases for use of
their facilities and various equipment. These leases may require payment of
various expenses as additional rent. Certain leases contain renewal options and
escalation clauses.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1995 for each of the
next five years and in the aggregate are:
DECEMBER 31, AMOUNT
- ------------ ------
1996 $ 1,957,934
1997 2,188,897
1998 2,006,315
1999 1,718,082
2000 1,510,315
Thereafter 7,084,603
---------------
TOTAL $ 16,466,146
----- ===============
Rent expense for the year ended December 31, 1995 and 1994 under various
operating leases amounted to $1,629,302 and $270,696, respectively.
The Company has comprehensive maintenance contracts with its equipment vendors
for the Magnetic Resonance Imaging ["MRI"], Computerized Tomography ["CT"] and
other diagnostic medical equipment. The terms of these contracts are between one
and five years, but may be canceled by the Company under certain circumstances.
F-17
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[17] CONCENTRATION OF CREDIT RISK
The Company's laboratories and imaging centers grant credit without collateral
to its patients, most of whom are residents of the laboratories' respective area
and are insured under third-party payor agreements. The mix of receivable from
third-party payors and patients are as follows:
DECEMBER 31,
1 9 9 5
-------
Blue Cross/Blue Shield 7 %
Medicare 14
Medicaid 7
Other Third-Party Payors 57
Self Payor 6
Workers Compensation 9
-------
TOTAL 100 %
=======
The Company maintains cash balances at several institutions in California and
Lafayette, Louisiana. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At December 31, 1995, the
Company's uninsured cash balance totaled $1,077,096.
[18] PENSION PLAN
Effective 1995, the Company offered a 401(K) Pension Plan [the "Plan"] to
full-time employees who have completed one year of service. Eligible employees
may make elective contributions which are capped and subject to an annual cost
of living adjustment ["COLA"]. The Company may make matching contributions in an
amount that will be discretionary and determined by the Company each year. In
addition, the Plan provides for the availability of year end profit-sharing
contributions, depending upon profits and Board of Directors' approval. There
were no Company contributions made for the year ended December 31, 1995.
[19] EXTRAORDINARY ITEM
In the fourth quarter of fiscal 1995, the Company settled on a note payable
principal balance in an amount less than the recorded liability. In addition,
the Company received an upgrade to the related equipment at no additional cost.
The transaction resulted in a net gain of $306,042 after taxes of approximately
$204,000.
[20] LITIGATION
The Company is subject to lawsuits arising in the course of ordinary business.
Management after review and consultation with counsel, believes it has
meritorious defenses and considers that any potential outcome from these matters
would not materially affect the financial position, statement of operations and
statement of cash flows of the Company.
[21] NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial statement note disclosure purposes. The accounting
requirements of SFAS No. 123, if adopted by the Company, will be effective for
transactions entered into in fiscal years that begin after December 15, 1995;
the disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995.
F-18
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[22] SUBSEQUENT EVENTS
A former director is one of three stockholders of Med LNC, Inc., to which the
Company was obligated to pay monthly consulting fees of $15,000 with respect to
CMI through June 1999. In January 1996, the Company issued 93,000 shares of
common stock in full payment of the remaining 41 months of the agreement.
A director of the Company is one of three stockholders of HPM, Inc., which is a
consultant with respect to CDC and which held warrants to purchase 192,000
shares of common stock at $.01 per share. These warrants were exercised in
January 1996 and the shares were delivered to the individual stockholders.
95,852 of such shares have been placed in escrow.
In January 1996, the Company entered into a line of credit with a financial
institution in the amount of $1,000,000 at the prime interest rate and will be
secured by the Company's accounts receivables.
Pursuant to a signed letter of intent dated January 23, 1996, the Company has
engaged an investment banking firm as its agent in connection with the proposed
offering of $50 million, plus a $7.5 million overallotment, of subordinated
Convertible Debentures. The initial $50 million of debentures were priced as of
March 29, 1996 and closed on April 3, 1996. The $7.5 million overallotment
closed on May 9, 1996. Such investment banking firm will be issued up to 250,000
five-year warrants. The Company plans to use the proceeds of this issuance to
fund future acquisitions.
In February 1996, the Company entered into a financing agreement to payoff lease
obligations assumed with the MIC acquisition. As a result of the lease
settlement, a restricted certificate of deposit was released by the former
lessor. The proceeds of the CD were subsequently used to make a principal
payment on the note payable issued in connection with the MIC acquisition.
The Company has signed "Letters of Intent" to acquire the following five [5]
outpatient diagnostic facilities.
<TABLE>
NAME LOCATION BUSINESS PURCHASED OWNERSHIP %
<S> <C> <C> <C>
South Coast Radiology Coos Bay, OR Multi-Modality Imaging 100
Allegheny MRI (Four Centers) Pittsburgh, PA MRI 100
Heights Imaging Center Haddon Heights, NJ Multi-Modality Imaging 100
DISC Charleston, SC Multi-Modality Imaging 80
Radiation Oncology Centers Modesto, CA Radiation Therapy 50.1
U.S. Imaging, Inc. Houston, TX Multi-Modality Imaging 100
</TABLE>
The Company intends to finance these acquisitions, with cash, notes and common
stock of the Company totaling approximately $44,000,000. These acquisitions will
be accounted for as asset or stock purchases with the excess purchase price over
the fair value of the assets attributed to goodwill totaling approximately
$21,000,000.
F-19
<PAGE>
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[22] SUBSEQUENT EVENTS [CONTINUED]
The following pro forma [unaudited] combined results of operations are adjusted
for the effect of the convertible debt offering, amortization of goodwill,
non-compete covenants, and depreciation on assets acquired as though the
acquisitions referred to here and Note 12 occurred at the beginning of the years
presented.
YEARS ENDED
DECEMBER 31,
1 9 9 5 1 9 9 4
------- -------
Net Revenues $ 79,117,000 $ 72,267,000
--------------- ----------------
Net Income Before Extraordinary Item 6,825,000 3,687,000
Extraordinary Item 306,000 --
--------------- ----------------
Net Income $ 7,131,000 $ 3,687,000
=============== ================
Primary Earnings Per Share:
Before Extraordinary Item $ .86 $ .79
Extraordinary Item .04 --
--------------- ----------------
Net Earnings $ .90 $ .79
=============== ================
Fully Diluted Earnings Per Share:
Before Extraordinary Item $ .71 $ *
Extraordinary Item .02 --
--------------- ----------------
Net Earnings $ .73 $ *
=============== ================
*Fully diluted earnings per share is not presented because the per share amount
is anti-dilutive.
. . . . . . . . .
F-20
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON WHERE SUCH OFFER WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AT ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE CIRCUMSTANCES OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION.....................2
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE..............................2
PROSPECTUS SUMMARY........................3 U.S. DIAGNOSTIC LABS INC.
RISK FACTORS..............................6
CAPITALIZATION...........................12 $57,500,000
DIVIDEND POLICY..........................12 9% SUBORDINATED CONVERTIBLE
DEBENTURES DUE 2003
PRICE RANGE OF COMMON STOCK..............13
7,269,334 SHARES
SELECTED FINANCIAL DATA..................14 COMMON STOCK
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................16
PROSPECTUS
BUSINESS.................................21
MANAGEMENT...............................29
SELLING SECURITYHOLDERS..................30 , 1996
DESCRIPTION OF THE DEBENTURES............32
DESCRIPTION OF CAPITAL STOCK.............47
PLAN OF DISTRIBUTION.....................51
LEGAL MATTERS............................51
ACCOUNTANTS..............................51
INDEX TO FINANCIAL STATEMENTS............52
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering all of which are to be
paid by the Registrant in connection with the issuance and distribution of the
securities being registered are as follows:
SEC Registration Fee $23,700
Nasdaq Listing Fee 17,500
Printing and Engraving Expenses 10,000
Accounting Fees and Expenses 15,000
Legal Fees and Expenses 25,000
Miscellaneous Expenses 1,300
---------
Total $75,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law which covers the
indemnification of directors, officers, employees and agents of a corporation is
hereby incorporated herein by reference. Reference is made to Article Ninth of
Registrant's Articles of Incorporation and Article V of Registrant's By-Laws
which provide for indemnification by the Registrant in the manner and to the
full extent permitted by Delaware law.
Reference is also made to Section 8 of the Underwriting Agreement filed
as Exhibit 1.1 to this Registration Statement.
ITEM 16. EXHIBITS
4.1 - Form of Unit Purchase Option(1)
4.2 - Form of Warrant Agreement(1)
4.3 - Escrow Agreement(1)
4.4 - Indenture
4.5 - Registration Rights Agreement
5.1 - Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1 - 1993 Stock Option Plan(1)
10.2 - Asset Purchase Agreement among the Company, Columbus Diagnostic
Center Inc. and Physicians Diagnostic Associates of Columbus.
L.P.(1)
10.3 - Amended Employment Agreement with Jeffrey Goffman(1)
10.5 - Employment Agreement with Robert Burke, M.D.(1)
10.6 - Form of Consulting Agreement with HPM Inc.(1)
10.7 - Consulting Agreement with MED LNC Inc.(1)
10.8 - Equipment Lease with Ventura Partners.(1)
10.9 - Form of Lease between the Company and Murry Goodman with respect
to Phillips Point.(1)
10.10 - Lease between the Company and United Properties Co.(1)
10.11 - Asset purchase Agreement dates as of December 31, 1994 among the
Company, Santa Fe Imaging Center, Ltd. and Santa Fe Imaging Center
Inc., a subsidiary of the Company. (2)
10.12 - Equipment Lease dated as of December 31, 1994 between Santa Fe
Imaging Center Ltd.(1) and Santa Fe Imaging Center Inc., a
subsidiary of the Company and the Company.(2)
10.13 - Property lease dated as of December 31, 1994 among Santa Fe Imaging
Center, Ltd.(1) and Santa Fe Imaging Center Inc., a subsidiary of
the Company and the Company.(2)
10.14 - Asset Purchase Agreement dated as of February 27, 1995 among the
Company, Open Air MRI, Inc., Community Radiology of Virginia, Inc.
and CROV Acquisition Corp., a subsidiary of the Company.(3)
10.15 - Radiology Agreement dated as of February 27, 1995 between Stephen
Raskin, M.D., P.C. and CROV Acquisition Corp., a subsidiary of the
Company.(3)
10.16 - Management Agreement dated as of February 27, 1995 among the
Company, Open Air MRI, Inc., Community Radiology of Virginia,
Inc. and CROV Acquisition Corp., a subsidiary of the Company.(3)
II-1
<PAGE>
10.17 - Escrow Agreement dated as of February 27, 1995 among the Company,
Open Air MRI, Inc., Community Radiology, Inc. and CROV Acquisition
Corp., a subsidiary of the Company.(3)
10.18 - Guaranty dated as of February 27, 1995 of the Company.(3)
10.19 - Stock Purchase Agreement dated as of February 15, 1995 among the
Company, Laborde Diagnostic, Inc. and Jeffrey J. Laborde, M.D.(4)
10.20 - Employment Agreement dated as of February 15, 1995 among the Company,
the Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(4)
10.21 - 1995 Long Term Incentive Plan(5)
10.22 - Consulting Agreement with Gordon Rausser(5)
10.23 - Consulting Agreement with Coyote Consulting(5)
10.24 - Consulting Agreement with Sawgrass Consulting(5)
10.25 - Asset Purchase Agreement dated as of October 10, 1995 among the
Company, Central Alabama Medical Enterprises, Inc. and Advanced
Medical Imaging Center, Inc., a subsidiary of the Company(6)
10.26 - Property Lease dated as of October 10, 1995 among the Company,
Central Alabama Medical Enterprises, Inc. and Advanced Medical
Imaging Center, Inc., a subsidiary of the Company(6)
10.27 - Employment Agreement dated as of August 1, 1995 between the Company
and David Cohen(6)
10.28 - Employment Agreement dated as of January 1, 1996 between the Company
and Todd Smith
10.29 - Amendment to Employment Agreement of Jeffrey Goffman(7)
10.30 - Amendment to Employment Agreement of Robert Burke, M.D.(7)
10.31 - Amendment to Coyote Consulting Agreement(7)
11 - Earnings per share calculation
21.1 - Subsidiaries of the Registrant(7)
23.1 - Consent of Bachner, Tally, Polevoy & Misher LLP--Included in
Exhibit 5.1
23.2 - Consent of Mortenson and Associates, P.C.
24.1 - Power of Attorney
- -----------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (file no. 33-73414)
(2) Incorporated by reference to the Company's Report on Form 8-K dated
January 11, 1995.
(3) Incorporated by reference to the Company's Report on Form 8-K dated
February 27, 1995.
(4) Incorporated by reference to the Company's Report on Form 8-K dated
March 20,1994.
(5) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (file no. 33-93536).
(6) Incorporated by reference to the Company's Report on Form 8-K dated
October 30,1995.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-2
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions of its Certificate of Incorporation
and By-Laws, of the Delaware General Corporation Law, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the issuer of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will by governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-3 and caused this Registration Statement
or amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on the 5th day of
June, 1996.
U.S. DIAGNOSTIC LABS INC.
By: /S/ JEFFREY A. GOFFMAN
--------------------------
Jeffrey A. Goffman, Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signature" constitutes and appoints Jeffrey A.
Goffman and Robert D. Burke, M. D., or either of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
NAME TITLE DATE
- ---- ----- ----
/S/ ROBERT D. BURKE, M.D. President and Director June 5, 1996
- -------------------------------
Robert D. Burke, M.D.
/S/JEFFREY A. GOFFMAN Chairman of the Board and June 5, 1996
- ------------------------------- Chief Financial Officer
Jeffrey A. Goffman (Principal Executive,
Financial and
Accounting Officer)
/S/ WILLIAM M. HARPER, IV, M.D. Director June 5, 1996
- -------------------------------
William M. Harper, IV, M.D.
/S/ANDREW J. ANELLO Director June 5, 1996
Andrew J. Anello
/S/AMOS F. ALMAND Director June 5, 1996
- -------------------------------
Amos F. Almand, III
/S/GORDON RAUSSER Director June 5, 1996
Gordon Rausser
/S/ CHARLES J. JACOBSON Director June 5, 1996
- -------------------------------
Charles J. Jacobson
II-4
Exhibit 4.4
================================================================================
U.S. DIAGNOSTIC LABS INC.,
Company
and
AMERICAN STOCK TRANSFER & TRUST COMPANY,
Trustee
INDENTURE
Dated as of March 29, 1996
=========================
$57,500,000
9% Subordinated Convertible Debentures Due 2003
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE................................. 1
Section 1.1. Definitions........................................... 1
Section 1.2. Other Definitions..................................... 10
Section 1.3. Incorporation by Reference of Trust Indenture Act..... 11
Section 1.4. Rules of Construction................................. 12
ARTICLE 2.
THE DEBENTURES............................................................. 12
Section 2.1. Form and Dating....................................... 12
Section 2.2. Execution and Authentication.......................... 14
Section 2.3. Registrar and Paying Agent............................ 14
Section 2.4. Paying Agent to Hold Money in Trust................... 15
Section 2.5. Holder Lists.......................................... 15
Section 2.6. Transfer and Exchange................................. 16
Section 2.7. Replacement Debentures................................ 22
Section 2.8. Outstanding Debentures................................ 23
Section 2.9. Treasury Debentures................................... 23
Section 2.10. Temporary Securities.................................. 23
Section 2.11. Cancellation.......................................... 24
Section 2.12. Defaulted Interest.................................... 25
Section 2.13. Deposit of Moneys..................................... 25
ARTICLE 3.
REDEMPTION................................................................. 25
Section 3.1. Notices to Trustee.................................... 25
Section 3.2. Selection of Debentures to be Redeemed................ 26
Section 3.3. Notice of Redemption.................................. 26
Section 3.4. Effect of Notice of Redemption........................ 27
Section 3.5. Deposit of Redemption Price........................... 27
Section 3.6. Debentures Redeemed in Part........................... 27
ARTICLE 4.
COVENANTS.................................................................. 28
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Section 4.1. Payment of Debentures...................................... 28
Section 4.2. Stay, Extension and Usury Laws............................. 28
Section 4.3. Continued Existence........................................ 28
Section 4.4. Reports.................................................... 29
Section 4.5. Maintenance of Consolidated Net Worth...................... 29
Section 4.6. Limitation on Restricted Payments and Investments.......... 32
Section 4.7. Taxes...................................................... 33
Section 4.8. Change of Control.......................................... 33
Section 4.9. Limitation on Dividend Restrictions Affecting Subsidiaries. 35
Section 4.10. Limitation on Disqualified Stock........................... 35
Section 4.11. Limitation on Debt......................................... 36
Section 4.12. Limitation on Senior Indebtedness.......................... 37
Section 4.13. Limitation on Additional Debt After Default................ 37
Section 4.14. Limitation on Liens........................................ 37
Section 4.15. Transactions with Related Persons.......................... 37
Section 4.16. Limitation on Line of Business............................. 38
Section 4.17. Compliance Certificate..................................... 38
Section 4.18. Further Assurance to the Trustee........................... 39
ARTICLE 5.
SUCCESSORS.................................................................. 39
Section 5.1. When Company May Merge or Sell Assets...................... 39
Section 5.2. Successor Substituted...................................... 40
ARTICLE 6.
DEFAULTS AND REMEDIES....................................................... 40
Section 6.1. Events of Default.......................................... 40
Section 6.2. Acceleration............................................... 42
Section 6.3. Other Remedies............................................. 42
Section 6.4. Waiver of Existing and Past Defaults....................... 43
Section 6.5. Control by Majority........................................ 43
Section 6.6. Limitation on Suits........................................ 43
Section 6.7. Rights of Holders to Receive Payment....................... 44
Section 6.8. Collection Suit by Trustee................................. 44
Section 6.9. Trustee May File Proofs of Claim........................... 44
Section 6.10. Priorities................................................. 44
Section 6.11. Undertaking for Costs...................................... 45
ARTICLE 7.
TRUSTEE..................................................................... 45
Section 7.1. Duties of Trustee.......................................... 45
Section 7.2. Rights of Trustee.......................................... 46
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Section 7.3. Individual Rights of Trustee............................... 47
Section 7.4. Trustee's Disclaimer....................................... 47
Section 7.5. Notice of Defaults......................................... 47
Section 7.6. Reports by Trustee to Holders.............................. 47
Section 7.7. Compensation and Indemnity................................. 48
Section 7.8. Replacement of Trustee..................................... 49
Section 7.9. Successor Trustee by Merger. etc........................... 50
Section 7.10. Eligibility; Disqualification.............................. 50
Section 7.11. Preferential Collection of Claims Against Company.......... 50
ARTICLE 8.
DISCHARGE OF INDENTURE...................................................... 50
Section 8.1. Termination of Company's Obligations....................... 50
Section 8.2. Application of Trust Money................................. 52
Section 8.3. Repayment to Company....................................... 52
Section 8.4. Reinstatement.............................................. 52
ARTICLE 9.
AMENDMENTS.................................................................. 53
Section 9.1. Without Consent of Holders................................. 53
Section 9.2. With Consent of Holders.................................... 53
Section 9.3. Compliance with Trust Indenture Act........................ 55
Section 9.4. Revocation and Effect of Consents.......................... 55
Section 9.5. Notation on or Exchange of Debentures...................... 55
Section 9.6. Trustee Protected.......................................... 56
ARTICLE 10.
CONVERSION.................................................................. 56
Section 10.1. Conversion Privilege........................................56
Section 10.2. Conversion Procedure........................................56
Section 10.3. Cash Payments in Lieu of Fractional Shares..................57
Section 10.4. Adjustment of Conversion Price..............................58
Section 10.5. Effect of Reclassification, Consolidation, Merger or Sale...61
Section 10.6. Taxes on Shares Issued..................................... 62
Section 10.7. Reservation of Shares; Shares to be Fully Paid;
Compliance with Government Requirements; Listing of
Common Stock............................................... 62
Section 10.8. Responsibility of Trustee Requirements..................... 62
Section 10.9. Notice to Holders Prior to Certain Actions................. 63
ARTICLE 11.
SUBORDINATION........................................................ 64
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Section 11.1. Agreement to Subordinate................................... 64
Section 11.2. Liquidation; Dissolution; Bankruptcy....................... 64
Section 11.3. Company Not to Make Payment with Respect to Debentures in
Certain Circumstances...................................... 65
Section 11.4. Acceleration of Debentures................................. 65
Section 11.5. When Distribution Must Be Paid Over........................ 65
Section 11.6. Notice by Company.......................................... 65
Section 11.7. Subrogation................................................ 66
Section 11.8. Relative Rights............................................ 66
Section 11.9. Subordination May Not be Impaired by Company............... 66
Section 11.10. Distribution of Notice to Representative................... 66
Section 11.11. Rights of Trustee and Paying Agent......................... 67
Section 11.12. Effectuation of Subordination by Trustee................... 68
Section 11.13. Trust Moneys Not Subordinated.............................. 68
ARTICLE 12.
MISCELLANEOUS............................................................... 68
Section 12.1. Trust Indenture Act Controls................................ 68
Section 12.2. Notices..................................................... 68
Section 12.3. Communication by Holders with Other Holders................. 69
Section 12.4. Certificate and Opinion as to Conditions Precedent.......... 70
Section 12.5. Statements Required in Certificate or Opinion of Counsel.... 70
Section 12.6. Rules by Trustee and Agents................................. 70
Section 12.7. Legal Holidays.............................................. 70
Section 12.8. No Recourse Against Others.................................. 71
Section 12.9. Counterparts................................................ 71
Section 12.10. Governing Law............................................... 71
Section 12.11. No Adverse Interpretation of Other Agreements............... 71
Section 12.12. Successors.................................................. 71
Section 12.13. Severability................................................ 71
Section 12.14. Table of Contents, Headings, Etc............................ 72
EXHIBITS
Exhibit A - Form of Debenture ...............................................A
Exhibit B - Transferee Letter of Representation .............................B
-iv-
<PAGE>
INDENTURE dated as of March 29, 1996, between U.S. Diagnostic Labs
Inc., a Delaware corporation (the "Company"), and American Stock Transfer &
Trust Company, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Company's 9% Subordinated
Convertible Debentures due March 31, 2003 (the "Debentures"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. DEFINITIONS.
"ACQUIRED DEBT" of any specified Person means Debt of any other Person
existing at the time such other Person merges or consolidates with or into or
becomes a Subsidiary of such specified Person, including Debt incurred in
connection with, or in contemplation of, such other person becoming a Subsidiary
of such specified Person.
"AFFILIATE" of any specified Person means (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such specified Person, (b) of the parent or of any Subsidiary of
such specified Person or (c) of any Person described in clause (i) above. For
purpose of this definition, "control" of a Person means the power, directly or
indirectly, to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise; and the terms "controlling" or
"controlled" have meanings correlative to the foregoing.
"AGENT" means any Registrar, Paying Agent, Conversion Agent or
co-registrar or any successor thereto.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
committee of the Board duly authorized to act under the Indenture.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL STOCK" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in the Common Stock or Preferred Stock of such Person, including,
without limitation, partnership and membership interests.
"CAPITALIZED LEASE OBLIGATION" means, with respect to any Person for
any period, an obligation of such Person to pay rent or other amounts under a
lease that is required to be capitalized for financial reporting purposes in
accordance with GAAP; and the amount of such
1
<PAGE>
obligation at any date shall be the capitalized amount shown on the balance
sheet of such Person at such date as determined in accordance with GAAP.
"CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) any Person (as the term "person" is used in Section 13(d) or Section
14(d) of the Exchange Act) is or becomes the direct or indirect beneficial owner
of shares of Capital Stock of the Company representing greater than 50% of the
total voting power of all outstanding shares of Capital Stock of the Company
entitled to vote in the election of directors under ordinary circumstances, (ii)
the sale, transfer or other disposition of a majority of the assets of the
Company or of the collective assets of the Company and its Subsidiaries, or
(iii) during any period of two consecutive years (or, in the case this event
occurs within the first two years after the date of original issue of the
Debentures, such shorter period as shall have commenced on the date of original
issue), Continuing Directors cease for any reason to constitute a majority of
the Board of Directors.
"COMMON STOCK" as to any Person other than the Company, means the
common equity (however designated), including, without limitation, partnership
or membership interests, of such Person, and as to the Company, means the Common
Stock, par value $.01 per share, or any successor class of common equity into or
for which such Common Stock may hereafter be converted, exchanged or
reclassified.
"COMPANY" means U.S. Diagnostic Labs Inc., a Delaware corporation,
until a successor replaces it in accordance with the applicable provisions of
this Indenture and, thereafter, "COMPANY" shall mean such successor.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the Net Income
of the Company and its Subsidiaries as the same would appear on a consolidated
statement of earnings of the Company for such fiscal period prepared in
accordance with GAAP, provided that (i) any extraordinary gain (but not loss)
and any gain (but not loss) on sales of assets other than in the ordinary course
of business, in each case together with any related provisions for taxes,
realized during such period shall be excluded, (ii) the results of operations of
any Person acquired in a pooling of interests transaction for any period prior
to the date of such acquisition shall be excluded, (iii) Net Income attributable
to any Person other than a Subsidiary that is at least 50% owned by the Company
shall be included only to the extent of the amount of cash dividends or
distributions actually paid to the Company or a Subsidiary of the Company during
such period, (iv) any extraordinary charge or gain resulting from the repurchase
of the Debentures shall be excluded, (v) the cumulative effect of a change in
accounting principles based upon the implementation of a change required by the
Financial Accounting Standards Board shall be excluded, (vi) any gain or loss,
net of taxes, realized from the termination of any employee pension benefit plan
shall be excluded, (vii) the net income of any Subsidiary of such Person to the
extent that the declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders shall be excluded, (viii) any restoration to
income of any contingency reserve, except to the extent provision for such
reserve was made
2
<PAGE>
out of income accrued at any time following the date of the Indenture, shall be
excluded and (ix) any gain arising from the acquisition of any securities, or
the extinguishment of any Debt of such Person shall be excluded.
"CONSOLIDATED NET WORTH" means, at any date, the net stockholders'
equity of the Company and its Subsidiaries as the same would appear on the
consolidated balance sheet of the Company as at such date prepared in accordance
with GAAP.
"CONTINUING DIRECTORS" means any member of the Board of Directors who
(i) is a member of the Board of Directors on the date hereof or (ii) was
nominated for election or elected to the Board of Directors with the affirmative
vote of a majority of such members and members of the Board of Directors who
were previously so nominated or elected.
"CONVERSION AGENT" means the Trustee or any successor entity thereto.
"CURRENT MARKET PRICE" means, when used with respect to any security as
of any date, the last sale price, regular way, or, in case no such sale takes
place on such date, the average of the closing bid and asked prices, regular
way, of such security in either case as reported for consolidated transactions
on the New York Stock Exchange or, if such security is not listed or admitted to
trading on the New York Stock Exchange, as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
if such security is not listed or admitted to trading on any national securities
exchange, as reported on the Nasdaq National Market, or, if such security is not
listed or admitted to trading on the Nasdaq National Market, as reported on the
Nasdaq SmallCap Market, or if such security is not listed or admitted to trading
on any national securities exchange or the Nasdaq National Market or the Nasdaq
SmallCap Market, the average of the high bid and low asked prices of such
security in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotations System or such other system
then in use or, if such security is not quoted by any such organization, the
average of the closing bid and asked prices of such security furnished by a New
York Stock Exchange member firm selected by the Company, or if such security is
not quoted by any such organization and no such New York Stock Exchange member
firm is able to provide such prices, such price as is determined by the
Independent Directors in good faith.
"DEBT" of any Person as of any date means and includes (without
duplication) (i) the Principal of and premium, if any, in respect of
indebtedness of such Person, contingent or otherwise, for borrowed money,
including, without limitation, all interest, fees and expenses owed with respect
thereto (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), or evidenced by bonds, notes,
debentures or similar instruments, or representing the deferred and unpaid
balance of the purchase price of any property or interest therein or any
services, if and to the extent such indebtedness would appear as a liability
(other than a liability for accounts payable and accrued expenses incurred in
the ordinary course of business) upon a balance sheet of such Person prepared on
a consolidated basis in accordance with GAAP, (ii) all obligations issued or
contracted for as payment in consideration of the purchase by such Person of
Capital Stock or a business or all or
3
<PAGE>
substantially all of the assets of another Person or as a result of a merger or
a consolidation, (iii) all Capitalized Lease Obligations of such Person, (iv)
all obligations of such Person in respect of letters of credit or similar
instruments or reimbursement of letters of credit or similar instruments
(whether or not such items would appear on the balance sheet of such Person),
(v) all net obligations of such Person in respect of interest rate protection
and foreign currency hedging arrangements, (vi) all guarantees by such Person of
items that would constitute Debt under this definition (whether or not such
items would appear on such balance sheet), (vii) the amount of all obligations
of such Person with respect to the redemption, repayment or other repurchase of
any Disqualified Stock, but only to the extent such obligations arise on or
prior to August 1, 2003, (viii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to Property
acquired by such Person and (ix) all Debt referred to in clauses (i) through
(viii) above of other Persons, the payment of which is secured by (or for which
the holder of such Debt has an existing right, contingent or otherwise, to be
secured by) any lien upon or with respect to such Property (including without
limitation, accounts and contract rights) owned by the Person with respect to
whom this definition is being applied, even though such Person has not assumed
or become liable for the payment of such Debt. Debt issued at a discount from
par shall be treated as if issued at par. The amount of Debt of any Person at
any date shall be the outstanding balance on such date of all unconditional
obligations as described above and the maximum determinable liability, upon the
occurrence of the event or circumstances giving rise to the obligation, of any
contingent obligations referred to in clauses (i), (iv), (vi), (vii), (vii) and
(ix) above at such date.
"DEBT TO OPERATING CASH FLOW RATIO" means, as of any date of
determination, the ratio of (i) (a) the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries as of such date on a
consolidated basis plus (b) the aggregate par or stated value of all outstanding
Preferred Stock of the Company and its Subsidiaries as reflected on the
Company's most recent consolidated balance sheet prepared in accordance with
GAAP (excluding any such Preferred Stock held by the Company or a wholly owned
Subsidiary of the Company) or, if greater with respect to any class of Capital
Stock which is Disqualified Stock, the aggregate redemption amount thereof as
reflected on the Company's most recent consolidated balance sheet (excluding any
such Disqualified Stock held by the Company or a wholly owned Subsidiary of the
Company) to (ii) Operating Cash Flow of the Company and its Subsidiaries on a
consolidated basis for the four most recent full fiscal quarters ended
immediately prior to such date, determined on a pro forma basis as set forth in
Section 4.11.
"DEBENTURES CUSTODIAN" means, with respect to the Debentures issued in
global form, the Trustee and any successor entity thereto or such other Person
as appointed by the Company from time to time in accordance with the provisions
of this Indenture.
"DEFAULT" means any event which is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DEPOSITARY" means, with respect to the Debentures issued in global
form, the Person specified in Section 2.3 as the Depositary with respect to the
Debentures, until a successor shall
4
<PAGE>
have been appointed and become such pursuant to the provisions of this
Indenture, and, thereafter "DEPOSITARY" shall mean or include such successor.
"DISQUALIFIED STOCK" means 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 at the option of the holder thereof or mandatorily (except to the
extent that such exchange or conversion right cannot be exercised or such
mandatory conversion cannot occur prior to August 1, 2003) is, or upon the
happening of an event or the passage of time would be, (a) required to be
redeemed or repurchased by the Company or any of its Subsidiaries, including at
the option of the holder, in whole or in part, or has, or upon the happening of
an event or passage of time would have, a redemption or similar payment due
prior to August 1, 2003 or (b) exchangeable or convertible into debt securities
of the Company or any of its Subsidiaries at the option of the holder thereof or
mandatorily, except to the extent such exchange or conversion right cannot be
exercised or such mandatory conversion cannot occur prior to August 1, 2003.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"FAIR MARKET VALUE" means, at any date as to any asset, Property or
right (including, without limitation, Capital Stock, evidences of indebtedness
or other securities, but excluding cash), the fair market value of such item as
determined in good faith by the Board of Directors, whose determination shall be
conclusive; provided, however, that such determination is described in an
Officers' Certificate filed with the Trustee and that, if there is a Current
Market Price for such item on such date, "FAIR MARKET VALUE" means such Current
Market Price.
"GAAP" means, as of any date, generally accepted accounting principles
in the United States and does not include any interpretations or regulations
that have been proposed but that have not become effective.
"HOLDER" means a Person in whose name a Debenture is registered on the
Register.
"INDENTURE" means this Indenture, as amended or supplemented from time
to time.
"INDEPENDENT DIRECTORS" means directors that (i) are not 5% or greater
stockholders of the Company or the designee of any such stockholder; (ii) are
not officers or employees of the Company, any of its Subsidiaries or of a
stockholder referred to above in clause (i); (iii) are not Related Persons; and
(iv) do not have relationships that, in the opinion of the Board of Directors,
would interfere with their exercise of independent judgment in carrying out the
responsibilities of the directors.
"INTEREST PAYMENT DATE" means March 31 and September 30 of each year,
commencing September, 1996.
"INVESTMENT" means any loan or advance to any Person, any acquisition
of any interest in any other Person, any capital contribution to any other
person, or any other investment in any
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other Person, other than (a) advances to officers and employees in the ordinary
course of business, (b) creation of receivables in the ordinary course of
business and (c) negotiable instruments endorsed for collection in the ordinary
course of business.
"LEGAL HOLIDAY" means a Saturday, Sunday and any other day on which
banking institutions in the state in which the principal corporate trust office
of the Trustee are required or authorized by law or other governmental action to
be closed.
"LIEN" means any mortgage, deed of trust, lien (statutory or
otherwise), pledge, charge, security interest, assignment, hypothecation,
preference, priority deposit, conditional sale, capital lease or other
encumbrance of any nature whatsoever (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement to
give any security interest).
"NET INCOME" of any Person means the net income (or loss) of such
Person, determined in accordance with GAAP, excluding, however, from the
determination of Net Income any extraordinary gain (but not loss) and any gain
(but not loss) upon the sale or other disposition (including, without
limitation, dispositions pursuant to sale-leaseback transactions) of any real
property or equipment of such Person, which is not sold or otherwise disposed of
in the ordinary course of business, or of any Capital Stock of a Subsidiary of
such Person.
"OFFICER" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice President of such Person.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers, one
of whom must be the Chairman of the Board, the President, the Treasurer or a
Vice-President of the Company, that meets the requirements of Sections 12.4 and
12.5 hereof.
"OPERATING CASH FLOW" means, with respect to the Company and its
Subsidiaries for any period, the Consolidated Net Income of the Company and its
Subsidiaries for such period, plus (i) extraordinary net losses and net losses
on sales of assets other than in the ordinary course of business during such
period, to the extent such losses were deducted in computing Consolidated Net
Income, plus (ii) provision for taxes based on income or profits, to the extent
such provision for taxes was included in computing such Consolidated Net Income,
and any provision for taxes utilized in computing the net losses under clause
(i) above, plus (iii) to the extent deducted in calculating Consolidated Net
Income, Total Interest Expense of the Company and its Subsidiaries for such
period, plus (iv) depreciation, amortization and all other non-cash charges, to
the extent such depreciation, amortization and other non-cash charges (excluding
any such non-cash charges to the extent that they require an accrual of or
reserve for cash charges for any future periods) were deducted in calculating
such Consolidated Net Income (including amortization of goodwill and other
intangibles).
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"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee that meets the requirements of Sections
12.4 and 12.5 hereof. The counsel may be an employee of or counsel to the
Company or the Trustee.
"PERMITTED DEBT" means (i) Debt evidenced by the Debentures in an
aggregate principal amount not to exceed $57,500,000, (ii) Debt owed by the
Company to any wholly-owned Subsidiary of the Company, provided that any such
Debt is subordinate in right of payment to the Debentures or (iii) Debt owed by
any wholly owned Subsidiary of the Company to the Company, provided that any
such Debt is subordinate in right of payment to the Debentures, (iv) deferred
income taxes as defined in accordance with GAAP, (v) Debt constituting
inter-company payables or receivables between or among the company and its
Subsidiaries incurred in the ordinary course of business and (vi) Refinancing
Debt.
"PERMITTED INVESTMENTS" means (i) Investments in the Company or in a
Subsidiary of the Company; (ii) Investments by the Company or any Subsidiary of
the Company in a Person who is not an Affiliate of the Company or who is an
Affiliate of the Company but in which no Affiliate of the Company other than
direct and indirect wholly owned Subsidiaries of the Company have made any
Investment and in which no Related Person has made any Investment, if as a
result of such Investment (a) such Person becomes or is a Subsidiary of the
Company or (b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company, but only if the Company and
such subject Subsidiary is in compliance with the provisions of Section 4.16
hereof immediately after such transaction; (iii) U.S. Government Obligations
maturing within one year of the date of acquisition thereof; (iv) time deposits
with, and certificates of deposit and banker's acceptances issued by, any bank
that is organized under the laws of the United States or any state thereof
having capital, surplus and undivided profits aggregating in excess of
$100,000,000; (v) repurchase agreements with respect to U.S. Government
Obligations; (vi) Investments in commercial paper rated at least A-1 or the
equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent
thereof by Moody's Investor Services, Inc. and maturing not more than 90 days
from the date of the acquisition thereof; and (vii) money market funds investing
principally in the investments described in clauses (iii), (iv) and (v) having
total assets in excess of $1.0 billion.
"PERMITTED LIENS" means (i) Liens for taxes, assessments or
governmental charges or claims that either (a) are not yet delinquent or (b) are
being contested in good faith by appropriate proceedings and as to which
appropriate reserves have been established or other provisions have been made in
accordance with GAAP; (ii) statutory Liens of landlords and carriers',
warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other
Liens imposed by law and arising in the ordinary course of business and with
respect to amounts that, to the extent applicable, either (a) are not yet
delinquent by more than 30 days or (b) are being contested in good faith by
appropriate proceedings and as to which appropriate reserves have been
established or other provisions have been made in accordance with GAAP; (iii)
Liens (other than any Lien imposed by the Employee Retirement Income Security
Act of 1974, as amended) incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (iv) judgment or other
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similar Liens arising in connection with court proceedings, provided that (a)
the execution or enforcement of each such Lien is effectively stayed within 30
days after entry of such judgment (or such judgment has been discharged within
such 30 day period), the claims secured thereby are being contested in good
faith by appropriate proceedings timely commenced and diligently prosecuted and
the aggregate amount of the claims secured thereby does not exceed $1,000,000 at
any time or (b) the payment of which is covered in full by insurance and the
insurance company has not denied or contested coverage thereof; (v) Liens
granted to secure Senior Indebtedness, (vi) Liens existing on Property of an
entity at the time it becomes a Subsidiary of the Company or existing on
property or assets of such entity at the time of the acquisition thereof by the
Company or any or of its Subsidiaries, which Liens were not created or assumed
in contemplation of, or in connection with, such entity becoming a Subsidiary of
the Company or such acquisition, as the case may be, and which attach only to
such property or assets, provided that the Debt secured by such Liens is not
thereafter increased; (vii) Liens securing Refinancing Debt, provided that such
Liens only extend to the property or assets securing the Debt being refinanced,
such Refinancing Debt was previously secured by similar Liens on such property
or assets and the Debt or other obligations secured by such Liens is not
increased; (viii) any other Liens existing on the date of this Indenture and
(ix) the Liens created by this Indenture.
"PERSON" means any individual, corporation, partnership, association,
trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.
"PREFERRED STOCK" means, with respect to any Person, the class or
classes or interests, including, without limitation, stock and share,
partnership and membership interests (however designated) which are preferred as
to the payments of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over interests of any other class of interests of such Person.
"PRINCIPAL" of a debt security means the principal of the security plus
the premium, if any, on the security.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included on the
most recent consolidated balance sheet of such Person in accordance with GAAP.
"PURCHASE MONEY INDEBTEDNESS" means any Debt incurred or assumed by the
Company or any Subsidiary of the Company, the proceeds of which is used by the
Company or such Subsidiary to finance all or a portion of the purchase price of,
or to reimburse the Company or such Subsidiary, as applicable, for the cost of
purchasing, capital stock or assets (including, without limitation, capital
stock, real estate, fixtures and equipment) and which Debt is secured only by
the assets acquired therewith.
"QUALIFIED STOCK" means Capital Stock of the Company that is not
Disqualified Stock.
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"REFINANCING DEBT" means Debt that refunds, refinances or extends any
Debentures, or other Debt existing on the date hereof or hereafter incurred by
the Company or its Subsidiaries in accordance with the terms of this Indenture,
but only to the extent that (i) such Refinancing Debt is subordinated to the
Debentures to the same extent as the Debt being refunded, refinanced or
extended, if at all, (ii) such Refinancing Debt is scheduled to mature either
(a) no earlier than the Debt being refunded, refinanced or extended or (b) after
the maturity date of the Debentures, (iii) the portion, if any, of such
Refinancing Debt that is scheduled to mature on or prior to the maturity date of
the Debentures (if not Senior Indebtedness) has a Weighted Average Life to
Maturity at the time such Refinancing Debt is incurred that is equal to or
greater than the Weighted Average Life to Maturity of the portion of the Debt
being refunded, refinanced or extended that is scheduled to mature on or prior
to the maturity date of the Debentures, (iv) such Refinancing Debt (if not
Senior Indebtedness) is in an aggregate principal amount that is equal to or
less than the aggregate principal amount then outstanding under the Debt being
refunded, refinanced or extended, plus customary fees and expenses associated
with a refunding, extension or refinancing and (v) such Refinancing Debt is
incurred by the same Person that initially incurred the Debt being refunded,
refinanced or extended, except that (a) the Company may incur such Refinancing
Debt to refund, refinance or extend Debt of any wholly-owned Subsidiary of the
Company and (b) any wholly-owned Subsidiary of the Company may incur such
Refinancing Debt to refund, refinance or extend Debt of any other wholly owned
Subsidiary of the Company.
"RELATED PERSON" means an individual related to an officer, director or
employee of the Company or any of its Affiliates which relation is by blood,
marriage or adoption and not more remote than first cousin.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative for an issue of Senior Indebtedness.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SENIOR INDEBTEDNESS" means the principal of and premium, if any, and
interest on (a) the Debt of the Company or any of its Subsidiaries which is
provided by a bank that is not an Affiliate of the Company or by any state or
local government or agency thereof, (b) Capitalized Lease Obligations, (c)
Purchase Money Indebtedness and (d) amendments, renewals, extensions,
modifications and refunding of any such Debt, whether any such Debt is
outstanding on the date of this Indenture or hereafter created, incurred or
assumed, unless, in any case, the instrument creating or evidencing any such
Debt pursuant to which the same is outstanding provides that such Debt is not
superior in right of payment to the Debentures.
"SUBSIDIARY" of a specified Person on any date means another Person a
majority of whose Capital Stock with voting power, under ordinary circumstances,
entitling holders of such Capital Stock to elect the board of directors or other
governing body, is at such date, directly or
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indirectly, owned by such specified Person and/or a Subsidiary or Subsidiaries
of such specified Person.
"TIA" means the Trust Indenture Act of 1939 (U.S. Code ss.ss.
77aaa-77bbbb) as in effect on the date of this Indenture; provided, however,
that in the event the TIA is amended after such date, "TIA" means, to the extent
required by any such amendments, to the TIA as so amended.
"TOTAL INTEREST EXPENSE" means, for any period, the interest expense of
the Company and its Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP, whether paid or accrued (including amortization
of original issue discount, non-cash interest payments and the interest
component of capital leases, but excluding amortization of debt and Preferred
Stock issuance costs).
"TRANSFER RESTRICTED SECURITIES" means Debentures that bear or are
required to bear the legend set forth in Section 2.6(g) hereof.
"TRUSTEE" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter "TRUSTEE" shall mean such successor.
"TRUST OFFICER" means any officer or corporate trust officer or
assistant corporate trust officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"U.S. GOVERNMENT OBLIGATIONS" means non-callable (i) direct obligations
(or certificates representing an ownership interest in such obligations) of the
United States for which its full faith and credit are pledged and (ii)
obligations of a Person controlled or supervised by, and acting as an agency or
instrumentality of, the United States, the payment of which is unconditionally
guaranteed as a full faith and credit obligation of the United States.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Debt or
Preferred Stock or portions thereof (if applicable) at any date, the number of
years obtained by dividing (i) the then outstanding principal amount or
liquidation amount of such Debt or Preferred Stock or portions thereof (if
applicable) into (ii) the sum of the products obtained by multiplying (a) 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 (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment.
SECTION 1.2. OTHER DEFINITIONS.
TERM DEFINED IN SECTION
"Agent Members" .............................................2.1
"Bankruptcy Law".............................................6.1
"Change of Control Date".....................................4.8
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"Change of Control Offer"..........................................4.8
"Change of Control Notice".........................................4.8
"Change of Control Payment"........................................4.8
"Change of Control Payment Date"...................................4.8
"Conversion Price"................................................10.1
"Custodian"........................................................6.1
"Deficiency Date"..................................................4.5
"Deficiency Offer".................................................4.5
"Deficiency Notice"................................................4.5
"Deficiency Offer".................................................4.5
"Deficiency Payment Date"..........................................4.5
"Deficiency Repurchase Amount".....................................4.5
"Definitive Securities"............................................2.1
"Event of Default".................................................6.1
"Global Security"..................................................2.1
"Incur"...........................................................4.11
"Paying Agent".....................................................2.3
"Purchase Agreement"...............................................2.1
"Reference Period"................................................4.11
"Register".........................................................2.3
"Registrar"........................................................2.3
"Restricted Payment"...............................................4.6
"Rule 144A"........................................................2.1
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
This Indenture is subject to the mandatory provisions of the TIA, which
are incorporated by reference in and made part of this Indenture. Such
provisions shall apply to this Indenture at all times, notwithstanding that at
any time of from time to time this Indenture is not required to be qualified
under the TIA.
The following TIA terms used in this Indenture have the following
meanings:
"INDENTURE SECURITIES" means the Debentures;
"INDENTURE SECURITY HOLDER" means a Holder;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "institutional trustee" means the Trustee;
"OBLIGOR" on the Debentures means the Company and any successor obligor
upon the Debentures.
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All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.4. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural include
the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act, the
Exchange Act or the TIA shall be deemed to include substitute,
replacement or successor sections or rules.
ARTICLE 2.
THE DEBENTURES
SECTION 2.1. FORM AND DATING.
The Debentures and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A which is hereby incorporated in and
expressly made a part of this Indenture. The Debentures may have notations,
legends or endorsements required by law, stock exchange rule, agreements to
which the Company is subject, if any, or usage (provided that any such notation,
legend or endorsement is in a form acceptable to the Company). Each Debenture
shall be dated the date of its authentication. The terms of the Debentures set
forth in Exhibit A are part of the terms of this Indenture. The Debentures are
general unsecured obligations of the Company limited to $57,500,000 in the
aggregate principal amount, subject to Section 2.7 hereof.
(a) GLOBAL SECURITIES. The Debentures are being offered and sold by the
Company pursuant to a Purchase Agreement, dated concurrently herewith, between
the Company and Forum Capital Markets L.P. (the "Purchase Agreement").
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Debentures offered and sold to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act "Rule 144A") in reliance on Rule
144A as provided in the Purchase Agreement, shall be issued initially in the
form of one or more permanent global securities in definitive, fully registered
form without interest coupons and with the Global Securities Legend and, unless
removed in accordance with Section 2.6(g) hereof, the Restricted Securities
Legend set forth in Exhibit A hereto (each, a "Global Security"), which shall be
deposited on behalf of the purchasers of the Debentures represented thereby with
the Trustee, at its New York office, as custodian for the Depositary, and
registered in the name of the Depositary or a nominee of the Depositary, duly
executed by the Company and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of the Global Securities may from time
to time be increased or decreased by adjustments made on the records of the
Trustee and the Depositary or its nominee as hereinafter provided.
(b) BOOK-ENTRY PROVISIONS. This Section 2.1(b) shall apply only to any
Global Security deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(b), authenticate and deliver initially one or more Global
Securities that (i) shall be registered in the name of the Depositary for such
Global Security or Global Securities or the nominee of the Depositary and (ii)
shall be delivered by the Trustee to the Depositary or pursuant to the
Depositary's instructions or held by the Trustee as custodian for the
Depositary.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary or by the Trustee as the custodian of the
Depositary or under such Global Security, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices of the Depositary governing the exercise of the rights of a
holder of a beneficial interest in any Global Security.
(c) CERTIFICATED SECURITIES. Except as provided in Section 2.10, owners
of beneficial interests in Global Securities will not be entitled to receive
physical delivery of certificated Debentures. Debentures offered and sold to
Persons who are not "qualified institutional buyers" shall be issued in
certificated Debentures in definitive, fully registered form without interest
coupons, with the Restricted Securities Legend and, if such Person is an
institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act), the Institutional Accredited Investor Legend, but
without the Schedule of Exchanges of Global Security for Definitive Securities,
set forth in Exhibit A hereto ("Definitive Securities"); provided, however, that
upon transfer of such Definitive Securities to a "qualified institutional
buyer," such Definitive Securities will, unless the Global Security has
previously been exchanged, be exchanged for an interest in a Global Security
pursuant to the provisions of Section 2.6 hereof.
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After a transfer of any Debentures during the period of the
effectiveness of a registration statement under the Securities Act with respect
to the Debentures, all requirements pertaining to legends on such Debentures
will cease to apply, the requirements requiring any such Debentures issued to
certain Holders be issued in global form will cease to apply, and a certificated
Debenture without legends will be available to the transferee of the Holder of
such Debentures upon exchange of such transferring Holder's certificated
Debentures or directions to transfer such Holder's interest in the Global
Security, as applicable.
SECTION 2.2. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Debentures for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Debentures
and may be in facsimile form.
If an Officer whose signature is on a Debenture no longer holds that
office at the time such Debenture is authenticated, such Debenture shall
nevertheless be valid.
A Debenture shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Debenture has been authenticated under this Indenture.
The Trustee shall authenticate Debentures for original issue up to the
aggregate principal amount stated in Paragraph 4 of the Debentures, upon a
written order of the Company signed by an Officer to a Trust Officer directing
the Trustee to authenticate the Debentures and certifying that all conditions
precedent to the issuance of the Debentures contained herein have been complied
with. The aggregate principal amount of Debentures outstanding at any time may
not exceed such amount, except as provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent reasonably acceptable
to and at the expense of the Company to authenticate Debentures. Unless limited
by the terms of such appointment, an authenticating agent may authenticate
Debentures whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company.
SECTION 2.3. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Debentures may be
presented for registration of transfer or for exchange (the "Registrar") and an
office or agency where Debentures may be presented for payment (the "Paying
Agent"). The Registrar shall keep a register of the Debentures (the "Register")
and of their transfer and exchange. The Company may appoint one or more
co-registrars and one or more additional paying agents. The term "Registrar"
includes any co-registrar and the term "Paying Agent" includes any additional
paying agent. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company shall notify the Trustee in writing of the
name and address of any Agent not a
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party to this Indenture. The Company or any of its Subsidiaries may act as
Paying Agent or Registrar. If the Company fails to appoint or maintain itself or
another entity as Registrar or Paying Agent, the Trustee shall act as such.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.7. The
Company or any of its wholly owned Subsidiaries may act as Paying Agent,
Registrar, co-registrar or transfer agent.
The Company initially appoints The Depositary Trust Company ("DTC") to
act as Depositary with respect to the Global Security.
The Company initially appoints the Trustee to act as Registrar and
Paying Agent with respect to the Global Security.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
Principal or interest on the Debentures, and will notify the Trustee of any
default by the Company in making any such payment. While any such default
continues, the Trustee may require a Paying Agent to pay all money held by it to
the Trustee and account for any money disbursed by it. The Company at any time
may require a Paying Agent to pay all money held by it to the Trustee and
account for any money disbursed by it. Upon payment over to the Trustee, the
Paying Agent (if other than the Company or a Subsidiary of the Company) shall
have no further liability for the money delivered to the Trustee. If the Company
or a Subsidiary of the Company acts as Paying Agent, it shall segregate and hold
in a separate trust fund for the benefit of the Holders all money held by it as
Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the
Company, the Trustee shall serve as Paying Agent for the Debentures.
SECTION 2.5. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA ss.312(a). If the Trustee is not the
Registrar, the Company shall furnish to the Trustee at least three Business Days
before each Interest Payment Date and, at such other times as the Trustee may
request in writing, within five Business Days after such request a list in such
form and as of such date as the Trustee may reasonably require, and which the
Trustee may conclusively rely upon, of the names and addresses of Holders, and
the Company shall otherwise comply with TIA ss. 312(a).
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SECTION 2.6. TRANSFER AND EXCHANGE.
(a) TRANSFER AND EXCHANGE OF DEFINITIVE SECURITIES. When Definitive
Securities are presented to the Registrar with a request:
(x) to register the transfer of the Definitive Securities; or
(y) to exchange such Definitive Securities for an equal principal
amount of Definitive Securities of other authorized
denominations,
the Registrar shall register the transfer or make the exchange as requested if
its requirements for such transactions are met; provided, however, that the
Definitive Securities presented or surrendered for register of transfer or
exchange:
i) shall be duly endorsed or accompanied by a written instruction
of transfer in form and substance satisfactory to the Registrar
duly executed by the Holder thereof or by his or her attorney,
duly authorized in writing; and
ii) in the case of Transfer Restricted Securities that are
Definitive Securities, shall be accompanied by the following
additional information and documents, as applicable:
(A) if such Transfer Restricted Security is being delivered to
the Registrar by a Holder for registration in the name of
such Holder, without transfer, a certification from such
Holder to that effect (in the form set forth on the reverse
of the Debentures); or
(B) if such Transfer Restricted Security is being transferred to
the Company or a "qualified institutional buyer" (as defined
in Rule 144A) in accordance with Rule 144A, a certification
to that effect (in the form set forth on the reverse of the
Debentures); or
(C) if such Transfer Restricted Securities are being transferred
(w) pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act; or
(x) to an institutional "accredited investor" within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act that is acquiring the security for its own
account, or for the account of such an institutional
accredited investor, in each case in a minimum principal
amount of Debentures of $250,000 for investment purposes and
not with a view to, or for offer or sale in
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connection with, any distribution in violation of the
Securities Act; or (y) in reliance on another exemption from
the registration requirements of the Securities Act: (i) a
certification to that effect (in the form set forth on the
reverse of the Debentures), (ii) if the Company, Trustee or
Registrar so requests, an Opinion of Counsel reasonably
acceptable to the Company, Trustee or Registrar, as the case
may be, to the effect that such transfer is in compliance
with the Securities Act and (iii) in the case of clause (x),
a signed letter in substantially the form of Exhibit B
hereto.
(b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE SECURITY FOR A BENEFICIAL
INTEREST IN A GLOBAL SECURITY. A Definitive Security may not be exchanged for a
beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by appropriate instruments of transfer,
in form satisfactory to the Trustee, together with:
i) if such Definitive Security is a Transfer Restricted
Security, certification, substantially in the form of
Exhibit B hereto, that such Definitive Security is
being transferred to a "qualified institutional
buyer" (as defined in Rule 144A) in accordance with
Rule 144A; and
ii) whether or not such Definitive Security is a Transfer
Restricted Security, written instructions directing
the Trustee to make, or to direct the Debentures
Custodian to make, an endorsement on the Global
Security to reflect an increase in the aggregate
principal amount of the Debentures represented by the
Global Security;
then the Trustee shall cancel such Definitive Security in accordance with
Section 2.11 hereof and cause, or direct the Debentures Custodian to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Debentures Custodian, the aggregate principal amount of
Debentures represented by the Global Security to be increased accordingly. If no
Global Security is then outstanding, the Company shall issue and the Trustee
shall authenticate a new Global Security in the appropriate principal amount.
(c) TRANSFER AND EXCHANGE OF GLOBAL SECURITY. The transfer and exchange
of a Global Security or beneficial interests therein shall be effected through
the Depositary in accordance with this Indenture (including the restrictions on
transfer set forth herein) and the procedures of the Depositary therefor.
(d) TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL SECURITY FOR A
DEFINITIVE SECURITY.
i) Any Person having a beneficial interest in a Global
Security that is being exchanged or transferred
pursuant to an effective registration statement
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under the Securities Act or pursuant to clause (A),
(B) or (C) below may upon request, and if accompanied
by the information specified below, exchange such
beneficial interest for a Definitive Security of the
same aggregate principal amount. Upon receipt by the
Trustee of written instructions or such other form of
instructions as is customary for the Depositary, from
the Depositary, or its nominee on behalf of any
Person having a beneficial interest in a Global
Security, and upon receipt by the Trustee of a
written order or such other form of instructions,
and, in the case of a Transfer Restricted Security
only, the following additional information and
documents (all of which may be submitted by
facsimile):
(A) if such beneficial interest is being transferred to the
Person designated by the Depositary as being the beneficial
owner, a certification from such Person to that effect (in
the form set forth on the reverse of the Debentures); or
(B) if such beneficial interest is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A) in
accordance with Rule 144A, a certification to that effect
from the transferor (in the form set forth on the reverse of
the Debentures); or
(C) if such beneficial interest is being transferred (w)
pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act; or
(x) to an institutional "accredited investor" within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act that is acquiring the security for its own
account, or for the account of such an institutional
accredited investor, in each case in a minimum principal
amount of Debentures of $250,000 for investment purposes and
not with a view to, or for offer or sale in connection with,
any distribution in violation of the Securities Act; or (y)
in reliance on another exemption from the registration
requirements of the Securities Act: (i) a certification to
that effect from the transferee or transferor (in the form
set forth on the reverse of the Debentures), (ii) if the
Company, Trustee or Registrar so requests, an Opinion of
Counsel from the transferee or transferor reasonably
acceptable to the Company, Trustee or Registrar, as the case
may be, to the effect that such transfer is in compliance
with the Securities Act, and (iii) in the case of clause
(x), a signed letter in substantially the form of Exhibit B
hereto;
then the Trustee or the Debentures Custodian, at the
direction of the Trustee, will cause, in accordance
with the standing instructions and procedures
existing between the Depositary and the Debentures
Custodian, the aggregate principal amount of the
Global Security to be
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reduced on its books and records and, following such
reduction, the Company will execute and, upon receipt
of an authentication order in the form of an
Officers' Certificate in accordance with Section 2.2
hereof, the Trustee will authenticate and deliver to
the transferee a Definitive Security in the
appropriate principal amount.
ii) Definitive Debentures issued in exchange for a
beneficial interest in a Global Security pursuant to
this Section 2.6(d) shall be registered in such names
and in such authorized denominations as the
Depositary, pursuant to instructions from the Agent
Members or otherwise, shall instruct the Trustee. The
Trustee shall deliver such Definitive Securities to
the Persons in whose names such Debentures are so
registered.
(e) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL SECURITY.
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in Section 2.6(f)), a Global Security may not be
transferred as a whole or in part except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) AUTHENTICATION OF DEFINITIVE SECURITIES IN ABSENCE OF DEPOSITARY.
If at any time:
i) the Depositary notifies the Company that the
Depositary is unwilling or unable to continue as
Depositary for the Global Securities and a qualified
successor Depositary for the Global Securities is not
appointed by the Company within 90 days after
delivery of such notice; or
ii) the Company, at its sole discretion, notifies the
Trustee in writing that it elects to cause the
issuance of Definitive Securities under this
Indenture;
then the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate, in accordance with Section 2.2 hereof, requesting the
authentication and delivery of Definitive Securities, will authenticate and
deliver Definitive Securities, in an aggregate principal amount equal to the
principal amount of the Global Securities, in exchange for such Global
Securities.
(g) LEGENDS.
i) Except as permitted by the following paragraph (ii),
each Debenture certificate evidencing the Global
Securities and the Definitive Securities (and all
Debentures issued in exchange therefor or in
substitution thereof) shall bear a legend in
substantially the following form:
"THIS DEBENTURE (OR ITS PREDECESSOR) HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
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(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS DEBENTURE NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION
OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, REGISTRATION. EACH PURCHASER OF THIS DEBENTURE IS
HEREBY NOTIFIED THAT THE SELLER OF THIS DEBENTURE MAY BE
RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5
OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
"THE HOLDER OF THIS DEBENTURE AGREES FOR THE BENEFIT OF THE
COMPANY THAT (A) THIS DEBENTURE MAY BE OFFERED, RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN
A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II)
IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S
UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (IV) TO
THE COMPANY OR (V) PURSUANT TO ANY OTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, IN EACH OF CASES (I) THROUGH (V) IN
ACCORDANCE WITH ANY APPLICABLE FEDERAL OR STATE SECURITIES
LAWS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS DEBENTURE FROM IT
OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE."
ii) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security
represented by a Global Security) pursuant to Rule
144 under the Securities Act or an effective
registration statement under the Securities Act:
(A) in the case of any Transfer Restricted
Security that is a Definitive Security, the
Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security
for a Definitive Security that does not bear
the legends set forth above and rescind any
restriction on the transfer of such Transfer
Restricted Security; and
(B) any such Transfer Restricted Security
represented by a Global Security shall not
be subject to the provisions set forth in
(i) above (such sales or transfers being
subject only to the provisions of Section
2.6(e)); provided, however, that with
respect to any request for an exchange of a
Transfer Restricted Security that is
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represented by a Global Security for a
Definitive Security that does not bear a
legend, which request is made in reliance
upon Rule 144 under the Securities Act, the
Holder thereof shall certify in writing to
the Registrar that such request is being
made pursuant to Rule 144 under the
Securities Act (such certification to be in
the form set forth on the reverse of the
Debentures).
(h) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL SECURITY. At such time as
all beneficial interests in a Global Security have either been exchanged for
Definitive Securities, redeemed, repurchased or cancelled, such Global Security
shall be returned to or retained and cancelled by the Trustee in accordance with
Section 2.11. At any time prior to such cancellation, if any beneficial interest
in a Global Security is exchanged for Definitive Securities, redeemed,
repurchased or cancelled, the principal amount of Debentures represented by such
Global Security shall be reduced accordingly and an endorsement shall be made on
such Global Security, by the Trustee or the Debentures Custodian, at the
direction of the Trustee, to reflect such reduction.
(i) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF DEFINITIVE
SECURITIES.
i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate
Definitive Securities and a Global Security at the
Registrar's request.
(ii) No service charge shall be made for any registration of
transfer or exchange, but the Company may require payment of
a sum sufficient to cover any transfer tax, assessments or
similar governmental charge payable in connection therewith.
(iii) The Registrar or co-registrar shall not be required to
register the transfer of or exchange of (a) any Definitive
Security selected for redemption in whole or in part
pursuant to Article 3, except the unredeemed portion of any
Definitive Security being redeemed in part, or (b) any
Debenture during the 15 day period preceding the mailing of
a notice of redemption or an offer to repurchase or redeem
Debentures or the 15 day period preceding an Interest
Payment Date.
(iv) Prior to the due presentation for registration of transfer
of any Debenture, the Company, the Trustee, the Paying
Agent, the Registrar or any co- registrar may deem and treat
the Person in whose name a Debenture is registered as the
absolute owner of such Debenture for the purpose of
receiving payment of Principal of and interest on such
Debenture and for all other purposes whatsoever, whether or
not such Debenture is overdue, and none of the Company, the
Trustee, the Paying Agent, the Registrar or any co-registrar
shall be affected by notice to the contrary.
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(v) All Debentures issued upon any transfer or exchange pursuant
to the terms of this Indenture shall evidence the same debt
and shall be entitled to the same benefits under this
Indenture as the Debentures surrendered upon such transfer
or exchange.
(j) NO OBLIGATION OF THE TRUSTEE.
(i) The Trustee shall have no responsibility or obligation to
any beneficial owner of a Global Security, a member of, or a
participant in the Depositary or other Person with respect
to the accuracy of the records of the Depositary or its
nominee or of any participant or member thereof, with
respect to any ownership interest in the Debentures or with
respect to the delivery to any participant, member,
beneficial owner or other Person (other than the Depositary)
of any notice (including any notice of redemption) or the
payment of any amount, under or with respect to such
Debentures. All notices and communications to be given to
the Holders and all payments to be made to Holders under the
Debentures shall be given or made only to or upon the order
of the registered Holders (which shall be the Depositary or
its nominee in the case of a Global Security). The rights of
beneficial owners in any Global Security shall be exercised
only through the Depositary subject to the applicable rules
and procedures of the Depositary. The Trustee may rely and
shall be fully protected in relying upon information
furnished by the Depositary with respect to its members,
participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions
on transfer imposed under this Indenture or under applicable
law with respect to any transfer of any interest in any
Debenture (including any transfers between or among the
Agent Members or beneficial owners in any Global Security)
other than to require delivery of such certificates and
other documentation or evidence as are expressly required
by, and to do so if and when expressly required by, the
terms of this Indenture, and to examine the same to
determine substantial compliance as to form with the express
requirements hereof.
SECTION 2.7. REPLACEMENT DEBENTURES.
If any mutilated Debenture is surrendered to the Trustee, the Registrar
or Debentures Custodian, or if the Holder of a Debenture claims that such
Debenture has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee, upon the written order of the Company signed by an Officer,
shall authenticate a replacement Debenture if the Trustee's requirements are
met. If required by the Trustee or the Company, an indemnity bond shall be
supplied by the Holder that is sufficient in the judgment of the Trustee and the
Company to protect the Company, the Trustee, any Agent and any authenticating
agent from any loss which
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any of them may suffer if a Debenture is replaced. The Company may charge the
Holder for its expenses in replacing a Debenture.
Every replacement Debenture is an additional obligation of the Company
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Debentures duly issued hereunder.
SECTION 2.8. OUTSTANDING DEBENTURES.
The Debentures outstanding at any time are all the Debentures
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Security
effected by the Trustee hereunder, and those described in this Section 2.8 as
not outstanding. Except as set forth in Section 2.9 hereof, a Debenture does not
cease to be outstanding because the Company or an Affiliate holds the Debenture.
If a Debenture is replaced pursuant to Section 2.7 hereof, it ceases to
be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Debenture is held by a bona fide purchaser.
If the principal amount of any Debenture is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary of the
Company or an Affiliate of any thereof) segregates and holds interest, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay Debentures payable on that date, and is not prohibited from
paying such money to the Holders thereof pursuant to the terms of this
Indenture, then on and after that date such Debentures shall be deemed to be no
longer outstanding and shall cease to accrue interest.
SECTION 2.9. TREASURY DEBENTURES.
In determining whether the Holders of the required aggregate principal
amount of Debentures have concurred in any direction, waiver or consent,
Debentures owned by the Company, or by any Affiliate of the Company shall be
considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Debentures as to which a Trust Officer of the
Trustee knows are so owned shall be so disregarded.
SECTION 2.10. TEMPORARY SECURITIES.
(a) Until Definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Debentures upon a written
order of the Company signed by an Officer and delivered or cause to be delivered
to a Trust Officer. Temporary Debentures shall be substantially in the form of
Definitive Securities but may have variations that the Company considers
appropriate for temporary Debentures. Without unreasonable delay, the
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Company shall prepare and the Trustee shall authenticate, upon receipt of a
written order of the Company signed by two Officers which shall specify the
amount of the temporary Debentures to be authenticated and the date on which the
temporary Debentures are to be authenticated, Definitive Securities in exchange
for temporary Debentures.
(b) A Global Security deposited with the Depositary or with the Trustee
as custodian for the Depositary pursuant to Section 2.1 shall be transferred to
the beneficial owners thereof only if such transfer complies with Section 2.6
and (i) the Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for such Global Security or if at any time such
Depositary ceases to be a "clearing agency" registered under the Exchange Act
and a successor Depositary is not appointed by the Company within 90 days after
such notice or (ii) an Event of Default has occurred and is continuing.
(c) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.10 shall be surrendered by the Depositary to
the Trustee located in New York, to be so transferred, in whole or from time to
time in part, without charge, and the Trustee shall authenticate and deliver,
upon such transfer of each portion of such Global Security, an equal aggregate
principal amount of Debentures of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depositary shall direct.
Any Debenture delivered in exchange for an interest in the Global Security
shall, except as otherwise provided by Section 2.6(b) bear the restricted
securities legend set forth in Exhibit A hereto.
(d) Subject to the provisions of Section 2.10(c), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action which a Holder is entitled to take under this
Indenture or the Debentures.
(e) In the event of the occurrence of either of the events specified in
Section 2.10(b), the Company will promptly make available to the Trustee, at the
Company's expense, a reasonable supply of certificated Debentures in definitive,
fully registered form without interest coupons.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Debentures to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Debentures surrendered to them for registration of transfer, exchange or
payment. The Trustee and no one else shall cancel all Debentures surrendered for
registration of transfer, exchange, payment, replacement or cancellation and
certification of their destruction (subject to the record retention requirements
of the Exchange Act) shall be delivered to the Company unless, by a written
order, signed by an Officer, the Company shall direct that cancelled Debentures
be returned to it. The Company may not issue new Debentures to replace
Debentures that it has paid or that have been delivered to the Trustee for
cancellation.
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SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Debentures, the
Company shall pay defaulted interest (plus interest on such defaulted interest
to the extent lawful) in any lawful manner. The Company shall pay the defaulted
interest to the Persons who are Holders on a subsequent special record date. The
Company shall fix or cause to be fixed (or upon the Company's failure to do so
the Trustee shall fix) any such special record date and payment date to the
reasonable satisfaction of the Trustee, which specified record date shall not be
less than 10 days prior to the payment date for such defaulted interest, and
shall promptly mail or cause to be mailed to each Holder a notice that states
the special record date, the payment date and the amount of defaulted interest
to be paid. The Company shall notify the Trustee in writing of the amount of
defaulted interest proposed to be paid and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such defaulted
interest or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment such money when deposited to be held
in trust for the benefit of the Person entitled to such defaulted interest as in
this subsection provided.
SECTION 2.13. DEPOSIT OF MONEYS.
Prior to 10:00 a.m. New York City time on each Interest Payment Date
and the maturity date, the Company shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date or maturity date, as the case may be, in a timely
manner which permits the Paying Agent to remit payment to the Holders on such
Interest Payment Date or maturity date, as the case may be.
ARTICLE 3.
REDEMPTION
SECTION 3.1. NOTICES TO TRUSTEE.
If the Company elects to redeem Debentures pursuant to the optional
redemption provisions of paragraph 5 of the Debentures, it shall notify the
Trustee of the redemption date, the principal amount of Debentures to be
redeemed and the redemption price at least 15 days prior to mailing any notice
of redemption to the Holders (unless the Trustee consents to a shorter period).
Such notice shall be accompanied by an Officers' Certificate from the Company to
the effect that such redemption will comply with the conditions herein.
The Company shall give notice to the Holders of any redemption pursuant
to this Article 3 at least 30 days but not more than 60 days before the
redemption date. If fewer than all the Debentures are to be redeemed, the record
date relating to such redemption shall be selected by the Company and given to
the Trustee, which record date shall be not less than 15 days after the date of
notice to the Trustee.
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SECTION 3.2. SELECTION OF DEBENTURES TO BE REDEEMED.
If less than all the Debentures are to be redeemed, the Trustee shall
select the Debentures to be redeemed in compliance with the requirements of the
principal national securities exchange, if any, on which the Debentures are
quoted or listed or, if the Debentures are not quoted or listed, on a pro rata
basis, by lot or by such other method that complies with applicable legal
requirements and that the Trustee considers fair and appropriate. The Trustee
shall make the selection not more than 60 days and not less than 30 days before
the redemption date from Debentures outstanding and not previously called for
redemption. The Trustee may select for redemption portions of the principal
amount of Debentures that have denominations larger than $1,000. Debentures and
portions of them it selects shall be in amounts of $1,000 or integral multiples
of $1,000. Provisions of this Indenture that apply to Debentures called for
redemption also apply to portions of Debentures called for redemption. The
Trustee shall notify the Company promptly of the Debentures or portions of
Debentures to be called for redemption.
SECTION 3.3. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a redemption date,
the Company shall mail or cause the Trustee to mail a notice of redemption by
first class mail to each Holder whose Debentures are to be redeemed.
The notice shall identify the Debentures to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) if any Debenture is being redeemed in part, the portion of
the principal amount of such Debenture to be redeemed and that, after the
redemption date, upon surrender of such Debenture, a new Debenture or Debentures
in principal amount equal to the unredeemed portion will be issued;
(d) the Conversion Price;
(e) the name and address of the Paying Agent and Conversion
Agent;
(f) that Debentures called for redemption may be converted at any
time before the close of business on the redemption date, in accordance with
Article 10;
(g) that Holders who want to convert Debentures must satisfy the
requirements in paragraph 8 of the Debentures;
(h) that unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such redemption payment
pursuant to the
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terms of this Indenture, Debentures called for redemption must be surrendered to
the Paying Agent to collect the redemption price; and
(i) that interest on Debentures called for redemption ceases to
accrue on and after the redemption date.
At the Company's request, the Trustee shall give notice of redemption
in the Company's name and at its expense. In such event, the Company shall
provide the Trustee with the information required by this Section 3.3.
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION.
Notice of redemption shall be deemed to be given when mailed in
accordance with Section 3.3 to each Holder at its last registered address,
whether or not the Holder receives such notice. Once notice of redemption is so
mailed, Debentures called for redemption become due and payable on the
redemption date at the redemption price set forth in the Debentures. A notice of
redemption may not be conditional. Upon surrender to the Trustee or the Paying
Agent, such Debentures called for redemption shall be paid at the redemption
price, plus accrued but unpaid interest thereon to the redemption date. If the
redemption date is after an Interest Payment Date but prior to the next
succeeding regular interest payment record date, interest with respect to any
Debenture converted after delivery of the related notice of redemption shall be
paid to the Holder so converting for the period from the last Interest Payment
Date to the date of such conversion. If the redemption date is after a regular
interest payment record date and on or prior to the related Interest Payment
Date, interest with respect to any Debenture converted after delivery of the
related notice of redemption shall be paid to Holders of record on such record
date.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE.
On or before 10:00 a.m. New York City time on any redemption date, the
Company shall deposit with the Trustee or with the Paying Agent immediately
available funds sufficient to pay the redemption price of and accrued interest
(if payable thereon) on all Debentures to be redeemed on that date other than
Debentures or portions of Debentures called for redemption which prior thereto
have been delivered by the Company to the Trustee for cancellation or have been
converted; provided, however, that any such deposit shall be a payment in
respect of the Debentures and shall be subject to the provisions of Article 11
hereof and shall be permitted only if payment would be permitted under Article
11 hereof. The Trustee or the Paying Agent shall return to the Company any money
not required for the purpose of paying such redemption price and accrued
interest.
SECTION 3.6. DEBENTURES REDEEMED IN PART.
Upon surrender of a Debenture that is redeemed in part, the Company
shall issue and the Trustee shall authenticate for the Holder at the expense of
the Company a new Debenture equal in principal amount to the unredeemed portion
of the Debenture surrendered.
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ARTICLE 4.
COVENANTS
SECTION 4.1. PAYMENT OF DEBENTURES.
The Company shall pay the Principal of and interest on the Debentures
on the dates and in the manner provided in the Debentures or pursuant to this
Indenture. Principal and interest shall be considered paid on the date due if
the Paying Agent (other than the Company or a Subsidiary of the Company) on that
date holds money in accordance with this Indenture designated for and sufficient
to pay in cash all Principal and interest then due and the Paying Agent is not
prohibited from paying such money to Holders on that date pursuant to the terms
of this Indenture.
To the extent lawful, the Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on (i)
overdue Principal at the rate borne by the Debentures and (ii) overdue
installments of interest at the same rate.
SECTION 4.2. STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law has been
enacted.
SECTION 4.3. CONTINUED EXISTENCE.
Subject to Article 5 hereof, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its existence
as a corporation and the corporate existence of its Subsidiaries and will
refrain or cause its Subsidiaries to refrain from taking any action that would
cause its corporate existence or the corporate existence of any of its
Subsidiaries to cease, including without limitation any action that would result
in the liquidation, winding up or dissolution or it or any of its Subsidiaries;
provided, however, that the Company shall not be required to preserve the
existence of any Subsidiary if the Board of Directors (including a majority of
the Independent Directors) shall determine, as evidenced by minutes of a meeting
signed by the Secretary of the Company or by a consent of directors in writing
filed with the Company's records of corporate proceedings, that the preservation
thereof is no longer desirable in the conduct of the business of the Company or
any Subsidiary and that the loss thereof to the Company taken as a whole is not
disadvantageous in any material respect to the Holders.
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SECTION 4.4. REPORTS.
(a) So long as any of the Debentures remain outstanding, the Company
shall prepare and deliver to the Trustee for delivery to the Holders copies of
quarterly and annual financial information that the Company is, or had the
Company been subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act would have been, required to file with the SEC pursuant to the
Exchange Act. All such financial information shall include consolidated
financial statements (including footnotes) prepared in accordance with GAAP.
Such annual financial information shall also include an opinion thereon
expressed by an independent accounting firm of established national reputation.
All such consolidated financial statements shall be accompanied by a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(b) The financial information to be distributed to the Holders shall be
mailed by the Trustee to the Holders at their addresses in the Register within
15 days after receipt by the Trustee of such financial information. The Company
shall deliver such financial information to the Trustee within 15 days after it
is filed with the SEC if it is required to be so filed, but in no event later
than 90 days after the end of the Company's fiscal year, in the case of annual
financial information, or later than 45 days after the end of each of the first
three quarters of each such fiscal year, in the case of quarterly financial
information; provided, however, that the Trustee's only obligation is to mail
the financial information that it receives from the Company to the Holders. The
Trustee shall be under no obligation to obtain any such financial information
from the Company or review any financial information provided by the Company for
distribution to Holders in accordance with this Section 4.4.
(c) The Company shall make such financial information described in
Section 4.4(a) available to prospective purchasers of the Debentures.
(d) The Company shall provide the Trustee with a sufficient number of
copies of all reports and other documents and information that the Trustee may
be required to deliver to the Holders under this Section 4.4.
SECTION 4.5. MAINTENANCE OF CONSOLIDATED NET WORTH.
(a) The Company is required to maintain a Consolidated Net Worth of at
least $18.0 million. If the Company's Consolidated Net Worth is less than $18.0
million at the end of any fiscal quarter, the Company shall furnish to the
Trustee an Officer's Certificate within 45 days after the end of such fiscal
quarter (90 days after the end of any fiscal year) notifying the Trustee that
the Company's Consolidated Net Worth has declined below $18.0 million. If, at
any time or from time to time, the Company's Consolidated Net Worth at the end
of each of any such two consecutive fiscal quarters (the last day of the second
fiscal quarter being referred to as a "Deficiency Date") is less than $18.0
million, then the Company shall, in each such event, no later than 50 days after
each Deficiency Date (100 days if such Deficiency Date is also the end of the
Company's fiscal year), mail to the Trustee and each Holder at such Holder's
last address as it appears on the Debenture Register a notice (the "Deficiency
Notice") of the
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occurrence of such deficiency, which shall include an offer by the Company
(the"Deficiency Offer") to repurchase up to 12.5% of the aggregate principal
amount of Debentures originally issued (or such lesser amount as may be
outstanding at the time of the Deficiency Notice) (the "Deficiency Repurchase
Amount") at a repurchase price equal to 100% of the principal amount of the
Debentures repurchased plus accrued but unpaid interest, if any, to the date of
purchase as described below. The failure to maintain a Consolidated Net Worth of
at least $18.0 million as of the end of any fiscal quarter will not be counted
toward the making of more than one Deficiency Offer.
(b) The Deficiency Notice shall state:
(i) that a net worth deficiency has occurred;
(ii) that the Company is offering to repurchase the Deficiency
Repurchase Amount;
(iii) the repurchase price and the Conversion Price then in
effect;
(iv) the expiration date of the Deficiency Offer, which shall be
no earlier than 30 days nor later than 45 days after the date
such notice is mailed;
(v) the date such purchase shall be effected, which shall be no
later than 20 days after the expiration date of the Deficiency
Offer (the "Deficiency Payment Date");
(vi) that Debentures not accepted for payment pursuant to the
Deficiency Offer shall continue to accrue interest;
(vii) that, unless the Company defaults in payment of the
Deficiency Repurchase Amount, all Debentures accepted for payment
pursuant to the Deficiency Offer shall cease to accrue interest
after the Deficiency Payment Date;
(viii) that if any Debenture is repurchased in part, a new
Debenture or Debentures in principal amount equal to the
unrepurchased portion will be issued;
(ix) the name and address of the Paying Agent;
(x) that Debentures to be repurchased must be surrendered to the
Paying Agent to collect the repurchase price; and
(xi) any other information required by applicable law to be
included therein and any other procedures that a Holder must
follow to have Debentures repurchased in such Deficiency Offer.
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(c) The Deficiency Offer shall remain open until the close of business
on the last day of the Deficiency Offer. If the Deficiency Payment Date is after
an Interest Payment Date but prior to the next succeeding regular interest
payment record date, interest with respect to any Debenture converted after
delivery of the related Deficiency Notice shall be paid to the Holder so
converting for the period from the last Interest Payment Date to the date of
such conversion. If the Deficiency Payment Date is on or after an interest
payment record date and on or before the related Interest Payment Date, accrued
interest through such Interest Payment Date will be paid to each Person in whose
name a Debenture repurchased in the Deficiency Offer is registered at the close
of business on such record date, and no additional interest will be payable to
Holders who tender Debentures pursuant to such Deficiency Offer. The Company
will comply with all applicable securities laws and regulations in connection
with each Deficiency Offer.
(d) On or before each Deficiency Payment Date, the Company shall, to
the extent lawful, purchase the Deficiency Repurchase Amount of Debentures or,
if less than the Deficiency Repurchase Amount has been delivered for repurchase,
all Debentures delivered for repurchase in response to the Deficiency Offer. If
the aggregate principal amount of Debentures delivered for repurchase exceeds
the Deficiency Repurchase Amount, the Company will purchase the Debentures
delivered to it pro rata (in $1,000 increments only) among the Debentures
delivered based on the relative principal amount of Debentures owned by the
Holders delivering Debentures for repurchase. The Company may credit against the
principal amount of Debentures to be repurchased in any Deficiency Offer 100% of
the principal amount (excluding premium) of Debentures acquired by the Company
subsequent to the Deficiency Date and prior to the related Deficiency Payment
Date through purchase (otherwise than pursuant to this provision or a Change of
Control Offer), optional redemption, conversion or exchange and surrendered for
cancellation. In addition, on or before such Deficiency Payment Date, the
Company shall:
(i) if the Company appoints a Depositary or Paying Agent,
deposit with such Depositary or Paying Agent money
sufficient to pay the repurchase price of all Debentures or
portions thereof so accepted; and
(ii) deliver or cause the Depositary or Paying Agent to
deliver an Officers' Certificate stating such Debentures or
portion thereof accepted for payment by the Company in
accordance with the terms of this Section 4.5.
(e) Not later than two Business Days prior to the Deficiency Payment
Date, the Company shall provide the Trustee with written notice of whether the
Company elects to credit any Debentures against its obligation to repurchase
Debentures as provided above and shall set forth the amount of such credit and
the basis therefor (including identification of any previously cancelled
Debentures not theretofore credited). Such notice shall be accompanied by any
Debentures required to be delivered to the Trustee for cancellation, as provided
above, in order to be credited against the Company's obligation to purchase
Debentures hereunder.
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(f) The Depositary, the Paying Agent or the Company, as the case may
be, shall promptly (but in any case not later than five Business Days after the
Deficiency Payment Date) mail or deliver to each tendering Holder an amount
equal to the purchase price of the Debentures tendered by such Holder and
accepted by the Company for purchase, and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Debenture equal in
principal amount to any unrepurchased portion of the Debenture surrendered. Any
Debentures not so accepted shall be promptly mailed or delivered by the Company
to the Holder thereof.
SECTION 4.6. LIMITATION ON RESTRICTED PAYMENTS AND INVESTMENTS.
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, (i) declare or pay any distribution or dividend on or in
respect of any class of its Capital Stock (except dividends or distributions
payable by wholly owned Subsidiaries of the Company and dividends or
distributions payable in Qualified Stock of the Company or in options, warrants
or other rights to purchase Qualified Stock of the Company); (ii) purchase,
repurchase, prepay, redeem, defease or otherwise acquire or retire for value
(other than in Qualified Stock of the Company or in options, warrants or other
rights to purchase Qualified Stock of the Company) any Capital Stock in the
Company or any of its Subsidiaries (other than a wholly owned Subsidiary of the
Company); (iii) make or permit any Subsidiary to make an Investment (other than
Permitted Investments) in, or payment on a guaranty of any obligation of, any
Person; or (iv) repay, prepay, redeem, defease, retire or refinance, prior to
scheduled maturity or scheduled sinking fund payment, any other Debt which is
pari passu with, or subordinate to, the Debentures (other than by the payment of
Qualified Stock of the Company or of options, warrants or other rights to
purchase Qualified Stock of the Company), except, in the case of this clause
(iv), if the proceeds used for such repayment, prepayment, redemption,
defeasance, retirement or refinancing are generated from the issuance of
Refinancing Debt (any such declaration, payment, distribution, purchase,
repurchase, prepayment, redemption, defeasance or other acquisition or
retirement or Investment referred to in clauses (i) through (iv) above being
hereinafter referred to as a "Restricted Payment"); unless at the time of and
after giving effect to a proposed Restricted Payment (the value of any such
payment, if other than cash, as determined by the Board of Directors, including
the affirmative vote of the Independent Directors, whose determination shall be
conclusive and evidenced by a board resolution) (a) no Event of Default (and no
event that, after notice or lapse of time, or both, would become an Event of
Default) shall have occurred and be continuing, (b) the Company could incur an
additional $1.00 of Debt pursuant to the provisions of Section 4.11 and (c) the
stockholders' equity of the Company as the same would appear on the consolidated
balance sheet of the Company as at the end of the most recent fiscal quarter of
the Company preceding such Restricted Payment, less the amount of any such
Restricted Payments made since the date of such consolidated balance sheet,
would not be less than $18.0 million. The making of a Permitted Investment
pursuant to this Section 4.6 shall not constitute a waiver by the Holders of the
Company's obligations with respect to any other covenant contained in this
Indenture.
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 is permitted and setting
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forth the basis upon which the calculations required by this Section 4.6 were
computed, which calculations may be based upon the Company's latest available
financial statements.
SECTION 4.7. TAXES.
The Company shall, and shall cause each of its Subsidiaries to, pay or
discharge prior to delinquency all taxes, assessments and governmental levies,
except as contested in good faith and by appropriate proceedings.
SECTION 4.8. CHANGE OF CONTROL.
(a) In the event of a Change of Control, then the Company shall give or
cause to be given written notice (the "Change of Control Notice") to all
Holders, the Trustee and the Paying Agent of such event and shall make an offer
to purchase (as the same may be extended in accordance with applicable law, the
"Change of Control Offer") all then outstanding Debentures at a purchase price
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the Change of Control Payment Date. The Change of Control Notice
shall be mailed and the Change of Control Offer shall be made not more than 30
days following the date of the Change of Control (the "Change of Control Date"),
unless the Company has previously mailed a notice of optional redemption by the
Company of all of the Debentures in accordance with this Indenture, to each
Holder at such Holder's last address set forth in the Register by first class
mail. The Change of Control Notice shall set forth:
(i) that a Change of Control has occurred and, unless the
Debentures are subject to a notice of optional redemption
described above, that the Company is offering to repurchase all
of the outstanding Debentures;
(ii) the circumstances and relevant facts regarding such Change
of Control (including, but not limited to, information with
respect to pro forma income, cash flow and capitalization of the
Company after giving effect to such Change of Control);
(iii) the repurchase price (the "Change of Control Payment");
(iv) the expiration date of the Change of Control Offer, which
shall be no earlier than 30 days nor later than 60 days from the
date such Change of Control Notice is mailed;
(v) the date such purchase shall be effected, which shall be no
later than 30 days after the expiration date of the Change of
Control Offer (the "Change of Control Payment Date");
(vi) that, unless the Company defaults in the payment of the
Change of Control Payment, all Debentures accepted for payment
pursuant to the Change
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of Control Offer shall cease to accrue interest after the Change
of Control Payment Date;
(vii) the Conversion Price;
(viii) the name and address of the Paying Agent and the
Conversion Agent;
(ix) that Debentures must be surrendered to the Paying Agent to
collect the Change of Control Payment; and
(x) any other information required by applicable law to be
included therein and any other procedures that a Holder must
follow in order to have Debentures repurchased.
(b) The Change of Control Offer shall remain open until the close of
business on the last day of the Change of Control Offer. If the Change of
Control Payment Date is after a regular Interest Payment Date but prior to the
next succeeding regular interest payment record date, interest with respect to
any Debenture converted after delivery of the related notice of the Change of
Control Offer shall be paid to the Holder so converting for the period from the
last Interest Payment Date to the date of such conversion. If the Change of
Control Payment Date is on or after an interest payment record date and on or
before the related Interest Payment Date, accrued interest through such Interest
Payment Date will be paid to each Person in whose name a Debenture repurchased
in the Change of Control Offer is registered at the close of business on such
record date, and no additional interest will be payable to Holders who tender
Debentures pursuant to the Change of Control Offer.
(c) In the event that the Company is required to make a Change of
Control Offer, the Company will comply with any applicable securities laws and
regulations, including, to the extent applicable, Section 14(e) of and Rule
14e-1 under the Exchange Act.
(d) On the Change of Control Payment Date, the Company shall, to the
extent lawful:
(i) accept for payment Debentures or portions thereof tendered
pursuant to the Change of Control Offer;
(ii) deposit with the Paying Agent in immediately available
funds an amount equal to the Change of Control Payment in
respect of all Debentures or portions thereof so accepted;
and
(iii) deliver or cause to be delivered to the Trustee the
Debentures so accepted together with an Officers'
Certificate stating the Debentures or portions thereof
tendered to the Company.
(e) The Paying Agent shall promptly (but in any case not later than
five Business Days after the Change of Control Payment Date) mail to each Holder
of Debentures so accepted
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payment in an amount equal to the Change of Control Payment for such Debentures,
and the Trustee shall promptly authenticate and mail to each Holder a new
Debenture equal in principal amount to any unpurchased portion of the Debentures
surrendered by such Holder, if any; provided, that each such new Debenture shall
be in principal amount of $1,000 or an integral multiple thereof. The Company
shall publicly announce the results of all repurchases pursuant to this Section
4.8 on or as soon as practicable after the Change of Control Payment Date.
SECTION 4.9. LIMITATION ON DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its Subsidiaries to,
create or otherwise cause or suffer to exist or become effective any encumbrance
or restriction of any kind on the ability of any Subsidiary of the Company to
(a) pay to the Company dividends or make to the Company any other distribution
on its Capital Stock, (b) pay any Debt owed to the Company or any of the
Company's Subsidiaries, (c) contribute capital or make loans or advances to the
Company or any of the Company's Subsidiaries or (d) transfer any of its property
or assets to the Company or any of the Company's Subsidiaries, other than such
encumbrances or restrictions existing or created under or by reason of (i)
applicable law, (ii) this Indenture, (iii) covenants or restrictions contained
in any instrument governing Debt of the Company or any of its Subsidiaries
existing on the date of this Indenture, or covenants or restrictions in any loan
documents relating to Senior Indebtedness incurred after the date hereof,
provided that in the absence of a default under any such loan documents, no such
restriction shall prevent a Subsidiary from paying dividends or otherwise
distributing funds to the Company in amounts sufficient to enable the Company to
make interest and principal payments on the Debentures as and when due,
(including pursuant to any Change of Control Offer or Deficiency Offer), (iv)
customary provisions restricting subletting, assignment and transfer of any
lease governing a leasehold interest of the Company or any of its Subsidiaries
or in any license or other agreement entered into in the ordinary course of
business, (v) any agreement governing Debt of a Person acquired by the Company
or any of its Subsidiaries in existence at the time of such acquisition (but not
created in connection with or in contemplation thereof), which encumbrances or
restrictions are not applicable to any Person, or the property or assets of any
Person, other than the Person, or the property or assets of the Person so
acquired, (vi) any restriction with respect to a Subsidiary imposed pursuant to
an agreement entered into in accordance with the terms of this Indenture for the
sale or disposition of Capital Stock or property or assets of such Subsidiary,
pending the closing of such sale or disposition or (vii) any Refinancing Debt;
provided, however that the encumbrances or restrictions contained in the
agreements governing any such Refinancing Debt shall be no more restrictive than
the encumbrances or restrictions set forth in the agreements governing the Debt
being refinanced as in effect on the date of this Indenture.
SECTION 4.10. LIMITATION ON DISQUALIFIED STOCK.
The Company shall not, and shall not permit any of its Subsidiaries to,
issue any shares of Disqualified Stock.
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SECTION 4.11. LIMITATION ON DEBT.
The Company shall not, and shall not permit any of its Subsidiaries to,
create, incur, assume or directly or indirectly guarantee or in any other manner
become directly or indirectly liable for ("incur") any Debt other than Permitted
Debt unless at the time of such incurrence and after giving pro forma effect
thereto (x) the Debt to Operating Cash Flow Ratio of the Company and its
Subsidiaries is 6.5:1 or less, (y) the Consolidated Net Worth of the Company is
in excess of $18.0 million and (z) such Debt would otherwise be permissible
under the terms of this Indenture. In addition, any Debt incurred by the Company
or any of its Subsidiaries (other than Senior Indebtedness, Acquired Debt or
Debt which would qualify as Purchase Money Indebtedness but for the fact the
same is not secured by a Lien on the assets acquired with the proceeds of such
Debt) shall have a Weighted Average Life to Maturity longer than the Weighted
Average Life to Maturity of the Notes. With respect to any revolving line of
credit, (A) the full amount of available borrowing thereunder will be deemed to
have been incurred at the time such line of credit is established and (B) each
advance thereunder shall be deemed to be a separate issuance of Debt, except
that for purposes of evaluating whether each advance under any such line of
credit is in compliance with this Section 4.11, only the then outstanding amount
of borrowings under such line of credit (as opposed to the full amount of
available borrowings thereunder) will be deemed to be outstanding Debt.
A calculation of the Debt to Operating Cash Flow Ratio as required by
this Section 4.11 shall be made, in each case, for the period of four full
consecutive fiscal quarters next preceding the date on which Debt is proposed to
be incurred ("Reference Period"). In addition, for purposes of the pro forma
calculations required to be made above, (i) (x) the amount of Debt to be
incurred (plus all other Debt previously incurred during such Reference Period),
and the amount (valued at its liquidation value and including any accrued but
unpaid dividends) of Disqualified Stock to be issued (plus all other
Disqualified Stock previously issued during such Reference Period) will be
presumed to have been incurred or issued on the first day of such Reference
Period and (y) the amount of any Debt redeemed, refinanced or repurchased with
the proceeds of the Debt referred to in clause (x) will be presumed to have been
redeemed, refinanced or repurchased on the first day of such Reference Period,
(ii) if any Asset Disposition occurred during such Reference Period, the
calculations included in the computation of the Debt to Operating Cash Flow
Ratio shall be adjusted to give effect to such Asset Disposition on a pro forma
basis as if such Asset Disposition had occurred on the first day of such
Reference Period, (iii) if an acquisition of a business or entity occurred
during such Reference Period, the calculations included in the computation of
the Debt to Operating Cash Flow Ratio will be adjusted to give effect to such
acquisition on a pro forma basis as if such acquisition had occurred on the
first day of such Reference Period and (iv) if such new Debt is being incurred
in connection with an acquisition, pro forma effect will be given to the
operating cash flow or losses attributable to the assets or business so
acquired, excluding extraordinary gains or losses related thereto. It shall not
be a condition to the incurrence of Debt that the Company deliver a copy of such
calculation to the Trustee.
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SECTION 4.12. LIMITATION ON SENIOR INDEBTEDNESS
The Company shall not issue or incur any Debt (other than Senior
Indebtedness (including Refinancing Debt incurred to refinance any such Debt))
unless such Debt shall be subordinate or rank pari passu in right of payment to
the Debentures. The Company shall not permit any of its Subsidiaries to issue or
incur any Debt (other than Senior Indebtedness (including Refinancing Debt
incurred to refinance any such Debt)) unless such Debt shall provide that such
Debt shall be subordinate or rank pari passu in right of payment to
distributions and dividends from such Subsidiary to the Company in an amount
sufficient to satisfy the Company's obligations under the Debentures to at least
the same extent that the Debentures are subordinate to Senior Indebtedness.
SECTION 4.13. LIMITATION ON ADDITIONAL DEBT AFTER DEFAULT.
The Company shall not, and shall not permit any of its Subsidiaries to,
incur any additional Debt, other than (i) Permitted Debt which is subordinate to
the Debentures or (ii) Debt utilized to cure the Default, provided the
incurrence of such Debt is not prohibited by the other limitations of this
Indenture.
SECTION 4.14. LIMITATION ON LIENS.
The Company shall not, and shall not permit any of its Subsidiaries,
directly or indirectly, to create, incur, assume or permit to exist any Lien
(other the Permitted Liens) upon or with respect to any of the Property of the
Company or any such Subsidiary, whether owned on the date of this Indenture or
hereafter acquired, or on any income or profits therefrom, to secure any Debt
which is pari passu with or subordinate in right of payment to the Debentures
unless payment of the Debentures is secured ratably therewith.
SECTION 4.15. TRANSACTIONS WITH RELATED PERSONS.
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with (a) any beneficial owner of 5% or
more of the outstanding voting securities of the Company (determined in
accordance with Section 13(d) of the Exchange Act) at the time of such
transaction, (b) any officer, director or employee of the Company, of any of its
Subsidiaries or any such beneficial owner of 5% or more of the outstanding
voting securities of the Company as described in clause (a) above or (c) any
Related Persons, unless such transaction or series of related transactions (i)
involves an amount of $250,000 or less or (ii) (A) is on terms that are no less
favorable to the Company or any such Subsidiary, as the case may be, than would
be available in a comparable transaction with an unrelated third party and (B)
(x) if such transaction or series of related transactions involve aggregate
payments in excess of $400,000, the Company delivers an officers' certificate to
the Trustee certifying that such transaction complies with clause (ii)(A) above
and such transaction or series of transactions is approved by a majority of the
Board of Directors of the Company including the approval of each of the
Independent Directors or (y) if
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such transaction or series of related transactions involve aggregate payments in
excess of $1.5 million, the Company obtains an opinion as to the fairness to the
Company or such Subsidiary from a financial point of view issued by an
investment banking firm, appraisal firm or accounting firm, in each case of
national standing.
Notwithstanding the foregoing, this provision will not apply to (i) any
transaction entered into in the ordinary course of business among the Company
and wholly-owned Subsidiaries of the Company, (ii) the payment of compensation
and provision of benefits to officers and employees of the Company and loans and
advances to such officers and employees in the ordinary course of business, or
any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise (including the grant of stock options or similar rights
to officers, employees and directors of the Company or any Subsidiary) pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans or other benefit plans approved by the Independent Directors,
and (iii) transactions with any Person who is a director of the Company or of
any of its Subsidiaries, and, who is not (a) the beneficial owner of 5% or more
of the outstanding voting securities of the Company (as determined in accordance
with Section 13(d) under the Exchange Act) or (b) an officer or employee of the
Company, of any of its Subsidiaries or of any such beneficial owner of 5% or
more of the outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) at the time of such
transaction.
SECTION 4.16. LIMITATION ON LINE OF BUSINESS.
For so long as any Debentures are outstanding, the Company and its
Subsidiaries will engage solely in the acquisition, operation and management of
multi-modality diagnostic imaging centers and other medical service facilities.
SECTION 4.17. COMPLIANCE CERTIFICATE.
The Company shall deliver to the Trustee, within 45 days after the end
of each fiscal quarter of the Company other than the last fiscal quarter of the
Company's fiscal year and within 120 days after the end of each fiscal year of
the Company, an Officers' Certificate stating that a review of the activities of
the Company and its Subsidiaries during the preceding fiscal quarter or fiscal
year, as the case may be, has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions hereof
(or, if a Default or Events of Default shall have occurred, describing all such
Defaults or Events of Default of which he or she may have knowledge and what
action the Company is taking or proposes to take with respect thereto), and
that, to the best of his or her knowledge, no event has occurred and remains in
existence by reason of which payments on account of the Principal of or
interest, if any, on the Debentures are prohibited.
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The Company shall, so long as any of the Debentures are outstanding,
deliver to the Trustee, within five Business Days after becoming aware of (i)
any Default, Event of Default or default in the performance of any covenant,
agreement or condition in this Indenture or (ii) any event of default under any
other instrument of Debt to which Section 6.1(d) applies, an Officers'
Certificate specifying such Default, Event of Default or default, describing its
status and what action the Company is taking or proposes to take with respect
thereto.
So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements shall be accompanied by a written statement of the Company's
independent public accountants (who shall be a firm of established national
reputation) that in making the examination necessary for certification of such
financial statements, nothing has come to their attention that would lead them
to believe that the Company has violated any provisions of this Article 4 or
Article 5, or if any such violation has occurred, specifying the nature and, if
known, the period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation.
SECTION 4.18. FURTHER ASSURANCE TO THE TRUSTEE.
The Company shall, upon request of the Trustee, execute and deliver
such further instruments and do such further acts as may be necessary or proper
to carry out more effectively the provisions of this Indenture.
ARTICLE 5.
SUCCESSORS
SECTION 5.1. WHEN COMPANY MAY MERGE OR SELL ASSETS.
The Company shall not consolidate with or merge into, or sell, lease,
convey or otherwise dispose of all or substantially all of its assets to, any
Person, without the consent of each Holder, unless:
(a) the Company is the continuing corporation or the Person formed by
or surviving any such consolidation or merger (if other than the Company), or to
which such sale, lease, conveyance or other disposition of assets shall have
been made, is organized and existing under the laws of the United States, any
state thereof or the District of Columbia and such Person (if other than the
Company) assumes by supplemental indenture executed and delivered to the Trustee
and in a form reasonably satisfactory to the Trustee, all the obligations of the
Company under the Debentures and this Indenture including, without limitation,
conversion rights in accordance with Article 11 hereof;
(b) immediately before and immediately after giving effect to the
transaction on a pro forma basis (and treating any Debt not previously an
obligation of the Company or any
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of its Subsidiaries which becomes the obligation of the Company or any of its
Subsidiaries as a result of such merger, consolidation, conveyance, transfer,
sale or lease as having been incurred at the time of such merger, consolidation,
conveyance, transfer, sale or lease) no Event of Default, and no event which,
after notice or lapse of time, or both, would become an Event of Default, shall
have occurred and be continuing;
(c) immediately after giving effect to such transaction, the Debentures
and this Indenture (as supplemented by such supplemental indenture) will be a
valid and enforceable obligation of the Company or such successor;
(d) immediately before and immediately after giving effect to such
transaction on a pro forma basis (on the assumption such transaction occurred on
the first day of the four quarter fiscal quarter period immediately prior to the
consummation of such transaction, with the appropriate adjustments with respect
to such transaction being included in such pro forma calculations), the Company
(or such successor) could incur $1.00 of additional Debt (other than Permitted
Debt) under Section 4.11; and
(e) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such proposed
transaction and such supplemental indenture comply with the applicable
provisions of this Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with.
SECTION 5.2. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.1, the Person formed by such consolidation or into or
with which the Company is merged or to which such sale, lease, conveyance or
other disposition is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person has been named as the Company herein;
provided, however that in the case of a sale, lease, conveyance or other
disposition the Company shall not be released from the obligation to pay the
Principal of and interest on the Debentures.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.
The following shall constitute an "Event of Default":
(a) failure to pay Principal on any Debenture when due and
payable, whether at maturity, upon redemption, upon a Change of Control Offer,
Deficiency Offer or otherwise, whether or not such payment is prohibited by the
subordination provisions of this Indenture;
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(b) failure to pay any interest on any Debenture when due and
payable, which failure continues for 30 days, whether or not such payment is
prohibited by the subordination provisions of this Indenture;
(c) failure to perform the other covenants of the Company in this
Indenture, which failure continues for 60 days after written notice as provided
in this Indenture;
(d) a default occurs (after giving effect to any applicable grace
periods or any extension of any maturity date) in the payment when due of
Principal of and/or acceleration of, any indebtedness for money borrowed by the
Company or any of its Subsidiaries in excess of $1 million, individually or in
the aggregate, if such indebtedness is not discharged, or such acceleration is
not annulled, within 10 days after written notice as provided in this Indenture;
(e) the Company or any Subsidiary of the Company pursuant to or
within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it
in an involuntary case,
(iii) consents to the appointment of a Custodian of it or
for all or substantially all of it or for all or substantially
all of its property, and such Custodian is not discharged
within 30 days,
(iv) makes a general assignment for the benefit of its
creditors, or
(v) generally is unable to pay its debts as the same become
due;
(f) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against the Company or any Subsidiary of
the Company in an involuntary case,
(ii) appoints a Custodian of the Company or any Subsidiary
of the Company or for all or substantially all of its
property, or
(iii) orders the liquidation of the Company or any
Subsidiary of the Company,
and, in each case, the order or decree remains unstayed and in effect for 60
days.
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The term "Bankruptcy Law" means title 11, U.S. Code or any similar
federal, foreign or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, examiner or similar official
under any Bankruptcy Law.
A Default under clause (c) (other than a Default under Section 5.1,
which Default shall be an Event of Default with the notice but without the
passage of time specified in this Section 6.1) or (d) shall not be not an Event
of Default until the Trustee notifies the Company or the Holders of at least 25%
in aggregate principal amount of the then outstanding Debentures notify the
Company and the Trustee of the Default and the Company does not cure the Default
under such clause (c) within 60 days after receipt of the notice, or under
clause (d) within 10 days after receipt of the notice. The notice must specify
the Default, demand that it be remedied and state that the notice is a "Notice
of Default."
SECTION 6.2. ACCELERATION.
If an Event of Default (other than an Event of Default specified in
clauses (e) and (f) of Section 6.1) occurs and is continuing, the Trustee by
notice to the Company, or the Holders of at least 25% in aggregate principal
amount of the then outstanding Debentures by notice to the Company and the
Trustee, may declare the unpaid Principal of and accrued interest on all the
Debentures then outstanding to be due and payable. Upon any such declaration,
the Principal and interest shall be due and payable immediately. If an Event of
Default specified in clause (e) or (f) of Section 6.1 occurs, such an amount
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 Holders
of a majority in aggregate principal amount of the then outstanding Debentures
by written notice to the Trustee may rescind an acceleration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all overdue interest on all Notes then outstanding and
(ii) the principal of and premium, if any, on the Notes then outstanding which
have become due otherwise than by such declaration of acceleration and interest
thereon at a rate borne by the Notes and (b)the rescission would not conflict
with any judgment or decree and 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. No such recision shall affect any subsequent
Default or impair any right consequent thereto.
SECTION 6.3. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of Principal or interest on the
Debentures or to enforce the performance of any provision of the Debentures or
this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Debentures or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
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SECTION 6.4. WAIVER OF EXISTING AND PAST DEFAULTS.
The Holders of a majority in aggregate principal amount of the then
outstanding Debentures by written notice to the Trustee may waive an existing
Default or Event of Default and its consequences, except (i) a continuing
Default or Event of Default in the payment of the Principal of, or the interest
on, any Debenture or (ii) a Default or Event of Default in respect of a
provision that under Section 9.2 cannot be amended without the consent of each
Holder affected. Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
SECTION 6.5. CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the then
outstanding Debentures may 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 it. However, the Trustee may refuse to follow any direction
that conflicts with applicable law or this Indenture, that the Trustee
determines is unduly prejudicial to the rights of other Holders or would involve
the Trustee in personal liability; provided, however, that the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction.
In the event the Trustee takes any action or follows any direction
pursuant to this Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against any loss or expense caused by
taking such action or following such direction.
SECTION 6.6. LIMITATION ON SUITS.
A Holder may pursue a remedy with respect to this Indenture or the
Debentures only if:
(a) the Holder gives to the Trustee notice of a continuing
Event of Default;
(b) the Holders of at least 25% in aggregate principal
amount of the then outstanding Debentures make a request to the Trustee
to pursue the remedy;
(c) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(e) during such 60-day period the Holders of a majority in
aggregate principal amount of the then outstanding Debentures do not
give the Trustee a direction inconsistent with the request.
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A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Debenture to receive payment of Principal and interest on the
Debenture, on or after the respective due dates expressed in the Debenture, or
to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of the
Holder.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Debenture to bring suit for the enforcement of the right to convert
the Debenture shall not be impaired or affected without the consent of the
Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.1(a) or (b) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company for the whole amount of Principal and
interest remaining unpaid on the Debentures and interest on overdue Principal
and interest, and such further amount as shall be sufficient to cover the costs
and, to the extent lawful, expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee and
the Holders allowed in any judicial proceedings relative to the Company, its
creditors or its property. Except as provided in this Indenture, nothing
contained herein shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Debentures
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:
First: to the Trustee for amounts due under Section 6.8 or 7.7;
Second: to holders of Senior Indebtedness to the extent required by
Article 11;
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Third: to Holders for amounts due and unpaid on the Debentures for
Principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and
payable on the Debentures for Principal and interest,
respectively; and
Fourth: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders.
At least 15 days before the record date, the Company shall mail to the
Trustee and each Holder (at such Holder's address as it appears on the
Register), a notice that states the record date, the payment date and amount to
be paid.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7, or a suit by Holders of more than 10% in aggregate
principal amount of the then outstanding Debentures or any suit for the
enforcement of the right to convert any Debenture in accordance with Article 10
hereof.
ARTICLE 7.
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.
(b) Except during the continuance of an Event of Default:
(i) The Trustee need perform only those duties that are
specifically set forth in this Indenture or the TIA and no others.
(ii) In the absence of gross negligence, willful misconduct
or bad faith on its part, the Trustee may conclusively rely, as to the
truth of the statements and the
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correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture, but the Trustee need not verify the contents
thereof.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) This paragraph does not limit the effect of paragraph (b)
of this Section 7.1.
(ii) The Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts.
(iii) The Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to the provisions of the TIA, paragraphs (a), (b), (c) and
(e) of this Section 7.1 and Section 7.2.
(e) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds held in trust
except to the extent required by law.
SECTION 7.2. RIGHTS OF TRUSTEE.
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts or
matters to the extent reasonably deemed necessary by it, and if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled upon reasonable notice, to examine the books and records and premises
of the Company, personally or by agent, authorized representative or attorney.
(b) Before the Trustee acts or refrains from acting pursuant to the
terms of the Indenture or otherwise, it may require an Officers' Certificate or
an Opinion of Counsel, or both. The Trustee shall not be liable for any action
it takes or omits to take in good faith in reliance on such Officers'
Certificate or Opinion of Counsel.
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(c) The Trustee may act through agents and shall not be responsible for
the willful misconduct or gross negligence of any Agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers conferred by this Indenture.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Debentures and may otherwise deal with the Company or any
Affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to and must comply with Sections 7.10 and 7.11.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Debentures, it shall not be accountable for the Company's
use of the proceeds from the Debentures, and it shall not be responsible for any
statement of the Company in the Indenture or any statement in the Debentures
other than its authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if it is
actually known to the Trustee, the Trustee shall mail to each Holder a notice of
the Default or Event of Default within 90 days after it occurs, unless such
Default or Event of Default shall have been cured or waived. Except in the case
of a Default or Event of Default in payment on any Debenture under Section
6.1(a) or (b), the Trustee may withhold the notice if and so long as a committee
of its Trust Officers in good faith determines that withholding the notice is in
the best interests of Holders. The second sentence of this Section 7.5 shall be
in lieu of the proviso to Section 315(b) of the TIA, which proviso is hereby
expressly excluded from this Indenture, as permitted by the TIA.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each March 31, commencing March 31, 1997, the
Trustee shall mail to Holders, at the Company's expense, a brief report dated as
of such reporting date that complies with TIA ss. 313(a) (but if no event
described in TIA ss. 313(a) has occurred within the twelve months preceding the
reporting date, no report need be transmitted). The Trustee also shall comply
with TIA ss. 313(b)(2) to the extent applicable. The Trustee shall also transmit
by mail all reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each stock exchange or market on which the Debentures are
listed or quoted. The Company
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shall notify the Trustee when the Debentures are listed on any stock exchange or
quoted on any market.
SECTION 7.7. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee (in its capacities as Trustee,
Debentures Custodian, Conversion Agent, Paying Agent and Registrar) from time to
time such compensation as may be agreed in writing between the Company and the
Trustee for its services hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred by it. Such expenses may include the reasonable compensation
and out-of-pocket expenses of the Trustee's agents and counsel, except such
disbursements, advances and expenses as may be attributable to its gross
negligence, willful misconduct or bad faith.
The Company shall indemnify the Trustee (in its capacity as Trustee)
and each of its officers, directors, attorneys-in-fact and agents for, and hold
each of such Persons harmless against, any claim, demand, expense (including but
not limited to disbursements and expenses of the Trustee's agents and counsel),
loss or liability incurred by any of them without negligence or bad faith on
such Person's part, arising out of or in connection with the administration of
this trust and the rights or duties of the Trustee hereunder including the costs
and expenses of such Person's in defending themselves against any claim or
liability in connection with the exercise or performance of any of the Trustee's
powers or duties hereunder. The Trustee shall notify the Company promptly of any
claim asserted against the Trustee for which it may seek indemnity. The Company
shall defend the claim and the Trustee shall provide reasonable cooperation at
the Company's expense in the defense. The Trustee shall have the right to select
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not reimburse any expense or indemnify against
any loss or liability to the extent incurred by the Trustee through its
negligence, bad faith or willful misconduct. The Company need not pay for any
settlement made without its consent, which consent shall not be unreasonable
withheld.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through willful conduct, gross
negligence or bad faith.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a lien prior to the Debentures on all money or property held
or collected by the Trustee, except that held in trust to pay Principal and
interest on particular Debentures.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(e) or (f) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
The Company's payment obligations pursuant to this Section 7.7 shall
survive the discharge of this Indenture.
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SECTION 7.8. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign by so notifying the Company in writing at least
30 days prior to the date of the proposed resignation; provided, however, that
no such resignation shall be effective until a successor Trustee has accepted
its appointment pursuant to this Section 7.8. The Holders of a majority in
aggregate principal amount of the then outstanding Debentures may remove the
Trustee by so notifying the Trustee and the Company. The Company shall remove
the Trustee if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in aggregate principal amount of the then outstanding Debentures
may appoint a successor Trustee to replace the successor Trustee appointed by
the Company.
If a successor Trustee is not appointed or does not take office within
60 days after the retiring Trustee resigns or is removed, the retiring Trustee,
the Company or the Holders of at least 10% in aggregate principal amount of the
then outstanding Debentures may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders. The retiring Trustee shall promptly transfer all property
held by it as Trustee to the successor Trustee, subject to the lien provided for
in Section 7.7. Notwithstanding the replacement of the Trustee pursuant to this
Section 7.8, the Company's obligations under Section
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7.7 hereof shall continue for the benefit of the retiring Trustee with respect
to expenses and liabilities incurred by it prior to such replacement.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER. ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss.ss. 310(a)(1) and 310(a)(2). The Trustee shall always
have a combined capital and surplus as stated in its most recent published
annual report of condition of at least $10 million. The Trustee shall comply
with TIA ss. 310(b), including the optional provision permitted by the second
sentence of TIA ss. 310(b)(9). The provisions of TIA ss. 310 shall apply to the
Company, as obligor of the Debentures.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein. The
provisions of TIA ss. 311 shall apply to the Company, as obligor of the
Debentures.
ARTICLE 8.
DISCHARGE OF INDENTURE
SECTION 8.1. TERMINATION OF COMPANY'S OBLIGATIONS.
This Indenture shall cease to be of further effect (except that the
Company's obligations under Section 7.7 and 8.3 shall survive) when all
outstanding Debentures theretofore authenticated and issued (other than
destroyed, lost or stolen Debentures which have been replaced or paid) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable hereunder. In addition, the Company shall be discharged from all of its
obligations under Section 2.13 and Sections 4.3 through 4.18 while the
Debentures remain outstanding if all outstanding Debentures will become due and
payable at their scheduled maturity within one year and the following conditions
have been satisfied:
(a) the Company has deposited, or caused to be deposited, irrevocably
with the Trustee as trust funds specifically pledged as security for, and
dedicated solely for, such purpose, (i) money in an amount, (ii) non-callable
U.S. Government Obligations which through the payment of Principal and interest
in accordance with their terms (without the reinvestment
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of such interest or Principal) will provide not later than one day before the
due date of any payment money in an amount, or (iii) a combination thereof,
sufficient with respect to clauses (ii) and (iii) in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee at or prior to the time of such
deposit, to pay the Principal and discharge each installment of interest on the
outstanding Debentures, together with all other amounts payable by the Company
under this Indenture;
(b) no Default or Event of Default with respect to the Debentures has
occurred and is continuing on the date of such deposit or shall occur as a
result of such deposit or at any time during the period ending on the 121st day
after the date of such deposit, as evidenced to the Trustee by an Officer's
Certificate delivered to the Trustee concurrently with such deposit;
(c) such defeasance does not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which it is bound, and is not prohibited by Article 11,
as evidenced to the Trustee by an Officers' Certificate delivered to the Trustee
concurrently with such deposit;
(d) the Company has delivered to the Trustee a private Internal Revenue
Service ruling or an Opinion of Counsel that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to federal income tax on the same
amount, in the same manner, and at the same times, as would have been the case
if such deposit, defeasance and discharge had not occurred;
(e) the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the deposit shall not result in the Company, the Trustee or the
trust being deemed to be an "investment company" under the Investment Company
Act of 1940, as amended;
(f) the Company has delivered to the Trustee an Opinion of Counsel to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(g) the Company has 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 the other creditors of the Company with the intent
of defeating, hindering, delaying or defrauding creditors of the Company or
others;
(h) 121 days pass after the deposit is made and during such 121 day
period no event or circumstances shall occur and be continuing at the end of
such period that would prevent the Company from making payments of the Principal
and interest on the Debentures; and
(i) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent relating
to the discharge of such provisions of the Indenture have been complied with.
Notwithstanding the foregoing, the
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Company's obligations to pay Principal and interest on the Debentures shall
continue until the Internal Revenue Service ruling or Opinion of Counsel
referred to in clause (d) above is provided.
If the Company exercises such option to discharge such provisions of
the Indenture, payment of the Debentures may not be accelerated because of an
event of default specified in Sections 6.1(c) with respect to the failure to
perform any of the covenants set forth in Section 2.13 and Section 4.3 through
4.18, or Section 6.1(d).
After a deposit made pursuant to this Section 8.1, the Trustee upon
request shall acknowledge in writing the discharge of the Company's obligations
specified above under this Indenture.
SECTION 8.2. APPLICATION OF TRUST MONEY.
The Trustee shall hold in trust money or U.S. Government Obligations
deposited with it pursuant to Section 8.1. It shall apply the deposited money
and the money from U.S. Government Obligations through the Paying Agent and in
accordance with this Indenture to the payment of Principal and interest on the
Debentures. Money and securities so held in trust are not subject to Article 11.
SECTION 8.3. REPAYMENT TO COMPANY.
Subject to Section 7.7, the Trustee and the Paying Agent shall promptly
pay to the Company upon request any excess money or securities held by them at
any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request by the Company any money held by them for the payment of Principal or
interest that remains unclaimed for one year after the date upon which such
payment shall have become due; provided, however that the Company shall have
first caused notice of such payment to the Company to be mailed to each Holder
entitled thereto no less than 30 days prior to such payment. After payment to
the Company, Holders entitled to the money must look to the Company for payment
as general creditors unless an applicable abandoned property law designates
another Person.
SECTION 8.4. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money in
accordance with Section 8.2 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Debentures
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply
all such money or U.S. Government Obligations in accordance with Section 8.2;
provided, however that if the Company makes any payment of interest on or
Principal of any Debenture following the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders
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of such Debentures to receive such payment from the money held by the Trustee or
Paying Agent.
ARTICLE 9.
AMENDMENTS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS.
The Company and the Trustee may amend this Indenture or the Debentures
without the consent of any Holder:
(a) to cure any ambiguity, defect or inconsistency; provided,
that such amendment does not in the opinion of the Trustee adversely affect the
rights of any Holder;
(b) to comply with Section 5.1;
(c) to provide for uncertificated Debentures in addition to or in
lieu of certificated Debentures;
(d) to add to the covenants of the Company further covenants,
restrictions, conditions or provisions for the protection of the Holders, and to
make the occurrence, or the occurrence and continuance, of a default in any such
additional covenants, restrictions, conditions or provisions an Event of Default
permitting the enforcement of all or any of the several remedies provided in
this Indenture or in the Debentures as herein set forth;
(e) to make any change that does not adversely affect the legal
rights hereunder of any Holder; or
(f) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA;
provided, however, that, in each case, the Company has delivered to the Trustee
an Opinion of Counsel and an Officers' Certificate, each stating that such
amendment complies with the provisions of this Section 9.1.
SECTION 9.2. WITH CONSENT OF HOLDERS.
Subject to the provisions of Sections 6.4 and 6.7, the Company and the
Trustee may amend or modify this Indenture or the Debentures with the written
consent of the Holders of at least a majority in aggregate principal amount of
the then outstanding Debentures, and the Holders of a majority in aggregate
principal amount of the Debentures then outstanding may waive compliance in a
particular instance by the Company with any provision of this Indenture
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or the Debentures; provided, however, that, without the consent of each Holder
affected, an amendment, modification or waiver under this Section 9.2 may not
(with respect to any Debentures held by a non-consenting Holder):
(a) change the stated maturity of, or any installment of interest
on, or waive a default in the payment of Principal of or interest on any
Debenture;
(b) reduce the principal amount of any Debenture or reduce the
rate or extend the time of payment of interest on any Debenture;
(c) increase the conversion price (other than in connection with
a reverse stock split as provided in this Indenture);
(d) change the place or currency of payment of Principal or
repurchase price, if any, or interest on, any Debenture;
(e) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debenture;
(f) adversely affect the right to exchange or convert Debentures;
(g) reduce the percentage of the aggregate principal amount of
outstanding Debentures, the consent of the Holders of which is necessary to
modify or amend this Indenture;
(h) reduce the percentage of the aggregate principal amount of
outstanding Debentures, the consent of the Holders of which is necessary
for waiver of compliance with certain provisions of this Indenture or for
waiver of certain defaults;
(i) modify the provisions of this Indenture with respect to the
subordination of the Debentures in a manner adverse to the Holders;
(j) except as otherwise permitted under Article 5, consent to the
assignment or transfer by the Company of any of its rights and obligations
under this Indenture;
(k) modify the provisions of this Indenture with respect to the
right to require the Company to repurchase Debentures in a manner adverse
to the Holders; or
(l) modify the provisions of this Indenture with respect to the
vote necessary to amend this Section 9.2.
To secure a consent of the Holders under this Section 9.2, it shall not
be necessary for the Holders to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
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After an amendment or waiver under this Section 9.2 becomes effective,
the Company shall mail to Holders a notice briefly describing the amendment or
waiver. Any failure of the Company to mail such notices, or any defect therein,
shall not, however, in any way, impair or affect the validity of any such
amendment or waiver.
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to this Indenture or the Debentures shall be set forth
in a supplemental indenture that complies with the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplemental indenture or waiver becomes effective,
a consent to it by a Holder of a Debenture is a continuing consent by such
Holder and every subsequent Holder of a Debenture or portion of a Debenture that
evidences the same debt as such consenting Holder's Debenture, even if notation
of the consent is not made on any Debenture. However, prior to becoming
effective, any such Holder or subsequent Holder may revoke the consent as to its
Debentures or a portion thereof if the Trustee receives written notice of
revocation before the consent of Holders of the requisite aggregate principal
amount of Debentures then outstanding has been obtained and not revoked.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment or
waiver. If a record date is fixed, then notwithstanding the provisions of the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or waiver or to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No consent shall be valid or effective for more than 90 days after
such record date unless consents from Holders of the principal amount of
Debentures required hereunder for such amendment or waiver to be effective shall
have also been given and not revoked within such 90-day period.
After an amendment or waiver becomes effective it shall bind every
Holder, unless it is of the type described in any of clauses (a) through (k) of
Section 9.2. In such case, the amendment or waiver shall bind each Holder of a
Debenture who has consented to it and every subsequent Holder of a Debenture
that evidences the same debt as the consenting Holder's Debenture.
SECTION 9.5. NOTATION ON OR EXCHANGE OF DEBENTURES.
The Trustee (in accordance with the written direction of the Company)
may (at the Company's expense) place an appropriate notation about an amendment,
supplement or waiver on any Debenture thereafter authenticated. The Company in
exchange for all Debentures may issue and the Trustee shall authenticate new
Debentures that reflect the amendment or waiver. Failure to make the appropriate
notation or issue a new Debenture shall not affect the validity and effect of
such amendment, supplement or waiver.
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SECTION 9.6. TRUSTEE PROTECTED.
The Trustee shall sign all supplemental indentures authorized by this
Indenture, except that the Trustee need not sign any supplemental indenture that
adversely affects its rights. In signing or refusing to sign such supplemental
Indenture, the Trustee shall be entitled to receive an Officer's Certificate and
Opinion of Counsel to the effect that such supplemental Indenture is authorized
or permitted by this Indenture and will be valid and binding on the Company in
accordance with its terms.
ARTICLE 10.
CONVERSION
SECTION 10.1. CONVERSION PRIVILEGE.
Each Holder may, at such Holder's option, at any time prior to the
close of business on March 31, 2003, unless earlier redeemed or repurchased,
convert such Holder's Debentures, in whole or in part (in denominations of
$1,000 or multiples thereof), at 100% of the principal amount so converted, into
shares of the Common Stock of the Company at a conversion price per share equal
to $9.00, as such conversion price may be adjusted from time to time in
accordance with this Article 10 (the "Conversion Price").
SECTION 10.2. CONVERSION PROCEDURE.
To convert a Debenture, the Holder thereof must (1) complete and sign
the conversion notice on the reverse of such Debenture, (2) surrender such
Debenture to the Conversion Agent, (3) furnish appropriate endorsements and
transfer documents if required by the Registrar or the Conversion Agent and (4)
pay any transfer or similar tax if required by Section 10.6. The Company's
delivery to the Holder of a fixed number of shares of Common Stock (and any cash
in lieu of fractional shares of Common Stock into which such Debenture is
converted) shall be deemed to satisfy the Company's obligation to pay the
principal amount of such Debenture and, subject to Sections 3.4, 4.5(c) and
4.8(b) hereof, unless such Debenture is converted after a regular interest
payment record date and prior to the related Interest Payment Date, all accrued
interest that has not previously been paid. If such Debenture is converted after
a regular interest payment record date and prior to the related Interest Payment
Date, the full interest installment on such Debenture scheduled to be paid on
such Interest Payment Date shall be payable on such Interest Payment Date to the
Holder of record at the close of business on such record date. Moreover, if such
Debenture is converted after delivery of a notice of redemption with respect to
such Debenture, which notice provides for a redemption date after an Interest
Payment Date and prior to the next regular interest payment record date, then
notwithstanding such conversions, the interest installment on such Debenture
scheduled to be paid on and through the date of redemption shall be payable on
such redemption date to the last Holder of such Debenture.
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As promptly as practicable after the surrender of a Debenture in
compliance with this Section 10.2, the Company shall issue and deliver at the
office of the Registrar or the Conversion Agent to such Holder, or on such
Holder's written order, a certificate or certificates for the full number of
whole shares of Common Stock issuable upon the conversion of such Debenture in
accordance with the provisions of this Article 10 and a check or cash in respect
of any fractional share of Common Stock arising upon such conversion, as
provided in Section 10.3. In case any Debenture of a denomination greater than
$1,000 shall be surrendered for partial conversion, then, subject to Article 2,
the Company shall execute and the Trustee shall authenticate and deliver to the
Holder of the Debenture so surrendered, without charge to such Holder, a new
Debenture or Debentures in authorized denominations in an aggregate principal
amount equal to the unconverted portion of the surrendered Debenture.
Each conversion shall be deemed to have been effected on the date on
which such Debenture shall have been surrendered in compliance with this Section
10.2, and the Person in whose name any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder of record of the shares of Common Stock
represented thereby for all purposes; provided, however, that any such surrender
on any date when the stock transfer books of the Company shall be closed shall
constitute the Person in whose name such certificate or certificates are to be
issued as the holder of record of such shares for all purposes on the next
succeeding day on which such stock transfer books are open, but such conversion
shall be at the Conversion Price in effect on the date on which such Debenture
shall have been surrendered.
If the last day on which a Debenture may be converted is a Legal
Holiday in a place where a Conversion Agent is located, the Debenture may be
surrendered to that Conversion Agent on the next succeeding day that is not a
Legal Holiday.
Provisions of this Indenture that apply to conversion of all of a
Debenture also apply to conversion of a portion of such Debenture.
SECTION 10.3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.
No fractional shares of Common Stock of the Company or scrip
representing fractional shares of the Company's Common Stock shall be issued
upon conversion of Debentures. If more than one Debenture shall be surrendered
for conversion at one time by the same Holder, the full number of whole shares
of the Company's Common Stock which shall be issuable upon conversion shall be
computed on the basis of the aggregate principal amount of Debentures (or
specified portions thereof to the extent permitted hereby) so surrendered. If
any fractional share of the Company's Common Stock of the would be issuable upon
the conversion of any Debenture or Debentures, the Company shall make an
adjustment therefor in cash at the Current Market Price of such Common Stock as
of the close of business on the Business Day prior to such conversion.
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SECTION 10.4. ADJUSTMENT OF CONVERSION PRICE.
(a) In the event that the Company shall (i) pay a dividend or other
distribution, in shares of its Common Stock, on any class of Capital Stock of
the Company or any Subsidiary which is not wholly owned by the Company, (ii)
subdivide its outstanding Common Stock into a greater number of shares by any
means or (iii) combine its outstanding Common Stock into a smaller number of
shares, by any means, then in each such case the Conversion Price in effect
immediately prior thereto shall be adjusted so that the Holder of any Debenture
thereafter surrendered for conversion shall be entitled to receive the number of
shares of Common Stock of the Company that such Holder would have owned or have
been entitled to receive after the happening of such event had such Debenture
been converted immediately prior to the happening of such event. An adjustment
made pursuant to this Section 10.4(a) shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date of such subdivision or combination, as the case may be.
(b) In the event that the Company shall issue or distribute Capital
Stock or issue rights, warrants or options or convertible or exchangeable
securities entitling the holder thereof to subscribe for or purchase, convert
into or exchange for Capital Stock at a price per share less than the Current
Market Price per share on the date of issuance or distribution (provided that
(x) the issuance of Capital Stock upon the exercise of warrants or options or
the conversion or exchange of convertible or exchangeable securities will not
cause an adjustment in the Conversion Price if no such adjustment would have
been required at the time such warrant or option or convertible or exchangeable
security was issued and (y) the issuance of Common Stock of the Company to
finance all or a portion of the cost of a business acquisition, which Common
Stock is subject to transfer restrictions pursuant to Rule 144 under the
Securities Act upon issuance will not cause an adjustment in the Conversion
Price if such transfer restricted Common Stock is issued at a price per share
not less than 80% of the Current Market Price of the Common Stock on the date of
issuance), then at the earliest of (i) the date the Company shall enter into a
firm contract for such issuance or distribution, (ii) the record date for the
determination of shareholders entitled to receive any such rights, warrants,
options or convertible or exchangeable securities, if applicable, or (iii) the
date of actual issuance or distribution of any such Capital Stock or rights,
warrants, options or convertible or exchangeable securities, the Conversion
Price in effect immediately prior to such earliest date shall be adjusted so
that the Conversion Price shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such earliest date by:
(x) if such Capital Stock is Common Stock other than Common Stock which
is subject to transfer restrictions pursuant to Rule 144 under the
Securities Act upon issuance and which is issued to finance all or a
portion of the cost of a business acquisition, the fraction whose
numerator shall be the number of shares of Common Stock outstanding on
such date plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at such Current
Market Price (such amount, with respect to any such rights, warrants,
options, or convertible or exchangeable securities, determined by
multiplying the total number of shares subject thereto by the
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exercise, conversion or exchange price, as the case may be, of such
rights, warrants, options or convertible or exchangeable securities and
dividing the product so obtained by the Current Market Price), and of
which the denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of additional shares of Common
Stock to be issued or distributed or receivable upon exercise of any
such warrant, right, option or convertible or exchangeable securities;
(y) if such Capital Stock is Common Stock which is subject to transfer
restrictions pursuant to Rule 144 under the Securities Act upon
issuance and which is issued to finance all or a portion of the cost of
a business acquisition and such transfer restricted Common Stock is
issued at a price per share less than 80% of the Current Market Price
of the Common Stock on the date of issuance, the fraction whose
numerator shall be the number of shares of Common Stock outstanding on
such date plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at 80% of such
Current Market Price (such amount determined by dividing the total
amount of the cost of such acquisition financed with Common Stock by
80% of such Current Market Price) and of which the denominator shall be
the number of shares of Common Stock outstanding on such date plus the
number of additional shares of Common Stock to be so issued; or
(z) if such Capital Stock is other than Common Stock, the fraction
whose numerator shall be the Current Market Price per share of Common
Stock on such date minus an amount equal to (A) the sum of (I) the
Current Market Price per share of such class of Capital Stock
multiplied by the number of shares of such class of Capital Stock to be
so issued minus (II) the offering price per share of such Capital Stock
(such amount, with respect to any such rights, warrants, options or
convertible or exchangeable securities being the exercise, conversion
or exchange price thereof) multiplied by the number of shares of such
class of Capital Stock to be so issued (B) divided by the number of
shares of Common Stock outstanding on such date and whose denominator
is the Current Market Price per share of the Common Stock on such date.
Such adjustment shall be made successively whenever any such Capital Stock,
rights, warrants or options are issued or distributed at a price below the
Current Market Price therefor (80% in the case of Common Stock covered by the
preceding subparagraph (y)) as in effect on the date of issuance or
distribution. In determining whether any rights, warrants, options or
convertible or exchangeable securities entitle the holders to subscribe for or
purchase shares of Capital Stock at less than such Current Market Price, and in
determining the aggregate offering price of shares of Capital Stock so issued or
distributed, there shall be taken into account any consideration received by the
Company fur such Capital Stock, rights, warrants, options or convertible or
exchangeable securities the value of such consideration, if other than cash, to
be determined by the Board of Directors, whose determination shall be conclusive
and described in a certificate filed with the Trustee. If any right, warrant,
option or convertible or exchangeable securities to subscribe for, purchase,
convert into or exchange for Capital Stock, the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this subsection (b), shall expire
and shall not nave been exercised, the Conversion Price shall immediately upon
such expiration
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be recomputed to the Conversion Price which would have been in effect had the
adjustment of the Conversion Price made upon the issuance of such right,
warrant, option or convertible or exchangeable securities been made on the basis
of offering for subscription, purchase, conversion or exchange only that number
of shares of Capital Stock actually purchased upon the actual exercise of such
right, warrant, option or convertible or exchangeable securities.
(c) In the event that the Company shall pay or distribute, as a
dividend or otherwise, to holders of any class of its Capital Stock generally or
to holders of any class of Capital Stock of any Subsidiary of the Company which
is not wholly owned by the Company assets, Properties or rights (including,
without limitation, Capital Stock, evidences of indebtedness, cash or other
securities, but excluding payments and distributions for which adjustment is
made as described in Sections 10.4(a) and 10.4(b) above and further excluding
cash dividends paid with respect to any calendar year within 180 days after the
end of such calendar year and are not in excess of 50% of the Company's
Consolidated Net Income with respect to such year, then in each such case the
Conversion Price in effect immediately after the date of such payment or
distribution shall equal the amount determined by multiplying the Conversion
Price in effect immediately prior to the date of such payment or distribution by
a fraction whose numerator shall be the Current Market Price of the Common Stock
of the Company on the record date mentioned below less the Fair Market Value on
such record date of the assets, Properties or rights so paid or distributed and
whose denominator shall be the Current Market Price of the Common Stock of the
Company on such record date. Such adjustment shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such payment or distribution.
(d) The provisions of this Section 10.4 shall similarly apply to all
successive events of the type described in this Section 10.4. Notwithstanding
anything contained herein to the contrary, however, no adjustment in the
Conversion Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Conversion Price then in effect;
provided, however, that any adjustments which by reason of this Section 10.4(d)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Article 10 shall be made
by the Company and shall be made to the nearest cent or to the nearest one
hundredth of a share, as the case may be and the Trustee shall be entitled to
rely thereon. Anything in this Section 10.4 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Conversion Price, in
addition to those required by this Section 10.4, as it in its discretion shall
determine to be advisable in order that any stock dividends, subdivision of
shares, distribution of rights to purchase stock or securities, or a
distribution of securities convertible into or exchangeable for stock hereafter
made by the Company to its stockholders shall not be taxable. Except as provided
in this Article 10, no adjustment in the Conversion Price will be made for the
issuance of Common Stock or any securities convertible into or exchangeable for
such Common Stock, or carrying the right to purchase any of the foregoing.
(e) Whenever the Conversion Price is adjusted as herein provided, the
Company shall promptly file with the Trustee and any Conversion Agent other than
the Trustee an Officers' Certificate setting forth the Conversion Price after
such adjustment and setting forth
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a brief statement of the facts requiring such adjustment. Promptly after
delivery of such Officers' Certificate, the Company shall prepare a notice of
such adjustment of the conversion Price setting forth the adjusted Conversion
Price and the date on which such adjustment becomes effective and shall mail or
cause to be mailed such notice to each Holder at his last address appearing on
the Register.
(f) Notwithstanding anything contained herein to the contrary, in any
case in which this Section 10.4 provides that an adjustment in the Conversion
Price shall become effective immediately after a record date for an event, the
Company may defer until the occurrence of such event (i) issuing to the Holder
of any Debenture converted after such record date and before the occurrence of
such event the additional shares of Common Stock issuable upon such conversion
by reason of the adjustment required by such event over and above the Common
Stock of the Company issuable upon such conversion before giving effect to such
adjustment and (ii) paying to such Holder any amount in cash in lieu of any
fractional share of such Common Stock pursuant to Section 10.3 hereof.
SECTION 10.5. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
In the event of (i) any reclassification or change of outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), (ii) any consolidation, merger or combination of the Company
with another corporation as a result of which holders of Common Stock shall be
entitled to receive securities or other Property (including cash) with respect
to or in exchange for such Common Stock or (iii) any sale or conveyance of the
Property of the Company as, or substantially as, an entirety to any other
corporation as a result of which holders of Common Stock shall be entitled to
receive securities or other Property (including cash) with respect to or in
exchange for such Common Stock, then the Company or the successor or purchasing
corporation, as the case may be, shall enter into a supplemental indenture
providing that each Debenture shall be convertible into the kind and amount of
securities or other Property (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
by a holder of a number of shares of Common Stock issuable upon conversion of
such Debentures immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance. Such supplemental
indenture shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article 10.
The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each Holder, at his address appearing on the Register.
Whenever a supplemental indenture is entered into as herein provided,
the Company shall promptly file with the Trustee and any Conversion Agent other
than the Trustee an Officers' Certificate setting forth a brief statement of the
facts requiring such supplemental indenture and warranting that such
supplemental indenture complies with the provisions of this Indenture. Promptly
after delivery of such Officers' Certificate, the Company shall mail or cause to
be
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mailed notice of the execution of such supplemental indenture and the effective
date thereof to each Holder, at his address appearing on the Register.
The provisions of this Section 10.5 shall similarly apply to all
successive events of the type described in this Section 10.5.
SECTION 10.6. TAXES ON SHARES ISSUED.
The issuance of a certificate or certificates on conversions of
Debentures shall be made without charge to the Holders of such Debentures for
any tax or charge in respect of the issuance thereof. The Company shall not,
however, be required to pay any tax or charge which may be payable in respect of
any transfer involved in the issue and delivery of a certificate or certificates
in any name other than that of the Holders of such Debentures, and the Company
shall not be required to issue or deliver any such certificate or certificates
unless and until the Person or Persons requesting the issue thereof shall have
paid to the Company the amount of such tax or charge or shall have established
to the satisfaction of the Company that such tax or charge has been paid.
SECTION 10.7. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE
WITH GOVERNMENT REQUIREMENTS; LISTING OF COMMON STOCK.
The Company shall reserve, out of its authorized but unissued Common
Stock or its Common Stock held in treasury, sufficient shares of its Common
Stock to provide for the conversion of the Debentures that are outstanding from
time to time.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
of the Company issuable upon conversion of Debentures, the Company will take all
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue shares of its Common Stock at
such adjusted Conversion Price.
The Company covenants that all shares of its Common Stock which may be
issued upon conversion of Debentures will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof.
The Company covenants that if any shares of its Common Stock issued or
delivered upon conversion of Debentures hereunder require registration with or
approval of any governmental authority under any applicable federal or state law
(excluding federal or state securities laws) before such shares may be lawfully
issued, the Company will in good faith and as expeditiously as possible endeavor
to secure such registration or approval, as the case may be.
SECTION 10.8. RESPONSIBILITY OF TRUSTEE REQUIREMENTS.
The Trustee and any other Conversion Agent shall not at any time be
under any duty or responsibility to any Holder to determine whether any fact
exists which may require any
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adjustment of the Conversion Price or other adjustment, or with respect to the
nature, extent or calculation of any such adjustment when made, or with respect
to the method employed, or herein or in any supplemental indenture provided to
be employed, in making any such adjustment. The Trustee and any other Conversion
Agent shall not be accountable with respect to the validity, value, kind or
amount of any item at any time issued or delivered upon the conversion of any
Debenture, and neither the Trustee nor any other Conversion Agent makes any
representations with respect thereto. Subject to Section 8.1, neither the
Trustee nor any Conversion Agent shall be responsible for any failure of the
Company to issue, transfer or deliver any item upon the surrender of any
Debenture for conversion or to comply with any of the duties, responsibilities
or covenants of the Company contained in this Article 10. Without limiting the
generality of the foregoing, neither the Trustee nor any Conversion Agent shall
be under any responsibility to determine the correctness of any provisions
contained in any supplemental indenture entered into pursuant to Section 10.5
hereof, but, subject to the provisions of Section 8.1 hereof, may accept as
conclusive evidence of the correctness of any such provisions, and shall be
protected in relying upon, the Officers' Certificate with respect thereto.
SECTION 10.9. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS.
In the event that:
(a) the Company shall declare or authorize any event which could result
in an adjustment in the Conversion Price under Section 10.4(a), 10.4(b) or
10.4(c) hereof or require the execution of a supplemental indenture under
Section 10.5 hereof; or
(b) the Company shall authorize the granting to the holders of its
Common Stock generally of rights, options or warrants to subscribe for or
purchase any shares of any class of its Capital Stock or any other rights,
options or warrants, the reclassification of its Common Stock (other than a
subdivision or combination of its outstanding shares of Common Stock, or a
change in par value, or from par value to no par value, or from no par value to
par value), the combination, consolidation or merger of the Company for which
approval of any stockholders of the Company is required, the sale or transfer of
all or substantially all of the assets of the Company or the voluntary or
involuntary dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall file or cause to be filed with the
Trustee and shall mail or cause to be mailed to each Holder at his address
appearing on the Register, as promptly as possible but in any event at least 15
days prior to the applicable date hereinafter specified, a notice prepared by
the Company stating the date on which a record is to be taken for the purpose of
determining the holders of outstanding shares of its Common Stock entitled to
participate in such event, the date on which such event is expected to become
effective or occur and the date on which it is expected that holders of
outstanding shares of its Common Stock of record shall be entitled to surrender
their shares, or receive any items, in connection with such event. Failure to
give such notice, or any defect therein, shall not affect the legality or
validity of such event.
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ARTICLE 11.
SUBORDINATION
SECTION 11.1. AGREEMENT TO SUBORDINATE.
The Company agrees, and each Holder by accepting a Debenture agrees,
that the indebtedness evidenced by the Debentures is subordinated in right of
payment, to the extent and in the manner provided in this Article 11, to the
prior payment in full of all Senior Indebtedness, and that the subordination is
for the benefit of the holders of Senior Indebtedness. All provisions of this
Article 11 shall be subject to Section 11.13.
SECTION 11.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution to creditors of the Company in a
liquidation, dissolution or winding up of the Company or in a bankruptcy,
reorganization, insolvency, receivership, assignment for the benefit of
creditors or similar proceeding, whether voluntary or involuntary, relating to
the Company or its property:
(a) holders of Senior Indebtedness shall be entitled to
receive payment in full of all Senior Indebtedness before Holders shall
be entitled to receive any payments of Principal or interest on the
Debentures; and
(b) until the Senior Indebtedness is paid in full, any
distribution to which Holders would be entitled but for this Article 11
shall be made to holders of Senior Indebtedness as their interests may
appear, except that Holders may receive securities that are
subordinated to Senior Indebtedness to at least the same extent as the
Debentures; provided that no such default will prevent any payment on,
or in respect of, the Debentures for more than 120 days unless the
maturity of such Senior Indebtedness has been accelerated.
A distribution may consist of cash, securities or other property.
The consolidation of the Company with, or the merger of the Company
with or into, another person or the liquidation or dissolution of the Company
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety to another Person upon the terms and conditions set
forth in Article 5 hereof shall not be deemed a bankruptcy, reorganization,
insolvency, receivership, assignment for the benefit of creditors or similar
proceeding for the purposes of this Section 11.2 if the Person formed by such
consolidation or the surviving entity of such merger or the Person which
acquires by conveyance, transfer or lease such properties and assets
substantially as an entirety,a s the case may be, shall, as a part of such
consolidation, merger, conveyance, transfer or lease, comply with the conditions
set forth in Article 5 hereof.
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SECTION 11.3. COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO DEBENTURES IN
CERTAIN CIRCUMSTANCES.
(a) Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, all Principal thereof and interest thereon and any
other amounts owing in respect thereof shall first be paid in full, or such
payment duly provided for in cash or in a manner satisfactory to the holders of
such Senior Indebtedness before any payment is made on account of the Principal
or interest on the Debentures or to acquire any of the Debentures.
(b) Upon the happening of an event of default (or if any event of
default would result upon any payment upon or with respect to Debentures) with
respect to any Senior Indebtedness as such event of default is defined therein
or in the instrument under which it is outstanding, permitting holders to
accelerate the maturity thereof, and, if the default is other than default in
payment of the Principal or interest on or any other amount owing in respect of
such Senior Indebtedness, upon written notice thereof given to the Company and
the Trustee by the holders of Senior Indebtedness or their Representative, then,
unless (i) such an event of default shall have been cured or waived or shall
have ceased to exist or (ii) the Company and the Trustee receive written notice
from the Representative of the Senior Indebtedness with respect to which such
event of default relates approving payment on the Debentures, no payment shall
be made by the Company with respect to the Principal or interest on the
Debentures or to acquire any of the Debentures; provided that no such default
will prevent any payment on, or in respect of, the Debentures for more than 120
days unless the maturity of such Senior Indebtedness has been accelerated. Not
more than one such 120 day delay may be made in any consecutive 360 day period,
irrespective of the number of defaults with respect to Senior Indebtedness
during such period.
SECTION 11.4. ACCELERATION OF DEBENTURES.
If payment of the Debentures is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Indebtedness of the
acceleration.
SECTION 11.5. WHEN DISTRIBUTION MUST BE PAID OVER.
If a distribution is made to Holders that, because of this Article 11,
should not have been made to them, the Holders who receive the distribution
shall hold it in trust for holders of Senior Indebtedness and pay it over to
them as their interests may appear.
SECTION 11.6. NOTICE BY COMPANY.
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of Principal of or
interest on the Debentures to violate this Article 11.
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SECTION 11.7. SUBROGATION.
After all Senior Indebtedness is paid in full and until the Debentures
are paid in full, Holders shall be subrogated to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to the
extent that distributions otherwise payable to the Holders have been applied to
the payment of Senior Indebtedness. A distribution made under this Article 11 to
holders of Senior Indebtedness which otherwise would have been made to Holders
is not, as between the Company and Holders, a payment by the Company on Senior
Indebtedness.
SECTION 11.8. RELATIVE RIGHTS.
This Article 11 defines the relative rights of Holders and holders of
Senior Indebtedness. Nothing in this Indenture shall:
(a) impair, as between the Company and Holders, the obligation of the
Company, which is absolute and unconditional, to pay Principal of and
interest on the Debentures in accordance with their terms;
(b) affect the relative rights of Holders and creditors of the Company,
other than holders of Senior Indebtedness; or
(c) prevent the Trustee or any Holder from exercising its available
remedies upon a Default, subject to the rights of holders of Senior
Indebtedness to receive distributions otherwise payable to Holders.
If the Company fails because of this Article 11 to pay Principal or
interest on a Debenture on the due date, such failure shall nevertheless be
deemed a Default. Nothing in this Article 11 shall have any effect on the right
of the Holders or the Trustee to accelerate the maturity of the Debentures.
SECTION 11.9. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Indebtedness to enforce the
subordination of the indebtedness evidenced by the Debentures shall be impaired
by any act or failure to act by the Company or by its failure to comply with the
terms of this Indenture.
SECTION 11.10. DISTRIBUTION OF NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Senior Indebtedness, the distribution may be made and the notice given to their
Representative, if any.
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SECTION 11.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding any provisions of this Indenture to the contrary, the
Trustee and any Paying Agent may continue to make payments on the Debentures and
shall not at any time be charged with knowledge of the existence of any facts
which would prohibit the making of such payments until it receives written
notice (received by a Trust Officer, in the case of the Trustee) reasonably
satisfactory to it that payments may not be made under this Article 11 and,
prior to the receipt of any such notice, the Trustee, subject to the provisions
of Article 7 hereof, and any agent shall be entitled to assume conclusively that
no such facts exist. The Company, an Agent, a Representative or a holder of
Senior Indebtedness may give the notice. If an issue of Senior Indebtedness has
a Representative, only the Representative (or any Representative, if more than
one) may give the notice with respect to such Senior Indebtedness.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a Representative) to establish that such notice has been given
by a holder of Senior Indebtedness (or a Representative), and shall be entitled
to rely on any written notice by a Person representing himself to be a holder of
Senior Indebtedness to the effect that such issue of Senior Indebtedness has no
Representative.
Any deposit of moneys by the Company with the Trustee or any Paying
Agent (whether or not in trust) for the payment of the Principal or interest on,
or payment on account of a Change of Control or Net Worth Deficiency, if any,
of, any Debentures shall be subject to the provisions of this Article 11, except
that if, at least three Business Days prior to the date on which by the terms of
this Indenture any such moneys may become payable for any purpose (including
without limitation, the payment of Principal or interest on any Debenture), the
Trustee shall not have received with respect to such moneys the notice provided
for in this Section 11.11, then the Trustee shall have full power and authority
to receive such moneys and to apply the same to the purpose for which they were
received and shall not be affected by any notice to the contrary which may be
received by it within three Business Days prior to or on or after such date.
This Section 11.11 shall be construed solely for the benefit of the Trustee and
Paying Agent and shall not otherwise affect the rights of holders of Senior
Indebtedness. In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any Person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 11, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of the Senior
Indebtedness held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article 11, and, if such evidence is not
furnished, the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive payment.
The Trustee shall not be deemed to owe any fiduciary duty to holders of
Senior Indebtedness by virtue of the provisions of this Article 11. The
Trustee's responsibilities to the holders of Senior Indebtedness are limited to
those set forth in this Article 11 and no implied covenants or obligations shall
be read into this Indenture. The Trustee shall not become liable
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to holders of Senior Indebtedness if it makes a payment prohibited by this
Article 11 in good faith.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
SECTION 11.12. EFFECTUATION OF SUBORDINATION BY TRUSTEE.
Each Holder of Debentures, by acceptance thereof, authorizes and
directs the Trustee on such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article 11 and appoints the Trustee as such Holders' attorney-in-fact for any
and all such purposes, including the execution of one or more inter-creditor
agreements or subordination agreements in accordance with Section 11.14.
SECTION 11.13. TRUST MONEYS NOT SUBORDINATED.
Notwithstanding anything contained herein to the contrary, payments
from money or the proceeds of U.S. Government Obligations held in trust under
Article 8 by the Trustee for the payment of Principal of and interest on the
Debentures shall not be subordinated to the prior payment of any Senior
Indebtedness or subject to the restrictions set forth in this Article 11, and
none of the Holders shall be obligated to pay over any such amount to the
Company or any holder of Senior Indebtedness of the Company or any other
creditor of the Company.
ARTICLE 12.
MISCELLANEOUS
SECTION 12.1. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision shall control.
SECTION 12.2. NOTICES.
Any notice or communication by the Company or the Trustee to the other
is duly given if in writing and delivered in person or mailed by first-class
mail (registered or certified, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery addressed as follows:
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if to the Company:
777 South Flagler Drive
West Palm Beach, Florida 33401
Fax No. (407) 833-8391
Attention: Chairman
if to the Trustee: 40 Wall Street
New York, New York 10005
Fax. No. (718) 236-4588
Attention: Executive Vice President
The Company or the Trustee by notice to the other may designate additional or
different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall
be deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after being deposited in the mail, postage
prepaid, if mailed; when answered back, if telexed; when receipt acknowledged,
if telecopied; and the next Business Day after timely delivery to the courier,
if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register kept
by the Registrar. Any notice or communication shall also be so mailed to any
Person described in TIA ss. 313(c), to the extent required by the TIA. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
SECTION 12.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Holders may communicate pursuant to TIA ss. 312(b) with other Holders
with respect to their rights under this Indenture or the Debentures. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA ss. 312(c).
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SECTION 12.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(b) at the Trustee's request, an Opinion of Counsel stating
that, in the opinion of such counsel, all such conditions precedent
have been complied with.
SECTION 12.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION OF COUNSEL.
Each Officers' Certificate or Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture shall
include:
(a) a statement that the individual making such Officers'
Certificate or Opinion of Counsel has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such Officers' Certificate or Opinion of Counsel are
based;
(c) a statement that, in the opinion of such individual, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such
individual, such condition or covenant has been complied with;
provided, however, that, with respect to certain matters of fact not
involving any legal conclusion, an Opinion of Counsel may, upon the
consent of the parties relying on such opinion, rely on an Officers'
Certificate or certificates of public officials.
SECTION 12.6. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar, Paying Agent or Conversion Agent may make reasonable
rules and set reasonable requirements for its functions.
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SECTION 12.7. LEGAL HOLIDAYS.
If a payment date is a Legal Holiday at a place of payment, payment may
be made at such place of payment on the next succeeding Business Day that is not
a Legal Holiday, and no additional interest shall accrue for the intervening
period.
SECTION 12.8. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation including with respect to any
certificate delivered thereunder or hereunder. Each Holder by accepting a
Debenture waives and releases all such liability. The waiver and release
contained in this Section 12.8 are part of the consideration for the Company's
issuance of the Debentures.
SECTION 12.9. COUNTERPARTS.
This Indenture may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
SECTION 12.10. GOVERNING LAW.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE
AND THE DEBENTURES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
SECTION 12.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary of the Company. Any such
indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.12. SUCCESSORS.
All agreements of the Company in this Indenture and the Debentures
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.
SECTION 12.13. SEVERABILITY.
In case any provision of this Indenture or in the Debentures shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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SECTION 12.14. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
executed as of the day and year first above written.
U.S. DIAGNOSTIC LABS INC.
By:-----------------------------
Name:
Title:
Attest:
- ---------------------------------
Name:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:-----------------------------
Name:
Title:
Attest:
- ---------------------------------
Name:
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EXHIBIT A
[Face of Debenture]
U.S. DIAGNOSTIC LABS INC.
9% SUBORDINATED CONVERTIBLE DEBENTURE DUE 2003
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS DEBENTURE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS DEBENTURE NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION. EACH PURCHASER OF THIS DEBENTURE IS HEREBY NOTIFIED
THAT THE SELLER OF THIS DEBENTURE MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS DEBENTURE AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) THIS DEBENTURE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (III)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (IV)
TO THE COMPANY OR (V) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH
(V) IN ACCORDANCE WITH ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
OF THIS DEBENTURE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
A-1
<PAGE>
[Institutional Accredited Investor Legend]
IN CONNECTION WITH ANY TRANSFER OF THIS DEBENTURE, THE HOLDER WILL
DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER
INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.
CUSIP No. 90328Q AA 6
No. $
-------------- --------------------
U.S. DIAGNOSTIC LABS INC., a Delaware corporation, promises to pay to
- ---------------------------------- or registered assigns, the principal sum of
- ------------------------------ Dollars on March 31, 2003.
Interest Payment Dates: March 31 and September 30, commencing
September 30, 1996.
Record Dates: March 15 and September 15.
Reference is made to the further provisions of this Debenture set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Dated: U.S. DIAGNOSTIC LABS INC.
By:
-----------------------------
Officer of the Company
(SEAL)
Attest:
By:
-----------------------------
Secretary
Authentication:
This is one of the Debentures referred
to in the within-mentioned Indenture:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Trustee
By:
------------------------------
Authorized Signature
Dated:
-------------
A-2
<PAGE>
[Reverse Side]
Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Indenture, dated as of March 29, 1996 (the
"Indenture"), as amended from time to time, between U.S. Diagnostic Labs Inc.
(the "Company") and American Stock Transfer & Trust Company, as trustee (the
"Trustee").
1. INTEREST.
(a) The Company shall pay interest on the outstanding
principal amount of this Debenture at the rate of 9% per annum from April 3,
1996 until maturity. The Company will pay interest semi-annually on March 31 and
September 30 of each year commencing September 30, 1996, or if any such day is
not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Debentures will accrue from the most recent date
on which interest has been paid or, if no interest has been paid, from April 3,
1996; provided, however, that if there is no existing Default in the payment of
interest, and if this Debenture is authenticated between a record date referred
to on the face hereof and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
(b) To the extent lawful, the Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
(i) overdue Principal at the rate borne by the Debentures; and (ii) overdue
installments of interest at the same rate.
2. METHOD OF PAYMENT. The Company will pay interest (except defaulted
interest) on the Debentures to the Persons who are registered Holders at the
close of business on the March 15 or September 15 next preceding the applicable
Interest Payment Date, even if such Debentures are cancelled after such record
date and on or before such Interest Payment Date. Defaulted interest shall be
paid to Holders as of a special record date established for purposes of
determining the Holders entitled thereto. The Debentures will be payable as to
Principal and interest at the office or agency of the Company maintained for
such purpose within or without the City and State of New York, or, at the option
of the Company, payment of interest may be made by check mailed to the Holders
at their addresses set forth in the register of Holders, and provided that
payment by wire transfer of immediately available funds will be required with
respect to Principal of and interest on the Global Security. Such payment shall
be in currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT, REGISTRAR AND CONVERSION AGENT. Initially, the Trustee
will act as Paying Agent, Registrar and Conversion Agent. The Company may change
any Paying Agent, Registrar or Conversion Agent without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Debentures under the Indenture.
The terms of the Debentures include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"TIA"), as in effect on the date of the Indenture. The Debentures are subject to
all such terms, and Holders are referred to the Indenture and the TIA for a
statement of such terms. The Debentures are general unsecured obligations of the
Company limited to $57,500,000 in aggregate principal amount, subject to Section
2.7 of the Indenture.
5. OPTIONAL REDEMPTION BY THE COMPANY. The Debentures are not subject
to redemption at the option of the Company prior to March 31, 1999. On or after
March 31, 1999, the Debentures will be redeemable at any time prior to maturity
at the option of the Company, in whole or in part from time to time, upon not
less than 30 days' nor more than 60 days' prior notice to the Holders at the
redemption prices (expressed as percentages of principal amount) set forth
below:
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AFTER MARCH 31, PERCENTAGE
1999 105.00%
2000 103.67
2001 101.33
2002 100.00
In each case together with accrued but unpaid interest, if any, to the
redemption date.
6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the
Company shall not be required to make mandatory redemptions with respect to the
Debentures.
7. REDEMPTION AT THE OPTION OF HOLDER.
(a) Upon a Change of Control, the Company shall offer to repurchase all
then outstanding Debentures (at each Holder's option) at a repurchase price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
to the Change of Control Payment Date, if any. Within 30 days after a Change of
Control, the Company shall mail a notice to each Holder setting forth the
procedures governing the Change of Control Offer as required by the Indenture. A
Holder may tender or refrain from tendering all or any portion of such Holder's
Debentures, at such Holder's discretion, by completing the form entitled "Option
of Holder to Elect Repurchase" below and delivering such form, together with the
Debentures with respect to which the repurchase right is being exercised, duly
endorsed for transfer to the Company, to the Trustee. Any partial tender of
Debentures must be in an integral multiple of $1,000.
(b) If, at any time or from time to time, the Company's Consolidated
Net Worth at the end of each of any two consecutive fiscal quarters (the last
day of the second fiscal quarter being referred to as a "Deficiency Date") is
less than $18.0 million, then the Company shall, in each such event, offer to
repurchase up to 12.5% of the aggregate principal amount of Debentures
originally issued (or such lesser amount as may be outstanding at the time
notice of such deficiency is sent) (the "Deficiency Repurchase Amount") at a
repurchase price equal to 100% of the principal amount of the Debentures to be
repurchased, plus accrued but unpaid interest to the date of repurchase. The
failure to have a Consolidated Net Worth of at least $18.0 million at the end of
any fiscal quarter shall not be counted towards more than one Deficiency Offer.
Within 50 days after each Deficiency Date (100 days if a Deficiency Date is also
the end of the Company's fiscal year), the Company shall mail a notice to each
Holder setting forth the procedures governing the Deficiency Offer as required
by the Indenture. A Holder of Debentures may tender or refrain from tendering
all or any portion of such Holder's Debentures at such Holder's discretion by
completing the form entitled "Option of Holder to Elect Repurchase" below and
delivering such form, together with the Debentures with respect to which the
repurchase right is being exercised, duly endorsed for transfer to the Company,
to the Trustee prior to the expiration of the Deficiency Offer. Any partial
tender of Debentures must be in an integral multiple of $1,000. If the aggregate
principal amount of Debentures delivered for repurchase pursuant to any
Deficiency Offer exceeds the Deficiency Repurchase Amount, the Debentures to be
repurchased shall be selected pro rata (in $1,000 increments only) among the
Debentures delivered based on the relative principal amounts of Debentures owned
by the Holders delivering Debentures for repurchase.
The Company may credit against the principal amount of Debentures to be
repurchased in any Deficiency Offer 100% of the principal amount (excluding
premium) of Debentures acquired by the Company subsequent to a Deficiency Date
and prior to the related Deficiency Repurchase Date through purchase (other than
pursuant to the provisions contained in paragraph 7(a) hereof), optional
redemption, conversion or exchange and surrendered for cancellation.
8. CONVERSION.
To convert a Debenture, the Holder thereof must (i) complete and sign
the conversion notice below, (ii) surrender such Debenture to the Conversion
Agent, (iii) furnish appropriate endorsements and transfer documents
A-4
<PAGE>
if required by the Registrar or the Conversion Agent and (iv) pay any transfer
or similar tax if required by Section 10.6 of the Indenture. No fractional
shares of the Company's Common Stock will be issued upon conversion, but an
adjustment in cash will be made, as provided in the Indenture, in respect of any
fractional share which would otherwise be issuable upon conversion. A Holder is
not entitled to any rights of a holder of Common Stock of the Company until such
Holder has converted its Debentures into shares of Common Stock of the Company
as provided in the Indenture.
9. SUBORDINATION. The Debentures are subordinated to Senior
Indebtedness. To the extent provided in the Indenture, Senior Indebtedness must
be paid before the Debentures may be paid. The Company agrees, and each Holder
by accepting a Debenture agrees, to the subordination provisions contained in
the Indenture and authorizes the Trustee to give effect to such provisions, and
each Holder appoints the Trustee its attorney-in-fact for any and all such
purposes.
10. DENOMINATIONS, TRANSFER, EXCHANGE. The Debentures are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. A Holder may transfer or exchange Debentures as provided in the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not exchange
or register the transfer of any Definitive Security (or portion thereof selected
for redemption). Also, it need not exchange or register the transfer of any
Debentures during the 15 day period preceding the mailing of a notice of
redemption or an offer to repurchase Debentures or the 15 day period preceding
an Interest Payment Date.
11. PERSONS DEEMED OWNERS. The registered Holder of a Debenture may be
treated as its owner for all purposes.
12. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Debentures may be amended with the consent of the Holders of at
least a majority in aggregate principal amount of the Debentures then
outstanding, and any existing Default (except a payment default) may be waived
with the consent of the Holders of at least a majority in aggregate principal
amount of the Debentures then outstanding. Without the consent of any Holder,
the Company and the Trustee may amend or supplement the Indenture or the
Debentures to (i) cure any ambiguity, defect or inconsistency, provided that
such amendment does not in the opinion of the Trustee adversely affect the
rights of any Holder, (ii) provide for uncertificated Debentures in addition to
or in lieu of certificated Debentures, (iii) comply with Sections 5.1 and 10.5
of the Indenture, (iv) make any change that does not adversely affect the rights
of any Holder, or (v) comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the TIA.
13. DEFAULTS AND REMEDIES. Events of Default include: (a) failure to
pay Principal of any Debenture when due and payable at maturity, upon
redemption, upon a Change of Control Offer, Deficiency Offer or otherwise,
whether or not such payment is prohibited by the subordination provisions of the
Indenture; (b) failure to pay any interest on any Debenture when due and
payable, which failure continues for 30 days, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (c) failure to
perform the other covenants of the Company in the Indenture, which failure
continues for 60 days after written notice as provided in the Indenture; (d)
failure to pay when due Principal of and/or acceleration of, any indebtedness
for money borrowed by the Company or any of its Subsidiaries in excess of
$1,000,000, individually or in the aggregate, if such indebtedness is not
discharged, or such acceleration is not annulled, within 10 days after written
notice as provided in the Indenture; and (e) certain events of bankruptcy,
insolvency or reorganization of the Company or any Subsidiary. If an Event of
Default shall occur and be continuing, the Trustee or the Holders of at least
25% in aggregate principal amount of the then outstanding Debentures may
accelerate the maturity of all Debentures, except that in the case of an Event
of Default arising from certain events of bankruptcy or insolvency, all
outstanding Debentures shall immediately so accelerate. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Debentures
at the request or direction of any of the Holders. Subject to certain
limitations, the Holders of a majority in aggregate principal amount of the
outstanding Debentures will have the right to direct the
A-5
<PAGE>
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. The
Company must furnish an annual compliance certificate to the Trustee.
14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if were not Trustee; provided, however, that if
the Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
15. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Debentures or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Debenture waives and
releases all such liability. The waiver and release contained in Article 12 of
the Indenture are part of the consideration for the Company's issuance of the
Debentures.
16. AUTHENTICATION. This Debenture shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
17. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants
by the entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors
Act).
18. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In
addition to the rights provided to Holders of Debentures under the Indenture,
Holders of Transfer Restricted Securities shall have all the rights set forth in
the Registration Rights Agreement.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
U.S. Diagnostic Labs Inc.
777 South Flagler Drive
West Palm Beach, FL 33401
Attn: Chairman
A-6
<PAGE>
SCHEDULE OF EXCHANGES OF GLOBAL SECURITY
FOR DEFINITIVE SECURITIES
The following exchanges of this Global Security for Definitive
Securities have been made:
<TABLE>
<S> <C> <C> <C> <C>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized officer
Principal Amount in Principal Security following of Trustee or
of this Global Amount of this such decrease or Debentures
Date of Exchange Security Global Security increase) Custodian
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-7
<PAGE>
FORM OF ELECTION TO CONVERT
I (we) hereby irrevocably exercise the option to convert this
Debenture, or the portion below designated, into shares of Common Stock of U.S.
DIAGNOSTIC LABS INC. in accordance with the terms of the Indenture referred to
in this Debenture, and direct that the shares issuable and deliverable upon
conversion, together with any check in payment for fractional shares, be issued
in the name of and delivered to the undersigned registered Holder hereof, unless
a different name has been indicated below. If shares are to be issued in the
name of a Person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto.
Portion of this Debenture
to be converted (if partial
conversion, $1,000 or an
integral multiple thereof): $
-----------------------
If shares of Common Stock are to be issued and registered in the name of a
Person other than the undersigned, please print the name and address, including
zip code, and social security or other taxpayer identification number of such
Person below.
------------------------------
------------------------------
------------------------------
Your Name:
----------------------------------
(exactly as your name appears
on the face of this Debenture)
By:
--------------------------------------
Title:
-----------------------------------
Date:
------------------------------------
A-8
<PAGE>
ASSIGNMENT FORM
To assign this Debenture, fill in the form below: (I) or (we) assign and
transfer this Debenture to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint agent
--------------------------------------------------
to transfer this Debenture on the books of the Company. The agent may
substitute another to act for him.
Date:
----------------
Your Name:
---------------------------------
(exactly as your name appears
on the face of this Debenture)
By:
-----------------------------------------
Title:
---------------------------------------
Date:
----------------------------------------
Signature Guaranteed:
By:
-------------------------
This signature shall be guaranteed by an
eligible guarantor institution (a bank
or trust company having an office or
correspondent in the United States or a
broker or dealer which is a member of a
registered securities exchange or the
National Association of Securities Dealers,
Inc.) with membership in an approved
signature guaranty medallion program pursuant
to SEC Rule 17Ad-15.
======================
[THE FOLLOWING IS APPLICABLE ONLY IF A RESTRICTED SECURITIES
LEGEND APPEARS ON THE FACT OF THIS DEBENTURE]
In connection with any transfer or exchange of any of the Debentures
evidenced by this certificate occurring prior to the date that is three years
after the later of the date of original issuance of such Debentures and the last
date, if any, on which such Debentures were owned by the Company or any
Affiliate of the Company, the undersigned confirms that such Debentures are
being:
[CONTINUED ON NEXT PAGE]
A-9
<PAGE>
CHECK ONE BOX BELOW:
|_| (1) acquired for the undersigned's own account, without transfer
(in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A)
of the Indenture; or
|_| (2) transferred to the Company; or
|_| (3) transferred pursuant to and in compliance with Rule 144A under the
Securities Act of 1933; or
|_| (4) transferred pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
|_| (5) transferred to an institutional "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act of 1933), that has furnished to the Company
and the Trustee a signed letter containing certain
representations and agreements (the form of which letter
appears as Exhibit C to the Indenture); or
|_| (6) transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Debentures evidenced by this certificate in the name of any Person other
than the registered holder thereof; provided, however, that if box (4), (5) or
(6) is checked, the Company, Trustee or Registrar may require, prior to
registering any such transfer of the Debentures, in their sole discretion, such
legal opinions, certifications and other information as the Company, Trustee or
Registrar has reasonably requested to confirm that such transfer is being made
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933, including but not
limited to the exemption provided by Rule 144 under such Act.
Your Name:
------------------------
(exactly as your name appears
on the face of this Debenture)
By:
-------------------------------
Title:
-----------------------------
Date:
-----------------------------
Signature Guaranteed:
By:
-------------------------------------
This signature shall be guaranteed by an
eligible guarantor institution (a bank
or trust company having an office or
correspondent in the United States or a
broker or dealer which is a member of a
registered securities exchange or the
National Association of Securities Dealers,
Inc.) with membership in an approved
signature guaranty medallion program
pursuant to SEC Rule 17Ad-15.
A-10
<PAGE>
OPTION OF HOLDER TO ELECT REPURCHASE
1. If you want to elect to have all or any part of this Debenture
repurchased by the Company pursuant to Article IV of the Indenture (in
connection with a Change of Control Offer or Deficiency Offer), state the amount
you elect to have repurchased (if all, write "ALL"): $
--------------- .
Your Name:
------------------------
(exactly as your name appears
on the face of this Debenture)
By:
-------------------------------
Title:
-----------------------------
Date:
------------------------------
Signature Guaranteed:
By:
------------------------------------
This signature shall be guaranteed by an
eligible guarantor institution (a bank
or trust company having an office or
correspondent in the United States or a
broker or dealer which is a member of a
registered securities exchange or the
National Association of Securities Dealers,
Inc.) with membership in an approved
signature guaranty medallion program
pursuant to SEC Rule 17Ad-15.
A-11
<PAGE>
EXHIBIT B
TRANSFEREE LETTER OF REPRESENTATION
U.S. Diagnostic Labs Inc.
c/o American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Dear Sirs:
This Certificate is delivered to request a transfer of $___________
principal amount of the 9% Subordinated Convertible Debentures due 2003 (the
"Debentures") of U.S. Diagnostic Labs Inc. (the "Company").
Upon transfer, the Debentures would be registered in the name of the
new beneficial owner as follows:
Name:
-----------------------------------------
Address:
---------------------------------------
Taxpayer ID Number:
----------------------------
The undersigned represents and warrant to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) purchasing for our own account or for the account of such an
institutional "accredited investor," and we are acquiring the Debentures not
with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act. We have such knowledge and experience in
financial business matters as to be capable of evaluating the merits and risk of
our investment in the Debentures and invest in or purchase securities similar to
the Debentures in the normal course of our business. We and any accounts for
which we are acting are each able to bear the economic risk of our or its
investment.
2. We understand that the Debentures have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any investor
account for which we are purchasing Debentures to offer, sell or otherwise
transfer such Debentures prior to the date which is three years after the later
of the date of original issue and the last date on which the Company or any
affiliate of the Company was the owner of such Debentures (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to the Company,
(b) pursuant to a registration statement which has been declared effective under
the Securities Act, (c) in a transaction complying with the requirements of Rule
144A under the Securities Act, to a Person we reasonably believe is a qualified
institutional buyer under Rule 144A (a "QIB") that purchases for its own account
or for the account of a QIB and to whom notice is given that the transfer is
being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the United States within the meaning of Regulation S under the
Securities Act, (e) to an institutional "accredited investor" within the meaning
of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing
for its own account or for the account of such an institutional "accredited
investor," in each case in a minimum principal amount of Debentures of $250,000
or (f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases to
any requirement of law that the disposition of our property or the property of
such investor account or accounts be at all times within our or their control
and in compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Debentures is proposed
to be made pursuant to clause (e) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the
B-1
<PAGE>
transferee substantially in the form of this letter to the Company and the
Trustee, which shall provide, among other things, that the transferee is an
institutional "accredited investor" within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act and that it is acquiring such Debentures for
investment purposes and not for distribution in violation of the Securities Act.
Each purchaser acknowledges that the Company, Trustee and Registrar reserve the
right prior to any offer, sale or other transfer prior to the Resale Termination
Date of the Debentures pursuant to clauses (d), (e) or (f) above to require the
delivery of an opinion of counsel, certifications and/or other information
satisfactory to the Company, Trustee and Registrar.
TRANSFEREE:
-------------------------------
BY:
---------------------------------------
B-2
Exhibit 4.5
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of March 29, 1996, by and between U.S.
Diagnostic Labs Inc., a Delaware corporation (the "Company"), and Forum Capital
Markets L.P. (the "Initial Purchaser"). The Company proposes to issue and sell
to the Initial Purchaser, upon the terms set forth in a purchase agreement of
even date herewith (the "Purchase Agreement"), up to $57,500,000 aggregate
principal amount of its 9% Subordinated Convertible Debentures due 2003 (the
"Debentures"), which Debentures are convertible into Common Stock (as defined
herein) as provided in the Debentures and the Indenture (as defined herein). As
an inducement to the Initial Purchaser to enter into the Purchase Agreement and
in satisfaction of a condition to the Initial Purchaser's obligations
thereunder, the Company agrees with the Initial Purchaser, for the benefit of
the Initial Purchaser and the other Holders (as defined herein), as follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"ACT" means the Securities Act of 1933, as amended from time to time.
"CLOSING DATE" has the meaning set forth in the Purchase Agreement.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company, or any successor class thereto, issuable upon conversion of the
Debentures.
"COMMISSION" means the Securities and Exchange Commission.
"DAMAGES PAYMENT DATE" means with respect to the Debentures and the
outstanding shares of Common Stock, if any, each Interest Payment Date.
"EFFECTIVENESS PERIOD" has the meaning set forth in Section 2 hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time.
"HOLDERS" means Persons owning Transfer Restricted Securities.
"INDENTURE" means the Indenture, dated the date hereof, between the
Company and American Stock Transfer & Trust Company, as trustee (the "TRUSTEE"),
pursuant to which the Debentures are to be issued, as such Indenture is amended
or supplemented from time to time in accordance with the terms thereof.
"INTEREST PAYMENT DATE" has the meaning set forth in the Form of
Debenture attached as Exhibit A to the Indenture.
"LIQUIDATED DAMAGES" has the meaning set forth in Section 4 hereof.
"OPTION CLOSING DATE" has the meaning set forth in the Purchase
Agreement.
"PERSON" means an individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
"PROSPECTUS" means the prospectus included in the Shelf Registration
Statement, as amended or supplemented by any prospectus supplement and by all
other amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
<PAGE>
"RECORD HOLDER" means (i) with respect to any Damages Payment Date
relating to the Debentures, each Person who is a Holder of Debentures on the
record date with respect to the Interest Payment Date on which such Damages
Payment Date shall occur and (ii) with respect to any Damages Payment Date
relating to the Common Stock, each Person who is a Holder of Common Stock on the
day that is fifteen days prior to the succeeding Damages Payment Date.
"REGISTRATION DEFAULT" has the meaning set forth in Section 4 hereof.
"SHELF REGISTRATION STATEMENT" has the meaning set forth in Section 2
hereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
"TRANSFER RESTRICTED SECURITIES" means each Debenture and, if such
Debenture has been converted, each share of Common Stock issued in connection
with such conversion, until (a) the date on which such Debenture or shares of
Common Stock, as applicable, have been effectively registered under the Act and
disposed of in accordance with the Shelf Registration Statement or (b) the date
on which such Debenture or shares of Common Stock, as applicable, are
distributed to the public pursuant to Rule 144 or any other applicable exemption
under the Act without additional restriction upon public resale.
"UNDERWRITTEN OFFERING" means a registration in which securities of the
Company are sold to an underwriter for reoffering to the public.
2. SHELF REGISTRATION. The Company shall use its reasonable best
efforts to file a registration statement with the Commission within 60 days
after the Closing Date relating to the offer and sale of the Transfer Restricted
Securities by Holders from time to time pursuant to Rule 415 under the Act and
in accordance with the methods of distribution set forth therein, which
registration statement may be substituted for by one or more subsequent
registration statements each relating to the offer and sale of the Transfer
Restricted Securities by Holders from time to time (as in effect from time to
time, the "Shelf Registration Statement"), and the Company shall use its
reasonable best efforts to cause such Shelf Registration Statement to be
declared effective by the Commission within 150 days after the Closing Date;
provided, however, that the Company may delay such filing or effectiveness under
the circumstances and during the periods described in Section 3 hereof. In
addition, the Company shall use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective, supplemented and amended for a
period (the "Effectiveness Period") of not less than three years following the
later of the Closing Date or any Option Closing Date or such shorter period that
will terminate when no Transfer Restricted Securities are outstanding (the
"Termination Date").
3. DELAY PERIODS; SUSPENSION OF SALES.
(a) If at any time prior to the expiration of the Effectiveness Period,
counsel to the Company (which counsel shall be experienced in securities laws
matters) has determined in good faith that the filing of the Shelf Registration
Statement or the compliance by the Company with its disclosure obligations in
connection with the Shelf Registration Statement would require the disclosure of
material information which the Company has a bona fide business purpose for
preserving as confidential, then the Company may delay the filing or the
effectiveness of the Shelf Registration Statement (if not then filed or
effective, as applicable) and shall not be required to maintain the
effectiveness thereof or amend or supplement the Shelf Registration Statement
for a period (an "Information Delay Period") expiring upon the earlier to occur
of (A) the date on which such material information is disclosed to the public or
ceases to be material or the Company is able to so comply with its disclosure
obligations and Commission requirements or (B) 30 days after counsel to the
Company makes such good faith determination. There shall not be more than three
Information Delay Periods during the Effectiveness Period, and there shall not
be more than two Information Delay Periods during any contiguous 90 day period.
- 2 -
<PAGE>
(b) If at any time prior to the expiration of the Effectiveness Period,
the Company is advised by a nationally recognized investment banking firm
selected by the Company that, in such firm's written reasonable opinion
addressed to the Company (a copy of which shall be delivered to each Holder of
Transfer Restricted Securities registered under the Shelf Registration
Statement), sales of Common Stock pursuant to the Shelf Registration Statement
at such time would materially adversely affect any immediately planned
underwritten public equity financing by the Company of at least $5 million, the
Company shall not be required to maintain the effectiveness of the Shelf
Registration Statement or amend or supplement the Shelf Registration Statement
for a period (a "Transaction Delay Period") commencing on the date of pricing of
such equity financing and expiring upon the earliest to occur of (i) the
abandonment of such financing or (ii) 90 days after the completion of such
financing. There shall not be more than two Transaction Delay Periods during the
Effectiveness Period.
(c) A Transaction Delay Period and an Information Delay Period are
hereinafter collectively referred to as "Delay Periods" or a "Delay Period." The
Company will give prompt written notice, in the manner prescribed by Section
10(b) hereof, to each Holder of each Delay Period. Such notice shall be given
(i) in the case of a Transaction Delay Period, 10 days in advance of the
commencement of such Delay Period and (ii) in the case of an Information Delay
Period, as soon as practicable after the circumstances giving rise thereto are
identified. Such notice shall state to the extent, if any, as is practicable, an
estimate of the duration of such Delay Period. Each Holder, by his acceptance of
any Transfer Restricted Securities, agrees that (i) upon receipt of such notice
of an Information Delay Period it will forthwith discontinue disposition of
Transfer Restricted Securities pursuant to the Shelf Registration Statement,
(ii) upon receipt of such notice of a Transaction Delay Period it will forthwith
discontinue disposition of the Common Stock pursuant to the Shelf Registration
Statement and (iii) in either such case, will not deliver any prospectus forming
a part of the Shelf Registration Statement in connection with any sale of
Transfer Restricted Securities or Common Stock, as the case may be, until the
expiration of such Delay Period.
4. LIQUIDATED DAMAGES. If (i) the Shelf Registration Statement is not
filed with the Commission within 60 days after the Closing Date, (ii) the
applicable Registration Statement has not been declared effective by the
Commission within 150 days after the Closing Date (the "Effectiveness Target
Date"), or (iii) at any time prior to the Termination Date, the Shelf
Registration Statement is filed and declared effective but shall thereafter
cease to be effective (other than as a result of the effectiveness of a
successor registration statement or during any Delay Period) or fail to be
useable for its intended purpose without being succeeded promptly by a
post-effective amendment to the Shelf Registration Statement that cures such
failure and that is itself declared effective within 45 days after the Shelf
Registration Statement ceases to be effective (each such event referred to in
clauses (i) through (iii), a "Registration Default"), the Company will pay
liquidated damages ("Liquidated Damages") to each Holder who has complied with
its obligations under this Agreement. During the first 90-day period immediately
following the occurrence of such Registration Default, the amount of such
Liquidated Damages shall be $.10 per week per $1,000 principal amount of
Debentures and, if applicable, $.001 per week per share of Common Stock (subject
to adjustment in the event of stock splits, stock consolidations, stock
dividends and the like) constituting Transfer Restricted Securities registered
under the Shelf Registration Statement. During each subsequent 90-day period
following the occurrence of such Registration Default, the amount of Liquidated
Damages shall increase by an additional $.10 per week per $1,000 principal
amount of Debentures and $.001 per week per share of Common Stock (subject to
adjustment as set forth above) of Common Stock constituting Transfer Restricted
Securities registered under the Shelf Registration Statement; provided, however,
the maximum amount of Liquidated Damages shall be $.40 per week per $1,000
principal amount of Debentures and $.004 per week per share of Common Stock
(subject to adjustment as set forth above) constituting Transfer Restricted
Securities registered under the Shelf Registration Statement. All accrued
Liquidated Damages shall be paid by the Company to Record Holders entitled
thereto on the next succeeding Damages Payment Date by wire transfer of
immediately available funds or by federal funds check. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease, but any
Liquidated Damages accrued through the date of cure shall be paid to Record
Holders on the next succeeding Damages Payment Date. If the Registration
Defaults described in either of clauses (i) or (ii) above arose solely because
the applicable Holder or Holders failed to provide the Company with certain
information within 20 business days after request therefor pursuant to Section
5(m), Liquidated Damages in respect thereof will not begin to accrue
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until five business days after such information has been provided to the
Company. Liquidated damages shall cease to accrue hereunder with respect to any
Transfer Restricted Security at the time it ceases to be a Transfer Restricted
Security.
All of the Company's obligations set forth in the preceding paragraph
which are outstanding with respect to any Transfer Restricted Security at the
time such security ceases to be a Transfer Restricted Security shall survive
until such time as all such obligations with respect to such security shall have
been satisfied in full.
5. REGISTRATION PROCEDURES.
In connection with the Shelf Registration Statement and any Prospectus
required by this Agreement to permit the sale or resale of Transfer Restricted
Securities, the following provisions shall apply:
(a) The Company shall furnish to each Holder, prior to the filing
thereof with the Commission, a copy of the Shelf Registration Statement and each
amendment thereto or each amendment or supplement to the Prospectus included
therein, and shall use its best efforts to reflect in each such document, when
so filed with the Commission, such comments as any Holder reasonably may
propose.
(b) The Company shall take such action as may be necessary so that (i)
the Shelf Registration Statement and any amendment thereto and any Prospectus
forming a part thereof and any supplement or amendment thereto complies in all
material respects with the Act and the rules and regulations thereunder, (ii)
the Shelf Registration and any amendment thereto (in either case, other than
with respect to written information furnished to the Company by or on behalf of
any Holder specifically for inclusion therein) does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make any statement
therein not misleading and (iii) the Prospectus and any supplement thereto (in
either case, other than with respect to such information from Holders), does not
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(c) The Company shall promptly advise the Holders of Transfer
Restricted Securities registered under the Shelf Registration Statement (which
advice pursuant to clauses (ii) - (iv) shall be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have been made)
and, if requested by such Persons, to confirm such advice in writing;
(i) when the Shelf Registration Statement and any amendments
thereto have been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto have
become effective;
(ii) of any request by the Commission for amendments to the
Shelf Registration Statement or amendments or supplements to the
Prospectus or for additional information relating thereto;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement or of
the suspension by any state securities commission of the qualification
of the Transfer Restricted Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for any of the
preceding purposes; and
(iv) of the happening of any event that requires the making of
any changes in the Shelf Registration Statement or the Prospectus so
that, as of such date, the Shelf Registration Statement and the
Prospectus do not contain an untrue statement of a material fact and do
not omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading.
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<PAGE>
(d) If at any time the Commission shall issue any stop order suspending
the effectiveness of the Shelf Registration Statement, or any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption from qualification of the Transfer Restricted
Securities under state securities or Blue Sky laws, the Company shall use its
best efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(e) The Company shall furnish to each Holder of Transfer Restricted
Securities included under the Shelf Registration Statement, without charge, at
least one copy of the Shelf Registration Statement and each post-effective
amendment thereto, including all financial statements and schedules, documents
incorporated by reference therein and, if the Holder so requests in writing, all
exhibits (including exhibits incorporated therein by reference).
(f) The Company shall, during the Effectiveness Period, deliver to each
Holder of Transfer Restricted Securities included under the Shelf Registration
Statement, without charge, as many copies of the Prospectus (including each
preliminary prospectus) included in the Shelf Registration Statement and any
amendment or supplement thereto as such Holder may reasonably request; and the
Company consents to the use of the Prospectus and any amendment or supplement
thereto by each of the selling Holders in connection with the offering and the
sale of the Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto during the Effectiveness Period.
(g) Prior to any public offering pursuant to the Shelf Registration
Statement, the Company shall use its reasonable best efforts to register or
qualify or cooperate with the Holders of Transfer Restricted Securities
registered thereunder, the underwriter(s), if any, and their respective counsel
in connection with the registration and qualification of such Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as such Holders or underwriters reasonably request in writing and
do any and all other acts or things necessary or advisable to enable the offer
and sale in such jurisdictions of such Transfer Restricted Securities; provided,
however, that the Company will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject.
(h) The Company shall cooperate with the Holders and the
underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Transfer Restricted Securities to be sold under the
Shelf Registration Statement, free of any restrictive legends and in such
denominations and registered in such names as the Holders or the underwriter(s),
if any, may request in connection with the sales of Transfer Restricted
Securities pursuant to the Shelf Registration Statement.
(i) Upon the occurrence of any event contemplated by Section 5(c)(ii) -
(iv), the Company shall file or cause the Trustee to file (and use its
reasonable best efforts to have declared effective as soon as possible) a
post-effective amendment to the Shelf Registration Statement or an amendment or
supplement to the Prospectus or file any other required document so that, as
thereafter delivered to the purchasers of Transfer Restricted Securities
registered under the Shelf Registration Statement, the Prospectus will not
contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in light of the circumstances
under which they were made not misleading. Each Holder of Transfer Restricted
Securities registered under the Shelf Registration Statement agrees by
acquisition of such Transfer Restricted Securities that, upon receipt of any
notice from the Company of the existence of any fact of the kind described in
Section 5(c)(ii) - (iv) hereof, such Holder will forthwith discontinue
disposition of Transfer Restricted Securities pursuant to the Shelf Registration
Statement until such Holder receives copies of the supplemented or amended
Prospectus contemplated by this Section 5(i), or until such Holder is advised in
writing by the Company that the use of the Prospectus may be resumed, and such
Holder has received copies of any additional or supplemental filings which are
incorporated by reference in the Prospectus. If so directed by the Company, each
Holder will deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such Holder's possession, of the Prospectus
covering such Transfer Restricted Securities current at the time of receipt of
such notice. In the event the Company shall give
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any such notice, the time period regarding the Company's obligations to maintain
the effectiveness of the Shelf Registration Statement set forth in Section 2
hereof shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to Section 5(c) hereof
to and including the date when such Holder shall have received the copies of the
supplemented or amended Prospectus contemplated by this Section 5(i) (but not
beyond the Termination Date).
(j) The Company shall provide a CUSIP number for all Transfer
Restricted Securities registered under the Shelf Registration Statement, in the
event of and at the time of any distribution thereof to Holders, not later than
the effective date of the Shelf Registration Statement and provide the Trustee
and the transfer agent for the Common Stock with printed certificates for such
Transfer Restricted Securities which are in a form eligible for deposit with the
Depository Trust Company.
(k) The Company shall use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders or otherwise provide in accordance with
Section 11(a) of the Act, as soon as practicable after the effective date of the
Shelf Registration Statement an earnings statement satisfying the provisions of
Section 11(a) of the Act.
(l) The Company shall cause the Indenture to be qualified under the TIA
not later than the effective date of the Shelf Registration Statement, and, in
connection therewith, cooperate with the Trustee and the Holders of Debentures
to effect such changes to the Indenture as may be required for such Indenture to
be so qualified in accordance with the terms of the TIA, and execute and use its
best efforts to cause the Trustee to execute, all documents as may be required
to be filed with the Commission to enable such Indenture to be so qualified in a
timely manner.
(m) The Company may require each Holder of Transfer Restricted
Securities to be registered under the Shelf Registration Statement to furnish to
the Company such information regarding such Holder and the distribution of such
Holder's securities thereunder as the Company may from time to time reasonably
require for inclusion in the Shelf Registration Statement and the Company may
exclude from such registration the Transfer Restricted Securities of any Holder
that fails to furnish such information within a reasonable time after receiving
such request.
(n) The Company shall, if requested by the Holders of Transfer
Restricted Securities being sold in an Underwritten Offering or the
underwriter(s) thereof, promptly incorporate in the Shelf Registration Statement
or Prospectus, pursuant to a supplement or post-effective amendment, if
necessary, such information as such underwriters and Holders reasonably agree
should be included therein including, without limitation, information relating
to the plan of distribution of the Transfer Restricted Securities, information
with respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), the purchase price being paid therefor and with
respect to any other terms of the offering of the Transfer Restricted Securities
to be sold in such offering; and shall make all required filings of such
Prospectus supplement or post-effective amendment as soon as practicable after
the Company is notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment.
(o) The Company shall enter into such customary agreements (including,
if proffered by underwriters willing to participate in an Underwritten Offering
of Transfer Restricted Securities, an underwriting agreement) and take all such
other appropriate actions in order to expedite or facilitate the disposition of
the Transfer Restricted Securities pursuant to the Shelf Registration Statement,
and in connection therewith, the Company shall (1) make such representations and
warranties to the Holders of Transfer Restricted Securities registered
thereunder and the underwriter(s), if any, in form, substance and scope as they
may request and as are customarily made by issuers to underwriters in primary
underwritten offerings; (2) obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance) shall
be reasonably satisfactory to such underwriters and the Holders of a majority of
the Transfer Restricted Securities being sold) addressed to each such
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<PAGE>
Holder and underwriter covering such matters as are customarily covered in
opinions requested in underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters; (3) if and to the extent
permitted by Statement of Auditing Standards No. 72, obtain comfort letters and
updates thereof from the Company's independent certified public accountants
addressed to such underwriters requesting the same, such letters to be in
customary form and covering matters of the type customarily covered in comfort
letters in connection with primary underwritten offerings; (4) in connection
with an Underwritten Offering only, set forth in full or incorporate by
reference in the underwriting agreement the indemnification provisions and
procedures of Section 6 hereof with respect to all parties to be indemnified
pursuant to said Section; and (5) deliver such documents and certificates as may
be reasonably requested by such Holders or underwriters to evidence compliance
with Section 5(i) and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company pursuant
to this Section 5(o). The foregoing actions set forth in clauses (1), (2), (3)
and (5) of this Section 5(o) shall be performed at each closing under any
underwriting or similar agreement as and to the extent required thereunder.
(p) The Company shall make available at reasonable times for inspection
by the Holders of the Transfer Restricted Securities, any underwriter
participating in any disposition pursuant to the Shelf Registration Statement,
and any attorney or accountant retained by any such Holders or underwriters, all
financial and other records, pertinent corporate documents and properties of the
Company and its subsidiaries; and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
underwriter, attorney or accountant in connection with the Shelf Registration
Statement subsequent to the filing thereof.
(q) The Company shall use its best reasonable efforts to cause the
Transfer Restricted Securities covered by the Shelf Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be reasonably requested by the Holders of such Transfer Restricted
Securities and necessary to enable any such Holder or the underwriter(s), if
any, to consummate the disposition of such Transfer Restricted Securities.
(r) The Company shall use its reasonable best efforts, subject to any
applicable rules thereto, to cause all Common Stock included among the Transfer
Restricted Securities to be listed on each securities exchange on which the
Common Stock is listed and, if requested by the Holders of a majority in
aggregate principal amount of Debentures, to list the Debentures registered
under the Shelf Registration Statement on a national securities exchange or the
Nasdaq Stock Market.
6. REGISTRATION EXPENSES.
(a) The Company shall bear all expenses incurred in connection with the
performance of or compliance with its obligations under Sections 2, 4 and 5
hereof, including without limitation all registration and filing fees, fees and
expenses of compliance with securities or blue sky laws, printing expenses,
messenger and delivery expenses and fees and disbursements of counsel for the
Company and all independent certified public accountants, and other persons
retained by the Company (all such expenses being herein called "Registration
Expenses"). Registration Expenses shall also include the Company's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on the Nasdaq Stock Market. The Company will reimburse the Initial
Purchaser and the Holders for the reasonable fees and disbursements of one firm
of attorneys chosen by the Holders of a majority of the Transfer Restricted
Securities to be sold pursuant to the Shelf Registration Statement.
(b) Each Holder will pay any discounts and commissions incurred upon
the sale of securities by it under the Shelf Registration Statement.
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<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company shall indemnify and hold harmless each Holder, its
officers and directors and each Person who controls such Holder within the
meaning of the Act against any and all losses, claims, damages, liabilities and
expenses whatsoever as incurred, insofar as such losses, claims, damages,
liabilities and expenses arise of out of or are based upon any untrue or alleged
untrue statement of material fact contained in the Shelf Registration Statement,
or any Prospectus or preliminary Prospectus or any amendment thereof or
supplement thereto or arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified Person, as incurred, for any legal or other expense
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that (i) the
Company will not be liable in any case to the extent that any loss, claim,
damage, liability or expense arises out of or is based upon any such untrue or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any such Holder specifically for inclusion therein
and (ii) the foregoing indemnity with respect to any untrue statement or alleged
untrue statement or omission or alleged omission made in any preliminary
prospectus relating to the Shelf Registration Statement shall not inure to the
benefit any Holder (or any person controlling such Holder) from whom the person
asserting any such loss, claim, damage or liability purchases any of the
Transfer Restricted Securities that are the subject thereof if such person did
not receive a copy of the final prospectus (or the final prospectus as
supplemented) at or prior to the written confirmation of the sale of such
Transfer Restricted Securities to such person and the untrue statement or
alleged omission contained in the preliminary prospectus was corrected in the
final prospectus (or the final prospectus as supplemented).
The Company also agrees to indemnify or contribute to losses of, as
provided in Section 7(d), any underwriters of Transfer Restricted Securities
registered under the Shelf Registration Statement, their officers and directors
and each Person, if any, who controls any such underwriter (within the meaning
of the Act) on substantially the same basis as that of the indemnification of
the Holders provided in this Section 7(a) and shall, if requested by any Holder,
enter into an underwriting agreement reflecting such agreement, as provided in
Section 5(o) hereof.
(b) Each Holder shall indemnify and hold harmless the Company, its
directors and officers and each Person, if any, who controls the Company (within
the meaning of the Act) against any and all losses, claims, damages, liabilities
and expenses described in the indemnity contained in Section 7(a) hereof, as
incurred, resulting from any untrue or alleged untrue statement of material fact
contained in the Shelf Registration Statement or any amendment thereof or
supplement thereto or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such loss,
claim, damage, liability or expense relates to or arises from information
relating to such Holder furnished in writing by such Holder specifically for use
in the Shelf Registration Statement; provided, however, that the obligation to
indemnify will be individual to each Holder and will be limited to the amount of
net proceeds received by such Holder from the sale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement.
(c) Any Person entitled to indemnification hereunder shall give notice
as promptly as reasonably practicable to each indemnifying party of any claim or
action commenced against it in respect of which indemnity may be sought
hereunder; provided, however, that failure to so notify an indemnifying party
shall not relieve such indemnifying party from any obligation that it may have
pursuant to this Section except to the extent that it has been materially
prejudiced (through the forfeiture of substantive rights or defenses) by such
failure; provided further, however, that the failure to notify the indemnifying
party shall not relieve it from any liability that it may have to an indemnified
party otherwise than on account of this indemnity agreement. If any such claim
or action shall be brought against an indemnified party, the indemnified party
shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other
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<PAGE>
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; provided, however, that an indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm of attorneys (in
addition to any local counsel) at any one time for all such indemnified party or
parties. Each indemnified party, as a condition to the indemnity agreements
contained in Sections 7(a) and 7(b), shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any such action or
claim. No indemnifying party shall be liable for any settlement or any such
action effected without its written consent, but if settled with its written
consent or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(d) If a claim by an indemnified party for indemnification under this
Section 7 is found unenforceable in a final judgment by a court of competent
jurisdiction (not subject to further appeal or review) even though the express
provisions hereof provide for indemnification in such case, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified as a result of such
losses in such proportion as is appropriate to reflect the relative fault of the
indemnifying party and indemnified party in connection with the actions,
statements or omissions that resulted in such losses as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission of a material fact, has been
taken or made by, or relates to information supplied by, such indemnifying party
or indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any losses shall
be deemed to include, subject to the limitations set forth in Section 7(c)
herein, any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceedings.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, an indemnifying party that is a
Holder shall not be required to contribute any amount in excess of the amount by
which the total price at which the Transfer Restricted Securities sold by such
indemnifying party and distributed to the public were offered to the public
exceeds the amount of any damages that such indemnifying party has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged
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omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled any contribution from any person
who was not guilty of such fraudulent misrepresentation.
8. RULES 144 AND 144A. The Company shall use commercially reasonable
efforts to file the reports required to be filed by it under the Act and the
Exchange Act in a timely manner and, if at any time the Company is not required
to file such reports, it will, upon the written request of any Holder of
Transfer Restricted Securities, make publicly available other information so
long as necessary to permit sales of such Holder's securities pursuant to Rules
144 and 144A. The Company covenants that it will take such further action as any
Holder of Transfer Restricted Securities may reasonably request, all to the
extent required from time to time to enable such Holder to sell securities
without registration under the Act within the limitation of the exemptions
provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)).
Upon the written request of any Holder of Transfer Restricted Securities, the
Company shall deliver to such Holder a written statement as to whether it has
complied with such requirements.
9. UNDERWRITTEN REGISTRATIONS. If any of the Transfer Restricted
Securities included under the Shelf Registration Statement are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority of the shares of Common Stock included among such Transfer Restricted
Securities (calculated as if all of the then outstanding Debentures were
converted into Common Stock at the time of such selection), provided, however,
that such managing underwriters shall be reasonably satisfactory to the Company
and the Company shall not be obligated to arrange for more than one Underwritten
Offering during the Effectiveness Period.
No Person may participate in any underwritten registration hereunder
unless such Person (i) agrees to sell such Person's Transfer Restricted
Securities on the basis reasonably provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents reasonably required
under the terms of such underwriting arrangements and (iii) at least 20% of the
outstanding Transfer Restricted Securities are included in such Underwritten
Offering.
10. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of Holders of a majority of the Common Stock issued or issuable
upon conversion of the Debentures (calculated as if all of the then outstanding
Debentures were converted into Common Stock at the time of such consent).
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of the
Holders of Transfer Restricted Securities being sold pursuant to the Shelf
Registration Statement and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of a majority of the shares of
Common Stock included among such Transfer Restricted Securities.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the address of such Holder maintained by the
Registrar under the Indenture;
(2) if to the Initial Purchaser, at the address set forth in the
Purchase Agreement;
(3) if to the Company, at its address set forth in the Purchase
Agreement;
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<PAGE>
or to such other addresses as the recipient party has specified to the sending
party by prior written notice to the sending party.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; one business day after
being delivered to a next-day air courier; five business days after being
deposited in the mail; when answered back, if faxed; and when receipt is
acknowledged by the recipient's telecopier machine, if telecopied.
(c) REMEDIES. In the event of a breach by the Company or by a Holder of
any of their respective obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(d) SEVERABILITY. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(e) NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the Holders in this Agreement.
(f) SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of their respective heirs, executors, administrators, successors,
legal representatives and assigns. In addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of Holders are also for the benefit of, and enforceable by, any
subsequent Holder.
(g) COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one and
the same Agreement.
(h) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
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(i) GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York.
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
U.S. DIAGNOSTIC LABS INC.
By:
-----------------------------
Its:
----------------------------
FORUM CAPITAL MARKETS L.P., acting on behalf of
itself and as the representative of the Holders
By:
-----------------------------
Its:
----------------------------
- 12 -
Exhibit 5.1
BACHNER, TALLY, POLEVOY & MISHER LLP
380 Madison Avenue
New York, New York 10017
(212) 687-7000
June 5, 1996
U.S. Diagnostic Labs Inc.
777 S. Flagler Drive
West Palm Beach, Florida 33401
Gentlemen:
We have acted as counsel to U.S. Diagnostic Labs Inc. (the "Company")
in connection with its filing of a registration statement on Form S-3 (the
"Registration Statement") covering (i) $57,500,000 principal amount of 9%
Convertible Debentures due 2003 (the "Debentures"), (ii) 6,388,879 shares of
Common Stock, $.01 par value ("Common Stock"), issuable upon conversion of the
Debentures, and (iii) 880,445 shares of Common Stock to be sold by certain
selling securityholders all as more particularly described in the Registration
Statement.
In our capacity as counsel to the Company, we have examined the
Company's Certificate of Incorporation, as amended and By-laws and the minutes
and other corporate proceedings of the Company.
With respect to factual matters, we have relied upon statements and
certificates of officers of the Company. We have also reviewed such other
matters of law and examined and relied upon such other documents, records and
certificates as we have deemed relevant hereto. In all such examinations we have
assumed conformity with the original documents of all documents submitted to us
as originals and the genuineness of all signatures on all documents submitted to
us.
On the basis of the foregoing, we are of the opinion that:
(i) Debentures constitute legal, valid and binding
obligations of the Company; and
(ii) the shares of Common Stock issuable upon conversion of the
Debentures will, upon conversion in accordance with the terms of the
Debentures be legally issued, fully paid and non-assessable; and
(iii) the shares of Common Stock to be offered by the selling
stockholders have been legally issued, fully paid and non-assessable.
<PAGE>
U.S. Diagnostic Labs Inc.
June 5, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of the Registration Statement.
Very truly yours,
BACHNER, TALLY, POLEVOY & MISHER LLP
U.S. DIAGNOSTIC LABS INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
EXHIBIT 11
- -------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Average Shares Outstanding Disregarding
Dilutive Outstanding Stock Options and
Warrants and after Adjustments for Shares
Held in Escrow 6,218,847 4,031,961
Assumed Exercise of all Dilutive and Anti-Dilutive
Warrants Based on the Modified Treasury Stock
Method using the Quarter End Price 11,272,514 4,971,825
--------------- ---------------
FULLY DILUTED SHARES OUTSTANDING 17,491,361 9,003,786
=============== ===============
NET INCOME ADJUSTED FOR FULLY DILUTED CALCULATIONS $ 2,736,000 $ 1,369,000
=============== ===============
FULLY DILUTED EARNINGS PER SHARE: $ .16 $ .15
=============== ===============
</TABLE>
This calculation is submitted in accordance with Securities Exchange Act of 1934
Release No. 9083 although it is contrary to Para 40 of APB No. 15 because it may
produce an anti-dilutive result.
<PAGE>
U.S. DIAGNOSTIC LABS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
EXHIBIT 11
- -------------------------------------------------------------------------------
<TABLE>
YEARS ENDED
DECEMBER 31,
1 9 9 5 1 9 9 4
------- -------
<S> <C> <C>
Average Shares Outstanding Disregarding
Dilutive Outstanding Stock Options and
Warrants and after Adjustments for Shares
Held in Escrow 4,996,021 --
Weighted Average Shares Outstanding Prior
to October 20, 1994 Initial Public Offering
[Based on 1,024,010] -- 809,542
Weighted Average Shares Outstanding
Subsequent to October 20, 1994 [Based on
1,986,550 Shares Issued in Initial Public
Offering, including Over-Allotments and
December 1994 Issuances] -- 518,491
--------------- ---------------
Average Shares Outstanding During Each Year 4,996,021 1,328,033
Assumed Exercise of all Dilutive and Anti-Dilutive
Warrants Based on the Modified Treasury Stock
Method using the Year End Price 6,765,406 329,888
--------------- ---------------
FULLY DILUTED SHARES OUTSTANDING 11,761,427 1,657,921
=============== ===============
NET INCOME [LOSS] ADJUSTED FOR FULLY DILUTED CALCULATIONS $ 7,012,987 $ (533,182)
=============== ===============
FULLY DILUTED:
Earnings [Loss] Before Extraordinary Item $ .57 $ (.32)
Extraordinary Item .03 --
--------------- ---------------
NET EARNINGS [LOSS] $ .60 $ (.32)
=============== ===============
</TABLE>
This calculation is submitted in accordance with Securities Exchange Act of 1934
Release No. 9083 although it is contrary to Para 40 of APB No. 15 because it
produces an antidilutive result.
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of
our report dated February 20, 1996 and May 10, 1996, on our audits of the
consolidated financial statements of U.S. Diagnostic Labs Inc. and for the years
ended December 31, 1995 and 1994. We also consent to the reference to our firm
under the caption "Experts" in such Registration Statement.
MORTENSON AND ASSOCIATES, P.C.
Certified Public Accountants.
Cranford, New Jersey
June 5, 1996
