-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PPuiFL1lOOSuHjTGJYm5TJwUrNL9iHWLOwIQssry8FCYNwNxfXlKokrb2XJKmb42 4U5SIjRjRmhfa1v374CX/A== 0000950109-97-006104.txt : 19970930 0000950109-97-006104.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950109-97-006104 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE IMAGING INC /DE/ CENTRAL INDEX KEY: 0000817135 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 330239910 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-33817 FILM NUMBER: 97687226 BUSINESS ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DRIVE STREET 2: SUITE 150 CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7149215656 MAIL ADDRESS: STREET 1: 3111 NORTH TUSTON AVE SUITE 150 STREET 2: 3111 NORTH TUSTON AVE SUITE 150 CITY: ORANGE STATE: CA ZIP: 926651752 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMT ACQUISITION CORP CENTRAL INDEX KEY: 0001044333 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-33817-01 FILM NUMBER: 97687227 BUSINESS ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7146887100 MAIL ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL MEDICAL HEALTH SERVICES INC CENTRAL INDEX KEY: 0001044334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 251738355 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-33817-02 FILM NUMBER: 97687228 BUSINESS ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7146887100 MAIL ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE IMAGING OF CENTRAL GEORGIA INC CENTRAL INDEX KEY: 0001044335 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-33817-03 FILM NUMBER: 97687229 BUSINESS ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7146887100 MAIL ADDRESS: STREET 1: 1065 NORTH PACIFICENTER DR STREET 2: SUITE 200 CITY: ANAHEIM STATE: CA ZIP: 92806 S-2/A 1 AMENDMENT NO. 1 TO FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1997 Registration No. 333-33817 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ALLIANCE IMAGING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 8099 33-0239910 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION OFINCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) --------------- 1065 NORTH PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CALIFORNIA 92806 (714) 688-7100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- SMT ACQUISITION CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 8099 33-0768045 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION OFINCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) --------------- 1065 NORTH PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CALIFORNIA 92806 (714) 688-7100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- ROYAL MEDICAL HEALTH SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- PENNSYLVANIA 8099 25-1738355 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION OFINCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) --------------- 1065 NORTH PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CALIFORNIA 92806 (714) 688-7100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- --------------- ALLIANCE IMAGING OF CENTRAL GEORGIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- GEORGIA 8099 33-0606074 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION OFINCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) --------------- 1065 NORTH PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CALIFORNIA 92806 (714) 688-7100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- MR. RICHARD N. ZEHNER, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 1065 NORTH PACIFICENTER DRIVE, SUITE 200 ANAHEIM, CALIFORNIA 92806 (714) 688-7100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- WITH COPIES TO: ANTHONY T. ILER, ESQ. JOHN J. SUYDAM, ESQ. JAMES J. CLARK, ESQ. IRELL & MANELLA LLP O'SULLIVAN GRAEV & CAHILL GORDON & REINDEL 333 SOUTH HOPE STREET KARABELL, LLP 80 PINE STREET SUITE 3300 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10005 LOS ANGELES, CALIFORNIA NEW YORK, NEW YORK 10112 (212) 701-3000 90071 (212) 408-2400 (213) 620-1555 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. 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, check the following box. [_] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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 effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1997 PROSPECTUS $170,000,000 ALLIANCE IMAGING, INC. % SENIOR SUBORDINATED NOTES DUE 2005 ---------- Alliance Imaging, Inc. ("Alliance") is offering $170,000,000 (the "Offering") aggregate principal amount of its % Senior Subordinated Notes due 2005 (the "Notes"). The Offering is part of the financing that will be used to consummate the recapitalization of Alliance (the "Recapitalization"). The Recapitalization will be effected pursuant to an Agreement and Plan of Merger (the "Recapitalization Merger Agreement"). Under the terms of the Recapitalization Merger Agreement, an entity formed by affiliates of Apollo Management, L.P. (collectively, "Apollo") will merge with and into Alliance upon the completion of the Offering, with Alliance as the surviving corporation. Concurrently with the Recapitalization, Alliance will acquire (the "SMT Acquisition") all of the capital stock of Three Rivers Holding Corp. ("Three Rivers"), a Delaware corporation which is a wholly owned subsidiary of Apollo and the owner of all of the capital stock of SMT Health Services Inc., a Delaware corporation ("SMT"). The consummation of the Offering, the Recapitalization and the SMT Acquisition, and the transactions contemplated thereby, will be concurrent, and the Offering is conditioned upon the other Transactions (as defined). As used herein, the term "Company" refers to Alliance and its subsidiaries and SMT and its subsidiaries on a pro forma combined basis. Interest on the Notes will be payable semi-annually on each and , commencing , 1998, at the rate of % per annum. The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2001 at the redemption prices set forth herein plus accrued interest to the date of redemption. In addition, on or prior to , 2000, the Company may, at its option, redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of one or more Equity Offerings (as defined), at the redemption price set forth herein plus accrued interest to the date of redemption; provided, however, that after any such redemption, 60% of the aggregate principal amount of the Notes issued must remain outstanding. The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the Credit Agreement (as defined). The Notes will be unconditionally guaranteed (the "Guarantees") on a senior subordinated basis by substantially all of Alliance's domestic subsidiaries (the "Guarantors"). The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all Guarantor Senior Debt (as defined) of the Guarantors. As of June 30, 1997, after giving pro forma effect to the Transactions, the Company would have had approximately $100.2 million of Senior Debt outstanding (excluding unused commitments of $112.0 million under the Credit Agreement). Upon a Change of Control (as defined), each holder will have the right to require the Company to repurchase such holder's Notes at a price equal to 101% of their principal amount plus accrued interest to the date of repurchase. There can be no assurance that the Company will have the financial ability or will be permitted by the Credit Agreement to repurchase the Notes. See "Risk Factors--Repurchase of Notes upon a Change of Control." In addition, the Company will be obligated to offer to repurchase the Notes at 100% of their principal amount plus accrued interest to the date of repurchase in the event of certain asset sales. There is no existing market for the Notes, and there can be no assurance as to the liquidity of any markets that may develop for the Notes, the ability of the holders of the Notes to sell their Notes or the price at which such holders would be able to sell their Notes. The Company does not intend to apply for listing of the Notes on any securities exchange. See "Risk Factors--Absence of Public Market." SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) THE COMPANY(3) - -------------------------------------------------------------------------------- Per Note................................. % % % - -------------------------------------------------------------------------------- Total.................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from the date of original issuance of the Notes. (2) The Company and the Guarantors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses of the Offering payable by the Company estimated at $ . The Notes are offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to various other conditions, including the Underwriters' right to reject orders in whole or in part. It is expected that delivery of the Notes will be made in book-entry form through the facilities of The Depository Trust Company on or about , 1997. JOINT BOOK-RUNNING MANAGERS SMITH BARNEY INC. BT ALEX. BROWN ---------- SALOMON BROTHERS INC The date of this Prospectus is , 1997 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-2 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Notes being offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations promulgated by the Commission. Statements made in this Prospectus, or in any document incorporated in this Prospectus by reference, as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed or incorporated by reference as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Registration Statement may be inspected by anyone without charge at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material may also be obtained at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. Such materials can also be inspected on the Internet at http://www.sec.gov. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the places, and in the manner, set forth above. In the event that the Company ceases to be subject to the informational reporting requirements of the Exchange Act, the Company has agreed that, so long as the Notes remain outstanding, it will file with the Commission and distribute to holders of the Notes copies of the financial information that would have been contained in annual reports and quarterly reports, including management's discussion and analysis of financial condition and results of operations, that the Company would have been required to file with the Commission pursuant to the Exchange Act. Such financial information will include annual reports containing consolidated financial statements and notes thereto, together with an opinion thereon expressed by an independent public accounting firm, as well as quarterly reports containing unaudited condensed consolidated financial statements for the first three quarters of each fiscal year. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company incorporates by reference herein the following documents filed with the Commission pursuant to the Exchange Act: I. Alliance's Annual Report on Form 10-K for the fiscal year ended December 31, 1996; II. Alliance's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997 and June 30, 1997; and III. Alliance's Current Report on Form 8-K dated August 1, 1997. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. i THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, INCLUDING STATEMENTS UNDER THE CAPTIONS "UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS FROM THE SMT ACQUISITION CANNOT BE FULLY REALIZED; (2) COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (3) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF ALLIANCE AND SMT ARE GREATER THAN EXPECTED; AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AFTER THE MERGER AND SUCH FORWARD LOOKING STATEMENTS IS INCLUDED IN THE SECTION HEREIN ENTITLED "RISK FACTORS". CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ii PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus or in the documents incorporated herein by reference. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained elsewhere in this Prospectus and in the documents incorporated by reference herein. Unless the context otherwise requires, the term "Alliance" refers to Alliance Imaging, Inc., and its subsidiaries before the Recapitalization, the term "SMT" refers to SMT Health Services Inc. and its subsidiaries, and the term "Company" refers to Alliance and its subsidiaries and SMT and its subsidiaries on a pro forma combined basis. The consummation of the Offering is conditioned upon, among other things, the simultaneous consummation of the Transactions. THE COMPANY The Company is a leading nationwide provider of diagnostic imaging services and the largest operator of state-of-the-art mobile diagnostic imaging systems and related outsourced radiology services in the United States. The Company primarily provides magnetic resonance imaging ("MRI") systems and services to hospitals and other health care providers on a mobile, shared user basis. The Company also provides dedicated, full-time MRI systems and services as well as full-service management of imaging operations for selected hospitals. The Company's services enable small to mid-size hospitals to gain access to advanced diagnostic imaging technology and related value-added services without making a substantial investment in equipment and personnel. In connection with the Offering, Alliance intends to consummate the Recapitalization and acquire SMT, a leading provider of mobile MRI services in the Mid-Atlantic region of the United States. Since the beginning of 1995, Alliance and SMT have each substantially increased revenues by adding new customers and increasing scan volumes at existing customer sites. During the same period, the growth rate of EBITDA (as defined herein) for each of Alliance and SMT has exceeded the growth rate of revenues principally as a result of spreading costs (which are primarily fixed) over a larger revenue base and implementing cost reduction and containment measures. The Company operates a fleet of 111 MRI systems and services over 420 MRI customers in 36 states under exclusive contracts with an average remaining length of approximately 25 months as of July 31, 1997. Pro forma combined revenues and adjusted EBITDA (as defined) of the Company for the six months ended June 30, 1997 were $52.9 million and $26.5 million, respectively. See "-- Summary Pro Forma Combined Consolidated Financial Data." INDUSTRY OVERVIEW The diagnostic imaging industry, which involves the use of non-surgical techniques to generate representations of internal structures and organs on film or video, generates annual revenues in excess of $50 billion in the United States, or 5% to 6% of total health care spending. MRI services, which involve the use of high strength magnetic fields to produce cross-sectional images of the anatomy, constituted approximately $6 to $7 billion of the diagnostic imaging industry in 1996. The approximately 4,000 MRI systems in the United States include approximately 2,400 hospital owned systems, 1,000 independent fixed site systems and 600 mobile systems. MRI facilitates the early diagnosis of diseases and disorders, often minimizing the cost and amount of care needed and frequently eliminating the need for invasive diagnostic procedures. MRI is the preferred imaging modality for the brain, the spine and soft tissue because it produces a superior image and does not expose patients to ionizing radiation. As a result of the cost efficiency and clinical effectiveness of MRI, hospitals and other health care providers are facing competitive pressures to provide MRI technology and related services despite budgetary limitations. Increasingly, such providers are utilizing third parties such as the Company to provide the necessary imaging systems and related services to avoid substantial equipment and operating costs. Mobile MRI operators employ systems housed in specially designed trailers and typically enter into long-term contracts to provide a specified schedule of service on a fee-per-scan basis. Operators then design schedules for each system to rotate among multiple hospitals in a manner that optimizes system utilization. The MRI services industry has experienced substantial growth in demand as measured by total scan volumes, which have increased from 5.4 million in 1990 to 8.8 million in 1996. According to an industry consultant, scan volumes are projected to grow at approximately 7% to 8% per year through 1999 and at 5% per year thereafter. Growth in the MRI industry is attributable to increased physician acceptance, substitution of MRI for other imaging modalities (including x-ray based techniques), expanding applications for MRI technology and health care reform which encourages outpatient services. The MRI services industry is highly fragmented. Recently, however, the industry has begun to undergo consolidation. The Company believes such consolidation is primarily the result of (i) economies of scale in the provision of services to a larger customer base; (ii) cost-effective purchasing of equipment, supplies and services by larger companies; and (iii) the decision by many smaller, capital constrained operators to sell their MRI businesses rather than make substantial investments in new imaging systems. Despite the recent trend, management estimates that as of July 31, 1997, the top eight MRI service providers operated only 13% of total MRI systems in the United States. COMPETITIVE STRENGTHS The Company attributes its market leadership and its significant opportunities for continued growth and increased profitability to the following strengths: Largest Provider of Mobile MRI Services. The Company operates 111 MRI systems in 36 states. The Company believes that the next largest mobile operator has a fleet of approximately 70 MRI systems. Compared to its smaller competitors, the Company believes it will benefit from (i) significant equipment purchasing savings; (ii) attractive service and maintenance contracts from its primary equipment suppliers; (iii) strong name recognition and a reputation for quality service; (iv) substantial financial flexibility and access to lower-cost capital; and (v) the ability to efficiently deploy systems in a manner which maximizes fleet utilization while satisfying customer requirements. Technologically Advanced MRI Fleet. On a pro forma combined basis, the Company has invested approximately $94 million since January 1, 1995 to replace and upgrade existing systems and to purchase new systems. As a result, the Company believes that it has upgraded substantially all of its systems and expects most of its capital expenditures for at least the next three to five years to relate to new system purchases. Of the Company's 111 MRI systems, 88 are state-of-the-art, high-field 1.0 or 1.5 Tesla systems and 15 are state-of- the-art, mid-field 0.5 Tesla systems. The Company believes its fleet is among the newest and most advanced in the industry, enabling the Company to perform a wider variety and greater volume of scans and produce higher quality images, which the Company believes provides a significant competitive advantage. Moreover, all of the Company's state-of-the-art systems are designed to facilitate hardware and software upgrades. As a result, the Company's systems should remain on the leading edge of technological developments. In addition, while many of its competitors lease their systems, the Company owns the vast majority of its systems, generally providing greater flexibility and lower costs over the life of the systems. Exclusive, Long-Term Contracts in Attractive Markets. The Company generates substantially all of its revenues from exclusive, long-term contracts with hospitals and other health care providers, with the price for its services determined on a fee-per-scan basis. The Company's contracts typically offer tiered pricing with lower fees on incremental scans, allowing customers to benefit from increased scan volumes and the Company to benefit from the operating leverage associated with increased scan volumes. Accordingly, tiered pricing enables the Company to retain customers who may be considering purchasing their own MRI systems rather than 2 renewing a contract with a mobile provider. As of July 31, 1997, the Company had more than 420 MRI customers under exclusive contracts which averaged approximately 25 months in remaining length. Most of the Company's contracts are with hospitals that have fewer than 200 beds, many of which may lack the financial resources or patient volume to justify the purchase of an MRI system. Superior Customer Service and Strong Customer Relationships. The Company positions itself as a service company rather than solely as an equipment provider and competes on the basis of value-added services in addition to price. The Company differentiates itself from competitors by aggressively marketing its services to referring physicians, radiologists and hospital administrators and by having the advanced imaging systems, trained technologists, fleet management capabilities and fleet size to accommodate the growing needs of its customers. Value-added services offered by the Company include patient scheduling and pre-screening, insurance pre-authorization, appointment confirmation, billing, managed care contracting, and management reporting services. The Company often provides two technologists per mobile system per shift and is therefore able to accommodate higher patient volume and operate with greater efficiency, resulting in high customer satisfaction levels. As a result, the Company enjoys strong customer relationships, having added more than 160 net new MRI customers from January 1, 1995 through June 30, 1997 and renewed or extended 238 of its customer contracts in this period. Substantial Operating Leverage. Because of the significant amount of fixed costs associated with operating an MRI system, MRI service providers benefit from operating leverage, with increased utilization rates resulting in significant increases in operating earnings and operating margins. On a pro forma combined basis, the Company's average scans per system per day increased to 7.8 for the six months ended June 30, 1997 from 7.2 for the six months ended June 30, 1996. Over the same period, the Company's pro forma combined adjusted EBITDA margin increased to 50.1% from 47.5%. Favorable Payment Terms. Approximately 94% of the Company's billings are direct to hospitals. The hospitals, in turn, generally pay the Company prior to collecting from patients and third party payors. Accordingly, the Company's exposure to uncollectible patient receivables is minimized. In addition, management believes that the Company's average number of days sales outstanding ("DSO") of receivables, which was 42 days as of July 31, 1997, is among the most favorable in the mobile MRI industry and more favorable than the DSO of many health care companies. Experienced Management Team. The Company's senior management team has an average of ten years of industry experience and eight years of experience with Alliance or SMT. The Company's senior and operating managers have successfully developed and implemented sophisticated marketing, fleet management and financial strategies which have enabled the Company to become the largest and among the most efficient and profitable mobile MRI operators. Upon consummation of the Transactions and after giving effect to the Company's option plans, management will own in excess of 16% of the capital stock of the Company on a fully diluted basis. BUSINESS STRATEGY The Company's management team has developed and implemented a business strategy designed to maximize return on invested capital and in turn increase revenues and EBITDA. The Company's revenues, adjusted EBITDA and adjusted EBITDA margin on a pro forma combined basis for the six months ended June 30, 1997 increased to $52.9 million, $26.5 million and 50.1%, respectively, from $40.0 million, $19.0 million and 47.5% for the six months ended June 30, 1996. The Company achieved comparable customer revenue growth of 18.5% and 9.7%, respectively, in the first six months of 1997 and in the year ended December 31, 1996. In addition, during the three months ended June 30, 1997 the Company added a total of five net mobile MRI systems. Management believes that the recent financial performance of the Company does not yet fully reflect the benefit of these new systems. 3 The primary components of the Company's business strategy are to (i) increase scan volumes; (ii) maximize return on invested capital; (iii) expand the scope of services provided; (iv) pursue strategic acquisitions; and (v) realize operating synergies. Increase Scan Volumes. The Company believes that the demand for MRI procedures will continue to grow as new applications are developed and MRI continues to gain acceptance and replace other imaging modalities. The Company has an opportunity to significantly increase its scan volumes by both adding new customers and increasing scans performed for existing customers. In response to the growing demand for MRI procedures, the Company added 29 net MRI systems and 160 net new MRI customers from January 1, 1995 to June 30, 1997. The Company's decision to purchase new systems is typically predicated on obtaining new customer contracts which serve as the basis of demand for the new MRI systems. Maximize Return on Invested Capital. The Company actively manages the utilization of its MRI systems to maximize its return on invested capital (i.e., the amount of cash flow generated by each system relative to the carrying value of such system). In the six months ended June 30, 1997, on a pro forma combined basis, the Company generated an annualized return on invested capital of 46.2%. The Company typically upgrades the quality of its fleet in markets where demand is greatest and redeploys less advanced systems in markets where demand is lower in order to generate incremental cash flow. The Company estimates that, on average, a system can be utilized in a high demand market for approximately eight years when properly maintained and upgraded, after which time the system can either be utilized in a market with less demand or traded in for a new system. Expand the Scope of Services Provided. The Company intends to leverage its national presence and customer service capabilities by introducing new services, the demand for which management believes will increase as hospitals continue to outsource departments and cost centers and seek incremental revenue sources. The Company expects to expand into open MRI services, lithotripsy services and full-service management of hospital radiology departments. Open MRI systems are used on claustrophobic patients and patients whose size prohibits them from entering traditional MRI systems. Management believes that with the introduction of its first open MRI system in the fourth quarter of 1997, the Company will be the first operator to offer mobile open MRI service. Pursue Strategic Acquisitions. Management has designed an acquisition strategy for the Company which capitalizes on the consolidation occurring in the industry as well as the Company's ability to (i) access substantial and lower cost financial resources; (ii) realize significant synergies, operating expense reductions and overhead cost savings; (iii) apply its consolidation strategy to expand outside of diagnostic imaging in related services; (iv) utilize the Company's expertise in logistics and fleet management; and (v) leverage the Company's existing customer relationships to expand into new modalities. Realize Operating Synergies. Management believes the Recapitalization and the SMT Acquisition will create substantial cost savings, including (i) identified operating and administrative cost savings; (ii) economies in purchasing equipment, supplies and services; and (iii) route consolidation efficiencies. Management believes the SMT Acquisition and future acquisitions will enable the Company to redeploy systems in overlapping markets, resulting in higher utilization rates and the opportunity to increase penetration in other markets. 4 THE TRANSACTIONS In connection with the completion of the Offering, Alliance intends to consummate the Recapitalization pursuant to the Recapitalization Merger Agreement. Concurrently with the Recapitalization, Alliance will consummate the SMT Acquisition. In connection with the Transactions, the Company expects to enter into an agreement (the "Credit Agreement") providing for a $50 million term loan facility (the "Term Loan Facility") and a $150 million revolving loan facility (the "Revolving Loan Facility"), of which $38 million will be borrowed in connection with the consummation of the Transactions. The unused portion of the Revolving Loan Facility will be available for the Company's working capital requirements and to finance acquisitions. In connection with the Transactions, Apollo will invest $63.1 million and BT Capital Partners, an affiliate of BT Alex. Brown Incorporated (the "BT Investor"), will invest $4.8 million of cash equity in the Company (collectively, the "Equity Investment"). Immediately following consummation of the Transactions, Apollo will own approximately 84% of the outstanding common stock of the Company (approximately 70% on a fully diluted basis) and the BT Investor will own approximately 5.9% of the outstanding common stock of the Company (approximately 5.0% on a fully diluted basis). As part of the Recapitalization, common stock of Alliance with a value of approximately $8 million will be retained by existing stockholders of the Company, representing approximately 10% of the outstanding common stock of the Company. In addition, immediately following consummation of the Transactions, through a combination of (i) the rollover of existing options (having an option value of approximately $4.1 million) to purchase common stock of Alliance and SMT into new options to purchase common stock of the Company and (ii) the issuance of options pursuant to the Company's new option plan (the "New Option Plan"), management will own in excess of 16% of the equity of the Company on a fully- diluted basis. The Offering, the Recapitalization, the SMT Acquisition, the Equity Investment and the related borrowings under the Credit Agreement are collectively referred to herein as the "Transactions." The consummation of the Transactions will be concurrent, and the Offering is conditioned upon the other Transactions. The approximate sources and uses of funds in connection with the Transactions are presented in the following table, assuming the Transactions occurred as of June 30, 1997 (dollars in millions): SOURCES OF FUNDS: Term Loan Facility................................................ $ 50.0 Revolving Loan Facility........................................... 38.0 Notes............................................................. 170.0 Equity Investment................................................. 67.9 ------ Total Sources................................................... $325.9 ====== USES OF FUNDS: Payment of cash consideration in Recapitalization(1).............. $159.8 Repay outstanding indebtedness of Alliance........................ 70.6 Acquisition of SMT(2)............................................. 88.3 Less cash on hand................................................. (12.7) Estimated fees and expenses....................................... 19.9 ------ Total Uses...................................................... $325.9 ======
- -------- (1) Comprised of (a) payment for shares of common stock of Alliance (approximately $146.2 million), (b) payments with respect to outstanding warrants and options and change of control payments under employment agreements (approximately $11.5 million) and (c) payments pursuant to Alliance's Long-Term Incentive Plan (approximately $2.1 million). (2) Comprised of equity investment (approximately $33.6 million) and repayment of SMT debt incurred in connection with the August 1997 acquisition of SMT by Three Rivers (approximately $54.7 million). 5 THE OFFERING Issuer...................... Alliance Imaging, Inc. Securities Offered.......... $170,000,000 in aggregate principal amount of % Senior Subordinated Notes due 2005. Maturity Date............... , 2005. Payment Dates............... Interest on the Notes will accrue from the date of issuance and will be payable semiannually on each and , commencing , 1998. Ranking..................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all Senior Debt of the Company, including the indebtedness under the Credit Agreement. The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all Guarantor Senior Debt of the Guarantors. As of June 30, 1997, after giving pro forma effect to the Transactions, the Company would have had approximately $100.2 million of Senior Debt outstanding (excluding unused commitments of $112.0 million under the Credit Agreement). Guarantees.................. The Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Notes will be redeemable, in whole or in Optional Redemption......... part, at the option of the Company, at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to , 2000, the Company may redeem up to 40% of the aggregate principal amount of the Notes with the net proceeds of one or more Equity Offerings at the redemption price set forth herein plus accrued and unpaid interest, if any, to the date of redemption; provided, however, that after any such redemption 60% of the aggregate principal amount of the Notes issued must remain outstanding. See "Description of the Notes-- Redemption." Change of Control........... Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all outstanding Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. In the event of a Change of Control, there can be no assurance that the Company will have the financial resources or be permitted under the terms of its other indebtedness to repurchase the Notes. In addition, the Credit Agreement will restrict the Company's ability to repurchase the Notes, including pursuant to a Change of Control Offer. The occurrence of a default under the Indenture (as defined) will also cause a default under the Credit Agreement. See "Description of the Notes-- Change of Control." 6 Certain Covenants........... The indenture pursuant to which the Notes will be issued (the "Indenture") will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined) to: incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company and impose restrictions on the ability of a Restricted Subsidiary to pay certain dividends or make certain payments to the Company. See "Description of the Notes--Certain Covenants." Offers to Purchase.......... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at a price equal to 100% of their principal amount plus accrued interest to the date of purchase. See "Description of the Notes--Certain Covenants--Limitation on Asset Sales." Use of Proceeds............. The Company intends to use the net proceeds from the Offering to partially fund the Transactions. See "Use of Proceeds." For more complete information regarding the Notes, including the definitions of certain capitalized terms used above, see "Description of the Notes." RISK FACTORS Prospective purchasers of the Notes should consider carefully the information set forth under the caption "Risk Factors," and all other information set forth in this Prospectus, in evaluating an investment in the Notes. 7 SUMMARY HISTORICAL FINANCIAL INFORMATION The summary historical consolidated financial information of Alliance and SMT with respect to each year in the three-year period ended December 31, 1996, respectively, is derived from the consolidated financial statements of Alliance and SMT. With respect to Alliance, such consolidated financial statements have been audited by Ernst & Young LLP, independent auditors. In the case of SMT, such consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The financial information of Alliance and SMT for the six months ended June 30, 1996 and June 30, 1997 are unaudited, but in the opinion of Alliance's and SMT's managements, respectively, reflect all adjustments necessary for a fair presentation of such information. Operating results of Alliance and SMT for the six months ended June 30, 1997, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. The summary historical consolidated financial information provided below should be read in conjunction with the consolidated financial statements and notes thereto of Alliance and SMT included elsewhere in this Prospectus. See "Index to Consolidated Financial Statements." ALLIANCE IMAGING, INC.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- ------------------ 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................... $ 57,875 $ 58,065 $ 68,482 $ 31,302 $ 39,911 Operating expenses, excluding depreciation..... 31,093 28,342 32,344 15,019 17,815 Selling, general and administrative expenses.... 6,284 6,294 8,130 3,160 3,990 Depreciation expense........ 13,424 12,202 12,737 6,048 7,144 Amortization expense, primarily goodwill......... 943 1,345 1,952 745 1,165 Interest expense, net....... 10,758 5,053 5,758 2,683 3,557 Net income (loss)(1)........ (19,066) 4,102 12,801 3,102 5,447 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash and short-term investments................ $ 2,478 $ 11,128 $ 10,867 $ 11,180 $ 13,817 Total assets................ 102,527 103,327 128,510 120,055 143,270 Total long-term debt, including current maturities................. 79,208 75,880 89,025 86,031 80,548 Redeemable preferred stock.. 15,500 16,430 4,694 15,965 -- Stockholders' equity (deficit).................. (1,665) 1,604 16,360 5,129 41,368 OTHER DATA: EBITDA(2)................... $ 20,498 $ 23,429 $ 28,008 $ 13,123 $ 18,106 EBITDA margin(3)............ 35.4% 40.3% 40.9% 41.9% 45.4% Cash flows provided by (used in): Operating activities...... $ 12,784 $ 18,043 $ 21,731 $ 10,866 $ 13,693 Investing activities...... (19,861) (7,789) (27,936) (14,447) (19,545) Financing activities...... 1,135 (1,604) 5,944 3,633 8,802 Capital expenditures(4)..... 22,361 11,383 34,376 17,943 20,333 Number of MRI systems at end of period.................. 72 76 86 87 90 Comparable customer revenue growth(5).................. (0.1)% 6.9% 8.8% 15.7% 17.3% Average scans per MRI system per day.................... 5.8 5.8 6.7 6.5 7.0 Ratio of earnings to fixed charges(6)................. -- 1.9x 2.1x 2.2x 2.6x
(footnotes on following page) 8 SMT HEALTH SERVICES INC.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------- --------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------ ------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues........................... $13,235 $15,020 $19,022 $8,725 $13,014 Operating expenses, excluding depreciation...................... 5,892 5,396 6,280 2,891 4,153 Selling, general and administrative expenses.......................... 1,894 2,472 2,877 1,373 1,907 Depreciation and amortization...... 3,164 3,679 4,725 2,109 3,194 Interest expense, net.............. 1,590 1,620 1,851 862 805 Net income(1)...................... 410 1,373 2,411 1,020 1,459 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash and short-term investments.... $ 2,317 $ 3,942 $ 5,043 $3,830 $13,913 Total assets....................... 20,623 23,348 39,498 28,844 50,736 Total long-term debt, including current maturities................ 16,212 17,091 27,210 20,522 23,080 Stockholders' equity............... 3,653 5,402 11,400 7,367 25,375 OTHER DATA: EBITDA(2).......................... $ 5,449 $ 7,152 $ 9,865 $4,461 $ 6,954 EBITDA margin(3)................... 41.2% 47.6% 51.9% 51.1% 53.4% Cash flows provided by (used in): Operating activities............. $ 3,630 $ 5,477 $ 7,441 $3,024 $ 6,782 Investing activities............. (261) (1,380) (2,567) (1,637) (2,976) Financing activities............. (3,548) (3,604) (2,573) (1,168) 5,064 Capital expenditures(4)............ 4,584 5,069 18,112 7,104 5,985 Number of MRI systems at end of period............................ 9 11 18 13 20 Comparable customer revenue growth(5)......................... 5.2% 0.1% 12.9% 9.7% 22.0% Average scans per MRI system per day............................... 9.0 10.4 10.9 10.9 11.5 Ratio of earnings to fixed charges(6)........................ 1.4x 2.0x 2.7x 2.5x 3.4x
- -------- (1) Alliance's net income (loss) includes special charges of $13.3 million for the year ended December 31, 1994 related to an equipment exchange transaction, the impairment of certain equipment, debt restructuring and employee severances; extraordinary gains (net of tax) of $6.3 million for the year ended December 31, 1996 related to the early extinguishment of debt; and an extraordinary gain (net of tax) of $1.3 million for the six months ended June 30, 1997 related to the early extinguishment of debt. SMT's net income includes a loss on disposal of discontinued operations of $132,000 for the year ended December 31, 1994 and an extraordinary loss (net of tax) of $181,000 for the six months ended June 30, 1997 related to the early extinguishment of debt. (2) EBITDA is defined herein as income before income taxes, plus depreciation, amortization, net interest expense and other non-recurring items (principally non-cash). EBITDA is presented because the Company believes it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (3) EBITDA margin is defined herein as EBITDA divided by revenues. (4) The substantial majority of Alliance's historical capital expenditures have related to either major upgrades to existing systems or the replacement of older, less-advanced systems with new, state-of-the-art technologically advanced systems. SMT's capital expenditures related to substantially upgrading its MRI systems as well as purchasing new systems to expand the size of its fleet. As a result of these historical investments, the Company believes that it has upgraded substantially all of its systems and expects most of its capital expenditures for at least the next three to five years to relate to net fleet additions through new system purchases. (5) Represents period over period revenue growth for customers that generated revenues for the entire term of both periods. (6) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense and one-third of the rent expense from long-term equipment operating leases, which management believes is a reasonable approximation of an interest factor. Alliance's earnings were insufficient to cover fixed charges by $18.0 million for the year ended December 31, 1994. 9 SUMMARY PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA The following table sets forth certain unaudited pro forma combined consolidated financial data for the Company for the year ended December 31, 1996, and as of and for the six months ended June 30, 1997, and certain financial ratios derived therefrom which are presented to reflect the pro forma effect of the Transactions. The summary unaudited pro forma combined consolidated statements of operations for the six months ended June 30, 1997 and for the year ended December 31, 1996 give effect to the Transactions as if they had occurred on January 1, 1997 and January 1, 1996, respectively. The summary unaudited pro forma combined consolidated balance sheet data gives effect to the Transactions as if they occurred on June 30, 1997. The unaudited pro forma combined consolidated financial data do not purport to be indicative of the results of operations or financial position of the Company that would have actually been obtained had the Transactions been completed as of the assumed dates and for the periods presented, or which may be obtained in the future. The unaudited pro forma combined consolidated financial data (i) have been derived from and should be read in conjunction with the "Unaudited Pro Forma Combined Consolidated Financial Data" and the notes thereto included elsewhere in this Prospectus and (ii) should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the separate historical consolidated financial statements of Alliance and SMT and the notes thereto included elsewhere in this Prospectus. The Consolidated Statements of Operations Data and Other Data (except for adjusted EBITDA and adjusted EBITDA margin) do not reflect anticipated cost savings referenced in footnote 2 below. Such savings are reflected in adjusted EBITDA and adjusted EBITDA margin. See "Index to Consolidated Financial Statements."
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ---------------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................................... $87,504 $ 52,925 Operating expenses, excluding depreciation.. 38,624 21,968 Selling, general and administrative ex- penses..................................... 11,007 5,897 Depreciation expense........................ 16,085 9,381 Amortization expense, primarily goodwill.... 4,795 2,575 Interest expense, net....................... 26,480 13,240 Loss before extraordinary gains............. (9,487) (136) OTHER DATA: EBITDA(1)................................... $37,873 $ 25,060 EBITDA margin............................... 43.3% 47.4% Adjusted EBITDA(2).......................... $40,753 $ 26,500 Adjusted EBITDA margin(2)................... 46.6% 50.1% Cash interest expense(3).................... $25,459 $ 12,729 Capital expenditures........................ 52,488 26,318 Number of MRI systems at end of period...... 104 110 Comparable customer revenue growth.......... 9.7% 18.5% Average scans per MRI system per day........ 7.4 7.8 Ratio of adjusted EBITDA to cash interest expense(2)................................. 1.6x 2.1x Ratio of earnings to fixed charges(4)....... -- -- AT JUNE 30, 1997 ---------------- CONSOLIDATED BALANCE SHEET DATA: Cash and short-term investments............................... $ 1,255 Total assets.................................................. 227,951 Total long-term debt, including current maturities............ 270,178 Stockholders' equity (deficit)................................ (62,796)
- -------- (1) EBITDA is defined herein as income before income taxes, plus depreciation, amortization, net interest expense and other non-recurring items (principally non-cash). EBITDA is presented because the Company believes it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (2) Adjusted EBITDA, adjusted EBITDA margin and the ratio of adjusted EBITDA to cash interest expense are based on pro forma EBITDA, adjusted for expense reductions expected to result from consolidation of identified functions, facilities and mobile MRI routes, and the reorganization of the combined entity (which reorganization is expected to commence immediately upon consummation of the Transactions). Operating expenses and selling, general and administrative expenses are expected to be reduced annually by approximately $3.4 million. An annual management fee payable to Apollo Management, L.P. of $500,000 has been included as an offset to the expected reduction in selling, general and administrative expenses. (3) Consists of interest expense, net of interest income, excluding deferred financing costs. A 1/8% variance in interest rates would change annual interest expense by approximately $322,000. (4) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense and one-third of the rent expense from long-term equipment operating leases, which management believes is a reasonable approximation of an interest factor. Pro forma earnings were insufficient to cover fixed charges by $9.5 million for the year ended December 31, 1996 and by $136,000 for the six months ended June 30, 1997. 10 RISK FACTORS Prospective purchasers of the Notes should consider carefully the information set forth below as well as all other information set forth in this Prospectus, in evaluating an investment in the Notes. SUBSTANTIAL LEVERAGE After giving effect to the Transactions, the Company's consolidated indebtedness will be approximately $270.2 million. This high level of indebtedness of the Company in comparison to that of Alliance and SMT on a historical basis may reduce the flexibility of the Company to respond to changing business and economic conditions, as well as limit capital expenditures of the Company. The Credit Agreement and the Indenture will include significant operating and financial restrictions, such as limits on the Company's ability to incur indebtedness. On a pro forma basis, after giving effect to the Transactions, the Company's earnings would have been insufficient to cover fixed charges by $9.5 million for the year ended December 31, 1996, and by $136,000 for the six months ended June 30, 1997. The Company's high degree of leverage may have important consequences for the Company, including: (i) the ability of the Company to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be on terms favorable to the Company; (ii) a substantial portion of the Company's cash flow will be used to pay the Company's interest expense, which will reduce the funds that would otherwise be available to the Company for its operations and future business opportunities; (iii) a substantial decrease in net operating cash flows or an increase in expenses of the Company could make it difficult for the Company to meet its debt service requirements and force it to modify its operations; (iv) the Company may be more highly leveraged than its competitors which may place it at a competitive disadvantage; and (v) the Company's high degree of leverage may make it more vulnerable to a downturn in its business or the economy generally. Any inability of the Company to service its indebtedness or obtain additional financing, as needed, would have a material adverse effect on the Company. A significant portion of the indebtedness to be incurred by the Company to finance the Transactions will bear interest at variable rates. Any increase in the interest rates on the Company's indebtedness will reduce funds available to the Company for its operations and future business opportunities and will exacerbate the consequences of the Company's leveraged capital structure. RESTRICTIVE DEBT COVENANTS The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all of or substantially all of the assets of the Company and impose restrictions on the ability of a Restricted Subsidiary to pay certain dividends or make certain payments to the Company. See "Description of the Notes--Certain Covenants." In addition, the Credit Agreement is expected to contain a number of significant covenants that, among other things, will restrict the ability of the Company to (i) declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt, including the Notes; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) incur additional indebtedness; (vi) amend or otherwise alter debt and other material agreements; (vii) make capital expenditures; (viii) engage in mergers, acquisitions and asset sales; (ix) enter into transactions with affiliates; and (x) alter the business it conducts. The indebtedness outstanding under the Credit Agreement will be guaranteed by substantially all of the Company's domestic subsidiaries and will be secured by a first priority lien on substantially all of the properties and assets of the Company and its subsidiaries, now owned or acquired later, including a pledge of all of the shares of the Company's existing and future subsidiaries and up to 65% of the shares of the Company's future foreign subsidiaries which are owned by the Company or one of its subsidiaries. In addition, under the Credit Agreement, the Company will also be required to comply with financial covenants with respect to (i) a maximum leverage 11 ratio; (ii) a minimum consolidated EBITDA; (iii) a minimum interest coverage ratio; and (iv) a minimum fixed charge coverage ratio. If the Company were unable to borrow under the Credit Agreement due to a default, it would be left without sufficient liquidity. See "Description of the Credit Agreement." REGULATION Many aspects of the medical industry in the United States, including the Company's business, are subject to extensive federal and state government regulation. Although the Company believes that its operations comply with applicable regulations, there can be no assurance that subsequent adoption of laws or interpretations of existing laws will not regulate, restrict or otherwise adversely affect the Company's business. The marketing and operation of the Company's MRI and computed axial tomography ("CT") systems are subject to state laws prohibiting the practice of medicine by non-physicians. Management believes that its operations do not involve the practice of medicine because all professional medical services relating to its operations, such as the interpretation of the scans and related diagnoses, are separately provided by licensed physicians not employed by the Company. Further, the Company believes that its operations do not violate state laws with respect to the rebate or division of fees. The Company is subject to federal and state laws which govern financial and other arrangements between health care providers. These include the federal Medicare and Medicaid anti-kickback statutes which prohibit bribes, kickbacks, rebates and any other direct or indirect remuneration in return for or to induce the referral of an individual to a person for the furnishing, directing or arranging of services, items or equipment for which payment may be made in whole or in part under Medicare, Medicaid or other federal health care programs. Violation of the anti-kickback statute may result in criminal penalties and exclusion from the Medicare and other federal health care programs. Many states have enacted similar statutes which are not necessarily limited to items and services paid for under Medicare or a federally funded health care program. In recent years, there has been increasing scrutiny by law enforcement authorities, the U.S. Department of Health and Human Services ("HHS"), the courts and Congress of financial arrangements between health care providers and potential sources of patient and similar referrals of business to ensure that such arrangements are not designed as mechanisms to pay for patient referrals. HHS interprets the anti-kickback statute broadly to apply to distributions of partnership and corporate profits to investors who refer federal health care program patients to a corporation or partnership in which they have an ownership interest and to payments for service contracts and equipment leases that are designed to provide direct or indirect remuneration for patient referrals or similar opportunities to furnish reimbursable items or services. In July 1991, HHS issued "safe harbor" regulations that set forth certain provisions which, if met, will assure that health care providers and other parties who refer patients or other business opportunities, or who provide reimbursable items or services, will be deemed not to violate the anti-kickback statute. The Company is also subject to separate laws governing the submission of false claims. The Company is a party to a partnership for provision of MRI services. The Company believes that the partnership is in compliance with the anti-kickback statute. The Company believes that its other operations likewise comply with the anti-kickback statutes. A federal law, commonly known as the "Stark Law," also imposes civil penalties and exclusions for referrals for "designated health services" by physicians to certain entities with which they have a financial relationship (subject to certain exceptions). "Designated health services" include, among other things, MRI services. While implementing regulations have been issued relating to referrals for clinical laboratory services, no implementing regulations have been issued regarding the other designated health services, including MRI services. In addition, several states in which the Company operates have enacted or are considering legislation that prohibits "physician self-referral" arrangements or requires physicians to disclose any financial interest they may have with a health care provider to their patients to whom they recommend that provider. Possible sanctions for violating these provisions include loss of licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely. The Company believes its operations comply with these federal and state physician self-referral laws. In some states, a certificate of need ("CON") or similar regulatory approval is required prior to the acquisition of high-cost capital items, including diagnostic imaging systems or provision of diagnostic imaging 12 services by the Company or its customers. CON regulations may limit or preclude the Company from providing diagnostic imaging services or systems. A significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. See "Business--Regulation." REIMBURSEMENT OF HEALTH CARE COSTS; COST CONTAINMENT PRESSURES; CONTRACTS The majority of payments to the Company are received directly from health care providers, rather than from private insurers, other third party payors or governmental entities. To a lesser extent, the Company's revenues are generated from direct billings to patients or their medical payors which are recorded net of contractual discounts and other arrangements for providing services at discounted prices. Under current reimbursement regulations, the Company is prohibited from billing the insurer or the patient directly for services provided for hospital inpatients or outpatients. Payment to health care providers by third party payors for the Company's diagnostic services depends substantially upon such payors' reimbursement policies. Consequently, those policies have a direct effect on health care providers' ability to pay for the Company's services and an indirect effect on the Company's level of charges. Ongoing concerns about rising health care costs may cause more restrictive reimbursement policies to be implemented in the future. Restrictions on reimbursements to health care providers may affect such providers' ability to pay for the services offered by the Company and could indirectly adversely affect the Company's financial performance. See "Business--Reimbursement." The current health care environment is characterized by cost containment pressures which the Company believes have resulted in decreasing revenues per scan. Although scan prices appear to have stabilized, the Company expects modest continuing downward pressure on pricing levels. Although the Company has experienced increased scan volumes in 1995, 1996 and the first half of 1997, it has also had periods of declining volumes in prior years, and there can be no assurance that the recent positive trends will continue. Among other things, the Company is subject to the risk that customers will cease using the Company's MRI services upon expiration of contracts and purchase or lease their own MRI systems. In the past, when this has occurred, the Company has generally been able to obtain replacement customers. However, it is not always possible to immediately obtain replacement customers, and some replacement customers have been smaller facilities and have had lower scan volumes. RISK OF INTEGRATION; ACQUISITION STRATEGY The anticipated benefits of the SMT Acquisition will require the integration of Alliance's and SMT's administrative, finance, sales and marketing organizations, the coordination of their sales efforts, the incorporation and coordination of their scanning services in an efficient manner, and the implementation of appropriate operations and financial and management systems and controls in order to capture the efficiencies and the cost reductions that are expected to result therefrom. Such integration will require substantial attention from the Company's management team, which is not experienced in integrating the operations of companies the size of Alliance and SMT. The diversion of management attention, as well as any other difficulties which may be encountered in the transition and integration process, could have an adverse impact on the revenue and operating results of the Company. There can be no assurance that the Company will be able to successfully integrate the operations of Alliance and SMT or any future acquisitions. The Company's expansion and acquisition strategy may require substantial capital, and no assurance can be given that the Company will be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities. Sufficient funds may not be available on terms acceptable to the Company, if at all. TECHNOLOGICAL CHANGE AND OBSOLESCENCE The Company's services require the use of state-of-the-art medical equipment that has been characterized by rapid technological advances. Although the Company believes that substantially all the MRI and CT systems 13 it provides can be upgraded to maintain their state-of-the-art character, the development of new technologies or refinements of existing ones might make the Company's existing systems technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, the Company's systems. MRI systems are currently manufactured by numerous companies. Competition among manufacturers for a greater share of the MRI systems market may result in technological advances in the capacity of these new systems. Consequently, the obsolescence of the Company's systems may be accelerated. Although the Company is aware of no substantial technological change, should such change occur, there can be no assurance that the Company will be able to acquire the new or improved systems which may be required to service its customers. SUBORDINATION OF NOTES AND THE GUARANTEES The Notes and the Guarantees will be unsecured and subordinated to the prior payment in full of all Senior Debt of the Company and all Guarantor Senior Debt of the Guarantors, respectively. As of June 30, 1997, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of all Senior Debt would have been approximately $100.2 million. In the event of a bankruptcy, liquidation or reorganization of the Company, the assets of the Company or the Guarantors will be available to pay obligations on the Notes only after all Senior Debt of the Company or all Guarantor Senior Debt of the Guarantors, as the case may be, has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. In addition, the Company may not pay principal or premium, if any, or interest on the Notes if any Senior Debt is not paid when due or any other default on any Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms, unless, in either case, such amount has been paid in full or the default has been cured or waived and such acceleration has been rescinded. In addition, if any default occurs with respect to certain Senior Debt and certain other conditions are satisfied, the Company may not make any payments on the Notes for a designated period of time. Finally, if any judicial proceeding is pending with respect to any such default in payment on any Senior Debt or other default with respect to certain Senior Debt, or if the maturity of the Notes is accelerated because of a default under the Indenture and such default constitutes a default with respect to any Senior Debt, the Company may not make any payment on the Notes. See "Description of the Notes--Subordination." FRAUDULENT TRANSFER CONSIDERATIONS The payment of the consideration in the Recapitalization to the stockholders of Alliance and the related financing (including the issuance of the Notes and the Guarantees) may be subject to review under federal or state fraudulent transfer laws. While the relevant laws may vary from state to state, under such laws, if a court in a lawsuit by a creditor or a representative of creditors of Alliance, such as a trustee in bankruptcy or one of such entities as debtor-in-possession, were to find that, at the time of or after and giving effect to the Transactions, Alliance (i) was insolvent or rendered insolvent thereby, (ii) was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay as they matured, or (iv) intended to hinder, delay or defraud creditors and, in the case of clauses (i), (ii) and (iii), that Alliance did not receive reasonably equivalent value or fair consideration in the Recapitalization, such court could avoid all or a part of the payment of the consideration in the Recapitalization and require that the stockholders, including stockholders exercising appraisal rights, return such consideration to Alliance or to a fund for the benefit of their respective creditors. In addition, if a court were to find that Alliance came within any of clauses (i) through (iv) above, Alliance, or its respective creditors or trustees in bankruptcy, could seek to avoid the grant of security interests to the lenders under the Credit Agreement or to subordinate or void altogether the Notes and the Guarantees. This would result in an event of default with respect to such indebtedness which, under the terms of such indebtedness (subject to applicable law), would allow the lenders to terminate their obligations thereunder and to accelerate payment of such indebtedness. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the jurisdiction which is being applied. There can be no certainty as to what law a court would apply pursuant to applicable choice of law provisions, although it is likely that a court would apply the law of the state of incorporation of Alliance, federal bankruptcy law, the law of the jurisdiction in which the headquarters of Alliance is located or the law of the jurisdiction in which the Recapitalization is deemed to have occurred. 14 Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of such company's debts is greater than all such company's property at a fair valuation, or if the present fair saleable value of such company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. There can be no assurance, however, that a court would not determine that Alliance was insolvent at the time of or after and giving effect to the Recapitalization. In addition, there can be no assurance that a court would not determine, regardless of whether Alliance was solvent, that the Recapitalization constituted a fraudulent transfer on another of the grounds listed above. Management believes that Alliance will be solvent following the consummation of the Transactions. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL In the event of a Change of Control, the Company will be required to offer to repurchase all of the outstanding Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. The Credit Agreement will prohibit the repurchase of the Notes upon a Change of Control unless and until the indebtedness under the Credit Agreement is repaid in full. There can be no assurance that the Company will have sufficient funds available or will be permitted by the Credit Agreement and any other indebtedness to repurchase the Notes upon the occurrence of a Change of Control. The Change of Control purchase feature of the Notes may in certain circumstances make more difficult or discourage a takeover of the Company and, thus, the removal of incumbent management. See "Description of the Notes--Change of Control." RELIANCE ON KEY PERSONNEL The Company's success depends in large part upon a number of key management personnel, principally Messrs. Zehner and Pino. The loss of the service of one or more of its executive officers or other key management personnel could have a material adverse effect on the Company. Messrs. Zehner and Pino have entered into employment agreements and an agreement not to compete with Alliance which will become effective at the effective time of the Recapitalization. See "Management--Employment and Related Agreements." COMPETITION The market for diagnostic imaging services and imaging systems is highly competitive. In addition to direct competition from other mobile providers, the Company competes with free-standing imaging centers and health care providers that have their own diagnostic imaging systems and with equipment manufacturers that sell or lease imaging systems to health care providers for full-time installation. Some of the Company's direct competitors that provide contract MRI services may have access to greater financial resources than the Company. In addition, some of the Company's customers are capable of providing the same services to their patients directly, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable licensure and CON requirements, if any. CONTROL BY APOLLO Upon consummation of the Transactions, Apollo will own approximately 84% of the outstanding common stock of the Company (approximately 70% on a fully diluted basis). Accordingly, Apollo and its general partner will control the Company and have the power to elect all of its directors, appoint new management and approve any action requiring the approval of the holders of shares of Alliance common stock, including adopting amendments to the Company's certificate of incorporation and approving mergers or sales of substantially all of the Company's assets. ABSENCE OF PUBLIC MARKET The Notes are a new issue of securities which have no established trading market. It is expected that the Notes will be sold to a limited number of investors. The Company has been advised by the Underwriters that they intend to make a market in the Notes after the consummation of this Offering; however, the Underwriters are not obligated to do so, and any such market- making, if commenced, may be terminated at any time without notice. No assurance can be given as to the liquidity of the trading market, if any, that may develop for the Notes. 15 THE TRANSACTIONS In connection with the completion of the Offering, Alliance intends to consummate the Recapitalization pursuant to the Recapitalization Merger Agreement. Concurrently with the Recapitalization, Alliance will consummate the SMT Acquisition by either merging a subsidiary of Alliance into Three Rivers or acquiring all of the capital stock of Three Rivers in exchange for shares of common stock of the Company. Three Rivers was formed by Apollo in connection with its acquisition of SMT. Three Rivers acquired SMT pursuant to a tender offer and a subsequent merger of Three Rivers Acquisition Corp. ("Three Rivers Acquisition"), a wholly owned subsidiary of Three Rivers, with and into SMT. In connection with the Transactions, the Company expects to enter into the Credit Agreement providing for the $50 million Term Loan Facility and the $150 million Revolving Loan Facility, of which approximately $38 million will be borrowed in connection with the consummation of the Transactions. Immediately following consummation of the Transactions, it is expected that the Company will have approximately $112 million of availability under the Revolving Loan Facility. The unused portion of the Revolving Loan Facility will be used to provide for the Company's working capital requirements and to finance acquisitions. In connection with the Transactions, Apollo will invest $63.1 million and the BT Investor will invest $4.8 million of cash equity in the Company. Immediately following consummation of the Transactions, Apollo will own approximately 84% of the outstanding common stock of the Company (approximately 70% on a fully diluted basis) and the BT Investor will own approximately 5.9% of the outstanding common stock of the Company (approximately 5.0% on a dully diluted basis). As part of the Recapitalization, common stock of Alliance with a value of approximately $8 million will be retained by existing stockholders of the Company, representing approximately 10% of the outstanding common stock of the Company. In addition, immediately following consummation of the Transactions, through a combination of (i) the rollover of existing options (having an option value of approximately $4.1 million) to purchase common stock of Alliance and Three Rivers into new options to purchase common stock of the Company and (ii) the issuance of options pursuant to the Company's New Option Plan, management of Alliance and SMT will own in excess of 16% of the equity of the Company on a fully-diluted basis. A more detailed description of the Transactions is contained in Alliance's registration statement on Form S-4 (File No. 333-33787). See "Available Information." 16 USE OF PROCEEDS The net proceeds of the Company from the sale of the Notes are estimated to be $163.0 million. The Company intends to use the net proceeds, together with borrowings under the Credit Agreement, to fund the Transactions, to repay certain outstanding indebtedness of Alliance and SMT and to pay fees and expenses relating to the Transactions. The indebtedness of Alliance being repaid consists of approximately $70.6 million (comprising Alliance's senior notes and debt incurred to purchase equipment) that bears interest at rates of 8.0% to 11.4% per annum and matures from 1997 to 2002. See Note 4 of Notes to Alliance's Consolidated Financial Statements. The indebtedness of SMT being repaid consists of $52.8 million of indebtedness incurred in connection with Apollo's acquisition of SMT that bears interest at rates of 8.6% to 8.9% per annum and matures from 2001 to 2003. The approximate sources and uses of funds in connection with the Transactions are set forth in the following table, assuming the Transactions occurred as of June 30, 1997. SOURCES AND USES OF FUNDS (IN MILLIONS) SOURCES OF FUNDS Term Loan Facility................................................ $ 50.0 Revolving Loan Facility........................................... 38.0 Notes............................................................. 170.0 Equity Investment................................................. 67.9 ------ Total Sources .................................................. $325.9 ====== USES OF FUNDS Payment of cash consideration in Recapitalization(1).............. $159.8 Repay outstanding indebtedness of Alliance........................ 70.6 Acquisition of SMT(2)............................................. 88.3 Less cash on hand................................................. (12.7) Estimated fees and expenses....................................... 19.9 ------ Total Uses...................................................... $325.9 ======
- -------- (1) Comprised of (a) payment for shares of common stock of Alliance (approximately $146.2 million), (b) payments with respect to outstanding warrants and options and change of control payments under employment agreements (approximately $11.5 million) and (c) payments pursuant to Alliance's Long-Term Incentive Plan (approximately $2.1 million). (2) Comprised of equity investment (approximately $33.6 million) and repayment of SMT debt incurred in connection with the August 1997 acquisition of SMT by Three Rivers (approximately $54.7 million). 17 PRO FORMA CAPITALIZATION The following table sets forth the pro forma capitalization of the Company, assuming the Transactions had occurred on June 30, 1997. This table should be read in conjunction with the information contained in "Use of Proceeds," "Unaudited Pro Forma Combined Consolidated Financial Information" and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as Alliance's and SMT's financial statements and the notes thereto included elsewhere in this Prospectus.
PRO FORMA AT JUNE 30, 1997 ------------- (IN MILLIONS) Cash and short-term investments............................. $ 1.3 ====== Long-term debt, including current portion: Term Loan Facility........................................ $ 50.0 Revolving Loan Facility(1)................................ 38.0 Other debt(2)............................................. 12.2 Notes..................................................... 170.0 ------ Total debt.............................................. 270.2 Stockholders' equity (deficit): Stockholders' equity (deficit)............................ (25.8) Accumulated deficit....................................... (37.0) ------ Total stockholders' equity (deficit).................... (62.8) ------ Total capitalization.................................. $207.4 ======
- -------- (1) The Revolving Loan Facility provides for borrowings of up to $150 million. See "Description of the Credit Agreement." (2) Consists of capitalized lease obligations and purchase money obligations secured by equipment. 18 UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma combined consolidated balance sheet at June 30, 1997 reflects the historical consolidated balance sheets of Alliance and SMT adjusted to give effect to the Transactions as if they had occurred at June 30, 1997. The Recapitalization will be treated as a leveraged recapitalization in which there will be no changes to the carrying values of Alliance's net assets and the sales and purchases of Alliance's common stock will be accounted for as capital transactions at amounts received from or paid to stockholders. The SMT Acquisition will be accounted for using the purchase method pursuant to which the fair value of the shares issued to effect the SMT Acquisition will be allocated to the fair values of the net assets of SMT determined based on appraisals and other methods. The purchase price allocations reflected in the pro forma combined consolidated financial statements are based on preliminary estimates of the fair values of assets and liabilities which may differ from the actual allocations. The following unaudited pro forma combined consolidated statements of operations combine the historical operations of Alliance and SMT for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively, with adjustments to reflect the Transactions as if they had occurred as of January 1, 1997 for the six months ended June 30, 1997, and as of January 1, 1996 for the year ended December 31, 1996. The unaudited pro forma combined consolidated financial information is based on the consolidated financial statements of Alliance and SMT giving effect to the Transactions under the assumptions and adjustments outlined in the accompanying Notes to Unaudited Pro Forma Combined Consolidated Financial Information. Such pro forma adjustments are based upon available information and upon certain assumptions that the Company's management believes are reasonable under the circumstances. The unaudited pro forma combined consolidated balance sheet and statements of operations are provided for comparative purposes only and do not purport to represent the results that would have been obtained had the Transactions occurred on the dates indicated or that may be achieved in the future. The unaudited pro forma combined consolidated balance sheet and statements of operations and accompanying notes should be read in conjunction with the respective historical consolidated financial statements of Alliance and SMT included elsewhere in this Prospectus. See "Index to Consolidated Financial Statements." 19 ALLIANCE IMAGING, INC. UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (IN THOUSANDS)
PRO HISTORICAL HISTORICAL FORMA ALLIANCE SMT ADJUSTMENTS COMBINED ---------- ---------- ----------- -------- ASSETS Current assets: Cash and short-term investments.................. $ 13,817 $13,913 $ (26,475)(a) $ 1,255 Receivables, net.............. 9,207 2,128 -- 11,335 Other current assets.......... 1,053 679 -- 1,732 -------- ------- --------- -------- Total current assets........ 24,077 16,720 (26,475) 14,322 Equipment, net.................. 89,776 32,489 -- 122,265 Intangible assets, net.......... 27,256 590 53,320 (b) 81,166 Other assets.................... 2,161 937 7,100 (c) 10,198 -------- ------- --------- -------- Total assets................ $143,270 $50,736 $ 33,945 $227,951 ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.............. $ 2,773 $ 887 $ -- $ 3,660 Accrued compensation and related expenses............. 2,855 117 -- 2,972 Other accrued liabilities..... 8,688 1,104 (1,000)(d) 8,792 Current portion of long-term debt......................... 19,618 5,928 (22,026)(e) 3,520 -------- ------- --------- -------- Total current liabilities... 33,934 8,036 (23,026) 18,944 Other liabilities............... 7,038 173 (2,066)(f) 5,145 Long-term debt.................. 60,930 17,152 188,576 (e) 266,658 -------- ------- --------- -------- Total liabilities........... 101,902 25,361 163,484 290,747 Stockholders' equity (deficit): Preferred stockholders' equity....................... 18,388 -- (18,388)(f) -- Common stockholders' equity (deficit).................... 36,280 24,635 (86,701)(f) (25,786) Retained earnings (accumulated deficit) .................... (13,300) 740 (24,450)(f) (37,010) -------- ------- --------- -------- Total stockholders' equity (deficit).................. 41,368 25,375 (129,539) (62,796) -------- ------- --------- -------- Total liabilities and stockholders' equity....... $143,270 $50,736 $ 33,945 $227,951 ======== ======= ========= ========
See accompanying notes. 20 ALLIANCE IMAGING, INC. NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (a) Reflects the following:
(IN THOUSANDS) Sources: Term Loan Facility........................................... $ 50,000 Revolving Loan Facility...................................... 38,000 Notes........................................................ 170,000 Equity Investment............................................ 67,900 -------- Total sources............................................. $325,900 ======== Uses: Repurchase Alliance equity................................... $159,830 Acquisition of SMT (see below)............................... 88,300 Transaction costs............................................ 12,800 Repay current debt........................................... 17,218 Repay long-term debt......................................... 53,330 Deferred financing fees for the Credit Agreement and the Notes....................................................... 7,100 Less cash on hand............................................ (12,678) -------- Total uses................................................ $325,900 ======== Acquisition of SMT: Net equity of SMT............................................ $ 25,375 Goodwill .................................................... 53,320 Deferred loan fees*.......................................... 2,500 Repay current debt........................................... 5,308 Repay long-term debt......................................... 15,594 Less cash on hand............................................ (13,797) -------- Total..................................................... $ 88,300 ======== Adjustment to cash: Alliance..................................................... $(12,678) SMT.......................................................... (13,797) -------- Total..................................................... $(26,475) ========
-------- * Incurred by Three Rivers and SMT subsequent to June 30, 1997 as a cost of obtaining new financing in connection with Three Rivers' acquisition of SMT. This amount will be expensed by Alliance at the time of the SMT Acquisition because the related debt will be concurrently repaid. (b) SMT is a provider of mobile MRI services. The SMT Acquisition will be accounted for as a purchase and the accounts of SMT will be included in Alliance's consolidated financial statements commencing with the date of its acquisition. For purposes of the pro forma presentation of combined results of operations, the SMT Acquisition is assumed to have occurred as of the beginning of each period presented. The pro forma balance sheet presents information as if the SMT Acquisition had occurred as of June 30, 1997. There are no contingent payments associated with the SMT Acquisition. Substantially all SMT Acquisition costs in excess of the fair value of net assets acquired are expected to be accounted for as goodwill and be amortized over a 20 year life. Goodwill is calculated by subtracting estimated fair value of the net equity of SMT of $22.9 million (which assumes the write off of SMT's books of $2.5 million of deferred financing fees with respect to debt repaid in connection with the closing of the Transactions) from the accounting purchase price of $78.7 million. The accounting purchase price is calculated by subtracting $2.5 million (i.e., the deferred financing costs written off) and $7.1 million (representing SMT's debt to be immediately repaid at closing, net of cash acquired) from the total transaction value of $88.3 million. Based on a preliminary review, SMT's net equity approximately reflects the fair value of its net assets excluding intangibles resulting from the Three Rivers' acquisition of SMT. 21 ALLIANCE IMAGING, INC. NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET--(CONTINUED) JUNE 30, 1997 (c) Reflects financing fees associated with the Credit Agreement and the Notes, which will be amortized over their respective terms as follows:
ANNUAL AMORTIZATION AMORTIZATION DESCRIPTION AMOUNT PERIOD EXPENSE ----------- ------ ------------ ------------ (DOLLARS IN THOUSANDS) Term Loan Facility.......................... $ 500 6 years $ 83 Revolving Loan Facility..................... 1,500 5 years 300 Notes....................................... 5,100 8 years 638 ------ ------ Total................................... $7,100 $1,021 ====== ======
(d) Reflects income tax benefit from write-off of deferred financing fees. (e) Reflects the following:
LONG- CURRENT TERM -------- -------- (IN THOUSANDS) Term Loan Facility....................................... $ 500 $ 49,500 Revolving Loan Facility.................................. -- 38,000 Notes.................................................... -- 170,000 Retirement of existing current and long-term debt: Alliance............................................... (17,218) (53,330) SMT.................................................... (5,308) (15,594) -------- -------- $(22,026) $188,576 ======== ========
(f) Reflects the following:
OTHER PREFERRED COMMON RETAINED TOTAL LONG-TERM EQUITY* EQUITY EARNINGS EQUITY LIABILITIES TOTAL --------- --------- -------- --------- ----------- --------- (IN THOUSANDS) Repurchase Alliance equity................. $(18,388) $(129,966) $ (9,410)** $(157,764) $(2,066) $(159,830) Transaction costs....... -- -- (12,800) (12,800) -- (12,800) Write-off deferred financing costs from SMT Acquisition........ -- -- (2,500) (2,500) -- (2,500) Income tax benefit from deferred financing costs write-off........ -- -- 1,000 1,000 -- 1,000 Proceeds from sale of stock in Recapitalization....... -- 34,300 -- 34,300 -- 34,300 Issuance of common stock in SMT Acquisition..... -- 33,600 -- 33,600 -- 33,600 Eliminate historical net equity of SMT.......... -- (24,635) (740) (25,375) -- (25,375) -------- --------- -------- --------- ------- --------- $(18,388) $ (86,701) $(24,450) $(129,539) $(2,066) $(131,605) ======== ========= ======== ========= ======= =========
-------- * Alliance's Series C and Series D Convertible Preferred Stock will be converted into Alliance Common Stock prior to the closing of the Transactions. ** Estimated cash used to settle outstanding employee stock options and change in control payments. The gross amount to be paid for Alliance common stock is $154.2 million which represents the $11.00 per share repurchase price multiplied by 14,023,350 total shares. The total of 14,023,350 shares is comprised of the sum of: (1) 10,943,138 shares of Alliance common stock outstanding as of July 31, 1997; (2) 80,212 shares of Alliance common stock to be issued with respect to the conversion of all Alliance Series C convertible preferred stock; and (3) 3,000,000 shares of Alliance common stock to be issued with respect to the conversion of all outstanding shares of Alliance Series D convertible preferred stock. The gross amount is increased by $2.1 million in payment of the net value of warrants canceled and reduced by $8.0 million (727,273 shares at $11.00 per share) with respect to the retained shares, and $18.4 million related to the carrying value of Alliance's preferred equity converted to common shares, resulting in a net payment for Alliance equity of $129,966,000. 22 ALLIANCE IMAGING, INC. UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL HISTORICAL PRO FORMA ALLIANCE SMT ADJUSTMENTS COMBINED(A) ---------- ---------- ----------- ----------- Revenues...................... $39,911 $13,014 $ -- $52,925 Costs and expenses: Operating expenses, excluding depreciation..... 17,815 4,153 -- 21,968 Selling, general and administrative expenses.... 3,990 2,127 (220)(b) 5,897 Depreciation expense........ 7,144 3,117 (880)(c) 9,381 Amortization expense, primarily goodwill......... 1,165 77 1,333 (c) 2,575 Interest expense, net....... 3,557 805 8,878 (d) 13,240 ------- ------- ------- ------- Total costs and expenses.. 33,671 10,279 9,111 53,061 ------- ------- ------- ------- Income (loss) before income taxes and extraordinary gain. 6,240 2,735 (9,111) (136) Income tax benefit (expense).. (2,125) (1,095) 3,220 (e) -- ------- ------- ------- ------- Income (loss) before extraordinary gain........... $ 4,115 $ 1,640 $(5,891) $ (136) ======= ======= ======= ======= OTHER PRO FORMA DATA: EBITDA........................ $25,060 EBITDA margin................. 47.4% Adjusted EBITDA(f)............ $26,500 Adjusted EBITDA margin(f)..... 50.1% Cash interest expense......... $12,729 Ratio of adjusted EBITDA to cash interest expense(f)..... 2.1x Ratio of earnings to fixed charges...................... -- (g)
See accompanying notes. 23 ALLIANCE IMAGING, INC. UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
HISTORICAL HISTORICAL PRO FORMA ALLIANCE SMT ADJUSTMENTS COMBINED(A) ---------- ---------- ----------- ----------- Revenues...................... $68,482 $19,022 $ -- $87,504 Costs and expenses: Operating expenses, excluding depreciation..... 32,344 6,280 -- 38,624 Selling, general and administrative expenses.... 8,130 2,577 300 (b) 11,007 Depreciation expense........ 12,737 4,548 (1,200)(c) 16,085 Amortization expense, primarily goodwill......... 1,952 177 2,666 (c) 4,795 Interest expense, net....... 5,758 1,851 18,871 (d) 26,480 ------- ------- -------- ------- Total costs and expenses.. 60,921 15,433 20,637 96,991 ------- ------- -------- ------- Income (loss) before income taxes and extraordinary gain. 7,561 3,589 (20,637) (9,487) Income tax benefit (expense).. (1,060) (1,178) 2,238 (e) -- ------- ------- -------- ------- Income (loss) before extraordinary gain........... $ 6,501 $ 2,411 $(18,399) $(9,487) ======= ======= ======== ======= OTHER PRO FORMA DATA: EBITDA........................ $37,873 EBITDA margin................. 43.3% Adjusted EBITDA(f)............ $40,753 Adjusted EBITDA margin(f)..... 46.6% Cash interest expense......... $25,459 Ratio of adjusted EBITDA to cash interest expense(f)..... 1.6x Ratio of adjusted earnings to fixed charges................ -- (g)
See accompanying notes. 24 ALLIANCE IMAGING, INC. NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 AND YEAR ENDED DECEMBER 31, 1996 (a) Non-recurring charges aggregating $23.7 million (comprised of $9.4 million used to settle outstanding employee stock options and other change in control payments, $12.8 million of transaction costs and a $1.5 million write-off of deferred financing costs from the SMT Acquisition, net of related estimated tax benefit) will be charged to operations upon the closing of the Recapitalization and SMT Acquisition. These amounts have not been reflected in the unaudited pro forma combined consolidated statements of operations. (b) A nonrecurring special charge of $220,000 for the six months ended June 30, 1997 and a nonrecurring special credit of $300,000 for the year ended December 31, 1996 (both included in SMT's historical selling, general and administrative expenses herein) have been eliminated by pro forma adjustment. (c) Reflects a decrease in depreciation on SMT's equipment reflecting a change in accounting estimate from a five year life with a 20% residual value to an eight year life with a 20% residual value. The amounts also reflect the amortization of the excess of cost over the fair value of assets acquired over 20 years on a straight line basis. (d) Interest expense, as adjusted, reflects the elimination of historical interest expense due to the retirement of substantially all of the existing debt obligations and assumes that the following indebtedness was outstanding as of the beginning of the respective reporting periods:
ANNUAL INTEREST PRINCIPAL EXPENSE --------- -------- (IN THOUSANDS) Term Loan Facility, interest at LIBOR plus 2.50% (currently 8.25%)..................................... $ 50,000 $ 4,125 Revolving Loan Facility, interest at LIBOR plus 2.25% (currently 8.0%) (including 0.5% annual commitment fee on pro forma unutilized balance of $112 million)...... 38,000 3,600 Notes, assumed interest at 9.75%....................... 170,000 16,575 Other debt, weighted average interest at approximately 9.5%.................................................. 12,178 1,159 -------- Cash interest expense.................................. 25,459 Amortization of deferred financing fees................ 1,021 -------- Total interest expense............................... $ 26,480 ========
A 1/8% variance in interest rates would change annual interest expense by approximately $322,000. (e) Income tax adjustments reflect estimated statutory rates applied to the pro forma adjustments excluding book/tax differences associated with nondeductible amortization expense. In accordance with FAS 109, "Accounting for Income Taxes", due to the occurrence of the loss before income taxes and extraordinary items, a tax benefit has not been recorded for the year ended December 31, 1996. (f) Adjusted EBITDA, adjusted EBITDA margin, and the ratio of adjusted EBITDA to cash interest expense are based on pro forma EBITDA, adjusted for expense reductions expected to result from consolidation of identified functions, facilities and mobile MRI routes, and the reorganization of the combined entity (which reorganization is expected to commence immediately upon consummation of the Transactions). Operating expenses and selling, general and administrative expenses are expected to be reduced annually by approximately $3.4 million. An annual management fee payable to Apollo Management, L.P. of $500,000 has been included as an offset to the expected reduction in selling, general and administrative expenses. (g) Pro forma combined earnings were insufficient to cover fixed charges by $9.5 million for the year ended December 31, 1996, and $136,000 for the six months ended June 30, 1997. 25 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF ALLIANCE The following selected historical consolidated financial information of Alliance with respect to each year in the five-year period ended December 31, 1996 is derived from the consolidated financial statements of Alliance. The consolidated financial statements of Alliance for each of the years in the three-year period ended December 31, 1996, are included elsewhere in this Prospectus. Such consolidated financial statements have been audited by Ernst & Young LLP, independent auditors. The financial information for the six months ended June 30, 1996 and June 30, 1997 is unaudited, but in the opinion of management of Alliance reflects all adjustments necessary for a fair presentation of such information. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. The selected financial information provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of Alliance and the notes thereto included elsewhere in this Prospectus. See "Index to Consolidated Financial Statements."
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues................ $ 63,695 $ 60,728 $ 57,875 $ 58,065 $ 68,482 $ 31,302 $ 39,911 Costs and expenses: Operating expenses, excluding depreciation.......... 32,043 31,768 31,093 28,342 32,344 15,019 17,815 Selling, general and administrative expenses.............. 5,842 6,538 6,284 6,294 8,130 3,160 3,990 Depreciation expense... 12,408 13,617 13,424 12,202 12,737 6,048 7,144 Amortization expense, primarily goodwill.... 737 790 943 1,345 1,952 745 1,165 Interest expense, net.. 10,846 10,507 10,758 5,053 5,758 2,683 3,557 Special charges........ -- 17,500 13,339 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total costs and expenses............ 61,876 80,720 75,841 53,236 60,921 27,655 33,671 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary gains.... 1,819 (19,992) (17,966) 4,829 7,561 3,647 6,240 Provision (benefit) for income taxes........... 766 (5,300) 1,100 727 1,060 545 2,125 -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary gains.... 1,053 (14,692) (19,066) 4,102 6,501 3,102 4,115 Extraordinary gains, net of taxes............... -- -- -- -- 6,300 -- 1,332 -------- -------- -------- -------- -------- -------- -------- Net income (loss)(1).... $ 1,053 $(14,692) $(19,066) $ 4,102 $ 12,801 $ 3,102 $ 5,447 ======== ======== ======== ======== ======== ======== ======== CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash and short-term investments............ $ 4,508 $ 8,420 $ 2,478 $ 11,128 $ 10,867 $ 11,180 $ 13,817 Total assets............ 133,920 117,096 102,527 103,327 128,510 120,055 143,270 Long-term debt, including current maturities............. 90,456 95,986 79,208 75,880 89,025 86,031 80,548 Redeemable preferred stock.................. -- -- 15,500 16,430 4,694 15,965 -- Stockholders' equity (deficit).............. 29,601 14,909 (1,665) 1,604 16,360 5,129 41,368 OTHER DATA: EBITDA(2)............... $ 25,810 $ 22,422 $ 20,498 $ 23,429 $ 28,008 $ 13,123 $ 18,106 EBITDA margin(3)........ 40.5% 36.9% 35.4% 40.3% 40.9% 41.9% 45.4% Cash flows provided by (used in): Operating activities.. $ 15,952 $ 12,708 $ 12,784 $ 18,043 $ 21,731 $ 10,866 $ 13,693 Investing activities.. (18,650) (14,188) (19,861) (7,789) (27,936) (14,447) (19,545) Financing activities.. (534) 5,392 1,135 (1,604) 5,944 3,633 8,802 Capital expenditures(4). 21,123 19,184 22,361 11,383 34,376 17,943 20,333 Number of MRI systems at end of period.......... 70 71 72 76 86 87 90 Comparable customer revenue growth(5)...... NA NA (0.1)% 6.9% 8.8% 15.7% 17.3% Average scans per MRI system per day......... 6.3 5.7 5.8 5.8 6.7 6.5 7.0 Ratio of earnings to fixed charges(6)....... 1.2x -- -- 1.9x 2.1x 2.2x 2.6x
- -------- (1) Net income (loss) includes special charges of $13.3 million for the year ended December 31, 1994 related to an equipment exchange transaction, the impairment of certain equipment, debt restructuring and employee severances; extraordinary gains (net of tax) of $6.3 million for the year ended December 31, 1996 related to the early extinguishment of debt; and an extraordinary gain (net of tax) of $1.3 million for the six months ended June 30, 1997 related to the early extinguishment of debt. (2) EBITDA is defined herein as income before income taxes, plus depreciation, amortization, net interest expense and other non-recurring items (principally non-cash). EBITDA is presented because the Company believes it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (3) EBITDA margin is defined herein as EBITDA divided by revenues. (4) The substantial majority of historical capital expenditures have related to either major upgrades to existing systems or the replacement of older, less-advanced systems with new, state-of-the-art technologically advanced systems. As a result of these historical investments, the Company believes that it has upgraded substantially all of its systems and expects most of its capital expenditures for at least the next three to five years to relate to net fleet additions through new system purchases. (5) Represents period over period revenue growth for customers that generated revenues for the entire term of both periods. (6) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense and one-third of the rent expense from long-term equipment operating leases, which management believes is a reasonable approximation of an interest factor. Earnings were insufficient to cover fixed charges by $20.0 million and $18.0 million for the years ended December 31, 1993 and 1994, respectively. 26 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF SMT The selected historical consolidated financial information of SMT with respect to each year in the five-year period ended December 31, 1996 is derived from the consolidated financial statements of SMT. The consolidated financial statements of SMT for each of the years in the three-year period ended December 31, 1996, are included elsewhere in this Prospectus. Such consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The financial information for the six months ended June 30, 1996 and June 30, 1997 is unaudited, but in the opinion of management of SMT reflects all adjustments necessary for a fair presentation of such information. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. The selected consolidated financial information provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of SMT and the notes thereto included elsewhere in this Prospectus. See "Index to Consolidated Financial Statements."
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- -------- -------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues................ $ 8,629 $11,844 $13,235 $15,020 $19,022 $ 8,725 $ 13,014 Costs and expenses: Operating expenses, excluding depreciation.......... 3,510 5,257 5,892 5,396 6,280 2,891 4,153 Selling, general and administrative expenses.............. 1,360 1,604 1,894 2,472 2,877 1,373 1,907 Depreciation and amortization.......... 2,070 2,756 3,164 3,679 4,725 2,109 3,194 Interest expense, net.. 1,462 1,654 1,590 1,620 1,851 862 805 Other.................. 16 678 59 2 (300) -- 220 ------- ------- ------- ------- ------- -------- -------- Total costs and expenses............. 8,418 11,949 12,599 13,169 15,433 7,235 10,279 ------- ------- ------- ------- ------- -------- -------- Income (loss) from continuing operations before income taxes and extraordinary item..... 211 (105) 636 1,851 3,589 1,489 2,735 Provision (benefit) for income taxes........... (32) (36) 94 478 1,178 469 1,095 ------- ------- ------- ------- ------- -------- -------- Income (loss) from continuing operations before extraordinary item................... 243 (69) 542 1,373 2,411 1,020 1,640 Discontinued operations, net..................... (92) (2,242) (132) -- -- -- -- Extraordinary item, net of income taxes......... -- -- -- -- -- -- (181) ------- ------- ------- ------- ------- -------- -------- Net income (loss)(1).... $ 151 $(2,311) $ 410 $ 1,373 $ 2,411 $ 1,020 $ 1,459 ======= ======= ======= ======= ======= ======== ======== CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash and short-term investments............ $ 2,695 $ 2,227 $ 2,317 $ 3,942 $ 5,043 $ 3,830 $ 13,913 Total assets............ 18,739 18,392 20,623 23,348 39,498 28,844 50,736 Long-term debt and capital lease obligations including current maturities..... 12,321 14,292 16,212 17,091 27,210 20,522 23,080 Stockholders' equity.... 5,554 3,243 3,653 5,402 11,400 7,367 25,375 OTHER DATA: EBITDA(2)............... $ 3,759 $ 4,983 $ 5,449 $ 7,152 $ 9,865 $ 4,461 $ 6,954 EBITDA margin(3)........ 43.6% 42.1% 41.2% 47.6% 51.9% 51.1% 53.4% Cash flows provided by (used in): Operating activities... $ 1,608 $ 2,808 $ 3,630 $ 5,477 $ 7,441 $ 3,024 $ 6,782 Investing activities... (1,874) (275) (261) (1,380) (2,567) (1,637) (2,976) Financing activities... 2,579 (3,002) (3,548) (3,604) (2,573) (1,168) 5,064 Capital expenditures(4). 6,760 4,663 4,584 5,069 18,112 7,104 5,985 Number of MRI systems at end of period.......... 8 9 9 11 18 13 20 Comparable customer revenue growth(5)...... NA NA 5.2% 0.1% 12.9% 9.7% 22.0% Average scans per MRI system per day......... 9.1 9.1 9.0 10.4 10.9 10.9 11.5 Ratio of earnings to fixed charges(6)....... 1.1x -- 1.4x 2.0x 2.7x 2.5x 3.4x
- -------- (1) Net income includes a loss on disposal of discontinued operations of $132,000 for the year ended December 31, 1994 and an extraordinary loss (net of tax) of $181,000 for the six months ended June 30, 1997 related to the early extinguishment of debt. (2) EBITDA is defined herein as income before income taxes, plus depreciation, amortization, net interest expense and other non-recurring items (principally non-cash). EBITDA is presented because the Company believes it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (3) EBITDA margin is defined herein as EBITDA divided by revenues. (4) Capital expenditures relate to substantially upgrading MRI systems as well as purchasing new systems to expand the size of the fleet. As a result of these historical investments, the Company believes that it has upgraded substantially all of its systems and expects most of its capital expenditures for at least the next three to five years to relate to net fleet additions through new system purchases. (5) Represents period over period revenue growth for customers that generated revenues for the entire term of both periods. (6) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense and one-third of the rent expense from long-term equipment operating leases, which management believes is a reasonable approximation of an interest factor. Earnings were insufficient to cover fixed charges by $105,000 for the year ended December 31, 1993. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of Alliance and SMT should be read in conjunction with Alliance's and SMT's consolidated financial statements and notes thereto included elsewhere in this Prospectus. OVERVIEW The Company is a leading nationwide provider of diagnostic imaging services and the largest operator of state-of-the-art mobile diagnostic imaging systems and related outsourced radiology services in the United States. The Company primarily provides MRI systems and services to hospitals and other health care providers on a mobile, shared user basis. The Company also provides dedicated, full-time MRI systems and services as well as full-service management of imaging operations for selected hospitals. The Company's services enable small to mid-size hospitals to gain access to advanced diagnostic imaging technology and related value-added services without making a substantial investment in equipment and personnel. The Company operates a fleet of 111 MRI systems and services over 420 MRI customers in 36 states under exclusive contracts with an average remaining length of approximately 25 months as of July 31, 1997. The Company's revenues are principally a function of the number of systems in service, scan volumes and fees per scan. The Company generates substantially all of its revenues under exclusive one to eight-year contracts with hospitals and health care providers. The Company's contracts typically offer tiered pricing with lower fees per scan on incremental scans, allowing customers to benefit from increased scan volumes and the Company to benefit from the operating leverage associated with increased scan volumes. The Company expects modest continuing downward pressure on pricing levels as a result of cost containment measures in the health care industry. However, in many cases higher scan volumes justify lower prices on incremental scans. The principal components of the Company's operating costs include salaries paid to technologists and drivers, annual system maintenance costs, insurance and transportation costs. Because a majority of these expenses are fixed, increased revenues as a result of higher scan volumes significantly improve the Company's profitability while lower scan volumes result in lower profitability. Since the beginning of 1995, Alliance and SMT have each substantially increased revenues by adding new customers and increasing scan volumes at existing customer sites. During the same period, the growth rate of EBITDA for each of Alliance and SMT increased more rapidly than the growth rate of revenues as a result of spreading costs (which are primarily fixed) over a larger revenue base and implementing cost reduction and containment measures. Alliance has historically focused on maximizing cash flow and return on invested capital nationwide, deploying new and upgraded systems in high volume markets and redeploying older, less advanced systems with lower carrying values in lower volume markets. Alliance's ongoing equipment trade-in and upgrade program has substantially improved the marketability and productivity of its MRI systems. Because Alliance owns substantially all of its MRI systems, it periodically evaluates its older, less marketable MRI systems to determine if it is more beneficial to continue to use such systems in lower volume markets, which are profitable but produce less revenue, or to trade in such equipment in connection with new system purchases. Since January 1, 1995, Alliance has invested approximately $66 million to upgrade and expand its fleet and currently maintains one of the most advanced fleets in the industry. In the last three years, SMT has focused on the development of efficient routes and the maximization of capacity utilization across the Mid-Atlantic region of the United States. Since January 1, 1995, SMT has invested approximately $29 million to upgrade and expand its fleet of MRI systems and, accordingly, employs substantially all new or upgraded premium MRI systems. In 1996, SMT purchased seven new systems and upgraded three existing systems for a total investment of $18.1 million. 28 The Company also provides CT services and imaging systems. Revenues from CT services and imaging systems accounted for less than 5% of the Company's revenues for the year ended December 31, 1996. On June 24, 1997, Three Rivers, which is wholly owned by Apollo, and Three Rivers Acquisition, which is wholly owned by Three Rivers, entered into an Agreement and Plan of Merger with SMT, pursuant to which Three Rivers Acquisition commenced an offer to purchase all outstanding shares of common stock of SMT for $11.75 per share. Following the expiration of the offer on August 5, 1997, Three Rivers Acquisition acquired approximately 91.9% of the issued and outstanding shares of common stock of SMT. On September 29, 1997, SMT became a wholly owned subsidiary of Three Rivers. Upon consummation of the SMT Acquisition, SMT will become an indirect wholly owned subsidiary of Alliance. Immediately following the Recapitalization and the SMT Acquisition, Apollo will own approximately 84% of the issued and outstanding common stock of Alliance and Alliance's existing shareholders will own approximately 10%. See "The Transactions." The pro forma effect of the Transactions is set forth under "Unaudited Pro Forma Combined Consolidated Financial Information" and the notes thereto included elsewhere in this Prospectus. RESULTS OF OPERATIONS OF ALLIANCE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996. Revenues for the first six months of 1997 were $39,911,000, an increase of $8,609,000, or 27.5%, over 1996. This increase reflects a scan-based MRI revenue increase of $7,879,000, or 28.4%, ($2,309,000, or 8.3%, as a result of MRI operations acquired subsequent to the first quarter of 1996), resulting from a 30.4% increase in total scan volume partially offset by a 1.6% decrease in the average revenue realized per MRI scan. The average daily scan volume per MRI system increased 7.7% to 7.0 from 6.5 in 1996. Management attributes the volume increase to Alliance's continuing MRI systems upgrade program, which has enabled Alliance to obtain new, long-term contracts from both existing and new customers, and to the effect of recently implemented marketing programs. Management believes the decrease in average revenue realized per scan is the result of: continuing competitive pressure in the MRI service industry and cost containment efforts by health care payors; obtaining contracts with customers that have high scan volumes which justify lower scan prices; and many customers achieving discount price levels on incremental scan volumes. CT revenues increased $397,000, or 21.6%, as a result of internal growth and the fourth quarter 1996 acquisition of a small CT business. Other revenues increased $300,000 primarily as a result of the implementation in late 1996 of a program providing management services for a large portfolio of imaging systems owned by others. Alliance operated 90 MRI systems at June 30, 1997 compared to 87 MRI systems at June 30, 1996. The average number of MRI systems operated by Alliance was 87 during the first half of 1997, compared to 82 during the first half of 1996. Operating expenses, excluding depreciation, totaled $17,815,000 in the first six months of 1997, an increase of $2,796,000, or 18.6%, from the first six months of 1996. Payroll and related employee expenses increased $1,250,000, or 18.5%, primarily as a result of an increase in operating staffing levels necessary to support revenue growth. Repairs and maintenance expense increased $364,000, or 50.5%, due to an increased number of systems in service. Fuel and other vehicle expenses collectively increased $291,000, or 46.9%, primarily due to increasing fuel prices and the addition of new mobile MRI systems. Preventative maintenance and cryogen contract expense increased $139,000, or 3.1%, due to the expiration of the warranties on an increased number of MRI systems. Other operating expenses (including insurance, equipment rental, supplies and professional services) increased $752,000, or 30.6%, as a result of the increased level of operations. Depreciation expense during the first six months of 1997 totaled $7,144,000, an increase of $1,096,000, or 18.1%, from the 1996 level principally due to a higher amount of depreciable assets associated with equipment 29 additions and upgrades. Amortization expense during the first six months of 1997 increased $420,000, or 56.4%, over the 1996 period as a result of goodwill amortization associated with recent business acquisitions. Selling, general and administrative expenses totaled $3,990,000 in the first six months of 1997, an increase of $830,000, or 26.3%, from the same period in 1996. Professional services expenses increased $297,000, or 118.8%, primarily due to costs associated with increased investor relations efforts and merger and acquisition activity. Payroll and related expenses increased $228,000 or 8.9%, primarily as a result of increased staffing levels necessary to support Alliance's increased level of operations. Other expenses increased primarily as a result of expanded marketing programs and costs associated with relocating Alliance's corporate offices. Interest expense of $3,557,000 in the first six months of 1997 was $874,000, or 32.6%, higher than the same period in 1996, as a result of higher average outstanding debt balances during 1997 as compared to 1996. This increase was primarily related to the senior bridge loan (which was converted into Series D convertible preferred stock on March 26, 1997), to the financing of several new imaging systems during the first half of 1997, and to debt assumed in connection with acquisitions made subsequent to the first half of 1996. An income tax provision of $2,125,000 was recorded in the first six months of 1997, which was higher than the tax provision recorded in the same period in 1996 by $1,580,000, or 289.9%. The increase resulted from the increase in income before taxes and an increase in Alliance's effective tax rate. The effective income tax rate increased to 34.1% in 1997 from 14.9% in 1996 because Alliance's taxable income in 1997 is expected to exceed remaining available net operating loss carryforwards. Alliance's income before extraordinary gain was $4,115,000 in the first six months of 1997 compared to net income of $3,102,000 in the first six months of 1996, an increase of $1,013,000, or 32.7%, primarily attributable to the increase in revenues achieved without a proportionate increase in costs and administrative expenses. Alliance reported an extraordinary gain, net of income taxes, in the first quarter of 1997 of $1,332,000 on early extinguishment of debt in January 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues for 1996 were $68,482,000, an increase of $10,417,000, or 17.9%, over 1995. On April 26, 1996, Alliance acquired all of the outstanding shares of Royal Medical Health Services, Inc. ("Royal") and certain related assets. Excluding revenues of $2,895,000 from operations which were sold in the second half of 1995, the increase in revenues was $13,312,000, or 24.1%, with Royal accounting for $4,694,000, or 8.5% of the increase. This increase reflects a scan-based MRI revenues increase of $10,897,000, or 22.0%, ($4,532,000, or 9.2%, as a result of the Royal acquisition), resulting from a 23.4% increase in total scan volume partially offset by a 1.1% decrease in the average revenues realized per MRI scan. Royal accounted for 9.8% of the scan volume increase and 0.1% of the offsetting price per scan decrease. The average number of scans per day for each MRI system increased 15.5% to 6.7 in 1996 from 5.8 in 1995. Management attributes the non-Royal volume increase to Alliance's continuing MRI systems upgrade program, which has enabled Alliance to obtain new long-term contracts from both existing and new customers, and to the effect of some smaller acquisitions. Management believes the decrease in average revenues realized per scan is the result of: continuing competitive pressure in the MRI service industry and cost containment efforts by health care payors; obtaining contracts with customers that have high scan volumes which justify lower scan prices; and many customers achieving discount price levels on incremental scan volumes. Revenues under fixed fee contracts increased $893,000, or 43.8%, resulting from an increased number of MRI systems under such arrangements. Other revenues increased $891,000 primarily as a result of Alliance selling its investment in London-based Alliance Medical, Ltd. and recording a gain of $750,000. CT revenues increased $632,000, or 21.8%, primarily as a result of the third quarter 1995 and fourth quarter 1996 acquisitions of two CT businesses. Alliance operated 86 MRI systems at December 31, 1996 compared to 76 MRI systems at December 31, 1995. The average number of MRI systems operated by Alliance was 85 during 1996, compared to 74 during 1995. 30 Operating expenses, excluding depreciation, totaled $32,344,000 in 1996, an increase of $4,002,000, or 14.1%, from 1995. Excluding expenses of $1,008,000 related to operations which were sold in the second half of 1995, the increase in operating expenses was $5,010,000, or 18.3%, with Royal contributing $2,333,000, or 8.5% of the increase. Payroll and related employee expenses increased $1,789,000, or 15.0%, which was in line with the revenue increase. Equipment rental expense increased $898,000, or 60.4%. The increase resulted from higher number of rented MRI systems in operation and Alliance's leasing of 20 new tractors in 1996. Other operating expenses increased $751,000, which was offset by a $761,000 decrease in preventive maintenance contract and cryogen expense, primarily as a result of more efficient systems and lower contract rates associated with Alliance's equipment upgrade program. Depreciation expense during 1996 totaled $12,737,000, an increase of $535,000, or 4.4%. Excluding depreciation expense of $638,000 related to operations which were sold in the second half of 1995, depreciation expense increased $1,173,000, or 10.1%, from the 1995 level principally due to a higher amount of depreciable assets associated with equipment additions and upgrades and the Royal acquisition. Amortization expense in 1996 increased $607,000, or 45.1%, over the 1995 period as a result of the Royal acquisition and four smaller acquisitions in late 1995 and 1996. Selling, general and administrative expenses totaled $8,130,000 in 1996, an increase of $1,836,000, or 29.2%, from 1995. Excluding expenses of $369,000 related to operations sold in the second half of 1995, selling, general and administrative expenses increased $2,205,000, or 37.2%. Payroll and related expenses increased $1,457,000, primarily as a result of increased employee compensation related to increased sales commissions, performance compensation in connection with the increase in net income, early achievement of long term incentive plan objectives and increased staffing levels. Bad debt expense increase $567,000 in 1996 compared to 1995. Interest expense of $5,758,000 in 1996 was $705,000, or 14.0%, higher than 1995, primarily as a result of higher average outstanding debt balances during 1996 as compared to 1995. This increase related to debt assumed in connection with the Royal acquisition and additional borrowing related to equipment additions. An income tax provision of $1,060,000 was recorded in 1996. Alliance's pre- tax income in 1996 was substantially offset by net operating loss carryforwards; however, certain federal alternative minimum taxes and state tax liabilities applied to this income, giving rise to the tax provision recorded. In 1995, an income tax provision of $727,000 was recorded, also related to certain federal alternative minimum taxes and state tax liabilities. Alliance's 1996 effective tax rate of approximately 14% of pre- tax income before extraordinary gains was comparable to the 1995 rate. At December 31, 1996, Alliance had approximately $26,400,000 of net operating loss carryovers available for federal regular income tax purposes to offset future taxable income, subject to certain limitations. Approximately $4,500,000 of this amount is not subject to such limitations; consequently, approximately $6,700,000 of operating loss carryovers is available in 1997 for regular federal income tax purposes. Alliance expects its future effective tax rate to increase as these net operating loss carryovers are fully utilized. Alliance's net income before extraordinary gains was $6,501,000 in 1996 compared to net income of $4,102,000 in 1995, an increase of $2,399,000, or 58.5%, primarily attributable to the increase in revenues achieved without a proportionate increase in operating and selling, general and administrative expenses. Alliance reported extraordinary gains, net of income taxes, in the fourth quarter of 1996 of approximately $6,300,000 on early extinguishment of debt. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues for 1995 were $58,065,000, an increase of $190,000, or 0.3%, over 1994. This increase reflects a $1,557,000 increase in MRI revenues under fixed fee contracts and an increase in CT and other revenues totaling $125,000, offset by a $1,492,000, or 2.9%, decrease in scan-based MRI revenues. The decrease in scan-based MRI revenues resulted from a 5.8% increase in scan volume offset by an 8.2% decrease in average revenues 31 realized per MRI scan. Management attributes the volume increases to Alliance's continuing MRI systems upgrade program, which has enabled Alliance to obtain new long-term contracts from both existing and new customers. The average number of scans per day for each MRI system remained unchanged at 5.8. Management believes the decrease in average revenues realized per scan is the result of continuing competitive pressure in the MRI service industry and cost containment efforts by health care payors, as well as obtaining contracts with customers that have high scan volumes which justify lower scan prices on incremental scan volume. The increase in MRI revenues under fixed fee contracts is a result of a higher number of systems deployed in full-time temporary assignments, including several older systems awaiting trade-in on new equipment. CT and other revenues increases are generally associated with the acquisition of a mobile CT business and the gain on sale of equipment and a related service contract, offset by lower other imaging revenue resulting from the disposition of Alliance's full-service imaging center in Fresno, California as of September 30, 1995. Alliance operated 76 MRI systems at December 31, 1995, compared to 72 systems at December 31, 1994. The average number of MRI systems operated by Alliance was 74 in 1995, compared with 73 during 1994. Operating expenses, excluding depreciation, totaled $28,342,000 in 1995, a decrease of $2,751,000, or 8.8%, from 1994. Payroll and related employee expenses decreased $336,000, or 2.7%, to $12,153,000 due to more efficient staffing associated with cost reduction efforts and a larger number of systems staffed by customer personnel in 1995. Maintenance and cryogen contract expense declined $54,000, or 0.6%, to $9,313,000, as a result of an increased number of newer, efficiently-operating systems in the fleet in 1995 and lower contract rates, partially offset by an increased number of systems. Equipment rental expense decreased $931,000, or 38.1%, to $1,515,000, as operating leases expired and Alliance returned the related equipment to the lessor. The leased equipment was generally replaced with low cost used MRI systems purchased by Alliance. Professional medical services, supplies, site fees and repairs expenses collectively decreased $1,443,000, or 40.0%, to $2,805,000, primarily as a result of reduced physician staffing and other cost control efforts at Alliance's full-service imaging center in Fresno, California, which was disposed of effective September 30, 1995. Depreciation expense during 1995 decreased $1,222,000, or 9.1%, from the 1994 level due to a lower amount of depreciable assets, resulting from equipment write-downs in late 1994, partially offset by equipment additions in 1995. Amortization expense in 1995 increased $402,000, or 42.6%, over 1994 because of the revision of the amortization period for goodwill from 40 to 25 years, effective October 1, 1994, and a small business acquisition in 1995. Selling, general and administrative expenses were essentially unchanged from the prior year. Payroll and related employee expenses increased $627,000, or 15.6%, as a result of long-term deferred incentive compensation costs and inflationary pressures. Bad debt expense decreased $609,000, or 100%, to zero in 1995 as a result of revised billing practices and continuing intensive collection efforts, primarily with respect to Alliance's retail accounts receivable. Interest expense of $5,053,000 in 1995 was $5,705,000, or 53.0%, lower than in 1994 primarily as a result of Alliance's comprehensive debt restructuring, effective as of December 31, 1994, and lower average outstanding debt balances in 1995. Alliance recorded special charges totaling $13,339,000 in the fourth quarter of 1994. No such charges were incurred in 1995. Including these charges, the loss before taxes totaled ($17,966,000) in 1994, compared to income before taxes of $4,829,000 in 1995, an improvement of $22,795,000. Although the preceding amounts before taxes are not representative of operating performance in accordance with GAAP, they have been provided to highlight the significant non-recurring element contained within the GAAP net income measurement. This improvement resulted from significantly reduced operating expenses (including depreciation), substantially lower interest expense and the absence of special charges in 1995. Income before taxes in 1995 increased $9,456,000 over 1994's loss before taxes without the effects of special charges. An income tax provision of $727,000 was recorded in 1995. Alliance's pre-tax income in 1995 was substantially offset by net operating loss carryforwards; however, certain federal alternative minimum taxes and 32 state tax liabilities applied to this income, giving rise to the tax provision recorded. In 1994, an income tax provision of $1,100,000 was recorded as a result of federal alternative minimum tax and certain state income taxes related to cancellation of debt income for tax purposes associated with Alliance's financial restructuring, as well as increased valuation allowances for deferred tax assets. However, these reserved tax assets may be available to reduce future income tax provisions. At December 31, 1995, Alliance had approximately $33,000,000 in federal net operating loss carryforwards available to offset future taxable income, subject to certain limitations. Alliance's net income was $4,102,000 in 1995, compared to a net loss of ($19,066,000) in 1994, an increase of $23,168,000, primarily attributable to the increased operating profits, lower interest expense and absence of special charges in 1995, as explained above. Net income in 1995 increased $9,354,000 over the net loss in 1994 without the effect of the special charges and related tax impact. Although the preceding amount of net loss excluding the effects of special charges and income taxes is not representative of operating performance in accordance with GAAP, it has been provided to highlight the significant non-recurring element contained within the GAAP net loss measurement. This increase is attributable to higher operating profit and lower interest expense in 1995. RESULTS OF OPERATIONS OF SMT SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenues for the six months ended June 30, 1997 increased $4,289,000, or 49%, to $13,014,000 compared to $8,725,000 for the six months ended June 30, 1996. The increase in revenues is principally due to three new MRI systems placed into service during the latter part of the 1996 first quarter, four additional systems subsequently placed into service during 1996, and a new system placed into service during mid-April 1997. In addition, the upgrade of three systems to newer technology during 1996 and increased utilization of SMT's mobile MRI systems also contributed to the increased revenues. Revenues derived from hospitals which SMT serviced in both comparable periods increased approximately 22% during the six months ended June 30, 1997 compared to the six months ended June 30, 1996, primarily as a result of increased scan volume. SMT operated an average of approximately 18.5 systems during the six months ended June 30, 1997 compared to approximately 13 systems during the six months ended June 30, 1996. During the six months ended June 30, 1997, SMT performed 31,900 MRI scans representing an increase of 11,273, or 55%, over the 20,627 MRI scans during the six months ended June 30, 1996. Average scans per day per system increased 0.6 to 11.5 during the six months ended June 30, 1997 compared to 10.9 during the six months ended June 30, 1996. The average fee per scan approximated $396 for the six months ended June 30, 1997 versus $414 for the six months ended June 30, 1996. The $18, or 4%, decrease in average fee per scan primarily related to discounted fees on incremental scans. Operating expenses increased $1,262,000, or 44%, to $4,153,000 during the six months ended June 30, 1997 compared to $2,891,000 during the six months ended June 30, 1996. Approximately $970,000, or 77% of the increase, is due to operating expenses associated with three new systems purchased in the first quarter of 1996, the four additional systems subsequently purchased during 1996, and the new system placed into service during April 1997. The remaining increase of $292,000, or 23%, is primarily due to higher payroll costs for operational personnel. Operating expenses per scan decreased $10, or 7%, to approximately $130 compared to $140 per scan during the six months ended June 30, 1996 primarily due to higher scan volumes. Depreciation and amortization expenses increased $1,085,000, or 52%, for the six months ended June 30, 1997 to $3,194,000 from $2,109,000 during the six months ended June 30, 1996. This increase was primarily due to depreciation expense associated with the three new systems purchased in the first quarter of 1996, the four additional systems subsequently purchased during 1996, the new system placed into service in April 1997, as well as the upgrade of three systems to newer technology during 1996. Selling, general and administrative costs for the six months ended June 30, 1997 increased $534,000 to $1,907,000, or 14% of revenues, compared to $1,373,000, or 16% of revenues, during the six months ended June 33 30, 1996. The increase is primarily due to an approximate $308,000 increase in executive compensation and costs related to SMT's management bonus plan, an approximate $94,000 increase in marketing expenses, $41,000 increase in miscellaneous taxes, $35,000 increase in travel and entertainment, $26,000 increase in director fees and expenses, and $16,000 increase in insurance costs, partially offset by a reduction in consulting expenses. Interest expense for the six months ended June 30, 1997 increased $133,000 to $1,080,000 from $946,000 during the six months ended June 30, 1996, primarily as a result of the three new systems purchased in the first quarter of 1996, the four additional systems subsequently purchased during 1996, the new system purchased in April 1997, as well as the upgrade of three systems to newer technology during 1996. This increase was partially offset by interest savings of approximately $114,000 related to the payoff of three leases in March 1997. Interest expense decreased as a percentage of revenue to 8% in the six months ended June 30,1997 compared to 11% of revenue during the six months ended June 30, 1996. SMT recorded $220,000 of expenses with respect to professional fees incurred related to its tender offer and merger. SMT reported income before extraordinary loss of $1,640,000 during the six months ended June 30, 1997 versus $1,020,000 during the six months ended June 30, 1996. Income tax expense for the six months ended June 30, 1997 was $1,095,000, an effective tax rate of approximately 40%, as compared to income tax expense of $469,000, an effective tax rate of approximately 32%, for the six months ended June 30, 1996. SMT reported an extraordinary loss on early extinguishment of debt of $181,000, net of an income tax benefit of $115,000, primarily as a result of prepayment penalties related to the repayment of debt. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 SMT achieved a considerable increase in profitability during 1996. Net income during 1996 increased $1,038,000, or 76%, to $2,411,000 from $1,373,000 during 1995. The increase in profitability is principally due to increased revenues attributed to new systems placed into service in late 1995, seven additional systems placed into service throughout 1996, the upgrade of four systems to newer technology in 1996, as well as increased utilization of SMT's mobile MRI systems. Lower financing costs and higher down payments on new and upgraded mobile MRI systems have also contributed to the increased profitability during 1996. SMT operated an average of approximately 14 systems during 1996. Revenues during 1996 increased $4,002,000, or 27%, to $19,022,000 compared to $15,020,000 in 1995. Excluding 1995 revenues of approximately $548,000 related to SMT's cardiac partnerships, which were sold on June 30, 1995, mobile MRI revenues increased approximately 32%. This increase in revenues was primarily attributed to the aforementioned new systems placed into service during late 1995, the seven additional systems placed into service during 1996, the upgrade of four systems to newer technology in 1996 and the increased utilization of SMT's existing mobile MRI systems. Revenues derived from hospitals which SMT serviced in both comparable periods increased approximately 13% in 1996 compared to 1995 primarily as a result of increased MRI procedures. During 1996, SMT performed 45,185 MRI scans, representing an increase of 12,103 scans, or 37%, over the 33,082 MRI scans during 1995. Average scans per day per system increased 0.5 to 10.9 scans per day during 1996 compared to 10.4 during 1995. The average fee per scan for 1996 approximated $408 for 1996 versus $435 for 1995. The $27, or 6%, decrease in average fee per scan primarily related to discounted fees on incremental scan volume provided to customers based upon higher scan volumes. Operating expenses increased $884,000, or 16%, to $6,280,000 during 1996 compared to $5,396,000 in 1995. Excluding approximately $179,000 of operating expenses associated with the cardiac partnerships which were sold on June 30, 1995, mobile MRI operating expenses increased $1,063,000 primarily due to approximately $1,350,000 of operating expenses associated with SMT's new systems purchased in late 1995 and the seven systems added during 1996, partially offset by a decrease of approximately $287,000, or 6%, in operating expenses of systems in operation for both comparable periods. This 6% decrease was primarily a result of $141,000 savings on state sales tax on certain systems, $122,000 savings on lower maintenance and cryogen 34 contracts, $64,000 savings on the rental of tractors used to transport the MRI systems and $42,000 savings on general repairs and maintenance costs, partially offset by higher payroll costs for operating personnel. Operating expenses per scan decreased $24, or 15%, to approximately $139 compared to $163 per scan during 1995. Depreciation and amortization expenses increased $1,046,000, or 28%, in 1996 to $4,725,000 from $3,679,000 in 1995. This increase was primarily due to depreciation expense associated with SMT's new systems purchased during late 1995, the seven additional systems placed into service in 1996, as well as the four systems upgraded during 1996. Selling, general and administrative costs for 1996 increased $405,000 to $2,877,000, or 15% of revenues, compared to $2,472,000, or 16% of revenues in 1995. The increase was primarily due to an approximate $200,000 increase in executive compensation and costs related to SMT's management bonus plan. The remaining increase is due to higher corporate expenses such as travel, insurance and costs associated with SMT's Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") accreditation. Interest expense for 1996 increased $284,000 to $2,041,000 from $1,758,000 in 1995, primarily as a result of the new systems purchased during late 1995, the seven additional systems placed into service in 1996 as well as the four systems upgraded during 1996. However, interest expense decreased as a percentage of revenue to 11% in 1996 compared to 12% of revenue in 1995. This decrease as a percentage of revenue was primarily due to higher down payments on new and upgraded mobile MRI systems as well as more favorable lease terms obtained on equipment financings and refinancings during 1995 and 1996. Other expense in 1996 reflects a $300,000 net state sales tax refund. The refund was the result of sales tax paid to a certain state over a period of time which SMT determined (by obtaining a private letter ruling from the state) was actually exempt from such tax. SMT obtained formal notice of the refund in September 1996 and received the cash refund in January 1997. SMT reported net income of $2,411,000 in 1996 versus $1,373,000 in 1995. Income tax expense for 1996 was $1,178,000, an effective tax rate of approximately 33%, as compared to income tax expense of $478,000, an effective tax rate of approximately 26%, for 1995. Income tax expense for 1996 reflects a net $105,000 deferred tax benefit resulting from an adjustment to SMT's federal net operating loss carryforward. Excluding the $105,000 tax adjustment, SMT's effective tax rate for 1996 approximated 36%. The increase in income tax expense reflects the significant increase in profitability of SMT during 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 SMT realized a significant increase in profitability during 1995. Net income during 1995 increased $963,000, or 235%, to $1,373,000 from $410,000 during 1994. The increase in profitability is primarily due to increased revenues, lower costs due to increased utilization of SMT's systems, the impact of a cost reduction program begun in 1994 and lower financing costs. Revenues during 1995 increased $1,785,000, or 13%, to $15,020,000 compared to $13,235,000 in 1994. Revenues, excluding $548,000 and $1,018,000 for 1995 and 1994, respectively, related to the Cardiac and Nuclear SPECT partnerships which SMT sold on June 30, 1995, increased 19% from 1994 to 1995. This increase is primarily due to increased utilization of SMT's MRI systems. Revenues of existing systems increased approximately 8% in 1995 compared to 1994. Further, SMT operated an average of ten systems during 1995 versus nine systems in 1994. During 1995, SMT performed 33,082 MRI scans, representing an increase of 7,587 scans, or 30%, over the 25,495 scans performed during 1994. Average scans per day averaged 10.4 during 1995 compared to approximately 9.0 scans per day during 1994. The average fee per scan for 1995 approximated $435 versus $476 per scan during 1994. The $41, or 9% decrease in average fee per scan is primarily due to discounted fees on incremental scans. Operating expenses during 1995 decreased $496,000, or 8%, to $5,396,000 compared to $5,892,000 in 1994. This decrease was primarily due to various cost containment measures implemented during late 1994 and 35 early 1995, as well as the purchase and upgrade during November 1994 of a mobile system which had previously been leased on an annual basis by SMT pursuant to an operating lease (accordingly, its lease payment was treated entirely as an operating expense). As a result of the purchase and upgrade, the lease costs were treated as depreciation and interest expenses. Operating expenses of existing systems decreased approximately 2% in 1995 compared to 1994, excluding the aforementioned lease adjustment. During 1994 and early 1995, SMT renegotiated its mobile MRI system maintenance contracts, property insurance rates and several other major operating expenditures resulting in annual cost savings of approximately $250,000. Operating expense per system decreased $68, or 29%, to $163 from $231 per scan during 1994. Depreciation and amortization expense increased $516,000, or 16%, to $3,679,000 in 1995 from $3,164,000 in 1994. The increase was primarily due to higher depreciation expense associated with SMT's new systems purchased in February and September of 1995 as well as its upgraded and refinanced systems. Selling, general and administrative costs for 1995 increased $578,000 to $2,472,000, or 16% of revenues, compared to $1,894,000, or 14% of revenues for 1994. The increase was primarily due to increased marketing expenses, increases in professional expenses related to SMT's shareholder rights plan and various securities filings and increased compensation costs related to SMT's management bonus plan. Interest expense for 1995 increased $120,000 to $1,758,000 from $1,638,000 but decreased as a percentage of revenue to 12% of revenue versus 13% of revenue in 1994. The increase in interest expense primarily reflects the interest payments on the two new systems purchased during 1995. The decrease in interest expense as a percentage of revenues reflects the more favorable lease terms obtained on the systems refinanced during 1994 and 1995. Income tax expense for 1995 was $478,000 as compared to income tax expense of $94,000 for 1994. This increase reflects the significant increase in profitability of SMT during 1995. LIQUIDITY AND CAPITAL RESOURCES Alliance generated $12.8 million, $18.0 million and $21.7 million from operating activities in 1994, 1995 and 1996 respectively, and $10.9 million and $13.7 million in the first six months of 1996 and 1997, respectively. The increase in cash provided by operating activities reflects the increase in scan volumes and improved operating performance. Capital expenditures, consisting primarily of new equipment purchases, totaled $22.4 million, $11.4 million and $34.4 million in 1994, 1995 and 1996, respectively, and $20.3 million in the first six months of 1997. Since January 1, 1995, Alliance has upgraded 22 MRI systems and purchased 27 new MRI systems, including replacement systems. As of December 31, 1996, Alliance had binding equipment purchase commitments totalling approximately $29.2 million. Alliance expects to purchase the equipment under these commitments in 1997 and finance such purchases with installment debt primarily provided by the equipment manufacturers. SMT generated $3.6 million, $5.5 million, and $7.4 million from operating activities in 1994, 1995 and 1996, respectively, and $3.0 million and $6.8 million in the first six months of 1996 and 1997, respectively. The increase in cash provided by operating activities reflects the increase in scan volumes and improved operating performance. Capital expenditures, consisting primarily of new equipment purchases, totaled $4.6 million, $5.1 million and $18.1 million in 1994, 1995 and 1996, respectively and $6.0 million in the first six months of 1997. Since January 1, 1995, SMT has purchased 17 new MRI systems, including six replacement systems. The Company's primary cash needs consist of capital expenditures and debt service. The Company incurs capital expenditures for the purposes of (i) providing routine upgrades of its MRI systems; (ii) replacing or making major upgrades to older, less advanced systems with new state-of-the-art systems; and (iii) purchasing new systems. The Company estimates that routine annual upgrade expenditures average approximately $25,000 36 per system or approximately $2.8 million in the aggregate, based on the fleet size at June 30, 1997. In addition to these routine expenditures, the Company expects capital expenditures to be approximately $26 million in the last six months of 1997 which reflects the anticipated purchase of 14 new systems, including replacement systems. The Company expects capital expenditures to be approximately $35 million in 1998, which includes the anticipated purchase of 20 new MRI systems. The Company's decision to purchase a new system is typically predicated on obtaining new or extending existing customer contracts which serve as the basis of demand for the new system. After giving effect to the Transactions, the Company will be capitalized with $170.0 million of Notes, a $200.0 million Credit Agreement consisting of a $50.0 million Term Loan Facility and approximately $38.0 million of borrowings under a $150.0 million Revolving Loan Facility and $12.2 million of other obligations. The Notes will bear interest at the rate per annum set forth on the cover page of this Prospectus, payable semiannually, and will require no principal repayments until maturity. The Term Loan will mature on the sixth anniversary of the initial borrowing and will require annual principal repayments of $0.5 million per year during the first five years and $47.5 million in the sixth year. The Revolving Loan Facility will mature on the fifth anniversary of the initial borrowing and will have mandatory commitment reductions of $75.0 million on the fourth and fifth anniversaries of the initial borrowing. The interest rate under the Credit Agreement is expected to be based on LIBOR. The Credit Agreement will contain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of other indebtedness. See "Description of the Credit Agreement". The Company believes that after giving effect to the Transactions and the incurrence of indebtedness related thereto, based on current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Revolving Loan Facility, will be sufficient over the next several years to fund anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the Credit Agreement. In addition, the Company continually evaluates potential acquisitions and expects to fund such acquisitions from its available sources of liquidity, including borrowings under the Revolving Loan Facility. The Company's expansion and acquisition strategy may require substantial capital, and no assurance can be given that the Company will be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to the Company, if at all. 37 INDUSTRY Diagnostic Imaging. Diagnostic imaging involves the use of non-surgical techniques to generate representations of internal organs on film or video. Diagnostic imaging systems have evolved from conventional x-rays to the advanced technologies of MRI, CT, ultrasound, nuclear medicine, mammography, positron emission tomography ("PET") and fluoroscopy. The market for diagnostic imaging services in the United States is estimated to be in excess of $50 billion annually, or 5% to 6% of total health care spending. MRI services constituted approximately $6 to $7 billion of the diagnostic imaging industry in 1996. Patients are typically billed for diagnostic imaging services by their hospitals. The bill consists of a technical fee or charge for use of the equipment as well as a professional fee for the services of the radiologist who interprets the data. Hospitals which outsource diagnostic imaging equipment and services pay providers directly and collect fees for service and technical charges from payors. Magnetic Resonance Imaging. Magnetic resonance imaging involves the use of high strength magnetic fields to produce computer-processed cross-sectional images of the anatomy. MRI services are provided by hospitals with in-house systems, independent fixed site operators and independent mobile operators. The approximately 4,000 MRI systems in the United States include 2,400 hospital owned systems, 1,000 independent fixed site systems and approximately 600 mobile systems. The MRI industry has experienced rapid growth as a result of increased physician acceptance of diagnostic imaging, substitution of MRI for other imaging modalities (including x-ray based techniques), expanding applications for MRI technology and health care reform which encourages outpatient services. Total scan volumes have increased from 5.4 million in 1990 to 8.8 million in 1996. According to an industry consultant, scan volumes are projected to grow at approximately 7% to 8% per year through 1999 and at 5% per year thereafter. The MRI services industry is highly fragmented. Recently, however, the industry has begun to undergo consolidation. The Company believes such consolidation is primarily the result of (i) economies of scale in the provision of services to a larger customer base; (ii) cost-effective purchasing of equipment, supplies and services by larger companies; and (iii) the decision by many smaller, capital constrained operators to sell their MRI businesses rather than make substantial investments in new imaging systems. Despite the recent trend, management estimates that as of July 31, 1997, the top eight MRI service providers operated only 13% of the total MRI systems in the United States. The history of the MRI industry can be divided into three periods: (i) initial growth from 1984-1992; (ii) downturn in 1993-1994; and (iii) renewed growth and consolidation beginning in 1995-1996. The increased use of MRI as a diagnostic tool between 1984 and 1992 resulted from a variety of factors including falling equipment costs, increased physician acceptance of the technology, increased number of clinical applications and Medicare reform enacted by Congress in 1983, which encouraged outpatient treatment. Changes in the health care industry and legislative reform between 1992 and 1994 slowed the growth of the MRI industry. The threat of health care reform and the desire to control medical costs and pricing, placed physicians under tremendous scrutiny to control costs and further contributed to the decrease in use of MRI by the medical profession. Simultaneously, the shift towards health maintenance organizations and the trend to decrease utilization of outpatient services and accept declining reimbursement rates (a 20% decline in reimbursement rates was experienced between 1992-1994) led to a period in which the use of MRI as a diagnostic tool was limited. Despite the new cost-conscious environment in which hospitals and physicians operated, the advantages of MRI as compared to other forms of diagnostic imaging, development of new practical uses of MRI and increased Medicare reimbursement (1%-2% increase per year between 1994-1996) resulted in increased MRI use beginning in 1995-1996. See "Business--Reimbursement." 38 Imaging Systems and Technology. MRI technology dates back to 1971 when Dr. Raymond Damadian began applying principles of magnetic resonance to the field of diagnostic imaging. In 1984, the FDA approved the sale of MRI systems to community hospitals and private clinics. A principal element underlying magnetic resonance imaging is that atoms in various kinds of body tissue behave differently in response to a magnetic field, enabling the differentiation of internal organs and structures and normal and diseased tissue. MRI facilitates the diagnosis of diseases and disorders at an early state, often minimizing the cost and amount of care needed and frequently eliminates the need for invasive diagnostic procedures. MRI is the preferred imaging modality for the brain, the spine and other internal organs because it produces a superior image of soft tissue, without artifacts from bony structures that are sometimes apparent with x-ray based imaging techniques. In addition, unlike x-rays and CT, MRI does not expose patients to ionizing radiation. Applications for MRI include detection of brain lesions, such as multiple sclerosis, tumors, strokes and infections, spinal injuries, diseases and congenital disorders, and heart, chest, abdomen, ligament, tendon and joint injuries or diseases. The major components of an MRI system are a large magnet, radio wave equipment, and a computer for data storage and image processing. During an MRI study, a patient lies on a table which is then placed into the magnet. The patient spends approximately 15 to 45 minutes inside the magnet, depending upon the type of MRI system and diagnostic study, during which time images of multiple planes are acquired. Images obtained from an MRI examination are displayed on a computer screen in the form of a cross-section of the organ or tissue. This information can be stored on magnetic media for future access or printed on film for interpretation by a physician and retention in the patient's files. Depending upon type, features and options selected, an MRI system and related housing and installation generally cost between $1.6 million and $2.2 million. The largest manufacturers of MRI systems are General Electric Medical Systems, Siemens Medical Systems, Phillips N.V. and Picker International. These manufacturers also supply maintenance and service under warranties and contracts. Industry participants typically enter into contracts with the manufacturers after the expiration of the warranty for comprehensive maintenance programs on equipment to minimize downtime (the period of time equipment is unavailable during scheduled use hours because of malfunctions). Research and Contrast Enhancement. Research is currently being conducted for additional uses of MRI and the Company believes more applications for MRI may be developed in the future. Contrast agents enhance the use of MRI in the detection of neurological lesions, including specific types of brain tumors. Contrast agents also enhance images of the post-operative spine, and are under investigation for use in the liver and other organ systems. MRI's role in the evaluation of cardiac disease and diseases of the bone marrow and joints is also on the increase. New technological developments are expected to extend the clinical uses of this technology and to increase the number of scans performed by the Company's customers. In October 1995, Medicare began to reimburse MRA procedures on a limited basis. MRA utilizes MRI technology to view blood flow of the head and neck. Prior to October 1995, MRA procedures were considered experimental and were not reimbursed by Medicare. Some MRA procedures have been approved by Medicare; it is expected that additional MRA procedures will be approved in the near future. Mobile MRI. Mobile MRI operators provide a cost-effective alternative enabling hospitals to access MRI technology. Mobile MRI operators use specially designed vans or trailers to transport MRI systems to hospitals and provide trained technologists to perform the scans. Operators typically enter into long-term contracts to provide a scheduled amount of service on a fee- per-scan basis. Operators then design schedules for each system to rotate among multiple hospitals in a manner that optimizes the utilization of each system. Mobile MRI systems typically operate in non-metropolitan areas, targeting small to mid-sized hospitals that do not own imaging systems. These hospitals often cannot afford the significant capital investment associated with MRI systems or lack the patient volume to utilize the systems in a cost-effective manner. In addition, CON and other licensing requirements in many states have further limited hospitals' ability to purchase MRI systems. However, such hospitals need state-of-the-art diagnostic imaging technology to remain competitive. In addition, many medical professionals have become increasingly aware of the risks of medical malpractice suits and believe that such risks would be reduced by utilizing state-of-the-art medical technology and related services. 39 BUSINESS GENERAL The Company is a leading nationwide provider of diagnostic imaging services and the largest operator of state-of-the-art mobile diagnostic imaging systems and related outsourced radiology services in the United States. The Company primarily provides MRI systems and services to hospitals and other health care providers on a mobile, shared user basis. The Company also provides dedicated, full-time MRI systems and services as well as full-service management of imaging operations for selected hospitals. The Company's services enable small to mid-size hospitals to gain access to advanced diagnostic imaging technology and related value-added services without making a substantial investment in equipment and personnel. In connection with the Offering, Alliance intends to consummate the Recapitalization and acquire SMT, a leading provider of mobile MRI services in the Mid-Atlantic region of the United States. Since the beginning of 1995, Alliance and SMT have each substantially increased revenues by adding new customers and increasing scan volumes at existing customer sites. During the same period, the growth rate of EBITDA for each of Alliance and SMT has exceeded the growth rate of revenues principally as a result of spreading costs (which are primarily fixed) over a larger revenue base and implementing cost reduction and containment measures. The Company operates a fleet of 111 MRI systems and services over 420 MRI customers in 36 states under exclusive contracts with an average remaining length of approximately 25 months as of July 31, 1997. Pro forma combined revenues and adjusted EBITDA of the Company for the six months ended June 30, 1997 were $52.9 million and $26.5 million, respectively. COMPETITIVE STRENGTHS The Company attributes its market leadership and its significant opportunities for continued growth and increased profitability to the following strengths: Largest Provider of Mobile MRI Services. The Company operates 111 MRI systems in 36 states. The Company believes that the next largest mobile operator has a fleet of approximately 70 MRI systems. Compared to its smaller competitors, the Company believes it will benefit from (i) significant equipment purchasing savings; (ii) attractive service and maintenance contracts from its primary equipment suppliers; (iii) strong name recognition and a reputation for quality service; (iv) substantial financial flexibility and access to lower-cost capital; and (v) the ability to efficiently deploy systems in a manner which maximizes fleet utilization while satisfying customer requirements. Technologically Advanced MRI Fleet. On a pro forma combined basis, the Company has invested approximately $94 million since January 1, 1995 to replace and upgrade existing systems and to purchase new systems. As a result, the Company believes that it has upgraded substantially all of its systems and expects most of its capital expenditures for at least the next three to five years to relate to new system purchases. Of the Company's 111 MRI systems, 88 are state-of-the-art, high-field 1.0 or 1.5 Tesla systems and 15 are state-of- the-art, mid-field 0.5 Tesla systems. The Company believes its fleet is among the newest and most advanced in the industry, enabling the Company to perform a wider variety and greater volume of scans and produce higher quality images, which the Company believes provides a significant competitive advantage. Moreover, all of the Company's state-of-the-art systems are designed to facilitate hardware and software upgrades. As a result, the Company's systems should remain on the leading edge of technological developments. In addition, while many of its competitors lease their systems, the Company owns the vast majority of its systems, generally providing greater flexibility and lower costs over the life of the systems. Exclusive, Long-Term Contracts in Attractive Markets. The Company generates substantially all of its revenues from exclusive, long-term contracts with hospitals and other health care providers, with the price for its services determined on a fee-per-scan basis. The Company has 61, 94 and 109 contracts that will expire, if not renewed or extended, in 1997, 1998 and 1999, respectively. The Company's contracts typically offer tiered pricing with lower fees on incremental scans, allowing customers to benefit from increased scan volumes and the Company to benefit from the operating leverage associated with increased scan volumes. Accordingly, tiered 40 pricing enables the Company to retain customers who may be considering purchasing their own MRI systems rather than renewing a contract with a mobile provider. As of July 31, 1997, the Company had more than 420 MRI customers under exclusive contracts which averaged approximately 25 months in remaining length. Most of the Company's contracts are with hospitals that have fewer than 200 beds, many of which may lack the financial resources or patient volume to justify the purchase of an MRI system. Superior Customer Service and Strong Customer Relationships. The Company positions itself as a service company rather than solely as an equipment provider and competes on the basis of value-added services in addition to price. The Company differentiates itself from competitors by aggressively marketing its services to referring physicians, radiologists and hospital administrators and by having the advanced imaging systems, trained technologists, fleet management capabilities and fleet size to accommodate the growing needs of its customers. Value-added services offered by the Company include patient scheduling and pre-screening, insurance pre-authorization, appointment confirmation, billing, managed care contracting, and management reporting services. The Company often provides two technologists per mobile system per shift and is therefore able to accommodate higher patient volume and operate with greater efficiency, resulting in high customer satisfaction levels. As a result, the Company enjoys strong customer relationships, having added more than 160 net new MRI customers from January 1, 1995 through June 30, 1997 and renewed or extended a substantial majority of its customer contracts in this period. Substantial Operating Leverage. Because of the significant amount of fixed costs associated with operating an MRI system, MRI service providers benefit from operating leverage, with increased utilization rates resulting in significant increases in operating earnings and operating margins. On a pro forma combined basis, the Company's average scans per system per day increased to 7.8 for the six months ended June 30, 1997 from 7.2 for the six months ended June 30, 1996. Over the same period, the Company's pro forma combined adjusted EBITDA margin increased to 50.1% from 47.5%. Favorable Payment Terms. Approximately 94% of the Company's billings are direct to hospitals. The hospitals, in turn, generally pay the Company prior to collecting from patients and third party payors. Accordingly, the Company's exposure to uncollectible patient receivables is minimized. In addition, management believes that the Company's average number of DSO of receivables, which was 42 days as of July 31, 1997, is among the most favorable in the mobile MRI industry and more favorable than the DSO of many health care companies. Experienced Management Team. The Company's senior management team has an average of ten years of industry experience and eight years of experience with Alliance or SMT. The Company's senior and operating managers have successfully developed and implemented sophisticated marketing, fleet management and financial strategies which have enabled the Company to become the largest and among the most efficient and profitable mobile MRI operators. Upon consummation of the Transactions and after giving effect to the Company's option plans, management will own in excess of 16% of the capital stock of the Company on a fully diluted basis. BUSINESS STRATEGY The Company's management team has developed and implemented a business strategy designed to maximize return on invested capital and in turn increase revenues and EBITDA. The Company's revenues, adjusted EBITDA and adjusted EBITDA margin on a pro forma combined basis for the six months ended June 30, 1997 increased to $52.9 million, $26.5 million and 50.1%, respectively, from $40.0 million, $19.0 million and 47.5% for the six months ended June 30, 1996. The Company achieved comparable customer revenue growth of 18.5% and 9.7%, respectively, in the first six months of 1997 and in the year ended December 31, 1996. In addition, during the three months ended June 30, 1997, the Company added a total of five net mobile MRI systems. Management believes that the recent financial performance of the Company does not yet fully reflect the benefit of these new systems. 41 The primary components of the Company's business strategy are to (i) increase scan volumes; (ii) maximize return on invested capital; (iii) expand the scope of services provided; (iv) pursue strategic acquisitions; and (v) realize operating synergies. Increase Scan Volumes. The Company believes that the demand for MRI procedures will continue to grow as new applications are developed and MRI continues to gain acceptance and replace other imaging modalities. The Company has an opportunity to significantly increase its scan volumes by both adding new customers and increasing scans performed for existing customers. In response to the growing demand for MRI procedures, the Company added 29 net MRI systems and 160 net new MRI customers from January 1, 1995 to June 30, 1997. The Company expects to add 34 net MRI systems by the end of 1998. The Company's decision to purchase new systems is typically predicated on obtaining new customer contracts which serve as the basis of demand for the new MRI systems. Maximize Return on Invested Capital. The Company actively manages the utilization of its MRI systems to maximize its return on invested capital (i.e., the amount of cash flow generated by each system relative to the carrying value of such system). In the six months ended June 30, 1997, on a pro forma combined basis, the Company generated an annualized return on invested capital of 46.2%. The Company typically upgrades the quality of its fleet in markets where demand is greatest and redeploys less advanced systems in markets where demand is lower in order to generate incremental cash flow. The Company estimates that, on average, a system can be utilized for approximately eight years in a high demand market when properly maintained and upgraded, after which time the system can either be utilized in a market with less demand or traded in for a new system. Expand the Scope of Services Provided. The Company intends to leverage its national presence and customer service capabilities by introducing new services, the demand for which management believes will increase as hospitals continue to outsource departments and cost centers and seek incremental revenue sources. The Company expects to expand into open MRI services, lithotripsy services (which involves the utilization of sound waves to eliminate kidney stones and urinary calculus in the bladder) and full-service management of hospital radiology departments. Open MRI systems are used on claustrophobic patients and patients whose size prohibits them from entering traditional MRI systems. Management believes that with the introduction of its first open MRI system in the fourth quarter of 1997, the Company will be the first operator to offer mobile open MRI service. Pursue Strategic Acquisitions. Management has designed an acquisition strategy for the Company which capitalizes on the consolidation occurring in the industry as well as the Company's ability to (i) access substantial and lower cost financial resources; (ii) realize significant synergies, operating expense reductions and overhead cost savings; (iii) apply its consolidation strategy to expand outside of diagnostic imaging in related services; (iv) utilize the Company's expertise in logistics and fleet management; and (v) leverage the Company's existing customer relationships to expand into new modalities. Realize Operating Synergies. Management believes the Recapitalization and the SMT Acquisition will create substantial cost savings, including (i) identified operating and administrative cost savings; (ii) economies in purchasing equipment, supplies and services; and (iii) route consolidation efficiencies. Management believes the SMT Acquisition and future acquisitions will enable the Company to redeploy systems in overlapping markets, resulting in higher utilization rates and the opportunity to increase penetration in other markets. OPERATIONS Customer Base. The Company believes that many hospitals and other health care providers require access to MRI services to remain competitive in the health care marketplace. Regulatory and licensing requirements in many states may also limit access to MRI systems. In addition, many health care providers lack sufficient patient volume or financial resources to justify the purchase of an MRI system. Such providers contract for mobile, shared-user systems or single-user, full-time systems to gain access to MRI technology and to provide comprehensive MRI services to their patients. In addition, many health care providers, regardless of whether their patient utilization levels and financial resources justify the purchase of an MRI system, prefer to contract with the Company for full-time or shared-user imaging systems to (i) obtain the use of an MRI system without any 42 capital investment or financial risk; (ii) retain the ability to switch system types and avoid technological risk; (iii) obtain MRI services in jurisdictions in which the use of the Company's services facilitates the procurement of regulatory approvals; (iv) avoid future uncertainty as to reimbursement policies; (v) eliminate the need to recruit, train and manage qualified technologists; (vi) outsource their entire MRI service to obtain access to needed technology while avoiding financial investment or risk and obtaining management expertise; or (vii) provide additional imaging services when patient demand exceeds their in-house capability. The Company's MRI and CT services, which include imaging systems, technologists and support services, are provided on both a mobile, shared-user basis and on a full-time basis to single customers. As of July 31, 1997, the Company provided imaging systems and related technologists and support services to 460 customers (424 for MRI services and 60 for CT services; some customers contract for both modalities) consisting primarily of small to mid- sized hospitals (i.e., hospitals with 50-200 beds). The Company believes that many of such hospitals lack the patient volume or financial resources to justify the purchase of an MRI system. As of July 31, 1997, the Company provided services and equipment to customers in 36 states. Typically, the Company's MRI systems are contracted on average for five to six days a week. The Company believes that as customers become familiar with the basic or expanded technology and its applications, the corresponding MRI system's rate of usage generally increases, causing the number of scans per day to increase and eventually leading to requests for additional days of usage. Contract Terms. Contract fees are charged on a fee-per-scan, fee-per-day or fee-per-month basis (with numerous variations within each billing method to accommodate particular customers' needs). Generally, the Company provides technologists under contracts billed on a fee-per-scan or fee-per-day basis but not under contracts billed on a fee-per-month basis. Although a typical contract offers daily flat-rate options, most customers currently pay on a fee-per-scan basis. The amount of fees paid on this basis depends upon the type of imaging system provided, the term of the contract, the types and number of scans performed as well as the day of the week on which scans are performed. The contracts typically allow the Company to reduce the number of days of service provided based upon the customer's scan volume, or to terminate the contract if the Company is unable to realize a profit on the services provided. The Company typically enters into exclusive, one to eight year contracts that include automatic renewal provisions. In addition, the Company's marketing representatives consistently seek to renew and extend contracts prior to expiration. From January 1, 1995 through June 30, 1997, the Company renewed or extended 238 of its customer contracts. As of July 31, 1997, the Company's contracts averaged approximately 25 months in remaining length. Imaging Systems. At July 31, 1997, the Company operated 111 MRI systems and 11 CT systems. Of the 111 MRI systems, 88 are state-of-the-art, high-field 1.0 or 1.5 Tesla systems and 15 are state-of-the-art, mid-field 0.5 Tesla systems. These systems are designed to facilitate hardware and software upgrades. As a result, the Company's systems should remain at the leading edge of technological developments. Further, of the 111 MRI systems, 99 are housed in mobile coaches and 12 are housed in relocatable modular buildings on hospital campuses or installed in the hospital facility. Substantially all of the imaging systems are owned by the Company. One of such systems is a fixed-site system at a large hospital in Georgia operated by a partnership of which a subsidiary of the Company is a partner. The Company orders substantially all of its imaging systems from major medical device manufacturers, primarily General Electric Medical Systems, Siemens Medical Systems and Picker International. Generally, the Company orders its imaging systems from such major manufacturers while simultaneously contracting with health care providers for their use, thereby reducing the Company's system utilization risk. The Company's MRI systems are installed in specially-designed trailers or relocatable, modular buildings. The trailers and relocatable modular buildings are designed jointly by the imaging system manufacturer and the housing manufacturer and are designed to provide image quality identical to those installed in hospital facilities. Fleet Management. The Company seeks to maximize cash flow and return on assets by actively managing its fleet to maximize utilization. The Company employs logistics management systems and redeploys or trades in 43 older MRI systems when it purchases new MRI systems. MRI systems are currently scheduled for as little as one-half day and up to seven days per week at any particular facility. Generally, technologists and a driver are assigned to each of the mobile operating systems. Movement of the systems typically occurs at night via a fleet of Company-owned or leased tractors. The drivers move the systems and activate them upon arrival at each imaging site so that the systems are operational when the Company's technologists arrive on the following scheduled imaging day. Regional Management. The Company's seven regional offices market, manage and staff the operation of its imaging systems. The Company's regional offices are located in Anaheim and Roseville, California; Pittsburgh, Pennsylvania; Chicago, Illinois; Colorado Springs, Colorado; Burlington, Connecticut; and Macon, Georgia. Each region has individuals responsible for sales and operations management. Licensing and JCAHO Accreditation. Most states do not currently license MRI providers such as the Company, although many do subject such providers to CON requirements. Hospitals with which the Company has contracted are subject to a variety of regulations and standards of state licensing and other authorities and accrediting bodies such as the JCAHO. As an outside vendor, the Company may be required to comply with such regulations and standards to enable the hospitals with which it has contracted to maintain their permits, approvals and accreditation. During January 1997, SMT received accreditation with commendation from JCAHO. Alliance is in the process of seeking accreditation from JCAHO. As of June 30, 1997, SMT is the only mobile JCAHO accredited provider. Management believes that accreditation is of significant importance to hospital administrators, who frequently have the responsibility of selecting outsourced service providers. CUSTOMER SUPPORT As part of its full service package, the Company provides several levels of support to a hospital or health care provider. The Company's technologists who staff the MRI systems regularly work with the hospital radiologists, referring physicians and nursing staff to perform the scans. The technologists also work with regional technical advisors who are specialists in MRI technology and consult on specialized technical problems, hold periodic training sessions for the technologists, radiologists, referring physicians and health care customers and provide problem-solving services. These specialists play a central role in the Company's retention of accounts and building of scan volumes. Management believes that targeted direct marketing at each hospital with assigned responsibility for support services is a key element for broadening the awareness of MRI technology, building scan volumes and obtaining contract renewals. SALES AND MARKETING Currently, the Company's sales force consists of 13 members who identify and contact candidates for the Company's services each with the overall management and sales responsibility for a specific region of the country. Direct marketing plays a primary role in the Company's development of new customers. The Company employs 13 marketing representatives who develop scan volumes at existing and new customer locations by introducing the Company's services to referring physicians and keeping such physicians apprised of the Company's MRI service capabilities. In addition, certain of the Company's executive officers and regional vice presidents spend a portion of their time marketing the Company's services. The Company believes that having senior managers involved in sales and contract negotiations enhances its ability to obtain new and retain existing customers. MAINTENANCE For its MRI and CT systems, the Company primarily relies upon the manufacturer to provide maintenance and service under warranties and service contracts. These service contracts require the Company to pay fixed monthly fees or variable fees on a risk-sharing basis. 44 Timely, effective service is essential to maintaining high utilization rates on the Company's MRI systems. If the Company experiences greater than anticipated malfunctions of its equipment or if it is unable to promptly obtain the service necessary to keep its systems functioning effectively, its business could be adversely affected. The Company contracts with the MRI equipment manufacturers for comprehensive maintenance programs on its systems to minimize downtime (the period of time equipment is unavailable during scheduled use hours because of malfunctions). These maintenance contracts commence upon the expiration of the applicable warranty period. The systems are generally warranted by the systems manufacturer for a specified period of time, usually one year to eighteen months from the date of purchase. During the warranty period and maintenance contract term, the Company receives uptime guarantees (a guarantee that equipment will function for a specified percentage of scheduled use hours.) However, these guarantees are not expected to substantially compensate the Company for loss of revenue for downtime. REIMBURSEMENT Substantially all the Company's revenues are derived directly from health care providers rather than from private insurers, other third party payors or governmental entities. Consequently, the Company historically has not had material direct exposure to, or direct connection with, patient billing, collections or reimbursement by insurance companies, other third parties or Medicare. However, to a lesser extent, the Company's revenues are generated from direct billings to patients or their third party payors which are recorded net of contractual discounts and other arrangements for providing services at less than established patient billing rates. On a pro forma basis, net revenues from direct patient billing would have amounted to approximately 6% of the Company's revenue in 1996. Most private health care insurers, including various Blue Cross and Blue Shield Plans, reimburse approximately 70% to 100% of the health care provider's charge for MRI and CT scans. Such insurers may impose limits on reimbursement for imaging services or deny reimbursement for tests that do not follow recommended diagnostic procedures. Because patient reimbursement may indirectly affect the levels of fees the Company can charge its customers by constricting the health care providers' profit margin, widespread application of restricted or denied reimbursement schedules could adversely affect the Company's business. Conversely, at lower reimbursement rates, a health care provider might find it financially unattractive to own an MRI or CT system, but could benefit from purchasing the Company's services. Congress has attempted to restrict rising federal reimbursement costs under the Medicare program by setting predetermined payment amounts for reimbursement of inpatient services according to each patient's diagnosis related group ("DRG"). Because a DRG rate compensates a hospital for all services rendered to a patient, a hospital cannot be separately reimbursed by Medicare for an MRI scan or other procedure performed on an inpatient. DRG payment rates for inpatient services became effective in the early 1980's and have been adjusted downward since then. Currently, those payment rates are not applicable to outpatient services; instead, Medicare reimbursement for imaging services furnished in a hospital outpatient setting is subject to alternative, generally more favorable, payment limits tied to the physician fee schedule described below. However, it is possible that DRG payment rates or other limits might be implemented with respect to outpatient services in the future. Because payments have generally been less restricted in non-hospital outpatient settings, in prior years there has been rapid growth in MRI systems at non-hospital free-standing facilities which provide outpatient services. HHS, as required by statute, has issued fee schedules for reimbursing physicians who treat Medicare patients. Under these fee schedules, physician reimbursement for professional services is based on a set of values assigned to each service provided by a physician. The fee schedules also generally apply to reimbursement for technical services (such as those provided by the Company) except in limited circumstances. There can be no assurance that Medicare payments will remain comparable to present levels. In particular, on June 18, 1997, the Health Care Financing Administration ("HCFA") issued a proposed rule affecting, among other things, the practice expense component of the physician fee schedule, physician supervision requirements for certain diagnostic tests and the adoption of a new definition of an independent diagnostic testing facility. Under the proposed rule, the 45 Relative Value Units ("RVU") for MRI scans would be relatively unchanged, but the RVUs for MRI scans with contrast would be reduced significantly. The proposed effective date of the rule is January 1, 1998. However, as part of federal budget legislation recently signed into law, implementation of the practice expense changes will be delayed until January 1, 1999, with a three year transition period for implementing the new method for calculating practice expenses. While the impact of the proposed changes is dependent on numerous factors, including whether the proposed rule is adopted substantially in the proposed form and whether the Company's hospital customers will seek similar adjustments in payments to the Company for scans with contrast agents to the extent they are currently charged additional amounts for contrast exams, there can be no assurance that such practice expense changes will not, directly or indirectly, have a material adverse effect on the Company's business or results of operations. The Budget Reconciliation Act for 1998 that was recently signed into law contains a number of changes to the Medicare program which will adversely affect hospitals and which could therefore potentially have an impact on suppliers of goods and services to hospitals, including the Company. In particular, among other things, the Act requires implementation of a prospective payment system for outpatient services beginning in 1999; and reduces hospital inpatient reimbursement for both operating and capital expenses compared with reimbursement levels that would have prevailed absent any change in law. The Company believes that approximately 15% to 20% of its hospital customers' MRI revenues are derived from Medicare patients. REGULATION Many aspects of the health care industry in the United States, including the Company's business, are subject to extensive federal and state government regulation. Although the Company believes that its operations comply with applicable regulations, there can be no assurance that subsequent adoption of laws or interpretations of existing laws will not regulate, restrict or otherwise adversely affect the Company's business. The marketing and operation of the Company's MRI and CT systems are subject to state laws prohibiting the practice of medicine by non-physicians and the rebate or division of fees between physicians and non-physicians. Management believes that its operations do not involve the practice of medicine because all professional medical services relating to its operations, such as the interpretation of the scans and related diagnoses, are separately provided by licensed physicians not employed by the Company. Further, the Company believes that its operations do not violate state laws with respect to the rebate or division of fees. The Company is subject to federal and state laws which govern financial and other arrangements between health care providers. These include the federal Medicare and Medicaid anti-kickback statutes which prohibit bribes, kickbacks, rebates and any other direct or indirect remuneration in return for or to induce the referral of an individual to a person for the furnishing, directing or arranging of services, items or equipment for which payment may be made in whole or in part under the Medicare, Medicaid or other federal health care programs. Violation of the anti-kickback statute may result in criminal penalties and exclusion from the Medicare and other federal health care programs. Many states have enacted similar statutes which are not necessarily limited to items and services paid for under the Medicare or a federally funded health care program. In recent years, there has been increasing scrutiny by law enforcement authorities, HHS, the courts and Congress of financial arrangements between health care providers and potential sources of patient and similar referrals of business to ensure that such arrangements are not designed as mechanisms to pay for patient referrals. HHS interprets the anti-kickback statute broadly to apply to distributions of partnership and corporate profits to investors who refer federal health care program patients to a corporation or partnership in which they have an ownership interest and to payments for service contracts and equipment leases that are designed to provide direct or indirect remuneration for patient referrals or similar opportunities to furnish reimbursable items or services. In July 1991, HHS issued "safe harbor" regulations that set forth certain provisions which, if met, will assure that health care providers and other parties who refer patients or other business opportunities, or who provide reimbursable items or services, will be deemed not to violate the anti-kickback statute. The Company is also subject to separate laws governing the submission of false claims. The Company is a party to a partnership for the provision of MRI services. The 46 Company believes that the partnership is in compliance with the anti-kickback statute. The Company believes that its other operations likewise comply with the anti-kickback statutes. A federal law, commonly known as the "Stark Law," also imposes civil penalties and exclusions for referrals for "designated health services" by physicians to certain entities with which they have a financial relationship subject to certain exceptions. "Designated health services" include, among others, MRI services. While implementing regulations have been issued relating to referrals for clinical laboratory services, no implementing regulations have been issued regarding the other designated health services, including MRI services. In addition, several states in which the Company operates have enacted or are considering legislation that prohibits "physician self- referral" arrangements or requires physicians to disclose any financial interest they may have with a health care provider to their patients to whom they recommend that provider. Possible sanctions for violating these provisions include loss of licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely. The Company believes its operations comply with these federal and state physician self-referral laws. In some states, a CON or similar regulatory approval is required prior to the acquisition of high-cost capital items, including diagnostic imaging systems or provision of diagnostic imaging services by the Company or its customers. CON regulations may limit or preclude the Company from providing diagnostic imaging services or systems. A significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. LIABILITY INSURANCE While the Company's imaging systems are at a customer's facility, they operate only under the direction of licensed physicians on the customer's staff who direct the procedures, supervise the Company's technologists and interpret the results of the examinations. Currently, there are no known biological hazards associated with MRI. However, there is a risk of harm to a patient who has a ferrous material or certain types of cardiac pacemakers within his or her body. Patients are carefully screened to safeguard against this risk. To protect against possible exposure for professional liability, the Company maintains professional liability insurance. COMPETITION The market for diagnostic imaging services and imaging systems is highly competitive. In addition to direct competition from other mobile providers, the Company competes with free-standing imaging centers and health care providers that have their own diagnostic imaging systems and with equipment manufacturers that sell or lease imaging systems to health care providers for full-time installation. Some of the Company's direct competitors which provide contract MRI services may have access to greater financial resources than the Company. In addition, some of the Company's customers are capable of providing the same services to their patients directly, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable licensure and CON requirements, if any. The Company competes against other MRI service providers on the basis of quality of services, quality and magnetic field strength of imaging systems, price, availability and reliability. EMPLOYEES As of July 31, 1997, on a pro forma combined basis, the Company had 599 employees, of whom approximately 497 were trained diagnostic imaging technologists, patient coordinators, technical support staff or other field operations personnel. Of the Company's employees, 145 are employed on a part- time or "as needed" basis. None of the Company's employees are represented by a labor organization and the Company is not aware 47 of any activity seeking such organization. The Company considers its relations with its employees to be satisfactory. PROPERTIES The Company leases approximately 15,000 square feet of space in an office building in Anaheim, California for its executive and principal administrative offices. This office will be expanded to a total of approximately 24,500 square feet during the fourth quarter of 1997. The Company also leases a 15,600 square foot operations warehouse in Orange, California and 5,500 square feet of office space in Wexford, Pennsylvania, as well as space for its other regional offices. LEGAL PROCEEDINGS The Company from time to time is involved in routine litigation incidental to the conduct of its business. The Company believes that no litigation pending against it will have a material adverse effect on its consolidated financial position or results of operations. 48 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The following table sets forth information concerning the individuals who will be the executive officers and directors of the Company upon consummation of the Transactions.
NAME AGE POSITION ---- --- -------- Richard N. Zehner................ 44 Chairman, President, Chief Executive Officer and Director Vincent S. Pino.................. 49 Executive Vice President, Chief Operating Officer and Director Jeff D. Bergman.................. 42 Senior Vice President and Director Daniel Dickman................... 50 Senior Vice President and Director Terrence M. White................ 43 Senior Vice President, Chief Financial Officer and Secretary Robert H. Falk................... 58 Director Michael S. Gross................. 35 Director Joshua J. Harris................. 32 Director Michael D. Weiner................ 44 Director
Richard N. Zehner has been the Chairman, President and Chief Executive Officer of Alliance since November 1988. Mr. Zehner was a founder and has been the President of Alliance and its predecessors since 1983. From 1987 until November 1988 he served as a director and President and Chief Operating Officer of Alliance. Vincent S. Pino has been the Executive Vice President and Chief Operating Officer of Alliance since December 1991 and August 1993, respectively, and a director since June 1991. From November 1988 to August 1993, he was the Chief Financial Officer of Alliance. Jeff D. Bergman has been Chief Executive Officer, Chairman of the Board and President of SMT since its formation in 1991 and held the same positions with SMT's predecessor since 1987. In 1983, Mr. Bergman joined Mobile Diagnostech, Inc. ("MDI"), a provider of mobile CT scanners and MRI equipment and a developer and manager of fixed-site oncology centers. Mr. Bergman is also an official in the National Football League. Mr. Bergman officiated Super Bowl XXXI in New Orleans, LA in January 1997. Daniel Dickman has been Executive Vice President and Chief Operating Officer of SMT since 1991 and held the same positions with SMT's predecessors, Shared Medical Technologies, Inc. since 1987 and Shared MRI-4, Inc. since its inception in 1990. In 1987, Mr. Dickman joined SMT to manage SMT's equipment routes and fixed-site modalities. He has over 12 years of experience in healthcare management consulting and systems design, and was formerly employed by Blue Cross of Western Pennsylvania as Manager of Hospital Consulting. Terrence M. White joined Alliance in July 1993 as Senior Vice President, Chief Financial Officer and Secretary. From 1975 through May 1993, he was employed by Ernst & Young LLP and its predecessor, and was a partner in such firms since 1987. Robert H. Falk has been an officer of certain affiliates of Apollo since 1992. Prior to 1992, Mr. Falk was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Falk is also a director of Converse Inc., Culligan Water Technologies, Inc., Florsheim Group Inc. and Samsonite Corporation. Michael S. Gross is a founding principal of Apollo and has served as an officer of certain affiliates of Apollo since 1990. Mr. Gross is also a director of Allied Waste Industries, Inc., Breuners Home Furnishings Corporation, Converse Inc., Florsheim Group Inc., Furniture Brands International, Inc., Proffitt's, Inc. and Urohealth, Inc. 49 Joshua J. Harris has served as an officer of certain affiliates of Apollo since 1990. Mr. Harris is a director of Converse Inc., Breuners Home Furnishings Corporation, Florsheim Group Inc. and NRT Incorporated. Michael D. Weiner has been an officer of certain affiliates of Apollo since 1992. Prior to 1992, Mr. Weiner was a partner in the law firm of Morgan, Lewis & Bockius LLP. Mr. Weiner is also a director of Converse Inc., Capital Apartment Properties, Inc., Continental Graphics Holdings, Inc., Florsheim Group Inc., NRT Incorporated and WMC Finance Co. EXECUTIVE COMPENSATION The following sets forth historical executive compensation information of the Company's Chief Executive Officer and the other four most highly compensated executive officers whose total cash compensation exceeded $100,000 during the fiscal year ended December 31, 1996 (collectively, the "Named Executive Officers") and who will serve as executive officers of the Company upon consummation of the Transactions. The compensation information of Messrs. Zehner, Pino and White, as well as that for Messrs. Bergman and Dickman, reflect their historical positions as executive officers of Alliance and SMT, respectively. Alliance and SMT historical executive compensation plans differ in form, targets, timing and methods and, except for the Summary Compensation Table, are set forth separately in the following sections. SUMMARY COMPENSATION TABLE The following table sets forth for the fiscal years indicated the annual and long-term compensation of the Named Executive Officers who will serve as executive officers of the Company upon consummation of the Transactions.
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------------------- ------------------------- SECURITIES UNDERLYING NAME AND PRINCIPAL OTHER ANNUAL STOCK ALL OTHER POSITION YEAR(1) SALARY BONUS COMPENSATION(2) OPTIONS/SARS COMPENSATION ------------------ ------- -------- ----------- --------------- ------------ ------------ Richard N. Zehner....... 1996 $296,000 $419,025 -- 155,000(3) $15,596(4) Chairman, President, Chief Executive Officer and 1995 278,750 191,544 -- -- (3) 15,495(4) Director 1994 260,000 280,462 -- 205,000(3) 15,490(4) Vincent S. Pino......... 1996 208,000 192,140 -- 125,025(3) 3,596(4) Executive Vice President, Chief Operating Officer and 1995 195,500 113,666 -- -- (3) 3,486(4) Director 1994 182,000 230,393 -- 125,000(3) 2,125(4) Terrence M. White....... 1996 150,000 108,150 -- 90,025(3) 3,488(4) Senior Vice President, Chief Financial Officer and 1995 131,250 70,605 -- -- (3) 3,351(4) Secretary 1994 120,000 209,083 -- 45,000(3) 1,402(4) Jeff D. Bergman......... 1996 209,000 134,000(5) -- 14,500(6) 9,534(7) Senior Vice President 1995 180,000 73,700(5) -- 224,000(6) 4,500(7) and Director 1994 161,000 19,000(5) -- 50,000(6) 45,000(7) Daniel Dickman.......... 1996 209,000 134,000(5) -- 14,500(6) 12,633(7) Senior Vice President 1995 180,000 73,700(5) -- 224,000(6) 6,500(7) and Director 1994 161,000 19,000(5) -- 50,000(6) 6,500(7)
- -------- (1) Rows specified "1996," "1995" and "1994" represent fiscal years ended December 31, 1996, 1995 and 1994, respectively. (2) With respect to each Named Executive Officer for each fiscal year, excludes perquisites, which did not exceed the lesser of $50,000 or 10% of the Named Executive Officer's salary and bonus for the fiscal year. 50 (3) All stock options granted to these Named Executive Officers were granted under the Alliance's 1991 Stock Option Plan. Option grant figures for 1994 include replacement options for previously granted options, in addition to new issuances. (4) Includes 401(k) matching contributions (for 1996, 1995 and 1994, respectively: Mr. Zehner--$3,164, $3,077 and $3,077; Mr. Pino--$3,164, $3,077 and $1,749; Mr. White--$3,164, $3,077 and $1,154); the balance for each of these Named Executive Officer represents life insurance premiums paid by Alliance. (5) Amounts shown are for payments made pursuant to SMT's Profit Sharing Plan. Employment agreements between Messrs. Bergman and Dickman, respectively, and SMT, required SMT to maintain a profit sharing plan. (6) All stock options granted to SMT's Named Executive Officers were granted under SMT's 1991 and 1996 Employee Stock Option Plans. Such grants have not been adjusted herein for the January 1997 7% stock dividend by SMT. (7) Amounts shown for fiscal 1996 include disability insurance premiums totaling $7,814 and $10,443 and split-dollar life insurance premiums totaling $720 and $1,190 for Messrs. Bergman and Dickman, respectively. Amounts shown for fiscal 1996 also include, for each of SMT's Named Executive Officers, SMT's 401(k) contribution of $1,000. ALLIANCE EXECUTIVE COMPENSATION PLAN Alliance compensates its executive officers using a plan that includes a predetermined target level of annual cash compensation for each officer. The plan is set by the Compensation Committee of Alliance's Board of Directors (the "Compensation Committee") at the beginning of the fiscal year. The actual total level of compensation for the fiscal year is determined after the end of the fiscal year based on the level of achievement of various criteria. The compensation plan establishes a minimum annual remuneration (i.e., base salary), a maximum compensation level and a target compensation amount. The annual minimum, target and maximum compensation levels established for Alliance's Named Executive Officers for 1996 is presented in the following table, together with the total actual cash compensation earned.
1996 1996 1996 1996 AMOUNT NAME MINIMUM MAXIMUM TARGET EARNED - ---- -------- -------- -------- -------- Richard N. Zehner........................... $296,000 $740,000 $518,000 $715,025 Vincent S. Pino............................. 208,000 416,000 312,000 400,140 Terrence M. White........................... 150,000 270,000 210,000 258,150
The actual amounts of cash compensation to Mr. Zehner, Mr. Pino and Mr. White, Alliance's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, respectively, were determined by the Compensation Committee based on its evaluation of the extent to which Alliance's 1996 earnings per share and cash flow budgets and individual objectives applicable to each executive were achieved. These amounts were generally more than the target amounts because Alliance significantly exceeded its earnings per share, cash flow and operating budgets. A predetermined percentage of the possible compensation award above the minimum amount is determined with respect to each of the criteria mentioned above for the respective officers. NEW OPTION PLAN After the consummation of the Recapitalization, the Company will adopt an employee option plan pursuant to which options with respect to a total of 527,272 shares of Alliance common stock will be available for grant, and Mr. Zehner and Mr. Pino will be granted options to purchase 175,000 and 154,545 shares of Alliance common stock, respectively. Fifty percent of the option shares will vest in equal increments over four years. Fifty percent of the option shares will vest after seven and one half years (subject to acceleration if certain per share equity targets are achieved). Vesting of the options occurs only during an employee's term of employment. The exercise price for the options is $11.00 per share and the options will expire ten years from the date of grant. 51 ALLIANCE OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth grants of stock options during 1996 to Alliance's Named Executive Officers pursuant to Alliance's 1991 Stock Option Plan. No stock appreciation rights have ever been granted to Alliance's Named Executive Officers.
POTENTIAL REALIZABLE VALUE AT PERCENTAGE OF ASSUMED ANNUAL RATE OF STOCK NUMBER OF OPTIONS/SARS EXERCISE OR PRICE APPRECIATION FOR SHARES GRANTED TO BASE RICE OPTION TERM(3) UNDERLYING EMPLOYEES IN PER SHARE EXPIRATION ------------------------------ NAME OPTIONS/SARS(1) FISCAL YEAR ($/SH)(2) DATE 0% 5% 10% ---- --------------- ------------- ----------- ---------- ------------------ ----------- Richard N. Zehner....... 155,000 31.7% $3.5625 3/1/06 $ 0 $ 347,268 $ 880,045 Vincent S. Pino......... 125,025 25.6% 3.5625 3/1/06 0 280,111 709,855 Terrence M. White....... 90,025 18.4% 3.5625 3/1/06 0 201,695 511,136
- -------- (1) All options granted in 1996 vest on March 1, 2003; however, vesting of the 1996 option shares will be accelerated based on achievement of the following per share stock prices for 15 consecutive trading days, as reported by Nasdaq: $4.75--25%; $5.50--50%; $6.25--75%; $7.00--100%; subject to a maximum vesting of one-third per year from February 29, 1996 regardless of stock price (no limits after year three). As of March 15, 1997, Alliance's stock price had achieved the first three accelerated vesting hurdles, and the 1996 options were two-thirds vested at such date. (2) All options were granted at market value (based on the closing price as reported on the Nasdaq SmallCap Market on the business day prior to the grant date) at the date of grant. (3) Valuations based upon the assumed rates of stock price appreciation are based upon appreciation over a ten-year period from the $3.5625 exercise price of the options. The 5% and 10% assumed annual rates of appreciation would result in the price of the Alliance's common stock increasing to $5.80 and $9.24 per share, respectively. ALLIANCE AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE The following table presents information with respect to options exercised by each of Alliance's Named Executive Officers in 1996, as well as the unexercised options to purchase the Alliance common stock granted under Alliance's 1991 Stock Option Plan to Alliance's Named Executive Officers and held by them as of December 31, 1996. The value of unexercised in-the-money options as of the end of the fiscal year is based on the last reported sales price of the Alliance common stock on the Nasdaq SmallCap Market on December 31, 1996 of $5.75 per share.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS/SARS IN-THE MONEY OPTIONS/ ACQUIRED AT YEAR-END SARS AT FISCAL YEAR-END NAME AND PRINCIPAL ON VALUE --------------------------- ------------------------- POSITION EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------ -------- -------- ----------- -------------- ----------- ------------- Richard N. Zehner....... -- -- 243,750 116,250 $1,401,563 $668,438 Vincent S. Pino......... -- -- 31,256 93,769 179,722 539,172 Terrence M. White....... 45,000 $230,625 22,506 67,519 129,375 388,234
ALLIANCE LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR In addition to the annual plan described above under "--Alliance Executive Compensation Plan," Alliance instituted a long-term executive incentive plan ("LTIP") in 1995 to provide future awards in cash or equivalent amounts of Alliance common stock to key executives. The objective of the plan is to advance the long-term interests of Alliance and its stockholders by providing substantial incentives to meet or exceed certain cash flow goals necessary to ensure that Alliance would be able to service its long-term obligations on a continuing basis, and that it would be able to pay certain preferred stock dividends in cash, thereby avoiding the substantial dilution to existing common stockholders if such dividends were paid in common stock equivalents. As of January 2, 1997, Alliance had retired all of its Series A 6% Redeemable Preferred Stock (the "Series A Preferred Stock"), thereby fully satisfying the second objective of the LTIP. 52 The following awards under the plan were earned by Alliance's Named Executive Officers in 1996:
ESTIMATED FUTURE PAY-OUTS UNDER NON-STOCK PRICE-BASED NUMBER SHARES, PERFORMANCE OR PLAN(1) UNITS OR OTHER PERIOD UNTIL --------------------------- NAME OTHER RIGHTS MATURATION OR PAY-OUT THRESHOLD TARGET MAXIMUM - ---- -------------- -------------------------------- --------- -------- -------- Richard N. Zehner....... $356,250 Four-Year Period Ending 12/31/98 $ 0 $356,250 $356,250 Vincent S. Pino......... 285,000 Four-Year Period Ending 12/31/98 0 285,000 285,000 Terrence M. White....... 213,750 Four-Year Period Ending 12/31/98 0 213,750 213,750
- -------- (1) Under the LTIP, amounts may be accrued with respect to each of the fiscal years from 1995 to 1998 based upon two factors: (a) the extent to which Alliance's actual earnings before depreciation, amortization, interest, taxes and equipment charges (as more precisely defined in the LTIP, "EBDIT") exceeds targeted EBDIT for such year and (b) the extent to which Alliance pays dividends on its Series A Preferred Stock in cash for such year (thereby avoiding the potential dilution to holders of common stock from the payment of dividends in common stock equivalents). As noted above, Alliance retired all of the Series A Preferred Stock as of January 2, 1997, thereby satisfying the Series A Preferred Stock dividend criteria of the LTIP. Therefore, the cumulative amount of the dividend component of the award was deemed earned and was accrued in fiscal 1996. Amounts accrued under the LTIP are allocated to specified senior officers. Amounts in the table reflect the potential pool amounts accrued in 1996 allocable to each of Alliance's Named Executive Officers based upon the two criteria summarized above as applied to fiscal 1996. Pursuant to the terms of the LTIP, at the effective time of the Recapitalization, Messrs. Zehner, Pino and White will be paid $543,750, $435,000 and $326,250, respectively (before federal and state income taxes) earned by them pursuant to the LTIP through the date of the Recapitalization. 53 SMT OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the stock options and warrants granted to each of SMT's Named Executive Officers for services rendered in 1996:
INDIVIDUAL GRANTS(1) ------------------------------------------ % OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO EXERCISE UNDERLYING EMPLOYEES OR BASE OPTIONS IN FISCAL PRICE EXPIRATION NAME GRANTED(#) YEAR ($/SHARE) DATE - ---- ---------- ---------- --------- ---------- Jeff D. Bergman...................... 7,000 18% $ 4.50 4/11/06 7,500 3% 6.875 10/1/06 Daniel Dickman....................... 7,000 18% 4.50 4/11/06 7,500 3% 6.875 10/1/06
- -------- (1) Not adjusted for the January 1997 7% stock dividend by SMT. All such options were exercisable in full on the date of grant. SMT OPTION EXERCISES AND HOLDINGS The following table sets forth information with respect to each of SMT's Named Executive Officers concerning the exercise of options during 1996 and unexercised options held as of December 31, 1996: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS OPTIONS ACQUIRED ON VALUE AT FISCAL AT FISCAL NAME EXERCISE(1) REALIZED YEAR END(1) YEAR END - ---- ----------- ---------- ---------------- ---------------- (# EXERCISABLE/ ($ EXERCISABLE/ (#) ($) # UNEXERCISABLE) $ UNEXERCISABLE) Jeff D. Bergman....... 136,500 $ 996,000 186,000/-- 391,000/-- Daniel Dickman........ 136,500 1,021,000 186,000/-- 391,000/--
- -------- (1)Not adjusted for the January 1997 7% stock dividend by SMT. Three Rivers Rollover and Options. In connection with the acquisition of SMT by Three Rivers, Three Rivers has agreed to roll over options to acquire shares of common stock of SMT held by officers and employees of SMT into options to acquire shares of Three Rivers common stock at the same price as that paid by Apollo for shares of Three Rivers common stock. The aggregate value of the SMT common stock to be rolled over is $1.4 million. In addition, Three Rivers has agreed that within 15 days after the effectiveness of the merger of Three Rivers Acquisition into SMT, Three Rivers will adopt an option plan (the "Three Rivers Option Plan"), pursuant to which Three Rivers will grant to certain officers and employees of SMT options to purchase in the aggregate up to 10% of the outstanding shares of Three Rivers common stock (without giving effect to any options) at any time within ten years following the effectiveness of the merger of Three Rivers Acquisition into SMT. Subject to certain exceptions, one half of such options will vest over four years based solely on continued employment with SMT and the other half of such options will vest after seven and one-half years (subject to acceleration if certain per share equity targets are achieved) based on continued employment with the Company. Three Rivers has agreed to grant to Messrs. Bergman and Dickman, pursuant to the Three Rivers Option Plan, options representing the right to acquire approximately 4.6% of the outstanding shares of Three Rivers common stock. The exercise price for each share issuable upon exercise of options issued pursuant to the Three Rivers Option Plan will be $100, the per share equity value of Three Rivers. It is expected that following the consummation of the Transactions, all options to acquire shares of Three Rivers common stock will be converted into options to purchase, in the aggregate, 522,274 shares of Alliance common stock. 54 EMPLOYMENT AND RELATED AGREEMENTS Payments Under Existing Employment Agreements. Each of Messrs. Zehner, Pino and White has an employment agreement with Alliance. The Recapitalization will constitute a "change of control" for the purposes of such employment agreements. The existing employment agreements for Messrs. Zehner, Pino and White were amended on May 15, 1997 to provide that upon the occurrence of a change in control, such executives are entitled to receive (i) a cash amount equal to 2.5 times (two times in the case of Mr. White) the sum of the executive's salary at the time of the change of control and the executive's target bonus for the year in which the change of control occurs, and (ii) continuation of benefits (including car allowance, health insurance and 401(k) plan benefits) for a period of 30 months (24 months in the case of Mr. White) following the change of control. Prior to the May 15, 1997 amendments, such payments would have been made, and such benefits would have been provided, only if (i) Alliance were to take actions which constitute constructive discharge (as defined in such agreements) or to terminate such executive without just cause (as defined in such agreements) within one year before or one year after the change of control, or (ii) the executive were to quit for any reason within one year following a change of control. Each of the employment agreements discussed above prohibit the provision of payments and benefits to the extent such payments or benefits would cause Alliance to be unable to deduct amounts pursuant to the provisions of Section 280G of the Internal Revenue Code of 1986, which imposes a limit on certain payments made by a corporation that are contingent upon a change of control. As a result of such limits, it is estimated that the amount of payments that Alliance will make to Messrs. Zehner, Pino and White as a result of the Recapitalization pursuant to the existing employment agreements (prior to federal and state income taxes) will be reduced to approximately $850,000, $500,000 and $420,000, respectively. New Employment Agreements for Messrs. Zehner and Pino. Alliance has entered into employment agreements dated as of July 23, 1997 with Richard N. Zehner to act as Chief Executive Officer and with Vincent S. Pino to act as Chief Operating Officer (the "New Employment Agreements"). Base compensation under the New Employment Agreements is $315,000 per year for Mr. Zehner and $275,000 per year for Mr. Pino, subject in each case to increase by the Board of Directors. In addition, Mr. Zehner and Mr. Pino are entitled to receive an annual cash bonus based upon Alliance's achievement of certain operating and/or financial goals, with an annual target bonus amount equal to a specified percentage of their then current annual base salary (75% in the case of Mr. Zehner and 60% in the case of Mr. Pino). In connection with the New Employment Agreements, Mr. Zehner and Mr. Pino are entitled to receive 175,000 and 154,545 options, respectively, under the New Stock Option Plan. The term of each New Employment Agreement is initially three years. After the first year, the New Employment Agreements will have a term of two years, with automatic extensions for additional three month periods if neither party gives notice that the term will not be so extended. Alliance may terminate Mr. Zehner's or Mr. Pino's employment at any time and for any reason and Mr. Zehner and Mr. Pino may resign at any time and for any reason. Agreements Not to Compete. Mr. Zehner and Mr. Pino have also entered into an agreement not to compete with Alliance. Pursuant to such agreement, Mr. Zehner and Mr. Pino have each agreed that they will not, prior to the later of five years following the Recapitalization and two years after the date of their termination, (i) engage in any Competitive Business in the United States or (ii) compete or participate as an agent, consultant, advisor, representative, owner, investor or otherwise in any enterprise engaged in a Competitive Business in the United States. Ownership of less than 5% of a publicly-traded entity engaged in a Competitive Business would not be a violation of the covenant to compete. For these purposes, "Competitive Business" means any imaging business or other business that becomes material to Alliance during the term of Mr. Zehner's or Mr. Pino's employment. 55 In addition, prior to 24 months after the later of the date of his termination or the date of ceasing to receive payments under the agreement not to compete, Mr. Zehner and Mr. Pino, as the case may be, have each agreed not to make any contact with any customer of Alliance with respect to the provision of any service that is the same or substantially similar to any service provided to such customer by Alliance. Furthermore, prior to 12 months after the later of the date of their respective terminations of employment or the date of ceasing to receive payments under the agreements not to compete, Mr. Zehner and Mr. Pino, as the case may be, have each agreed not to solicit or make any contact with any employee of Alliance with respect to any employment, service or other business relationship. In consideration of the non-competition and non-solicitation agreements of Mr. Zehner and Mr. Pino, Alliance has agreed to make certain payments to Mr. Zehner and Mr. Pino following the termination of their employment. However, in the event of a termination with cause or a resignation without good reason (as defined in the New Employment Agreements), Alliance will be under no obligation to make such payments. SMT Employment Arrangements. In connection with the acquisition of SMT by Three Rivers, SMT and each of Messrs. Bergman and Dickman entered into new employment agreements, dated as of June 24, 1997, (the "SMT Employment Agreements") pursuant to which each of Messrs. Bergman and Dickman will continue to serve in their current positions with SMT. Each of the SMT Employment Agreements provides for a three-year term, with an additional quarter to be added at the end of the fifth quarter of the term and each quarter thereafter. Under the SMT Employment Agreements, Mr. Bergman and Mr. Dickman will each receive a base salary of $240,000 per annum. Each of the SMT Employment Agreements contains customary terms (including confidentiality and non- competition arrangements) and other benefits and provisions which are generally comparable to the benefits and provisions provided to such persons in their prior employment agreements with SMT. In addition, pursuant to the SMT Employment Agreements, SMT has agreed to make available a fixed annual bonus pool equal to 15% of SMT's pre-tax income (excluding the effect of such bonus pool and adjusted for any non-recurring gains or losses) for the 12 months ended June 30, 1997, but in no event greater than $1,240,000. Payments of such bonuses are conditioned on SMT achieving reasonable performance objectives established by SMT's compensation committee. Each of Mr. Bergman and Dickman will be eligible to receive up to one quarter of the annual bonus pool. The SMT Employment Agreements provide that if the employee is terminated other than for "cause" or if such employee terminates for "good reason," the employee will be entitled to a continuation of full salary and bonus compensation and benefits for a period equal to the remainder of the term. If the employee is terminated for "cause" or if the employee terminates "without good reason," the employee will only be entitled to accrued salary and other accrued benefits prior to the date of termination. Each of the SMT Employment Agreements provide that the employee must refrain from competing with SMT, interfering with its customer relationships or recruiting its employees is extended until the second anniversary of the date when the severance benefits end. Under the SMT Employment Agreements, each of Mr. Bergman and Mr. Dickman has the right to terminate his employment, as does SMT, upon at least 90 days' notice, effective as of the first anniversary of the closing of the acquisition of SMT by Three Rivers with such person agreeing to provide consulting services to SMT for a period of two years following such termination and to continue to receive payment of his base salary during such two-year period. The consulting arrangement would require Mr. Bergman or Mr. Dickman, as the case may be, to be available no more than one day per week, via telephone, at the request of management while taking into account such person's prior commitments and scheduling constraints. 56 PRINCIPAL STOCKHOLDERS Immediately after the Transactions, Apollo will own approximately 84.0% of the outstanding shares of common stock of the Company (the "Company Common Stock") (approximately 70.0% on a fully diluted basis) and the BT Investor will own approximately 5.9% of the outstanding shares of Company Common Stock (approximately 5.0% on a fully diluted basis). In addition, immediately following consummation of the Transactions, through a combination of (i) the rollover of existing options to purchase shares of Company Common Stock into new options to purchase shares of Company Common Stock and (ii) the issuance of options pursuant to the Company's New Option Plan, management of Alliance and SMT together will own in excess of 16% of the shares of Company Common Stock on a fully diluted basis. 57 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS At the effective time of the Recapitalization, Alliance will pay to Apollo Management L.P. a fee of $2.5 million in connection with arranging the transactions contemplated by the Recapitalization (including the financings thereof). Thereafter, the Company will pay Apollo Management, L.P. an annual management fee of $500,000 and will continue to receive financial advisory services from Apollo Management L.P. on an ongoing basis, with compensation to be determined. At the effective time of the acquisition of SMT by Apollo, SMT paid a transaction fee of $1.0 million to Apollo Management L.P. as consideration for structuring such acquisition. Pursuant to an engagement letter, Alliance will pay Salomon Brothers Inc ("Salomon") the following fees: (A) $100,000, which was earned upon Alliance's execution of the Recapitalization Merger Agreement; plus (b) an additional fee of $400,000, which was earned upon the initial submission of Salomon's fairness opinion to the Board of Directors on July 22, 1997; plus (c) an additional fee of $2.4 million, which is contingent upon the consummation of the Recapitalization and payable at the closing thereof. In addition, Salomon will be a lender under the Credit Agreement. Smith Barney Inc. acted as an advisor to SMT with respect to Apollo's purchase of SMT, for which SMT paid to Smith Barney Inc. a fee of approximately $1.2 million. Smith Barney Inc. also acted as an advisor to an affiliate of Apollo with respect to the Recapitalization of Alliance, for which Smith Barney will receive a fee of $1.75 million. The BT Investor, an affiliate of BT Alex. Brown Incorporated, will invest approximately $4.8 million in the Company concurrently with the consummation of the Transactions. Bankers Trust Company, also an affiliate of BT Alex. Brown Incorporated, will be an agent and lender under the Credit Agreement and is an agent and lender under SMT's credit agreement. For a description of certain management arrangements in connection with the Transactions, see "Management--Employment and Related Agreements." 58 DESCRIPTION OF THE CREDIT AGREEMENT CREDIT AGREEMENT General. Pursuant to a commitment letter dated as of July 22, 1997 from Bankers Trust Company (the "Agent") to Apollo (the "Commitment Letter") and subject to the negotiation, execution and delivery of definitive documentation, the Agent has committed to lend to the Company (the "Loans"), $50 million in the form of the Term Loan Facility and up to $150 million in the form of the Revolving Loan Facility for an aggregate principal amount of up to $200 million (the "Commitment"). Pursuant to the Commitment Letter, the Agent reserves the right to syndicate all or a portion of the Commitment to one or more financial institutions (including the Agent, each, a "Lender"), such institutions being subject to the Company's approval. Upon the acceptance of the commitment of any Lender to provide a portion of the Commitment, the Agent will be released from that portion of the Commitment. In addition, the Agent agrees to serve as administrative and syndication agent in connection with the Loans, as well as fronting bank in connection with the letters of credit issued under the Revolving Loan Facility. The following terms and descriptions of the Loans are based upon the terms set forth in the Commitment Letter and are subject to the final negotiation and execution of the Credit Agreement and related documents. As a result, the final terms of the Loans may vary from those set forth below. Use of Proceeds; Maturity. The Loans are expected to be made available to the Company to finance in part the Recapitalization, the SMT Acquisition and certain related costs and expenses, and to refinance certain existing indebtedness of Alliance and SMT. The full amount to be borrowed under the Term Loan Facility must be drawn in a single drawing on the date the Term Loan Facility is closed, which is expected to be the date on which the Transactions close (the "Closing Date"). The Revolving Loan Facility is expected to be available at the Closing Date and thereafter to finance (including through the making of revolving loans and the issuance of letters of credit) working capital requirements and general corporate purposes of the Company. The Term Loan Facility matures on the sixth anniversary of the Closing Date. The Revolving Loan Facility will mature on the fifth anniversary of the Closing Date. The Credit Agreement will require the Company to reduce the commitments under the Revolving Loan Facility to $75 million on the fourth anniversary of the Closing Date and to make annual amortization payments with respect to the Term Loan Facility of $0.5 million per year in the first five years and $47.5 million in the sixth year. Prepayments. Loans are required to be prepaid with (a) 100% of the net proceeds of all non-ordinary-course asset sales or other dispositions of the property by the Company and its subsidiaries, subject to limited exceptions, (b) 100% of the net proceeds of issuances of debt obligations and certain preferred stock by the Company and its subsidiaries, subject to limited exceptions, (c) 50% of the net proceeds from common equity and certain preferred stock issuances by the Company and its subsidiaries, subject to limited exceptions, (d) 75% of annual excess cash flow and (e) 100% of certain insurance proceeds, subject to limited exceptions. Such mandatory prepayments will be allocated as follows: first, to the Term Loan Facility and second, to the Revolving Loan Facility. Voluntary prepayments will be permitted in whole or in part, at the option of the Company, in minimum principal amounts to be agreed upon, without premium or penalty, subject to reimbursement of the Lender's re-deployment costs in the case of prepayment of Reserve Adjusted Eurodollar Loans (as defined in the Commitment Letter) other than on the last day of the relevant interest period. Interest and Fees. The interest rates under the Loans will be as follows: (a) Term Loan Facility: At the option of the Company, (i) 1.50% in excess of the higher of (A) 1/2 of 1% in excess of the Federal Reserve reported certificate of deposit rate and (B) the rate that the Agent announces from time to time as its prime lending rate, as in effect from time to time, and (ii) 2.50% in excess of the Reserve Adjusted Eurodollar Rate, in each case, subject to decreases based upon the Company's leverage ratio. (b) Revolving Loan Facility: At the option of the Company, (i) 1.25% in excess of the higher of (A) 1/2 of 1% in excess of the Federal Reserve reported certificate of deposit rate and (B) the rate that the Agent announces from time to time as its prime lending rate, as in effect from time to time, and (ii) 2.25% in excess of the Reserve Adjusted Eurodollar Rate, in each case, subject to decreases based upon the Company's leverage ratio. 59 The Company may elect interest periods of 1, 2, 3 or 6 months for Reserve Adjusted Eurodollar Loans. With respect to Reserve Adjusted Eurodollar Loans, interest will be payable at the end of each interest period and, in any event, at least every 3 months. With respect to Base Rate Loans (as defined in the Commitment Letter), interest will be payable quarterly on the last business day of each fiscal quarter. In each case, calculation of interest will be on the basis of actual number of days elapsed in a year of 360 days. The Commitment Letter provides for payment by the Company in respect of outstanding letters of credit of (i) a per annum fee equal to the spread over the Reserve Adjusted Eurodollar Rate for the Revolving Loan Facility from time to time in effect, (ii) a fronting fee equal to 1/4 of 1% on the aggregate outstanding stated amounts of such letters of credit, plus (iii) customary administrative charges. The Company will also pay a commitment fee equal to 1/2 of 1% per annum on the undrawn portion of the available Commitment, subject to decreases based on the Company's leverage ratio. Collateral and Guarantees. The Loans will be guaranteed by all of the Company's existing and future direct and indirect wholly owned domestic subsidiaries. The Loans will be secured by a first priority lien in substantially all of the properties and assets of the Company and its direct and indirect wholly owned domestic subsidiaries, now owned or acquired later, including a pledge of all capital stock and notes owned by the Company and its subsidiaries; provided that, in certain cases, no more than 65% of the stock of foreign subsidiaries of the Company shall be required to be pledged. Representations and Warranties and Covenants. The Commitment Letter provides that the Credit Agreement documentation will contain certain customary representations and warranties by the Company. In addition, the Credit Agreement is expected to contain customary covenants restricting the ability of the Company to, among others (i) declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) incur additional indebtedness; (vi) amend or otherwise alter debt and other material agreements; (vii) make capital expenditures; (viii) engage in mergers, acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the business it conducts. It is also expected that the Company will be required to indemnify the Agent and comply with specified financial covenants and make certain customary affirmative covenants. Events of Default. Events of default under the Credit Agreement are expected to include (i) the Company's failure to pay principal or interest when due; (ii) the Company's material breach of any representation or warranty contained in the loan documents; (iii) covenant defaults; (iv) events of bankruptcy; and (v) a change of control of the Company. 60 DESCRIPTION OF THE NOTES The Notes will be issued under an indenture (the "Indenture"), to be dated as of , 1997 by and among Alliance Imaging, Inc., the Guarantors and , as Trustee (the "Trustee"). The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture (a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part), including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. The definitions of certain capitalized terms used in the following summary are set forth below under "--Certain Definitions." For purposes of this section, references to the "Company" include only Alliance Imaging, Inc. and not its Subsidiaries. The Notes will be unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt of the Company. The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of the Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office in New York, New York. At the Company's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of Holders. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $270.0 million, of which $170.0 million will be issued in the Offering, and will mature on , 2005. Interest on the Notes will accrue at the rate of % per annum and will be payable semiannually in cash on each and commencing on , 1998, to the persons who are registered Holders at the close of business on the and immediately preceding the applicable interest payment date. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. The Notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION Optional Redemption. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after , 2001, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE ---- ---------- 2001........................................................... % 2002........................................................... % 2003........................................................... % 2004........................................................... 100.000%
Optional Redemption upon Equity Offerings. At any time, or from time to time, on or prior to , 2000, the Company may, at its option, use the net cash proceeds of one or more Equity Offerings (as defined below) to redeem up to 40% in aggregate principal amount of the Notes at a redemption price equal to % of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date 61 of redemption; provided, however, that after any such redemption the aggregate principal amount of the Notes outstanding must equal at least 60% of the aggregate amount of the Notes issued in the Offering plus any additional Notes issued after the Issue Date pursuant to the Indenture. In order to effect the foregoing redemption with the net cash proceeds of any Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Equity Offering. As used in the preceding paragraph, "Equity Offering" means a public or private offering of Qualified Capital Stock (other than public offerings with respect to the Company's Common Stock on Form S-8) of the Company for aggregate net cash proceeds to the Company of at least $25.0 million. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; provided, further, that if a partial redemption is made with the net cash proceeds of an Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to the Indenture. SUBORDINATION The payment of all Obligations on the Notes is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all Obligations on Senior Debt. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company or its property, whether voluntary or involuntary, all Obligations due or to become due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the Notes, or for the acquisition of any of the Notes for cash or property or otherwise. If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Senior Debt, no payment of any kind or character shall be made by or on behalf of the Company or any other Person on its or their behalf with respect to any Obligations on the Notes or to acquire any of the Notes for cash or property or otherwise. In addition, if any other event of default occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for the respective issue of Designated Senior Debt gives written notice of the event of default to the Trustee (a "Default Notice"), then, unless and until all events of default have been cured or waived or have ceased to exist or the Trustee receives notice from the Representative for the respective issue of Designated 62 Senior Debt terminating the Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Blockage Period"), neither the Company nor any other Person on its behalf shall (x) make any payment of any kind or character with respect to any Obligations on the Notes or (y) acquire any of the Notes for cash or property or otherwise. Notwithstanding anything herein to the contrary, in no event will a Blockage Period extend beyond 180 days from the date the payment on the Notes was due and only one such Blockage Period may be commenced within any 360 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action, or any breach of any financial covenants for a period commencing after the date of commencement of such Blockage Period that, in either case, would give rise to an event of default pursuant to any provisions under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose). By reason of such subordination, in the event of the insolvency of the Company, creditors of the Company who are not holders of Senior Debt, including the Holders of the Notes, may recover less, ratably, than holders of Senior Debt. After giving effect to the Transactions, on a pro forma basis, at June 30, 1997, the Company would have had approximately $100.2 million of Senior Debt outstanding. GUARANTEES Each Guarantor unconditionally guarantees, on a senior subordinated basis, jointly and severally, to each Holder and the Trustee, the full and prompt performance of the Company's obligations under the Indenture and the Notes, including the payment of principal of and interest on the Notes. The Guarantees will be subordinated to Guarantor Senior Debt on the same basis as the Notes are subordinated to Senior Debt. The obligations of each Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each Guarantor, determined in accordance with GAAP. Each Guarantor may consolidate with or merge into or sell its assets to the Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company without limitation, or with other Persons upon the terms and conditions set forth in the Indenture. See "Certain Covenants--Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by the Company and the sale complies with the provisions set forth in "Certain Covenants--Limitation on Asset Sales," the Guarantor's Guarantee will be released. Separate financial statements of the Guarantors are not included herein because such Guarantors are jointly and severally liable with respect to the Company's obligations pursuant to the Notes, and the aggregate net assets, earnings and equity of the Guarantors and the Company are substantially equivalent to the net assets, earnings and equity of the Company on a consolidated basis. CHANGE OF CONTROL The Indenture will provide that upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Notes pursuant to the offer described 63 below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. The Indenture will provide that, prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full and terminate all commitments under Indebtedness under the Credit Agreement and all other Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and all other such Senior Debt and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the Credit Agreement and all other Senior Debt to permit the repurchase of the Notes as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described below. The Company's failure to comply with the covenant described in the immediately preceding sentence shall constitute an Event of Default described in clause (iii) and not in clause (ii) under "Events of Default" below. Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 45 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event the Company is required to purchase outstanding Notes pursuant to a Change of Control Offer, the Company expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to a Holder's right to redemption upon a Change of Control. Restrictions in the Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Restricted Subsidiaries by the management of the Company. While such restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. 64 CERTAIN COVENANTS The Indenture will contain, among others, the following covenants: Limitation on Incurrence of Additional Indebtedness. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any of the Guarantors may incur Indebtedness (including, without limitation, Acquired Indebtedness) and Restricted Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 1.75 to 1.0 if such incurrence is on or prior to December 31, 1999 and 2.0 to 1.0 if such incurrence is thereafter. Limitation on Restricted Payments. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned subsequent to the Issue Date and on or prior to the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company; plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock; plus (z) without duplication, the sum of (1) the aggregate amount returned in cash on or with respect to Investments (other than Permitted Investments) made subsequent to the Issue Date whether through interest payments, principal payments, dividends or other distributions or payments, (2) the net cash proceeds received by the Company or any Restricted Subsidiary of the Company from the disposition of all or any portion of such Investments (other than to a Subsidiary of the Company) and (3) upon redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the fair market value of such Subsidiary; provided, however, that the sum of clauses (1), (2) and (3) above shall not exceed the aggregate amount of all such Investments made subsequent to the Issue Date. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of such dividend if the dividend would have been permitted on the date of declaration; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any shares of Capital Stock of the Company, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of 65 a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes either (i) solely in exchange for shares of Qualified Capital Stock of the Company, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of Default shall have occurred and be continuing, repurchases by the Company of Common Stock of the Company from employees of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment of such employees, in an aggregate amount not to exceed $5.0 million in any calendar year (with unused amounts in any calendar year being carried over to succeeding years subject to a maximum of $7.5 million in any calendar year); (5) the declaration and payment of dividends to holders of any class or series of Preferred Stock (other than Disqualified Capital Stock) issued after the Issue Date, provided that for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date of issuance of such Preferred Stock, after giving effect to such issuance on a pro forma basis, the Company would have had a Consolidated Fixed Charge Coverage Ratio of at least 1.75 to 1.00; (6) the payment of dividends on the Company's Common Stock, following the first public offering of the Company's Common Stock after the Issue Date, of up to 6% per annum of the net proceeds received by the Company in such public offering, other than public offerings with respect to the Company's Common Stock registered on Form S-8; (7) the repurchase, retirement or other acquisition or retirement for value of equity interests of the Company in existence on the Issue Date and from the persons holding such equity interests on the Issue Date and which are not held by Apollo or any of its Affiliates or members of management of the Company and its Subsidiaries on the Issue Date (including any equity interests issued in respect of such equity interests as a result of a stock split, recapitalization, merger, combination, consolidation or similar transaction), provided, however, that the Company shall be permitted to make Restricted Payments under this clause only if after giving effect thereto, the Company would be permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on Incurrence of Additional Indebtedness" covenant and (8) other Restricted Payments in an aggregate amount not to exceed $5.0 million. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1), (2), (4), (5), (6), (7) and (8) shall be included in such calculation. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company's latest available internal quarterly financial statements. Limitation on Asset Sales. The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; provided that the amount of (a) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes) that are assumed by the transferee of any such assets, and (b) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days after such Asset Sale (to the extent of the cash received) shall be deemed to be cash for the purposes of this provision; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility, (B) to make an Investment 66 in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date or in businesses the same, similar or reasonably related thereto ("Replacement Assets"), or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $5.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $5.0 million, shall be applied as required pursuant to this paragraph). In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Restricted Subsidiaries as an entirety to a Person in a transaction permitted under "--Merger, Consolidation and Sale of Assets," the successor corporation shall be deemed to have sold the properties and assets of the Company and its Restricted Subsidiaries not so transferred for purposes of this covenant, and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other 67 Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement; (4) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary of the Company; (5) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (7) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature discussed in clause (c) above on the property so acquired; (8) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Restricted Subsidiary of the Company pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (9) secured Indebtedness otherwise permitted to be incurred pursuant to the covenants described under "Limitation on Incurrence of Additional Indebtedness" and "Limitation on Liens" that limit the right of the debtor to dispose of the assets securing such Indebtedness; (10) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business; (11) an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clauses (1) through (10) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such Indebtedness are no less favorable to the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clauses; or (12) an agreement governing Indebtedness permitted to be incurred pursuant to the "Limitation on Incurrence on Additional Indebtedness" covenant; provided that the provisions relating to such encumbrance or restriction contained in such Indebtedness are no less favorable to the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions contained in the Credit Agreement as in effect on the Issue Date. Limitation on Liens. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Notes and the Guarantees; (D) Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens (A) are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and (B) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted Liens. Prohibition on Incurrence of Senior Subordinated Debt. The Company and the Guarantors will not incur or suffer to exist Indebtedness that is senior in right of payment to the Notes or the Guarantees, as the case may be, and subordinate in right of payment by its terms to any other Indebtedness of the Company or such Guarantor, as the case may be. Merger, Consolidation and Sale of Assets. The Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) whether as an entirety or substantially as an 68 entirety to any Person unless (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes and the Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction on a pro forma basis and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on Incurrence of Additional Indebtedness" covenant; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity, as the case may be, shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. Notwithstanding the foregoing, the merger of the Company with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction shall be permitted. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The Indenture will provide that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, in which the Company is not the continuing corporation, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and the Notes with the same effect as if such Surviving Entity had been named as such. Each Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and the Indenture in connection with any transaction complying with the provisions of "--Limitation on Asset Sales") will not, and the Company will not cause or permit any Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Guarantor unless (i) the entity formed by or surviving any such consolidation or merger (if other than the Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) such entity assumes by supplemental indenture all of the obligations of the Guarantor on the Guarantee; (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the Company could satisfy the provisions of clause (ii) of the first paragraph of this covenant. Any merger or consolidation of a Guarantor with and into the Company (with the Company being the surviving entity) or 69 another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company need only comply with clause (iv) of the first paragraph of this covenant. Limitations on Transactions with Affiliates. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $1.0 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $10.0 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in clause (a) shall not apply to (i) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors; (ii) transactions exclusively between or among the Company and any of its Wholly Owned Restricted Subsidiaries or exclusively between or among such Wholly Owned Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the Indenture; (iii) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by the Indenture; (v) transactions in which the Company or any of its Restricted Subsidiaries, as the case may be, delivers to the Trustee a letter from an Independent Financial Advisor stating that such transaction is fair to the Company or such Restricted Subsidiary from a financial point of view or meets the requirements of the first sentence of paragraph (a) above; (vi) the existence of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any of its Restricted Subsidiaries of obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after that Issue Date shall only be permitted by this clause to the extent that the terms of any such, amendment or new agreement are not otherwise disadvantageous to the holders of the Notes in any material respect; (vii) loans to employees of the Company and its Subsidiaries which are approved by the Board of Directors of the Company in good faith; (viii) the payment of all fees and expenses related to the Transactions; and (ix) transactions with customers, clients, suppliers, or purchasers or sellers of goods or services, in each case in the ordinary course of business and otherwise in compliance with the terms of the Indenture, which are fair to the Company or its Restricted Subsidiaries, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Additional Subsidiary Guarantees. If the Company or any of its Restricted Subsidiaries transfers or causes to be transferred, in one transaction or a series of related transactions, any property to any domestic Restricted 70 Subsidiary that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another domestic Restricted Subsidiary having total equity value in excess of $1.0 million, then such transferee or acquired or other Restricted Subsidiary shall (i) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver to the Trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture. Reports to Holders. The Indenture will provide that the Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA (S) 314(a). EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); (ii) the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); (iii) a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes; (iv) the failure to pay at final stated maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company, or the acceleration of the final stated maturity of any such Indebtedness if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final stated maturity or which has been accelerated, aggregates $5.0 million or more at any time; (v) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (vi) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries; or (vii) any of the Guarantees ceases to be in full force and effect or any of the Guarantees is declared to be null and void and unenforceable or any of the Guarantees is found to be invalid or any of the Guarantors denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the Indenture). 71 If an Event of Default (other than an Event of Default specified in clause (vi) above with respect to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become immediately due and payable upon the first to occur of an acceleration under the Credit Agreement or 5 business days after receipt by the Company and the Representative under the Credit Agreement of such Acceleration Notice. If an Event of Default specified in clause (vi) above with respect to the Company occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Indenture will provide that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Under the Indenture, the Company is required to provide an officers' certificate to the Trustee promptly upon any such officer obtaining knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. 72 LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, except for (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (viii) the Company shall have delivered to the Trustee an opinion of counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Senior Debt, including, without limitation, those arising under the Indenture and (B) assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day following the date of the deposit and that no Holder is an insider of the Company, after the 91st day following the date of the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (ix) certain other customary conditions precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel required by clause (ii) above need not be delivered if all Notes not theretofore delivered to the Trustee for cancellation (x) have become due and payable, (y) will become due and 73 payable on the maturity date within one year or (z) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration or transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company, the Guarantors and the Trustee, without the consent of the Holders, may amend the Indenture for certain specified purposes, including curing ambiguities, defects or inconsistencies, so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture, except that, without the consent of each Holder affected thereby, no amendment may (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default; (vi) amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control which has occurred or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto after a Change of Control has occurred or the subject Asset Sale has been consummated; (vii) modify or change any provision of the Indenture or the related definitions affecting the subordination or ranking of the Notes or any Guarantee in a manner which adversely affects the Holders; or (viii) release any Guarantor from any of its obligations under its Guarantee or the Indenture otherwise than in accordance with the terms of the Indenture. GOVERNING LAW The Indenture will provide that it, the Notes and the Guarantees will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. 74 THE TRUSTEE The Indenture will provide that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions; provided that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Restricted Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "Affiliate" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $1.0 million, (ii) the sale or exchange of equipment in connection with the purchase or other acquisition of other equipment, in each case used in the business of the Company and its Restricted Subsidiaries and (iii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under "Merger, Consolidation and Sale of Assets." "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. 75 "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "Cash Equivalents" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Ratings Services ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250.0 million; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture) other than to the Permitted Holders; (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of the Indenture); (iii) any Person or Group (other than the Permitted Holders) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; or (iv) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by the Permitted Holders or a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all 76 income taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary, unusual or nonrecurring gains or losses), (B) Consolidated Interest Expense and (C) Consolidated Non-cash Charges less any non-cash items increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the two full fiscal quarters (the "Two Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Two Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Two Quarter Period or at any time subsequent to the last day of the Two Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Two Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any pro forma expense and cost reductions and other operating improvements as determined in good faith by a responsible financial or accounting officer of the Company) attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Two Quarter Period) occurring during the Two Quarter Period or at any time subsequent to the last day of the Two Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Two Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense (excluding amortization or write-off of deferred financing costs), plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including without limitation, (a) any amortization of debt discount and amortization or write- off of deferred financing costs (including the amortization of costs relating to interest rate caps or other similar agreements), (b) the net costs under Interest Swap Obligations, (c) 77 all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP, minus interest income for such period. "Consolidated Net Income" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom (a) after-tax gains or losses from Asset Sales (without regard to the $1.0 million limitation set forth in the definition thereof) or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Restricted Subsidiary of the referent Person, (d) the net income (but not loss) of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise, (e) the net income of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Wholly Owned Restricted Subsidiary of the referent Person by such Person, (f) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued), and (g) in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent Person's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Non-cash Charges" means, with respect to any Person, for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Credit Agreement" means the Credit Agreement to be dated as of the Issue Date, between the Company, the lenders party thereto in their capacities as lenders thereunder and Bankers Trust Company, as administrative agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder (provided that such increase in borrowings is permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant above) or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Designated Senior Debt" means (i) Indebtedness under or in respect of the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which, at the time of determination, has an aggregate principal amount of at least $25.0 million and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, 78 matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof on or prior to the final maturity date of the Notes. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "Guarantor" means (i) each of SMT Acquisition Corp., Royal Medical Health Services, Inc. and Alliance Imaging of Central Georgia, Inc. and (ii) each of the Company's Restricted Subsidiaries that in the future executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of the Indenture as a Guarantor; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of the Indenture. "Guarantor Senior Debt" means with respect to any Guarantor, (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of a Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing by any Guarantor in respect of, (x) all monetary obligations of every nature of a Guarantor under, or with respect to, the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, (y) all Interest Swap Obligations (including guarantees thereof) and (z) all obligations under Currency Agreements (including guarantees thereof), in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include (i) any Indebtedness of such Guarantor to a Restricted Subsidiary of such Guarantor, (ii) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of such Guarantor or any Restricted Subsidiary of such Guarantor (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or other taxes owed or owing by such Guarantor, (vi) that portion of any Indebtedness incurred in violation of the Indenture provisions set forth under "Limitation on Incurrence of Additional Indebtedness" (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (vi) if the holder(s) of such obligation or their representative and the Trustee shall have received an officers' certificate of the Company to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of the Indenture), (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the 79 Company or any Guarantor and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Independent Financial Advisor" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary of the Company at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary of the Company and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary of the Company at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment; provided that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of 80 dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means the date of original issuance of the Notes. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements, (c) repayment of Indebtedness that is required to be repaid in connection with such Asset Sale and (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Holders" means Apollo Management, L.P. and its affiliates. "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Notes and the Guarantees issued in the Offering; (ii) Indebtedness incurred pursuant to the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $200.0 million less the amount of all repayments and permanent commitment reductions under the Credit Agreement with Net Cash Proceeds of Asset Sales applied thereto as required by the "Limitation on Asset Sales" covenant; (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon; (iv) Interest Swap Obligations covering Indebtedness of the Company or any of its Restricted Subsidiaries; provided, however, that such Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not, at the time of the incurrence thereof, exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; provided that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; 81 (vi) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Restricted Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company; provided that if as of any date any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary of the Company and is subject to no Lien; provided that (a) any Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of the Company is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Indenture and the Notes and (b) if as of any date any Person other than a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two business days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self- insurance or similar requirements in the ordinary course of business; (x) Indebtedness represented by Capitalized Lease Obligations and Purchase Money Indebtedness of the Company and its Restricted Subsidiaries incurred in the ordinary course of business not to exceed $25.0 million at any one time outstanding; provided that all or a portion of the $25.0 million permitted to be incurred under this clause (x) may, at the option of the Company, be incurred under the Credit Agreement instead of pursuant to Capitalized Lease Obligations or Purchase Money Indebtedness; (xi) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or a Subsidiary for the purpose of financing such acquisition; provided, however, that (a) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary of the Company (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (a)) and (b) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including noncash proceeds (the fair market value of such noncash proceeds being measured at the time it is received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary of the Company in the ordinary course of business; (xiii) Refinancing Indebtedness; and (xiv) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $25.0 million at any one time outstanding (which amount may, but need not, be incurred in whole or in part under the Credit Agreement). 82 "Permitted Investments" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Wholly Owned Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Wholly Owned Restricted Subsidiary of the Company, provided that such Wholly Owned Restricted Subsidiary of the Company is not restricted from making dividends or similar distributions by contract, operation of law or otherwise; (ii) Investments in the Company by any Restricted Subsidiary of the Company; provided that any Indebtedness evidencing such Investment is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Notes and the Indenture; (iii) Investments in cash and Cash Equivalents; (iv) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not to exceed $1.0 million at any one time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture; (vi) additional Investments (including joint ventures) not to exceed $20.0 million at any one time outstanding; (vii) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (viii) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the "Limitation on Asset Sales" covenant; and (ix) Investments of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time such Person merges or consolidates with the Company or any of its Restricted Subsidiaries, in either case in compliance with the Indenture; provided that such Investments were not made by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such merger or consolidation. "Permitted Liens" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or asset which is not leased property subject to such Capitalized Lease Obligation; 83 (vii) Liens securing Capitalized Lease Obligations and Purchase Money Indebtedness permitted pursuant to clause (x) of the definition of "Permitted Indebtedness"; provided, however, that in the case of Purchase Money Indebtedness (A) the Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 180 days of such acquisition or construction or, in the case of a refinancing of any Purchase Money Indebtedness, within 180 days of such refinancing; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set- off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xii) Liens in the ordinary course of business not exceeding $5.0 million at any one time outstanding that (a) are not incurred in connection with borrowing of money and (b) do not materially detract from the value of the property or materially impair its use; (xiii) Liens by reason of judgment or decree not otherwise resulting in an Event of Default; (xiv) Liens securing Indebtedness permitted to be incurred pursuant to clause (xiv) of the definition of "Permitted Indebtedness"; (xv) Liens securing Indebtedness under Currency Agreements permitted under the Indenture; and (xvi) Liens securing Acquired Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant; provided that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Purchase Money Indebtedness" means Indebtedness of the Company and its Restricted Subsidiaries incurred in the normal course of business for the purpose of financing all or any part of the purchase price, or the cost of installation, construction or improvement, of property or equipment. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. 84 "Refinance" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means any Refinancing by the Company or any Restricted Subsidiary of the Company of Indebtedness incurred or existing in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii) or (xiv) of the definition of Permitted Indebtedness), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; provided that (x) if such Indebtedness being Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "Representative" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt; provided that if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "Restricted Subsidiary" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such property. "Senior Debt" means the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing by the Company in respect of, (x) all monetary obligations of every nature of the Company under the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, (y) all Interest Swap Obligations (including guarantees thereof) and (z) all obligations under Currency Agreements (including guarantees thereof), in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not include (i) any Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of the Company or any Subsidiary of the Company (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or 85 other taxes owed or owing by the Company, (vi) that portion of any Indebtedness incurred in violation of the Indenture provisions set forth under "Limitation on Incurrence of Additional Indebtedness" (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (vi) if the holder(s) of such obligation or their representative and the Trustee shall have received an officers' certificate of the Company to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of the Indenture), (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of the Company. "Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of Regulation S-X under the Securities Act. "Subsidiary", with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that (x) the Company certifies to the Trustee that such designation complies with the "Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. 86 UNDERWRITING Subject to the terms and conditions contained in the underwriting agreement (the "Underwriting Agreement") among Alliance, the Guarantors and BT Alex. Brown Incorporated, Smith Barney Inc. and Salomon Brothers Inc (collectively, the "Underwriters"), the Underwriters have severally agreed to purchase from Alliance, and Alliance has agreed to sell to the Underwriters severally, the entire principal amount of the Notes offered hereby. The Underwriting Agreement provides that the obligation of the Underwriters to pay for and accept delivery of the Notes is subject to the approval of certain legal matters by counsel and to various other conditions. The nature of each Underwriter's obligation is such that each is committed to purchase the aggregate principal amount of Notes set forth opposite its name if any Notes are purchased.
PRINCIPAL AMOUNT UNDERWRITERS OF NOTES ------------ ---------------- BT Alex. Brown Incorporated................................. $ Smith Barney Inc............................................ Salomon Brothers Inc ....................................... ------------ Total..................................................... $170,000,000 ============
The Underwriters propose to offer the Notes directly to the public at the public offering price set forth on the cover page hereof, and to certain dealers at such price less a concession not in excess of % of the principal amount of the Notes offered hereby. After the public offering of the Notes offered hereby, the public offering price and other selling terms may be changed. Alliance does not intend to apply for listing of the Notes on a national securities exchange. Alliance has been advised by the Underwriters that they presently intend to make a market in the Notes, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Notes, and any such market making may be discontinued at any time in the sole discretion of the Underwriters. There can be no assurance that an active public market for the Notes will develop. Alliance and the Guarantors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, will be an agent and lender under the Credit Agreement and is an agent and lender under SMT's credit agreement. See "Description of the Credit Agreement." The BT Investor, also an affiliate of BT Alex. Brown Incorporated, will invest approximately $4.8 million in the Company concurrently with the consummation of the Transactions. Smith Barney Inc. has acted as financial advisor to SMT in connection with the purchase of SMT by Apollo for which it has received certain fees and has been reimbursed for certain of its expenses. Smith Barney also acted as an advisor to an affiliate of Apollo with respect to the Recapitalization of Alliance, for which Smith Barney will receive a fee of $1.75 million. Salomon Brothers Inc has acted as financial advisor to Alliance in connection with the Recapitalization for which it will receive certain fees and be reimbursed for certain of its expenses. In addition, Salomon Brothers Inc will be a lender under the Credit Agreement. See "Certain Relationships and Related Transactions." In connection with the Offering, certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Notes. Specifically, the Underwriters may bid for and purchase Notes in the open market to stabilize the price of the Notes. The Underwriters may also overallot the Offering, creating a syndicate short position, and may bid for and purchase Notes in the open market to cover the syndicate short position. In addition, the Underwriters may bid for and purchase the Notes in market making transactions and impose penalty bids. These activities may stabilize or maintain the market price of the Notes above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities, and may end these activities at any time. 87 LEGAL MATTERS The validity of the Notes offered hereby are being passed upon for the Company by O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal matters relating to the Notes are being passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. Cahill Gordon & Reindel has represented in the past and continues to represent Apollo and its affiliates with respect to various matters. EXPERTS The consolidated financial statements of Alliance at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of SMT at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 88 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- ALLIANCE IMAGING, INC. Report of Independent Auditors--Ernst & Young LLP....................... F-2 Consolidated Balance Sheets at December 31, 1995 and 1996 and at June 30, 1997 (unaudited)................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)............................................................ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)............................................................ F-5 Consolidated Statements of Preferred Stock, Common Stock, Additional Paid-In Capital and Accumulated Deficit for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997 (unaudited)............ F-7 Notes to Consolidated Financial Statements.............................. F-8 Quarterly Financial Data (unaudited).................................... F-20 SMT HEALTH SERVICES INC. Report of Independent Auditors--KPMG Peat Marwick LLP................... F-22 Consolidated Balance Sheets at December 31, 1995 and 1996 and at June 30, 1997 (unaudited)................................................... F-23 Consolidated Statements of Earnings for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)............................................................ F-24 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)............................................................ F-25 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997 (unaudited).............................................. F-27 Notes to Consolidated Financial Statements.............................. F-28 Quarterly Financial Data (unaudited).................................... F-45
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Alliance Imaging, Inc. We have audited the accompanying consolidated balance sheets of Alliance Imaging, Inc. as of December 31, 1995 and 1996 and the related consolidated statements of operations, cash flows and preferred stock, common stock, additional paid-in capital and accumulated deficit for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of Alliance's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alliance Imaging, Inc. at December 31, 1995 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young llp Orange County, California February 21, 1997, except for Note 4, as to which the date is March 26, 1997, and Note 9, as to which the date is July 23, 1997 F-2 ALLIANCE IMAGING, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, -------------------------- ------------ 1995 1996 1997 ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and short-term investments.... $ 11,128,000 $ 10,867,000 $ 13,817,000 Accounts receivable, net of allow- ance for doubtful account of $367,000 in 1995 and $513,000 in 1996 (Note 4)..................... 5,583,000 8,889,000 9,207,000 Prepaid expenses................... 369,000 710,000 1,014,000 Other receivables.................. 109,000 345,000 39,000 ------------ ------------ ------------ Total current assets............. 17,189,000 20,811,000 24,077,000 Equipment, at cost (Note 4).......... 112,014,000 121,354,000 138,729,000 Less accumulated depreciation........ (52,368,000) (43,735,000) (48,953,000) ------------ ------------ ------------ 59,646,000 77,619,000 89,776,000 Goodwill, net of accumulated amorti- zation of $5,690,000 in 1995 and $7,568,000 in 1996.................. 23,971,000 27,990,000 27,256,000 Deposits and other assets............ 2,521,000 2,090,000 2,161,000 ------------ ------------ ------------ Total assets..................... $103,327,000 $128,510,000 $143,270,000 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................... $ 692,000 $ 1,765,000 $ 2,773,000 Accrued compensation and related expenses.......................... 2,310,000 3,465,000 2,855,000 Other accrued liabilities.......... 5,025,000 6,341,000 8,688,000 Current portion of long-term debt (Note 4).......................... 9,948,000 16,323,000 19,618,000 ------------ ------------ ------------ Total current liabilities........ 17,975,000 27,894,000 33,934,000 Long-term debt, net of current por- tion (Note 4)....................... 65,932,000 72,702,000 60,930,000 Other liabilities.................... 596,000 2,029,000 2,207,000 Deferred income taxes (Note 3)....... 790,000 4,831,000 4,831,000 ------------ ------------ ------------ Total liabilities................ 85,293,000 107,456,000 101,902,000 Commitments (Note 6) Redeemable preferred stock, Series A, $.01 par value; 155,000 shares authorized; shares issued and outstanding (at liquidation and redemption value)--155,000 in 1995 and 44,286 in 1996.................. 16,430,000 4,694,000 -- Convertible preferred stock, $.01 par value; 22,000 shares authorized; 3,876 shares issued and outstanding in 1996 (Note 5).................... -- 388,000 18,388,000 Common stock, $.01 par value; 25,000,000 shares authorized; shares issued and outstanding--10,836,171 in 1995 and 10,913,388 in 1996 (Note 5).................................. 108,000 109,000 109,000 Additional paid-in capital........... 31,908,000 34,404,000 36,171,000 Accumulated deficit.................. (30,412,000) (18,541,000) (13,300,000) ------------ ------------ ------------ Total liabilities and stockholders' equity............. $103,327,000 $128,510,000 $143,270,000 ============ ============ ============
See accompanying notes. F-3 ALLIANCE IMAGING, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ------------ ----------- ----------- ------------ ------------ (UNAUDITED) Revenues................ $ 57,875,000 $58,065,000 $68,482,000 $ 31,302,000 $ 39,911,000 Costs and expenses: Operating expenses, excluding depreciation......... 31,093,000 28,342,000 32,344,000 15,019,000 17,815,000 Depreciation expense.. 13,424,000 12,202,000 12,737,000 6,048,000 7,144,000 Selling, general and administrative expenses............. 6,284,000 6,294,000 8,130,000 3,160,000 3,990,000 Amortization expense, primarily goodwill... 943,000 1,345,000 1,952,000 745,000 1,165,000 Interest expense, net of interest income of $253,000 in 1994, $437,000 in 1995 and $502,000 in 1996..... 10,758,000 5,053,000 5,758,000 2,683,000 3,557,000 Asset impairment and other special charges.............. 13,339,000 -- -- -- -- ------------ ----------- ----------- ------------ ------------ Total costs and expenses........... 75,841,000 53,236,000 60,921,000 27,655,000 33,671,000 Income (loss) before income taxes and extraordinary gains.... (17,966,000) 4,829,000 7,561,000 3,647,000 6,240,000 Provision for income taxes (Note 3)......... 1,100,000 727,000 1,060,000 545,000 2,125,000 ------------ ----------- ----------- ------------ ------------ Income (loss) before extraordinary gains.... (19,066,000) 4,102,000 6,501,000 3,102,000 4,115,000 Extraordinary gains, net of taxes............... -- -- 6,300,000 -- 1,332,000 ------------ ----------- ----------- ------------ ------------ Net income (loss)....... (19,066,000) 4,102,000 12,801,000 3,102,000 5,447,000 Less: Preferred stock dividends.............. -- 930,000 943,000 468,000 -- Add: Excess of carrying amount of preferred stock repurchased over consideration paid..... -- -- 1,764,000 -- 1,906,000 ------------ ----------- ----------- ------------ ------------ Income (loss) applicable to common stock........ $(19,066,000) $ 3,172,000 $13,622,000 $ 2,634,000 $ 7,353,000 ============ =========== =========== ============ ============ Weighted average common and common equivalent shares outstanding..... 7,124,000 11,158,000 11,494,000 11,416,000 13,456,000 ============ =========== =========== ============ ============ Earnings per share: Income before items below................ $ (2.68) $ 0.28 $ 0.48 $ 0.23 $ 0.31 Excess of carrying amount of preferred stock repurchased over consideration paid................. -- -- 0.15 -- 0.14 ------------ ----------- ----------- ------------ ------------ Income (loss) before extraordinary gains.. (2.68) 0.28 0.63 0.23 0.45 Extraordinary gains, net of taxes......... -- -- 0.55 -- 0.10 ------------ ----------- ----------- ------------ ------------ Income (loss) applicable to common stock........ $ (2.68) $ 0.28 $ 1.18 $ 0.23 $ 0.55 ============ =========== =========== ============ ============
See accompanying notes. F-4 ALLIANCE IMAGING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)....... $(19,066,000) $ 4,102,000 $12,801,000 $ 3,102,000 $ 5,447,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gains.... -- -- (6,300,000) -- (1,332,000) Depreciation and amor- tization.............. 14,367,000 13,547,000 14,689,000 6,793,000 8,309,000 Amortization of de- ferred financing charges............... 406,000 85,000 411,000 207,000 28,000 Distributions in excess of (undistributed) in- come of investee...... 69,000 (262,000) (91,000) 2,000 91,000 Special charges........ 13,339,000 -- -- -- -- Increase (decrease) in deferred income taxes. 665,000 (173,000) 1,041,000 -- -- Gain on disposal of equipment............. -- (335,000) -- -- -- Gain on sale of invest- ment.................. -- -- (750,000) -- -- Changes in operating as- sets and liabilities: Accounts receivable, net................... (527,000) 1,261,000 (2,474,000) (1,216,000) (240,000) Prepaid expenses....... 167,000 (78,000) (306,000) (348,000) (304,000) Other receivables...... 151,000 (18,000) (49,000) (55,000) 306,000 Other assets........... (71,000) (96,000) (72,000) (7,000) (451,000) Accounts payable, ac- crued compensation and other accrued liabili- ties.................. 3,344,000 (520,000) 2,115,000 2,107,000 1,661,000 Other liabilities...... (60,000) 530,000 716,000 281,000 178,000 ------------ ----------- ----------- ----------- ----------- Net cash provided by op- erating activities..... 12,784,000 18,043,000 21,731,000 10,866,000 13,693,000 INVESTING ACTIVITIES Equipment purchases..... (20,093,000) (10,243,000) (26,510,000) (14,360,000) (19,036,000) Decrease in deposits on equipment.............. 232,000 448,000 264,000 2,212,000 247,000 Purchase of contracts and related assets of Mobile M.R. Venture, Ltd.................... -- -- (455,000) (455,000) -- Purchase of common stock of Royal Medical Health Services, Inc. and re- lated assets, net of cash acquired.......... -- -- (1,844,000) (1,844,000) -- Purchase of common stock of Sun MRI Services, Inc., net of cash acquired... -- -- (269,000) -- -- Purchase of contracts and related assets of West Coast Mobile Imaging......... -- -- (90,000) -- -- Purchase of contracts and related assets of Advanced Healthcare Di- agnostic Service, Inc.. -- (412,000) -- -- -- Purchase of MRI con- tracts and related as- sets of Pacific Medical Imaging, Inc... -- -- -- -- (756,000) Proceeds from sale of investment............. -- -- 968,000 -- -- Proceeds from sale of equipment.............. -- 2,418,000 -- -- -- ------------ ----------- ----------- ----------- ----------- Net cash used in invest- ing activities......... (19,861,000) (7,789,000) (27,936,000) (14,447,000) (19,545,000)
(continued) F-5 ALLIANCE IMAGING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ------------ ------------ ------------ ----------- ----------- FINANCING ACTIVITIES Payment of preferred stock dividends........ $ -- $ -- $ (1,594,000) $ (930,000) $ (471,000) Purchase of senior sub- ordinated debentures... -- -- (5,714,000) -- (2,286,000) Partial prepayment of senior notes........... -- -- (3,537,000) -- -- Repurchase of Series A preferred stock........ -- -- (6,307,000) -- (2,523,000) Principal payments on long-term debt......... (11,141,000) (12,763,000) (13,630,000) (5,608,000) (9,190,000) Proceeds from long-term debt................... 12,276,000 11,116,000 23,889,000 10,227,000 18,123,000 Proceeds from senior bridge loan............ -- -- 12,872,000 -- 5,128,000 Increase in deferred fi- nancing charges........ -- (54,000) (76,000) (76,000) -- Proceeds from exercise of employee stock op- tions.................. -- 97,000 41,000 20,000 21,000 ------------ ------------ ------------ ----------- ----------- Net cash provided by fi- nancing activities..... 1,135,000 (1,604,000) 5,944,000 3,633,000 8,802,000 ------------ ------------ ------------ ----------- ----------- Net increase (decrease) in cash and short-term investments............ (5,942,000) 8,650,000 (261,000) 52,000 2,950,000 Cash and short-term in- vestments at beginning of year................ 8,420,000 2,478,000 11,128,000 11,128,000 10,867,000 ------------ ------------ ------------ ----------- ----------- Cash and short-term in- vestments at end of year................... $ 2,478,000 $ 11,128,000 $ 10,867,000 $11,180,000 $13,817,000 ============ ============ ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA- TION Cash paid during year for: Interest................ $ 8,690,000 $ 5,483,000 $ 5,562,000 $ 2,724,000 $ 3,727,000 Income Taxes............ 104,000 629,000 378,000 202,000 283,000 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Net book value of assets exchanged.............. 2,291,000 1,104,000 3,521,000 1,871,000 1,295,000 Issuance of common and Series A preferred stock in connection with debt restructur- ing.................... 18,125,000 -- -- -- -- Preferred Stock dividend accrued................ -- 930,000 266,000 468,000 -- Excess of carrying amount of preferred stock repurchased over consideration paid..... -- -- 1,764,000 -- 1,906,000 Conversion of senior bridge loan into Series D 4% convertible pre- ferred stock........... -- -- -- -- 18,000,000
During the 1996 second quarter, Alliance purchased all of the common stock of Royal Medical Health Services, Inc. and related assets for cash consideration of approximately $1,914,000. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired.............................. $ 8,601,000 Cash paid for common stock................................. (1,914,000) ----------- Liabilities assumed...................................... $ 6,687,000 ===========
As additional consideration for the above purchase, Alliance issued convertible stock in the amount of $388,000 and common stock warrants valued at $212,000. As a result of this transaction, Alliance recorded goodwill of approximately $3,945,000. During the 1996 third quarter, Alliance purchased all of the common stock of Sun MRI Services, Inc. for cash consideration of approximately $391,000. In connection with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired............................... $1,602,000 Cash paid for common stock.................................. (391,000) ---------- Liabilities assumed....................................... $1,211,000 ==========
See accompanying notes. F-6 ALLIANCE IMAGING, INC. CONSOLIDATED STATEMENTS OF PREFERRED STOCK, COMMON STOCK, ADDITIONAL PAID-IN-CAPITAL AND ACCUMULATED DEFICIT
SERIES C SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- ------------------ ------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT -------- ------------ ------ ----------- ---------- -------- ----------- ------------ Balance at December 31, 1993................... -- $ -- -- $ -- 7,114,371 $ 71,000 $29,356,000 $(14,518,000) Issuance of common and Series A preferred stock in connection with debt restructuring (Note 5)............... 155,000 15,500,000 -- -- 3,500,000 35,000 2,457,000 -- Net loss for year ended December 31, 1994...... -- -- -- -- -- -- -- (19,066,000) -------- ------------ ------ ----------- ---------- -------- ----------- ------------ Balance at December 31, 1994................... 155,000 15,500,000 -- -- 10,614,371 106,000 31,813,000 (33,584,000) Exercise of common stock options................ -- -- -- -- 221,800 2,000 95,000 -- Preferred stock divi- dends.................. -- 930,000 -- -- -- -- -- (930,000) Net income for year ended December 31, 1995................... -- -- -- -- -- -- -- 4,102,000 -------- ------------ ------ ----------- ---------- -------- ----------- ------------ Balance at December 31, 1995................... 155,000 16,430,000 -- -- 10,836,171 108,000 31,908,000 (30,412,000) Payment of 1995 pre- ferred stock dividends. -- (930,000) -- -- -- -- -- -- Exercise of common stock options................ -- -- -- -- 77,217 1,000 39,000 -- Issuance of common stock warrants in connection with senior and subor- dinated debt amendment. -- -- -- -- -- -- 259,000 -- Issuance of common stock warrants in connection with transfer and amendment of senior notes.................. -- -- -- -- -- -- 222,000 -- Issuance of Series C preferred stock in connection with acquisition of Royal Medical Health Services, Inc.......... -- -- 3,876 388,000 -- -- -- -- Issuance of common stock warrants in connection with acquisition of Royal Medical Health Services, Inc.......... -- -- -- -- -- -- 212,000 -- Preferred stock divi- dends.................. -- 930,000 -- -- -- -- -- (930,000) Payment of 1996 pre- ferred stock dividends. -- (664,000) -- -- -- -- -- -- Repurchase of Series A preferred stock........ (110,714) (11,072,000) -- -- -- -- 1,764,000 -- Net income for year ended December 31, 1996................... -- -- -- -- -- -- -- 12,801,000 -------- ------------ ------ ----------- ---------- -------- ----------- ------------ Balance at December 31, 1996................... 44,286 4,694,000 3,876 388,000 10,913,388 109,000 34,404,000 (18,541,000) Exercise of common stock options (unaudited).... -- -- -- -- 27,750 -- 21,000 -- Repurchase of Series A redeemable preferred stock (unaudited)...... (44,286) (4,694,000) -- -- -- -- 1,906,000 -- Transaction costs asso- ciated with conversion of senior bridge loan into Series D preferred stock (unaudited)...... -- -- -- -- -- -- (160,000) -- Conversion of senior bridge loan into Series D preferred stock (un- audited)............... -- -- 18,000 18,000,000 -- -- -- -- Series C preferred stock dividend (unaudited)... -- -- -- -- -- -- -- (14,000) Series D preferred stock dividend (unaudited)... -- -- -- -- -- -- -- (192,000) Net income for the six months ended June 30, 1997 (unaudited)....... -- -- -- -- -- -- -- 5,447,000 -------- ------------ ------ ----------- ---------- -------- ----------- ------------ Balance at June 30, 1997 (unaudited)............ -- $ -- 21,876 $18,388,000 10,941,138 $109,000 $36,171,000 $(13,300,000) ======== ============ ====== =========== ========== ======== =========== ============
See accompanying notes. F-7 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 1. DESCRIPTION OF ALLIANCE AND BASIS OF FINANCIAL STATEMENT PRESENTATION DESCRIPTION OF ALLIANCE--Alliance Imaging, Inc. (Alliance) provides outsourced radiology services and high technology diagnostic imaging systems and related technical support services, as well as management and information services, to hospitals and other healthcare providers. Diagnostic imaging services are provided on both a mobile, shared-user basis as well as on a full-time basis to single customers. Alliance operates entirely within the United States and is one of the largest providers of magnetic resonance imaging (MRI) and computed tomography (CT) services in the country. The equipment used by Alliance is sophisticated and subject to accelerated obsolescence in the event of significant technological change. BASIS OF FINANCIAL STATEMENT PRESENTATION--The accompanying consolidated financial statements include the accounts of Alliance Imaging, Inc. and its consolidated subsidiaries. The accompanying unaudited consolidated financial statements have been prepared by Alliance Imaging, Inc. in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Alliance, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. DEBT RESTRUCTURING--Effective December 31, 1994, Alliance completed a comprehensive debt restructuring with the holders of its senior notes and senior subordinated debentures. The restructuring included a reduction in interest rates, an exchange of a portion of the debentures for issuance of redeemable preferred and common stock and the extension of the repayment terms on all of the remaining debt. These transactions were accounted for as a troubled debt restructuring. Supplemental loss per common share for the year ended December 31, 1994, based on historical loss per share adjusted to give effect to the issuance of common shares in exchange for debt in the debt restructuring and a reduction of related interest expense assuming the exchange had occurred on January 1, 1994, is ($1.77) based on 10,614,000 weighted average common shares outstanding. SPECIAL CHARGES--During the fourth quarter of 1994, Alliance recorded special charges totaling $13,339,000 related to an equipment exchange transaction, the impairment of certain equipment, debt restructuring and employee severances. Alliance entered into an agreement with one of its major equipment vendors to exchange several older MRI scanners for more technologically advanced scanners which had been refurbished. The fair value of the assets received, net of related debt incurred, was less than the net book value of the assets exchanged, resulting in a non-cash pre-tax charge of $2,156,000. Alliance also evaluated the carrying values of all of its remaining older mid-field mobile MRI scanners. An impairment analysis of these scanners resulted in an $8,670,000 non-cash pre-tax charge to reduce the net book values to their estimated current market value. Alliance then identified assets to be held for sale or other disposition and recorded a non-cash pre- tax charge of $1,831,000 to write these assets down to their estimated net realizable value on disposition. In addition, Alliance recorded pre-tax special charges of $440,000 related to debt restructuring and $242,000 for employee severances. F-8 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND SHORT-TERM INVESTMENTS--Alliance considers short-term investments with original maturities of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE--Alliance provides shared and single-user diagnostic imaging equipment and technical support services to the healthcare industry and directly to patients on an outpatient basis. Substantially all of Alliance's accounts receivable are due from hospitals, other healthcare providers and health insurance providers located throughout the United States. Services are generally provided pursuant to long-term contracts and directly to patients, and generally collateral is not required. Receivables generally are collected within industry norms for third-party payers. Credit losses are provided for in the consolidated financial statements. EQUIPMENT--Equipment is stated at cost and is generally depreciated using the straight-line method over an initial estimated life of three to eight years to an estimated residual value, generally approximating between five and 20 percent of original cost. If Alliance continues to operate the equipment beyond its initial estimated life, the residual value is then depreciated to a nominal salvage value over three years. Routine maintenance and repairs are charged to expense as incurred. Major repairs and purchased software and hardware upgrades, which extend the life or add value to the equipment, are capitalized and depreciated over the remaining useful life. With the exception of a small amount of office furniture and equipment, substantially all of the property owned by Alliance relates to diagnostic imaging equipment, tractors and trailers used in the business. GOODWILL--Alliance amortizes goodwill over a period of one to 25 years. For acquired entities, the amortization period selected is primarily based upon the estimated life of the customer contracts, including expected renewals, and related other assets acquired, not to exceed 20 years. The Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in March 1995. Statement 121 requires long-lived assets and certain intangibles held and used by Alliance to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability test is to be performed at the lowest level at which undiscounted net cash flows can be directly attributable to long-lived assets. Alliance adopted Statement 121 in the first quarter of 1996 with no material effect on Alliance's financial statements. REVENUE RECOGNITION--The majority of Alliance's revenues are derived directly from healthcare providers. To a lesser extent, revenues are generated from direct billings to patients or their medical payers which are recorded net of contractual discounts and other arrangements for providing services at less than established patient billing rates. Net revenues from direct patient billing amounted to approximately 13%, 10% and 8% of revenues in the years ended December 31, 1994, 1995 and 1996, respectively. No single customer accounted for 3% or more of consolidated revenues in each of the three years in the period ended December 31, 1996. All revenues are recognized at the time the service is performed. INCOME TAXES--Alliance calculates deferred taxes and related income tax expense using the liability method. This method determines deferred taxes by applying the current tax rate to the cumulative temporary differences between recorded carrying amounts and the corresponding tax basis of assets and liabilities. A F-9 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) valuation allowance is established for deferred tax assets unless their realization is considered more likely than not. Alliance's provision for income taxes is the sum of the change in the balance of deferred taxes between the beginning and the end of the period plus income taxes currently payable. INVESTMENT TAX CREDITS--Alliance accounts for investment tax credits under the flow through method. FAIR VALUES OF FINANCIAL INSTRUMENTS--FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimated cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Alliance. The following methods and assumptions were used by Alliance in estimating its fair value disclosures for financial instruments: Cash and short-term investments--The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Long-term debt--The fair values of Alliance's long-term debt are estimated using discounted cash flow analyses, based on Alliance's current incremental rates for similar types of borrowing arrangements. The carrying amounts and estimated fair values of Alliance's financial instruments are as follows:
DECEMBER 31, 1995 DECEMBER 31, 1996 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- Cash and short-term invest- ments........................ $11,128,000 $11,128,000 $10,867,000 $10,867,000 Long-term debt................ 75,880,000 61,500,000 89,025,000 84,150,000 Redeemable preferred stock.... 16,430,000 (See Below) 4,694,000 2,788,000
As more fully discussed in Note 4, Alliance has repurchased all of its redeemable preferred stock. Alliance paid approximately $2,788,000 to retire the December 31, 1996 balance and consequently believes $2,788,000 reasonably approximates the fair value of its redeemable preferred stock balance at December 31, 1996. The original fair value of Alliance's redeemable preferred stock of $15,500,000 was determined by independent valuation consultants as of December 31, 1994. Although it was not practicable to reevaluate the estimated fair value of the preferred stock as of December 31, 1995 because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs, Alliance believes the $16,430,000 carrying amount at December 31, 1995, which represents the original fair value of the preferred stock increased for the 1995 cumulative dividend, reasonably approximates its fair value at that date. F-10 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) EARNINGS PER COMMON SHARE--Earnings per common share have been computed based on the weighted average number of shares outstanding during each year and the assumed exercise of dilutive stock options and warrants less the number of treasury shares assumed to be purchased from the proceeds using the average market price of Alliance's common stock. The earnings per common share for the six month periods ended June 30, 1997 and 1996 are based upon weighted average common and common equivalent shares outstanding during the period. For the six month period ended June 30, 1996 common equivalent shares include vested stock options with exercise prices lower than current market value, as well as the assumed conversion of the Series D convertible preferred stock into common shares. Supplemental earnings per share for the six months ended June 30, 1997 based on historical earnings per share adjusted assuming the conversion of the senior bridge loan into Series D convertible preferred stock had occurred on January 1, 1997 is $0.30 per share. This calculation ignores amounts reported in the 1997 historical results as gain arising from the repurchase of the senior subordinated debentures and as the earnings per share benefit arising from the excess of carrying value of the preferred stock repurchased over the consideration paid. Therefore, this supplemental earnings per share calculation is the most comparable to the $0.31 per share "income before items below" reported in Alliance's six months ended June 30, 1997 historical results of operations. In February 1997, the FASB issued Statement No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, Alliance will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options, warrants and the Series D convertible preferred stock will be excluded. The impact is expected to result in an increase to basic earnings per share for the six months ended June 30, 1996 and 1997 of $0.01 and $0.05 per share, respectively. 3. INCOME TAXES The provision for income taxes shown in the consolidated statements of operations consists of the following:
1994 1995 1996 ---------- ----------- ----------- Current: Federal................................. $ -- $ 960,000 $ 2,958,000 State................................... 120,000 970,000 735,000 ---------- ----------- ----------- 120,000 1,930,000 3,693,000 Utilization of net operating loss carryo- vers..................................... -- (1,029,000) (2,649,000) ---------- ----------- ----------- 120,000 901,000 1,044,000 Deferred: Federal................................. 181,000 (181,000) -- State................................... 799,000 7,000 731,000 ---------- ----------- ----------- 980,000 (174,000) 731,000 ---------- ----------- ----------- $1,100,000 $ 727,000 $ 1,775,000 ========== =========== ===========
F-11 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) The provision for income taxes applicable to income before extraordinary gains and attributed to the extraordinary gains is as follows:
1994 1995 1996 ---------- -------- ---------- Provision for taxes on income before extraordi- nary gains: Current...................................... $ 120,000 $901,000 $ 329,000 Deferred..................................... 980,000 (174,000) 731,000 ---------- -------- ---------- Total provision for taxes on income before ex- traordinary gains............................. 1,100,000 727,000 1,060,000 Provision for taxes on extraordinary gains (current)..................................... -- -- 715,000 ---------- -------- ---------- $1,100,000 $727,000 $1,775,000 ========== ======== ==========
Significant components of Alliance's deferred tax assets and (liabilities) at December 31 are as follows:
1995 1996 ------------ ------------ Deferred Tax Liabilities: Equipment basis differences......................... $(10,738,000) $(12,981,000) Cancellation of indebtedness........................ -- (2,258,000) ------------ ------------ Total deferred tax liabilities.................... (10,738,000) (15,239,000) Deferred Tax Assets: Net operating losses................................ 12,549,000 9,900,000 Cancellation of indebtedness........................ 3,265,000 -- Accounts receivable................................. 266,000 266,000 Basis differences associated with other assets...... 1,015,000 2,105,000 Other............................................... 1,174,000 330,000 ------------ ------------ Total deferred tax assets......................... 18,269,000 12,601,000 Valuation allowance................................. (8,631,000) (2,193,000) ------------ ------------ Net deferred tax assets........................... 9,638,000 10,408,000 ------------ ------------ Net deferred taxes.................................. (1,100,000) (4,831,000) Current deferred tax liability...................... 310,000 -- ------------ ------------ Noncurrent deferred tax liability................... $ (790,000) $ (4,831,000) ============ ============
The net change in Alliance's valuation allowance on deferred tax assets during the year ended December 31, 1996 totaled $4,664,000 and $1,774,000 for federal and state purposes, respectively. At December 31, 1996, for federal regular income tax purposes, Alliance had approximately $26,400,000 of operating loss carryovers expiring through 2006. Due to a change in ownership in November 1991, utilization of $19,700,000 of these net operating losses is subject to an annual limitation of approximately $2,200,000. Any unutilized annual limitation may be carried forward to future years. The annual limitation may be increased if built-in gains which existed on the date of the change in ownership are recognized by sale or other disposal of equipment. As a result of these limitations, Alliance has approximately $6,700,000 of operating loss carryovers available in 1997 for federal regular income tax purposes. Future changes in the ownership of Alliance could result in additional limitations on the utilization of its operating loss carryovers. F-12 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) A reconciliation of the expected total provision for income taxes, computed using the federal statutory rate on income before extraordinary gains, is as follows:
1994 1995 1996 ----------- ----------- ----------- Computed expected provision (benefit).......................... $(6,288,000) $ 1,690,000 $ 2,646,000 State income taxes, net of federal benefit............................ 919,000 313,000 572,000 Amortization of goodwill............ 310,000 458,000 487,000 Alternative minimum tax............. 181,000 34,000 182,000 Increase (decrease) in valuation allowance on federal deferred tax assets......................... 5,936,000 (1,710,000) (2,798,000) Other............................... 42,000 (58,000) (29,000) ----------- ----------- ----------- $ 1,100,000 $ 727,000 $ 1,060,000 =========== =========== =========== 4. INDEBTEDNESS Long-term debt consisted of the following at December 31: 1995 1996 ----------- ----------- Obligations to lending institutions, secured by equipment, due in monthly installments through December 2001 with weighted average interest rates of 9.62% and 9.77% at December 31, 1995 and 1996, respectively......................... $32,547,000 $51,695,000 Senior notes, secured by equipment (see below).. 26,700,000 19,866,000 Senior bridge loan, due March 31, 1997 if not converted into preferred stock (see below), interest at 10% payable at maturity............ -- 12,872,000 Senior subordinated debentures, unsecured, due in quarterly installments through 2005 with an effective interest rate of 0% (7.5% stated interest rate)................................. 16,633,000 4,592,000 ----------- ----------- 75,880,000 89,025,000 Less current portion............................ 9,948,000 16,323,000 ----------- ----------- $65,932,000 $72,702,000 =========== ===========
Installment obligations to lending institutions and the senior notes are collateralized by equipment with a net book value of $77,339,000 at December 31, 1996. On December 31, 1996, Alliance entered into a Bridge Loan Agreement (enabling Alliance to borrow up to $18,000,000) and borrowed $12,872,000 under a senior bridge loan; an additional $5,128,000 was borrowed on January 2, 1997. The senior bridge loan is convertible into 18,000 shares of a new Series D convertible preferred stock (see Note 5). On December 31, 1996, Alliance used the proceeds of the senior bridge loan to repurchase $11,345,000 carrying value of its senior subordinated debentures (debentures) and $11,071,000 of its Series A redeemable preferred stock at a discount (plus related accrued interest and dividends). As a result, in the fourth quarter of 1996, Alliance recorded an extraordinary gain of $4,935,000, net of taxes of $560,000, from this early extinguishment of debt. In addition, the excess of carrying amount of preferred stock repurchased over consideration paid and other charges amounted to $1,764,000, which has been recognized as an increase in additional paid-in capital. In connection with this transaction, on January 2, 1997, Alliance used the additional senior bridge loan proceeds to repurchase the remaining balance of its debentures and Series A redeemable preferred stock at a discount (plus related accrued interest and dividends). Accordingly, in January 1997, Alliance F-13 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) recorded an extraordinary gain of $1,332,000, net of taxes of $920,000, from this early extinguishment of debt. The excess of carrying amount of preferred stock repurchased over consideration paid in January 1997 amounted to $1,906,000. On March 26, 1997, the holder of the senior bridge loan exercised its option to convert the senior bridge loan into 18,000 shares of Series D convertible preferred stock. At that time, senior notes not to exceed $9,000,000 held by the same lender become convertible into a new Series E preferred stock on or after January 1, 1998 (see Note 5). Supplemental earnings per share for the year ended December 31, 1996, based on historical earnings per share adjusted to give effect to (1) the issuance of the Series D preferred stock, and (2) the use of the $18 million proceeds therefrom on a pro rata basis to repurchase the debentures and Series A redeemable preferred stock repurchased in December 1996 and January 1997, and assuming the transactions had occurred on January 1, 1996, is $0.45 per share. This calculation ignores amounts reported in the historical results for 1996 as gains arising from the repurchase of the senior notes and debentures and as the earnings per share benefit arising from the excess of the carrying value of the preferred stock repurchased over the consideration paid. Therefore, this supplemental earnings per share calculation is most comparable to the $0.48 per share "income before items below" reported in Alliance's 1996 historical results of operations. In November 1996, Alliance arranged for the sale of all of its senior notes by the original holders to new owners. In connection with the sale, Alliance prepaid $5,300,000 of the senior notes at a discount and recorded an extraordinary gain of $1,365,000, net of taxes of $155,000, from this early extinguishment of debt. In addition, the new holders and Alliance agreed to remove or modify various restrictive covenants contained in the note purchase agreement governing the senior notes. The amended senior notes bear interest at a stated annual rate of 7.5%, with interest payable monthly, and require minimum mandatory quarterly principal payments of $150,000 in 1997 increasing to $1,800,000 in 2003. Alternatively, Alliance may make voluntary monthly principal and interest payments of $335,000 through October 2002 to fully retire the notes. Alliance may also prepay the notes at any month end at specified discounts from their face amount. The senior notes agreement contains limitations on equipment additions, incurrence of debt and other similar items. The carrying amount of long-term debt as of December 31, 1996 is due as follows (assuming voluntary prepayments of Alliance's senior notes, and excluding the senior bridge loan, which was converted to preferred stock in March 1997, and the debentures refinanced thereby): Year ending December 31: 1997...................................................... $16,323,000 1998...................................................... 17,263,000 1999...................................................... 14,914,000 2000...................................................... 11,403,000 2001...................................................... 8,097,000 2002...................................................... 3,561,000 ----------- $71,561,000 ===========
Of Alliance's total indebtedness at December 31, 1996, $83,552,000 is an obligation of Alliance and $5,473,000 is an obligation of Alliance's consolidated subsidiaries. F-14 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Alliance has a $3 million revolving line of credit with a bank. The line bears interest at the bank's prime rate (8.5% at December 31, 1995 and 8.25% at December 31, 1996) plus two percent, with a commitment fee of 0.375% per year on the unused balance, and is secured by substantially all of Alliance's accounts receivable. The line of credit had not been utilized through December 31, 1996. 5. PREFERRED AND COMMON STOCK PREFERRED STOCK--Alliance is authorized to issue 1,000,000 shares of preferred stock, undesignated as to series. The Board of Directors has the authority to establish the voting powers, designations, preferences and other special rights for each series of preferred stock issued. In connection with Alliance's debt refinancing effective December 31, 1996 (see Note 4), Alliance authorized 18,000 shares of a new Series D convertible preferred stock and 9,000 shares of a new Series E convertible preferred stock. The holders of the Series D and E convertible preferred stock, when issued, are entitled to receive cumulative dividends at the rate of 4% per annum of the stated liquidation value (subject to increase, to a maximum of 8%, under certain circumstances). Unpaid dividends accumulate and are payable quarterly by Alliance in cash. Shares of Series D convertible preferred stock are convertible at the option of the holder at any time on or before December 31, 2006 into shares of common stock at a conversion price of $6.00 per common share, subject to adjustment. Shares of Series E convertible preferred stock are convertible at the option of the holder at any time on or before December 31, 2006 into shares of common stock at a conversion price of the greater of $6.00 per share of common stock or the market price (as defined) per common share at date of issuance of the Series E convertible preferred stock. Shares of Series D and E convertible preferred stock are subject to redemption at the option of Alliance after December 31, 2006. In connection with the Royal acquisition (Note 8), Alliance issued 3,876 shares of a new Series C convertible preferred stock. The Series C convertible preferred stock bears a dividend of 5% of its original liquidation value ($388,000) payable annually in cash and is redeemable at Alliance's option. Holders of Series C convertible preferred stock may convert their stock into common stock at a price of $5.00 per common share. In the event of liquidation, dissolution or winding up of Alliance, the holders of Series C, D and E convertible preferred stock shall be entitled to receive an amount equal to the stated liquidation value per share (plus accumulated but unpaid dividends) prior to any distributions to common stockholders. No sinking fund has been or will be established for the retirement or redemption of shares of Series C, D or E convertible preferred stock. The holders of shares of preferred stock are not entitled to any voting rights with respect to any matters voted upon by the common stockholders. However, a majority of preferred stockholders (with each series voting as a single class) must approve certain corporate transactions including the authorization of additional classes or series of stock ranking prior to their stock, any increase in the number of authorized shares of their preferred stock series, any amendment to the terms of such preferred stock series and similar actions. STOCK OPTIONS AND AWARDS--Alliance has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Alliance's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-15 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Alliance's 1991 Stock Option Plan provides that up to 2,000,000 shares may be granted to management and key employees. Options are granted at their fair market value at the date of grant. All options granted have 10 year terms and vest and become fully exercisable at the end of three to four years of continued employment. The weighted-average remaining contractual life of options outstanding as of December 31, 1996 is 9.6 years. The following table summarizes the activity under this plan.
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- ---------------- Outstanding at December 31, 1993................ 509,000 $3.5423 Granted....................................... 738,400 0.4375 Canceled...................................... (505,000) 3.5535 -------- ------- Outstanding at December 31, 1994................ 742,400 0.4375 Granted....................................... 32,000 2.1172 Exercised..................................... (221,800) 0.4375 Canceled...................................... (11,600) 0.4375 -------- ------- Outstanding at December 31, 1995................ 541,000 0.5369 Granted....................................... 489,200 3.5625 Exercised..................................... (77,217) 0.5151 Canceled...................................... (2,000) 1.6875 -------- ------- Outstanding at December 31, 1996................ 950,983 $2.0926 ======== =======
At December 31, 1996, 430,700 of these options were exercisable at $0.4375, 121,050 were exercisable at $3.5625, and 12,667 were exercisable at prices between $1.6875 and $2.375. In 1991, options for 30,000 shares not covered by the 1991 Stock Option Plan were granted to three non-employee directors at an exercise price of $8.25 per share. In 1993, options for 40,000 shares were granted at exercise prices ranging from $1.125 to $2.50 per share. In 1995, options for an additional 10,000 shares were granted at an exercise price of $1.6875 per share. These options vest over a four year period. At December 31, 1996, options for 40,000 shares had been canceled and options for 30,000 shares were exercisable. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if Alliance has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996: risk-free interest rate of 5.72%; no dividend yield; volatility factor of the expected market price of Alliance's common stock of .43; and a weighted-average expected life of the option of seven years. The weighted-average fair value of options granted during 1996 is $1.93. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Alliance's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-16 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' maximum vesting period. Alliance's pro forma information for the year ended December 31, 1996 follows: Pro forma net income........................................ $12,577,000 Pro forma earnings per share................................ $1.17
At December 31, 1996 Alliance had 328,900 warrants outstanding to purchase common stock with exercise prices ranging from $2.50 to $5.00 per share over terms of three to ten years. The weighted-average grant-date fair value of the warrants was $2.13. 6. COMMITMENTS Alliance has contracts with its equipment vendors for comprehensive maintenance and cryogen coverage for its MRI and CT systems. The contracts are between one and five years and extend through December 2001, but may be canceled by Alliance under certain circumstances. Contract payments are approximately $9,200,000 per year. At December 31, 1996, Alliance had binding equipment purchase commitments totaling approximately $29,200,000. Alliance leases office and warehouse space and certain equipment under non- cancelable operating leases. The office and warehouse leases generally call for minimum monthly payments plus maintenance and inflationary increases. The future minimum payments under such leases are as follows: Year ending December 31: 1997....................................................... $1,478,000 1998....................................................... 960,000 1999....................................................... 668,000 2000....................................................... 141,000 2001....................................................... 34,000 ---------- $3,281,000 ==========
Alliance's total rental expense, which includes short-term equipment rentals, for the years ended December 31, 1994, 1995 and 1996 was $2,781,000, $1,923,000 and $3,380,000, respectively. 7. 401(K) SAVINGS PLAN Alliance established a 401(k) Savings Plan in January 1990. All employees of Alliance are eligible to participate after a six month waiting period. Employees may contribute between 1% and 15% of their annual compensation. Alliance matches 33.3 cents for every dollar of employee contributions up to 7% of their compensation, subject to the limitations imposed by the Internal Revenue Code. Alliance may also make discretionary contributions depending on profitability. Alliance incurred and charged to expense $119,000, $140,000 and $157,000 during 1994, 1995 and 1996, respectively, related to the plan. 8. ACQUISITION On April 26, 1996, Alliance acquired all of the outstanding shares of Royal Medical Health Services, Inc. (Royal) of Pittsburgh, Pennsylvania. Like Alliance, Royal is a provider of comprehensive MRI services. Alliance issued 3,876 shares of Series C convertible preferred stock valued at $388,000, common stock warrants valued F-17 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) at $212,000, and paid $1,914,000 in cash as consideration for the acquisition of Royal and certain related assets. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Royal have been included in Alliance's consolidated financial statements from the date of acquisition. The unaudited pro forma information below presents combined results of operations as if the Royal acquisition had occurred at the beginning of the respective periods presented. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had the acquisition actually occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ----------- ----------- Revenues.......................................... $63,621,000 $70,518,000 Income before extraordinary gains................. 4,492,000 6,487,000 Net income........................................ 4,492,000 12,787,000 Earnings per share: Income before extraordinary gains................ $ 0.32 $ 0.48 Income applicable to common stock................ 0.32 1.18
9. SUBSEQUENT EVENT On July 23, 1997, Alliance entered into an Agreement and Plan of Merger (the "Recapitalization Merger Agreement"). Under the terms of the Recapitalization Merger Agreement, an entity formed by affiliates of Apollo Management, L.P. (collectively, "Apollo") will merge with and into Alliance (the "Recapitalization"). Each share of Alliance common stock, par value $.01 per share, issued and outstanding immediately prior to the effective time of the Recapitalization, other than dissenting shares, either (1) will be converted into the right to receive $11.00 in cash or (2) will be retained by such stockholder. The Recapitalization Merger Agreement requires that 727,273 shares in the aggregate of common stock be retained by Alliance's existing shareholders; therefore, the right to receive either $11.00 in cash for each share or to retain that share of Alliance common stock is subject to proration. Additionally, in connection with the Recapitalization and subject to certain conditions, Alliance will acquire all the shares of common stock of a new holding company formed by Apollo to acquire (the "SMT Acquisition") SMT Health Services Inc. ("SMT"). The proposed Recapitalization is subject to stockholder approval. However, pursuant to a Stockholder Agreement, stockholders representing beneficial ownership of not less than 54.4% of Alliance common stock (the "Stockholders") have agreed to vote all shares beneficially owned by them in favor of the approval of the Recapitalization Merger Agreement and the Recapitalization and to convert or exercise all securities they hold that are convertible into or exercisable for shares of Alliance common stock prior to the time of the special meeting of shareholders called in connection with the Recapitalization. In addition, each Stockholder has granted to Apollo an option to acquire their shares of common stock, and a proxy to vote such shares in favor of the Recapitalization and the SMT Acquisition. At the closing of the Recapitalization and the SMT Acquisition, significant new sources of financing will be provided to Alliance for the purchase of shares of common stock in the Recapitalization, repayment of indebtedness, and for working capital purposes, among other uses. SMT, like Alliance, is a provider of comprehensive MRI services. Upon consummation of the SMT Acquisition, SMT will become an indirect wholly owned subsidiary of Alliance, with Apollo to receive 3,181,818 shares of Alliance common stock valued at approximately $33.6 million in connection with the SMT F-18 ALLIANCE IMAGING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Acquisition. In addition, Alliance will assume and refinance approximately $55 million of SMT's debt. The acquisition will be accounted for as a purchase and, accordingly, results of operations of SMT will be included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net tangible assets acquired, substantially all of which is expected to be accounted for as goodwill, is estimated to total approximately $53 million and will be amortized over a 20 year life. After the consummation of the Recapitalization, the Company will adopt a new employee stock option plan pursuant to which options (the "New Options") with respect to a total of 527,272 shares of Alliance common stock (the "New Option Shares") will be available for grant. The New Option Shares will be allocated in amounts agreed upon between Apollo and the Company. Of the New Option Shares, 50% will vest in equal increments over four years ending on the fourth anniversary of the last day of the consummation of the Recapitalization. The remaining 50% will vest upon attainment by the Company of certain per-share equity targets. Vesting of New Options occurs only during an employee's term of employment. The exercise price for the New Options is expected to be at the fair market value at a grant date (i.e., $11.00 per share at the consummation of the Recapitalization)." As a part of the new financing to be provided, Alliance plans to sell $170 million of Senior Subordinated Notes (the "Notes") in an underwritten public offering. The Notes are to be unconditionally guaranteed, on a senior subordinated basis, jointly and severally, by all significant direct and indirect consolidated subsidiaries of Alliance, which consist of Royal Medical Health Services, Inc., Alliance Imaging of Central Georgia, Inc. and SMT Acquisition Corp., a newly formed corporation established by Apollo to effect its acquisition of SMT, which is expected to be acquired by Alliance in exchange for 3,181,818 shares of Alliance common stock prior to the issuance of the Notes. The consolidated financial statements of SMT as of December 31, 1995 and 1996 and June 30, 1997 (unaudited) and for each of the three years in the period ended December 31, 1996 and the six month periods ended June 30, 1996 and 1997 (unaudited) are presented elsewhere herein. Combined summarized financial information for Royal Medical Health Services, Inc. and Alliance Imaging of Central Georgia, Inc. is set forth below (in thousands):
DECEMBER 31, ------------- JUNE 30, 1995 1996 1997 ------ ------ -------- Current assets........................................... $ -- $ 131 $ 127 Noncurrent assets........................................ 1,450 8,163 8,269 ------ ------ ------ Total assets........................................... $1,450 $8,294 $8,396 ====== ====== ====== Current liabilities...................................... $ -- $1,621 $1,648 Noncurrent liabilities................................... 641 4,238 3,535 Equity................................................... 809 2,435 3,213 ------ ------ ------ Total liabilities and equity........................... $1,450 $8,294 $8,396 ====== ====== ======
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ---------------- ----------- 1994 1995 1996 1996 1997 ---- ---- ------ ---- ------ Revenues.......................................... $408 $558 $7,142 $569 $3,702 Costs and expenses................................ 183 225 5,676 400 3,025 ---- ---- ------ ---- ------ Operating margin.................................. 225 333 1,466 169 677 Provision for income taxes........................ 14 50 205 28 231 ---- ---- ------ ---- ------ Net income........................................ $211 $283 $1,261 $141 $ 446 ==== ==== ====== ==== ======
The Company's non-guarantor subsidiaries are inconsequential. F-19 ALLIANCE IMAGING, INC. QUARTERLY FINANCIAL DATA Summarized quarterly unaudited financial data for the years ended December 31, 1995 and 1996, and the six month period ended June 30, 1997 follows:
THREE MONTHS ENDED --------------------------------------------------------------- JUNE 30, MARCH 31, 1995 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995 -------------- ----------- ------------------ ----------------- Revenues................ $14,481,000 $14,766,000 $15,058,000 $13,760,000 Operating expenses, excluding depreciation. 7,169,000 7,148,000 7,121,000 6,904,000 Depreciation expense.... 2,992,000 3,024,000 3,074,000 3,112,000 Selling, general and administrative expenses............... 1,542,000 1,597,000 1,549,000 1,606,000 Amortization expense, primarily goodwill..... 331,000 332,000 340,000 342,000 Interest expense, net... 1,254,000 1,349,000 1,273,000 1,177,000 Income before income taxes.................. 1,193,000 1,316,000 1,701,000 619,000 Net income.............. 1,021,000 1,112,000 1,447,000 522,000 Earnings per common share:................. Net income per common share................ $ 0.07 $ 0.08 $ 0.11 $ 0.02 =========== =========== =========== =========== Weighted average common and common equivalent shares outstanding..... 10,881,000 11,202,000 11,267,000 11,283,000 =========== =========== =========== ===========
THREE MONTHS ENDED --------------------------------------------------------------- JUNE 30, MARCH 31, 1996 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 -------------- ----------- ------------------ ----------------- Revenues................ $14,686,000 $16,616,000 $17,795,000 $19,385,000 Operating expenses, excluding depreciation. 7,181,000 7,838,000 8,530,000 8,795,000 Depreciation expense.... 2,866,000 3,182,000 3,122,000 3,567,000 Selling, general and administrative expenses............... 1,507,000 1,653,000 1,719,000 3,251,000 Amortization expense, primarily goodwill..... 344,000 401,000 564,000 643,000 Interest expense, net... 1,185,000 1,498,000 1,501,000 1,574,000 Income before income taxes and extraordinary gains.................. 1,603,000 2,044,000 2,359,000 1,555,000 Extraordinary gains, net of taxes............... -- -- -- 6,300,000 Net income.............. 1,364,000 1,738,000 1,949,000 7,750,000 Earnings per common share: Income before items below................ $ 0.10 $ 0.13 $ 0.15 $ 0.10 Excess of carrying amount of preferred stock repurchased over consideration paid................. -- -- -- 0.15 ----------- ----------- ----------- ----------- Income before extraordinary gains.. 0.10 0.13 0.15 0.25 Extraordinary gains, net.................. -- -- -- 0.55 ----------- ----------- ----------- ----------- Income applicable to common stock......... $ 0.10 $ 0.13 $ 0.15 $ 0.80 =========== =========== =========== =========== Weighted average common and common equivalent shares outstanding..... 11,309,000 11,522,000 11,558,000 11,560,000 =========== =========== =========== ===========
F-20 ALLIANCE IMAGING, INC. QUARTERLY FINANCIAL DATA--(CONTINUED)
THREE MONTHS ENDED -------------------------- JUNE 30, MARCH 31, 1997 1997 -------------- ----------- Revenues............................................ $19,106,000 $20,805,000 Operating expenses, excluding depreciation.......... 8,681,000 9,134,000 Depreciation expense................................ 3,485,000 3,659,000 Selling, general and administrative expenses........ 1,897,000 2,093,000 Amortization expense, primarily goodwill............ 571,000 594,000 Interest expense, net............................... 1,933,000 1,624,000 Income before income taxes and extraordinary gain... 2,539,000 3,701,000 Extraordinary gain, net of taxes.................... 1,332,000 -- Net income.......................................... 3,036,000 2,411,000 Earnings per common share: Income before items below......................... $ 0.14 $ 0.16 Excess of carrying amount of preferred stock repurchased over consideration paid.............. 0.16 -- ----------- ----------- Income before extraordinary gain.................. 0.30 0.16 Extraordinary gain, net........................... 0.11 -- ----------- ----------- Income applicable to common stock................. $ 0.41 $ 0.16 =========== =========== Weighted average common and common equivalent shares outstanding........................................ 11,985,000 14,934,000 =========== ===========
F-21 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders SMT Health Services Inc.: We have audited the accompanying consolidated balance sheets of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of SMT'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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick llp Pittsburgh, Pennsylvania January 31, 1997, except as to Note 18 which is as of March 4, 1997 F-22 SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, ------------------------ ----------- 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents-- unrestricted.......................... $ 2,341,519 $ 4,643,158 $13,513,262 Cash and cash equivalents--restricted (Note 10)............................. 1,600,000 400,000 400,000 Accounts receivable--no allowance for doubtful accounts..................... 1,059,567 1,726,442 2,127,781 Notes receivable--current portion...... 47,760 52,240 26,706 Receivable from the sale of leases secured by equipment--current portion (Note 3).............................. 342,789 387,999 284,640 Other current assets................... 249,961 615,257 367,244 ----------- ----------- ----------- Total current assets................. 5,641,596 7,825,096 16,719,633 ----------- ----------- ----------- PROPERTY AND EQUIPMENT: Equipment.............................. 174,556 200,709 203,779 Furniture and fixtures................. 59,712 43,055 53,217 Vehicles............................... 125,103 162,915 223,611 Leasehold improvements................. 27,915 28,495 32,995 Mobile MRI equipment................... 22,167,551 35,932,207 41,773,266 ----------- ----------- ----------- Total property and equipment......... 22,554,837 36,367,381 42,286,868 Less accumulated depreciation and amortization.......................... (6,613,759) (6,734,353) (9,798,183) ----------- ----------- ----------- Property and equipment, net.......... 15,941,078 29,633,028 32,488,685 ----------- ----------- ----------- OTHER ASSETS: Notes receivable--noncurrent........... 52,240 -- -- Receivable from the sale of leases secured by equipment--noncurrent (Note 3).............................. 878,590 490,591 385,403 Contract and license acquisition costs, net of accumulated amortization of $788,000, $889,000 and $129,000, respectively............ 109,260 631,933 590,353 Deposits and other assets.............. 506,041 594,915 552,241 Deferred income taxes, net of valuation allowance of $103,000 at December 31, 1995 (Note 4)............ 219,000 322,000 -- ----------- ----------- ----------- Total other assets................... 1,765,131 2,039,439 1,527,997 ----------- ----------- ----------- TOTAL ASSETS............................ $23,347,805 $39,497,563 $50,736,315 =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................ $ 270,277 $ 363,682 $ 887,543 Accrued wages and related taxes......... 57,823 111,664 117,498 Current portion of long-term debt and capital lease obligations.............. 4,380,930 6,349,962 5,927,827 Other current liabilities............... 527,217 412,748 1,103,576 ----------- ----------- ----------- Total current liabilities............. 5,236,247 7,238,056 8,036,444 ----------- ----------- ----------- Deferred tax liability................... -- -- 173,000 Long-term debt and capital lease obligations--less current portion....... 12,709,905 20,859,964 17,152,347 ----------- ----------- ----------- Total liabilities..................... 17,946,152 28,098,020 25,361,791 ----------- ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 2,654,400, 3,695,030 and 5,746,300, respectively............ 26,544 36,950 57,463 Cumulative convertible preferred stock; $0.01 par value; authorized 994,600 shares; no shares issued and outstanding............................ -- -- -- Additional paid-in capital (Note 5)..... 6,636,070 12,081,614 24,576,612 Retained earnings (accumulated deficit)............................... (1,260,961) (719,021) 740,449 ----------- ----------- ----------- Total stockholders' equity............ 5,401,653 11,399,543 25,374,524 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $23,347,805 $39,497,563 $50,736,315 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-23 SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ---------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) REVENUES: Service revenue........ $13,235,019 $15,020,428 $19,021,954 $8,724,606 $13,014,262 Interest income........ 47,166 137,417 190,399 84,270 274,603 ----------- ----------- ----------- ---------- ----------- Total revenues....... 13,282,185 15,157,845 19,212,353 8,808,876 13,288,865 ----------- ----------- ----------- ---------- ----------- COSTS AND EXPENSES: Operating expenses- third parties......... 5,054,997 5,216,121 6,279,915 2,890,727 4,152,758 Operating expenses- lease expenses-re- lated parties......... 837,000 180,000 -- -- -- Depreciation and amor- tization.............. 3,163,606 3,679,246 4,724,909 2,108,997 3,193,672 Selling, general and administrative........ 1,894,037 2,472,023 2,877,421 1,373,233 1,907,332 Professional fees re- lated to acquisition (Note 20)............. -- -- -- -- 220,000 Interest-third par- ties.................. 239,193 1,671,013 2,005,429 946,443 1,012,762 Interest-related par- ties.................. 1,398,363 86,538 35,818 -- 66,871 Other (Note 17)........ -- -- (300,000) -- -- ----------- ----------- ----------- ---------- ----------- Total costs and ex- penses.............. 12,587,196 13,304,941 15,623,492 7,319,400 10,553,395 ----------- ----------- ----------- ---------- ----------- Income from continuing operations before in- come taxes, minority interests, gain on sale and extraordinary item. 694,989 1,852,904 3,588,861 1,489,476 2,735,470 Minority interests in earnings of subsidiar- ies (Note 14).......... 59,231 49,906 -- -- -- ----------- ----------- ----------- ---------- ----------- Income from continuing operations before in- come taxes, gain on sale and extraordinary item................... 635,758 1,802,998 3,588,861 1,489,476 2,735,470 Gain on sale of partner- ship interests......... -- 48,219 -- -- -- ----------- ----------- ----------- ---------- ----------- Income from continuing operations before in- come taxes and extraor- dinary item............ 635,758 1,851,217 3,588,861 1,489,476 2,735,470 Income taxes (Note 4)... 93,500 478,000 1,178,000 469,000 1,095,000 ----------- ----------- ----------- ---------- ----------- Income from continuing operations before extraordinary item..... 542,258 1,373,217 2,410,861 1,020,476 1,640,470 ----------- ----------- ----------- ---------- ----------- Discontinued operations: Loss on disposal of discontinued opera- tions, net of tax benefit of $102,000 and $68,000 in 1995 and 1994, respective- ly.................... (132,000) (198,000) -- -- -- Extraordinary item, debt forgiveness, net of income tax expense of $102,000........... -- 198,000 -- -- -- ----------- ----------- ----------- ---------- ----------- (132,000) -- -- -- -- ----------- ----------- ----------- ---------- ----------- Income before extraordi- nary item.............. 410,258 1,373,217 2,410,861 1,020,476 1,640,470 Extraordinary loss on early extinguishment of debt (net of income tax ben- efit of $115,000) (Note 19).................... -- -- -- -- 181,000 ----------- ----------- ----------- ---------- ----------- Net income.............. $ 410,258 $ 1,373,217 $ 2,410,861 $1,020,476 $ 1,459,470 =========== =========== =========== ========== =========== Earnings (Loss) per com- mon share (Note 2): Primary: Continuing operations before extraordinary item.................. $ .20 $ .46 $ .61 $ .27 $ .30 Discontinued opera- tions before extraor- dinary item........... (.05) -- -- -- -- Extraordinary loss per share (Note 19)....... -- -- -- -- (.03) ----------- ----------- ----------- ---------- ----------- Earnings per common share.................. $ .15 $ .46 .61 $ .27 $ .27 =========== =========== =========== ========== =========== Fully diluted: Continuing operations before extraordinary item.................. $ .20 $ .46 $ .59 $ .27 $ .30 Discontinued opera- tions before extraor- dinary item........... (.05) -- -- -- -- Extraordinary loss per share (Note 19)....... -- -- -- -- (.03) ----------- ----------- ----------- ---------- ----------- Earnings per common share.................. $ .15 $ .46 $ .59 $ .27 $ .27 =========== =========== =========== ========== =========== Weighted average shares outstanding (Note 2)... 2,705,400 2,770,230 3,232,505 2,919,000 5,081,000 =========== =========== =========== ========== ===========
See accompanying notes to consolidated financial statements. F-24 SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------- --------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations............ $ 542,258 $1,373,217 $2,410,861 $1,020,476 $1,459,470 Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities: Extraordinary loss on early extinguishment of debt............. -- -- -- -- 296,000 Depreciation and amortization........ 3,163,606 3,679,246 4,724,909 2,108,997 3,193,672 Negative amortization on capital lease obligations......... 51,017 5,521 -- -- -- Minority interests in subsidiaries........ 59,231 49,906 -- -- -- Deferred income tax expense............. 48,500 288,000 1,288,000 359,000 740,000 Gain on sale of partnership interests........... -- (48,219) -- -- -- Other................ 110,658 10,467 -- -- -- Changes in assets and liabilities of continuing operations: Accounts and notes receivable.......... 143,231 17,705 (544,660) (244,708) (375,805) Other current assets. (72,347) 12,182 (470,751) (179,106) 248,013 Accounts payable and other............... (14,348) 143,049 (21,064) (53,075) 1,214,689 Accrued wages and related taxes....... 8,073 10,134 53,841 12,866 5,834 ---------- ---------- ---------- ---------- ---------- NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES............. 4,039,879 5,541,208 7,441,136 3,024,450 6,781,873 ---------- ---------- ---------- ---------- ---------- NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES............. (410,108) (64,264) -- -- -- ---------- ---------- ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES... 3,629,771 5,476,944 7,441,136 3,024,450 6,781,873 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES:.. Purchase of equipment........... (234,833) (269,354) (2,977,334) (1,389,258) (2,983,426) Construction of leasehold improvements........ -- -- -- (1,330) (4,500) Payment for purchase of acquired entities, net of cash acquired....... (44,000) (642,840) (642,840) -- Net change in cash restricted for equipment financing purposes............ (270,000) (1,131,500) 1,200,000 330,000 -- Net cash received for sale of partnership interests........... -- 122,854 -- -- -- Net cash received for sale of discontinued entities............ 380,183 110,000 -- -- -- Other................ (92,496) (212,409) (146,472) 66,450 12,036 ---------- ---------- ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES... (261,146) (1,380,409) (2,566,646) (1,636,978) (2,975,890) ---------- ---------- ---------- ---------- ----------
(Continued) See accompanying notes to consolidated financial statements. F-25 SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------- ---------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ----------- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under long-term debt and capital leases: Continuing operations: Third parties...... (633,485) (3,241,524) (4,735,551) (2,113,318) (2,569,987) Related parties.... (2,593,808) (329,627) (64,329) -- (124,153) Discontinued operations: Third parties...... (254,612) -- -- -- -- Related parties.... (182,918) (27,807) -- -- -- Principal pay-off of capital leases........ -- -- -- -- (4,236,435) Extraordinary loss on early extinguishment of debt............... -- -- -- -- (296,000) Issuance of common stock from exercise of stock options and warrants.......... -- -- 2,227,029 944,822 12,270,511 Other.................. 116,505 (4,562) -- -- 20,185 ---------- ---------- ---------- ---------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (3,548,318) (3,603,520) (2,572,851) (1,168,496) 5,064,121 ---------- ---------- ---------- ---------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS-- (UNRESTRICTED)-- ...... (179,693) 493,015 2,301,639 218,976 8,870,104 CASH AND CASH EQUIVALENTS-- (UNRESTRICTED)-- BEGINNING OF YEAR...... 2,028,197 1,848,504 2,341,519 2,341,519 4,643,158 ---------- ---------- ---------- ---------- ----------- CASH AND CASH EQUIVALENTS-- (UNRESTRICTED)-- END OF YEAR............ $1,848,504 $2,341,519 $4,643,158 $2,560,495 $13,513,262 ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements. F-26 SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
PREFERRED RETAINED COMMON STOCK STOCK ADDITIONAL EARNINGS TOTAL ----------------- ------------- PAID-IN (ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY --------- ------- ------ ------ ----------- ------------ ------------- BALANCES--December 31, 1993................... 2,408,000 $24,080 -- $-- $ 5,940,858 $(2,721,884) $ 3,243,054 Net Income............. -- -- -- -- -- 410,258 410,258 --------- ------- ---- ---- ----------- ----------- ----------- BALANCES--December 31, 1994................... 2,408,000 24,080 -- -- 5,940,858 (2,311,626) 3,653,312 Stock Dividend (Note 12)................... 120,400 1,204 -- -- 321,348 (322,552) -- Issuance of common stock (Note 9).............. 120,000 1,200 -- -- 358,800 -- 360,000 Exercise of Stock Options............... 6,000 60 -- -- 15,064 -- 15,124 Net Income............. -- -- -- -- -- 1,373,217 1,373,217 --------- ------- ---- ---- ----------- ----------- ----------- BALANCES--December 31, 1995................... 2,654,400 26,544 -- -- 6,636,070 (1,260,961) 5,401,653 Exercise of Stock Options and Warrants (Notes 5 and 7)....... 793,500 7,935 -- -- 2,219,094 -- 2,227,029 Tax Adjustment Regarding Stock Option and Warrant Exercises (Notes 4, 5 and 7).... -- -- -- -- 1,360,000 -- 1,360,000 Stock Dividend (Note 12)................... 247,130 2,471 -- -- 1,866,450 (1,868,921) -- Net Income............. -- -- -- -- -- 2,410,861 2,410,861 --------- ------- ---- ---- ----------- ----------- ----------- BALANCES--December 31, 1996................... 3,695,030 36,950 -- -- 12,081,614 (719,021) 11,399,543 Exercise of Stock Options and Warrants (unaudited) (Note 18). 2,051,270 20,513 -- -- 12,249,998 -- 12,270,511 Tax Adjustment Regarding Stock Option and Warrant Exercises (unaudited)........... -- -- -- -- 245,000 -- 245,000 Net Income (unaudited). -- -- -- -- -- 1,459,470 1,459,470 --------- ------- ---- ---- ----------- ----------- ----------- BALANCES--June 30, 1997 (unaudited)............ 5,746,300 $57,463 -- $-- $24,576,612 $ 740,449 $25,374,524 ========= ======= ==== ==== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-27 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 1. ORGANIZATION SMT Health Services Inc. and its wholly-owned subsidiaries ("SMT") are engaged primarily in providing medical diagnostic imaging services to hospitals, physicians and patients. SMT, through its subsidiaries, operates 18 (20 at June 30, 1997) mobile magnetic resonance imaging (MRI) systems ("MRI systems") in Pennsylvania, West Virginia, North Carolina, Virginia, South Carolina, Kentucky and Ohio. SMT began operation of seven new MRI systems during 1996, including four MRI systems which began operations during the last four months of the year. SMT's common stock and warrants (Note 18) trade on the National Association of Securities Dealers, Inc. Automated Quotations Systems (Nasdaq) National Market System under the symbols "SHED" and "SHEDW", respectively (Note 20). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Policy--The consolidated financial statements include the accounts of SMT Health Services Inc. and its wholly owned subsidiaries. The unaudited consolidated financial statements as of and for the six month periods ended June 30, 1996 and 1997 include the accounts of SMT and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared by management in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with SEC informational requirements. The financial statements reflect normal recurring accounting adjustments which, in the opinion of SMT's management, are necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the six month period ended June 30, 1997 are not necessarily indicative of the results for the entire current fiscal year ending December 31, 1997. Certain amounts in the June 30, 1996 Consolidated Statements of Earnings and Cash Flows have been reclassified to conform with the June 30, 1997 presentation. Revenue Recognition--Revenue from diagnostic imaging services is recognized as patient services are performed. Service Agreements--SMT provides services directly to hospitals under Mobile MRI Service Agreements which expire at various times between 1997 and 2002 and, accordingly, bills and collects the fees for such services directly from the hospitals. Approximately 29% of SMT's billings and collections under these service contracts are processed through Hospital Shared Services (HSS), a representative of certain hospitals. As a fee for these services, HSS retains approximately 2.5% of gross billings to these hospitals and, accordingly, SMT records related revenues on a net basis. Such fees totaled approximately $120,000, $146,000 and $150,000 for 1994, 1995 and 1996, respectively. Cash and Cash Equivalents--Cash equivalents include highly-liquid investments with original maturities of ninety days or less. F-28 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Property and Equipment--Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, which is generally five years. Leased medical equipment is being amortized to its estimated residual value using the straight-line method over the lease or finance term of generally five years. Contract and License Acquisition Costs--Contract acquisition costs primarily represent the value of mobile service contracts acquired relating to the purchase of VA-MRI in November 1994 (Note 9) and are being amortized over an approximate four-year period which approximates the lives of the contracts. License acquisition costs represent the value of Certificate of Need licenses acquired in March 1996 (Note 16) and are being amortized over a ten year period. Income Taxes--SMT files a consolidated federal income tax return. 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 bases and operating loss and tax credit carryforwards. 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. 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. Net Earnings Per Common and Common Share Equivalent--The net earnings per common and common share equivalent are calculated using the weighted average common and common share equivalents outstanding during the year, except where anti-dilutive. Common share equivalents include shares issuable upon the exercise of stock options, rights and warrants less the number of shares assumed purchased with the proceeds available from the assumed exercise of the options, rights and warrants. The Treasury Stock Method of reflecting the use of proceeds from options and warrants may not adequately reflect potential dilution if options and warrants to acquire a substantial number of common shares (greater than 20% of the number of common shares outstanding for the period for which the computation is being made) are outstanding. In such instances, the Modified Treasury Stock Method must be utilized. SMT's options and warrants to acquire common shares exceeded 20% of the number of common shares outstanding for 1995, 1996 and for the six month periods ended June 30, 1996 and 1997 and accordingly, the Treasury Stock Method has been modified in determining the dilutive effect of the options and warrants on earnings per share data for those periods. Earnings per share for the year ended December 31, 1994 were not subject to the Modified Treasury Stock Method as this method was anti-dilutive. Accordingly, weighted average shares outstanding were 2,705,400 for 1994. The weighted average shares outstanding for 1994 reflect a retroactive adjustment increasing the weighted average shares outstanding by 297,400 shares to reflect the July 1995 5% and January 1997 7% stock dividends as if such dividends had occurred at the beginning of the respective period (Note 12). The Modified Treasury Stock Method resulted in adjusted net income for the year ended 1995 of approximately $2,699,000 and adjusted shares outstanding of approximately 5,884,000, resulting in earnings per common share of $.46 for the year ended December 31, 1995. Actual net income for the year ended December 31, 1995 of $1,373,217 divided by the actual weighted average shares outstanding for the year of 2,770,230 resulted in earnings per common share of $.50 for the year ended December 31, 1995. The 1995 earnings per share calculations have reflected a retroactive adjustment to reflect the January 1997 7% stock dividend (Note 12). F-29 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) For purposes of the earnings per share calculation, the Modified Treasury Stock Method resulted in adjusted net income for the year ended 1996 of approximately $3,435,000 and adjusted shares outstanding of 5,668,000, resulting in earnings per common share of $.61 for the year ended December 31, 1996 after giving effect to a seven percent (7%) common stock dividend paid to shareholders in January 1997 (Note 12). Actual net income for the year ended December 31, 1996 of $2,410,861 divided by the actual weighted average shares outstanding for the year of 3,232,505 resulted in earnings per common share of $.75 for the year ended December 31, 1996. The Modified Treasury Stock Method resulted in adjusted net income for the six months ended June 30, 1996 of $1,517,000 and adjusted shares outstanding of 5,562,000, resulting in earnings per common share of $.27 for the six months ended June 30, 1996. Actual net income for the six months ended June 30, 1996 of $1,020,000 divided by the actual weighted average shares outstanding for the six month period of 2,919,000 resulted in earnings per common share of $.35 for the six months ended June 30, 1996. The June 30, 1996 earnings per share calculations have reflected a retroactive adjustment to reflect the January 1997 7% stock dividend (Note 12). In addition, the Modified Treasury Stock Method utilized actual net income for the six months ended June 30, 1997 of $1,459,000 and adjusted shares outstanding of 5,426,000, resulting in earnings per common share of $.27 for the six months ended June 30, 1997. Actual net income for the six month period ended June 30, 1997 of $1,459,000 divided by the actual weighted average shares outstanding for the six month period of 5,081,000 resulted in earnings per common share of $.29 for the six months ended June 30, 1997. Fully diluted earnings per common share were anti-dilutive in 1994 and 1995 and for the six month periods ended June 30, 1996 and 1997. Fully diluted earnings per common share for 1996 were $.59 reflecting the higher year-end stock price. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This Statement is effective for financial statements issued for periods ending after December 15, 1997 including "interim" periods and earlier application is not permitted. In summary, the Statement simplifies the standards for computing earnings per share primarily found in APB Opinion No. 15, Earnings Per Share and makes them comparable to international standards. The standard replaces the presentation of Primary Earnings Per Share with a presentation of Basic Earnings Per Share. It also requires dual presentation of basic and diluted earnings per share on the income statement of all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. F-30 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Had SMT been permitted to adopt the Statement as of January 1, 1997, the six month periods ended June 30, 1996 and 1997 pro forma Basic and Diluted EPS would have been:
SIX SIX MONTHS MONTHS ENDED ENDED JUNE 30, JUNE 30, 1996 1997 --------- --------- Basic: Earnings before extraordinary item.................... $ .35 $ .32 Extraordinary loss per share.......................... -- (.03) --------- --------- Net Basic Earnings per share........................ $ .35 $ .29 ========= ========= Diluted: Earnings before extraordinary item.................... $ .27 $ .30 Extraordinary loss per share.......................... -- (.03) --------- --------- Net Diluted Earnings per share........................ $ .27 $ .27 ========= ========= Weighted Average Shares Outstanding................... 2,919,000 5,081,000 ========= =========
Geographic Concentration--SMT is engaged primarily in providing mobile MRI services to small-to-medium-sized hospitals in Pennsylvania, West Virginia, North Carolina, Virginia, South Carolina, Kentucky and Ohio. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain Significant Estimates--SMT operates mobile MRI systems which are capital intensive and subject to changes in technology. SMT primarily finances such equipment over a 48 to 60 month period and depreciates the equipment over the respective finance period to an estimated residual value which typically approximates 20% of the original cost of the equipment. The useful lives and residual values estimated by management are considered significant estimates. During 1995 and 1996, SMT upgraded its fleet of mobile MRI systems to newer state-of-the-art technology. Management does not currently anticipate significant technological advances which could materially affect its estimates. SMT is not dependent on any one customer or geographic region as a source of its revenues. However, SMT utilizes the services of HSS to process approximately 29% of its billings and collections (Note 2--Service Agreements). Long-Lived Assets--Effective January 1, 1996, SMT adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In accordance with SFAS 121, management evaluates long-lived assets and related intangible assets for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. No evidence existed which indicated any long-lived assets and related intangible assets were impaired and, therefore no write-down of recorded assets was necessary. Financial Instruments--Management believes that the carrying values of its financial instruments approximates their fair values and any differences which may exist between the carrying values and fair values are not material. F-31 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Stock-Based Compensation--During 1996, SMT adopted SFAS 123, "Accounting for Stock-Based Compensation". As permitted for under SFAS 123, SMT has elected to continue to follow the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for its stock-based employee compensation arrangements. Because SMT elected the disclosure-only method available under SFAS 123, the adoption of SFAS 123 did not have any impact on the Consolidated Financial Statements (Note 7). Common Stock Dividend--On January 14, 1997, a 7% common stock dividend was paid to shareholders of record at the close of business on January 10, 1997. All stock related data in the Consolidated Financial Statements reflect the stock dividend for all periods presented (Note 12). 3. LONG-TERM DEBT AND LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following:
DECEMBER 31, ----------------------- 1995 1996 ----------- ----------- Capital lease and loan obligations............... $17,090,835 $27,209,926 Less current portion............................. 4,380,930 6,349,962 ----------- ----------- $12,709,905 $20,859,964 =========== ===========
Future minimum lease payments under capital leases and maturities of long- term debt as of December 31, 1996 are as follows:
CAPITAL LONG-TERM LEASE YEAR ENDING DECEMBER 31, DEBT OBLIGATIONS ------------------------ ----------- ----------- 1997......................................... $ 2,037,232 $ 5,792,078 1998......................................... 2,223,518 5,537,301 1999......................................... 2,291,825 4,686,822 2000......................................... 2,476,641 3,098,604 2001......................................... 1,107,289 1,440,719 ----------- ----------- 20,555,524 Less amounts representing interest.............. (3,482,103) ----------- $10,136,505 $17,073,421 =========== ===========
As of December 31, 1996, the cost and accumulated amortization of property securing capital lease and loan obligations were $35,932,000 and $6,508,000, respectively. Interest rates under the long-term debt and capital leases ranged from approximately 8.0% to 13.5%. On July 31, 1996, SMT refinanced two MRI systems which had previously been refinanced in March 1995 to more favorable lease terms. The new leases totaled approximately $2.3 million (net of a $150,000 down payment) in the aggregate and are being financed over a thirty-six month period at an interest rate of 9.25%. The refinancing resulted in annual cashflow savings to SMT of approximately $200,000 (Note 10). SMT upgraded one of its .5 Tesla Signa systems to a 1.0 Tesla Horizon system. The new system was financed at a net total cost of approximately $2.0 million and was delivered in late February 1996. SMT financed the purchase of this new system with a 60 month dollar-out (bargain purchase option of one dollar) lease requiring monthly payments of approximately $44,000. F-32 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) SMT contracted with several new hospital clients and purchased a new Siemens 1.0 Tesla Impact system which began service in mid-February 1996. The cost of this new system approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $41,000. In April 1996, SMT upgraded one of the systems purchased from another mobile provider (Note 16) to a Siemens 1.0 Tesla Impact system. The new system was financed at a net total cost of approximately $1.9 million. SMT financed this new system with a 60 month loan requiring monthly payments of approximately $43,000. In June 1996, SMT upgraded one of its .5 Tesla Signa systems to a Siemens 1.0 Tesla Impact system. The new system was financed at a net total cost of approximately $2.0 million with a 60 month dollar-out lease requiring monthly payments of approximately $43,000. In May 1996, SMT signed an agreement with Siemens Medical Systems to upgrade the second system purchased from another mobile provider (Note 16) and to purchase a new system during the fourth quarter of 1996. Delivery of the upgraded system occurred in July 1996 and the new system was delivered and began operation on October 1, 1996. The upgrade's net cost approximated $1.9 million and SMT financed approximately $1.7 million with a 60 month finance agreement requiring monthly payments of approximately $36,000. SMT's new system cost approximately $1.9 million and SMT financed approximately $1.7 million requiring a monthly payment of approximately $37,000. During September 1996, SMT upgraded an older system to a new Siemens 1.0 Tesla Impact system. The cost of this new system approximated $1.9 million which was financed with a 60 month loan requiring monthly payments of approximately $39,000. SMT purchased and took delivery of two new GE 1.0 Tesla Horizon systems in September 1996. These systems were purchased at a cost of approximately $1.8 million each and SMT financed approximately $1.6 million and $1.5 million with 60 month finance agreements requiring monthly payments of approximately $34,000 and $32,000, respectively. On November 1, 1996, SMT purchased a mobile MRI system from Palmetto Community Health Network (the "Network") for approximately $390,000 and signed new service contracts with six South Carolina hospitals which are members of the Network. This new system represents SMT's eighteenth mobile system and the seventh new system acquired during 1996. SMT completed a previously negotiated upgrade of a .5 Tesla Signa system to a 1.0 Tesla Horizon system on November 2, 1996. The new system was financed at a net cost of approximately $1.5 million with a 60 month finance agreement requiring monthly payments of approximately $32,000. In December 1996, SMT upgraded the mobile MRI system purchased from the Network to a new 1.0 Tesla Horizon. The new system was financed at a net cost of approximately $1.4 million with a 60 month finance agreement requiring monthly payments of approximately $30,000. The long-term debt and capital lease obligations balance at December 31, 1996 includes approximately $880,000 of capital lease obligations due to third parties related to the equipment at the Auburn Regional Center for Cancer Care and Airport Regional Imaging Center which SMT had treated as discontinued operations and F-33 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) sold in October 1994 and in June 1995, respectively. Accordingly, SMT has recorded an offsetting receivable for the lease receivables due from the purchaser of the centers. Such lease receivables are secured by the equipment and accounts receivable of the centers (Note 13). SMT leases certain tractors for the transportation of mobile MRI systems. Operating lease expenses related to such tractor rentals totaled $257,000, $313,000 and $346,000 for 1994, 1995 and 1996, respectively. Prior to July 1, 1995, SMT rented certain tractors from Shared Mobile Enterprises (Note 9). The future minimum lease payments (excluding variable mileage costs of $.063 per mile) required under these operating leases are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1997..................................... $ 349,300 1998..................................... 326,700 1999..................................... 326,700 2000..................................... 326,700 2001..................................... 169,600 Thereafter................................ 3,300 ---------- Total.................................... $1,502,300 ==========
In addition, see Note 20 regarding the subsequent event. 4. INCOME TAXES Income tax expense attributable to income from continuing operations for the years ended December 31, 1994, 1995 and 1996 are as follows:
CURRENT DEFERRED TOTAL -------------------------- --------------------------- --------------------------- 1994 1995 1996 1994 1995 1996 1994 1995 1996 ------- -------- --------- ------- -------- ---------- ------- -------- ---------- Federal $ -- $ 10,000 $ -- $44,000 $254,000 $1,014,000 $44,000 $264,000 $1,014,000 State 45,000 180,000 (110,000) 4,500 34,000 274,000 49,500 214,000 164,000 ------- -------- --------- ------- -------- ---------- ------- -------- ---------- $45,000 $190,000 ($110,000) $48,500 $288,000 $1,288,000 $93,500 $478,000 $1,178,000 ======= ======== ========= ======= ======== ========== ======= ======== ==========
In addition to the deferred tax expense disclosed above, approximately $1,360,000 of deferred tax benefits were allocated to equity in connection with the tax deductions generated by the exercise of certain stock options and warrants. The difference between SMT's effective income tax rate and its statutory rate is reconciled below:
1994 1995 1996 -------- --------- ---------- Income tax expense at statutory rate....... $216,158 $ 629,414 $1,220,213 Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit.............. 32,670 137,000 110,000 Change in state net operating loss carryforward rules...................... (90,000) -- (61,000) Decrease in valuation allowance.......... (72,500) (312,000) (103,000) Other items.............................. 7,172 23,586 11,787 -------- --------- ---------- $ 93,500 $ 478,000 $1,178,000 ======== ========= ==========
F-34 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) The components of the net deferred tax asset recognized in the December 31, 1995 and 1996 consolidated balance sheets of SMT are presented below:
1995 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................ $ 1,415,794 $ 3,518,800 Non-deductible accrued expenses................. 139,291 75,000 Other........................................... 37,203 19,000 ----------- ----------- 1,592,288 3,612,800 Deferred tax liabilities: Diagnostic medical equipment, principally due to differences in depreciation.................... (1,270,288) (3,290,800) ----------- ----------- 322,000 322,000 Less valuation allowance........................ (103,000) -- ----------- ----------- Net deferred tax asset.......................... $ 219,000 $ 322,000 =========== ===========
Deferred income taxes are provided to account for temporary differences between financial statement accounting and income tax reporting and relate principally to differences in reporting for diagnostic medical equipment, depreciation and net operating loss carryforwards. The net change in the total valuation allowance for the years ended December 31, 1995 and 1996 was a decrease of $312,000 and a decrease of $103,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate relation of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not SMT will realize the benefits for these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. At December 31, 1996, SMT had net operating loss carryforwards for federal income tax purposes of approximately $8,200,000 which are available to offset future federal taxable income through 2010. SMT has approximately $10,100,000 of available carryforwards as of December 31, 1996 for state purposes which are available principally through 1999. 5. STOCKHOLDERS' EQUITY In accordance with SMT's March 1992 Initial Public Offering, SMT issued Warrants to purchase shares of common stock of SMT. Pursuant to the Warrant Agreement, the outstanding Warrants have been recapitalized to reflect the July 1995 5% and January 1997 7% common stock dividends (Note 12). Accordingly, the outstanding Warrants' exercise price of $7.00 entitled the holder to purchase 1.1235 shares of common stock of SMT (Note 18). As additional compensation in connection with the initial public offering, SMT granted to SMT's Initial Public Offering underwriter an option to purchase options which covered 120,000 units, each unit consisted of F-35 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 1.05 shares of common stock and one SMT Warrant to purchase 1.05 shares of common stock. The Option was exercisable until March 4, 1997 and entitled the underwriter to purchase each unit at an exercise price equal to $5.94, subject to adjustment in certain events. The underwriter subsequently transferred the Options to principles of the underwriter (Transferees), who exercised the Options during 1996 resulting in net proceeds to SMT of approximately $719,000. During August 1996, one of the Transferees exercised 24,000 Warrants to purchase 25,200 shares of common stock of SMT resulting in additional proceeds to SMT of approximately $168,000. As a result of the 7% common stock dividend paid in January 1997 (Note 12), the remaining 96,000 underwriter Warrants were convertible to 107,856 shares of common stock. On August 9, 1995, SMT adopted the 1995 Director Warrant Plan (the "Plan") pursuant to which eligible directors received unregistered warrants to purchase common stock (the "Directors' Warrants"). The Plan allows for issuance of warrants to purchase up to 700,000 shares of common stock. On August 9, 1995, warrants to purchase up to 500,000 shares of common stock at an initial exercise price of $3.875 (the closing price of SMT's stock on the date of issue) were issued to five directors pursuant to the Plan. Separately, unregistered warrants to purchase 114,500 shares of common stock at an initial exercise price of $4.01 were also issued to an outside director, who was also a consultant to SMT, who was ineligible to participate in the Plan. During May 1996, the outside director who was also a consultant to SMT exercised the 114,500 Warrants and sold 114,500 shares of common stock. SMT received cash proceeds of approximately $459,000 related to the exercise of such Warrants. During January 1997, SMT's three outside directors each exercised 25,000 Director Warrants and sold 26,750 shares of common stock (after adjustment for the January 1997 7% common stock dividend--Note 12). SMT received cash proceeds of approximately $291,000 as a result of the exercise of the 75,000 Director Warrants. Pursuant to the 1995 Director Warrant Plan, the Director Warrants have been recapitalized to reflect the January 1997 7% common stock dividend (Note 12). Accordingly, the outstanding Director Warrants' exercise price of $3.875 now entitles the holder to purchase 1.07 shares of common stock of SMT. As of January 31, 1997, 425,000 Director Warrants to purchase 454,750 shares of common stock of SMT were outstanding. In October 1995, SMT signed an agreement retaining Commonwealth Associates ("Commonwealth") as its investment banking firm. Commonwealth, a New York- based investment banking firm specializing in serving the financial needs of emerging growth companies, had been engaged to assist SMT in establishing a long-term financial strategy and in evaluating possible transactions involving other mobile diagnostic providers. In addition to a cash retainer, SMT granted to Commonwealth 100,000 five-year Warrants to purchase SMT's common stock at $4.47, the closing bid price of the common stock on the day the Agreement was executed. The agreement with Commonwealth expired in April 1996. During July and October 1996, Commonwealth or a designated employee of Commonwealth exercised the 100,000 Warrants in a net transaction and SMT issued to Commonwealth or the designated employee an aggregate of 36,061 shares of common stock of SMT. In November 1995, SMT adopted a Preferred Stock Purchase Rights Plan (the "Rights Plan") which contains provisions to protect SMT in the event of an unsolicited offer to acquire control of SMT on terms which SMT's Board of Directors determines not to be in the best interest of SMT. The Rights Plan provides for the distribution to shareholders of one right for each share of common stock outstanding. When exercisable, each right will entitle shareholders to buy one one-hundredth of a newly issued share of SMT's Class A Series One Preferred Stock at an exercise price of $22.00. Each right has terms designed F-36 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) to make it substantially the economic equivalent of one share of common stock. Shareholders of record as of the close of business on November 8, 1995 and thereafter will receive the rights. The rights will expire on November 30, 2005, unless further extended, and will be subject to redemption by the Board of Directors at $.01 per right at any time prior to the first date upon which they become exercisable. The rights themselves have no voting power, nor will they entitle a holder to receive dividends. In addition, see Note 20 regarding the subsequent event. 6. PREFERRED STOCK SMT is authorized to issue 994,600 shares of preferred stock ("Preferred Stock"), issuable in series. SMT had one authorized series of 5,400 Preferred Shares, par value $.01, designated as Series A Preferred Stock, which was converted to common stock in July 1993. 7. STOCK OPTION PLANS SMT's 1991 and 1996 Employee Stock Option Plans (the "Employee Plans") currently provide for the granting of options to employees to purchase up to 1,110,125 shares of SMT's common stock at the fair market value at the date of grant. Options granted to employees may either be incentive stock options (as defined in the Internal Revenue Code of 1986, as amended) or non-qualified stock options and expire ten years from date of grant.
OPTIONS OUTSTANDING ------------------------- NUMBER PRICE PER SHARE -------- --------------- Balance--December 31, 1993......................... 145,514 $3.11 Granted.......................................... 203,179 $1.28-$2.00 Exercised........................................ -- -- Expired.......................................... -- -- -------- Balance--December 31, 1994......................... 348,693 $1.28-$3.11 Granted.......................................... 431,349 $2.30-$3.56 Exercised........................................ -- -- Expired.......................................... -- -- -------- Balance--December 31, 1995......................... 780,042 $1.28-$3.56 Granted.......................................... 309,770 $3.92-$6.43 Exercised........................................ (439,900) $1.28-$3.11 Expired.......................................... (10,480) $3.11 -------- Balance--December 31, 1996......................... 639,432 $1.28-$6.43 ========
All of the above outstanding options are non-qualified options. At December 31, 1996, options to purchase 639,432 shares were exercisable and no additional shares were available for future grant in accordance with the Employee Plans. The total number of options to purchase shares of common stock and the exercise prices of any options which were granted pursuant to the Employee Plan prior to July 1995 have been adjusted to reflect the July 1995 5% common stock dividend (Note 12). In January 1997, SMT granted a 7% common stock dividend. The aforementioned number of options to purchase shares of common stock and the exercise prices of such options reported above have been adjusted to reflect the January 1997 dividend (Note 12). F-37 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) SMT's 1991 Director Stock Option Plan for non-employee directors (the "Directors' Plan") currently provides for the granting of options to non- employee directors to purchase up to 112,350 shares of SMT's common stock at the fair market value on the date of grant. Under the Directors' Plan, each eligible director automatically receives options to purchase 2,247 shares of SMT's common stock on December 31 of each year. Options granted under the Directors' Plan may be exercised within ten years of the date of grant and while the recipient of the option is a director of SMT.
OPTIONS OUTSTANDING ------------------------ NUMBER PRICE PER SHARE ------- --------------- Balance--December 31, 1993.......................... 21,294 $1.66-$3.00 Granted........................................... 10,647 $2.06 Exercised......................................... -- -- Expired........................................... -- -- ------- Balance--December 31, 1994.......................... 31,941 $1.66-$3.00 Granted........................................... 8,547 $4.09 Exercised......................................... (6,000) $1.66-$3.00 Expired........................................... (300) $1.66-$3.00 ------- Balance--December 31, 1995.......................... 34,188 $1.66-$4.09 Granted........................................... 6,741 $7.94 Exercised......................................... (23,100) $1.66-$4.09 Expired........................................... (2,100) $4.09 ------- Balance--December 31, 1996.......................... 15,729 $1.66-$7.94 =======
As of December 31, 1996, options to purchase 15,729 shares of common stock were exercisable under the Directors' Plan and 65,484 shares were available for future grant in accordance with the Director Plan. The total number of options to purchase shares of common stock and the exercise prices of any options which were granted pursuant to the Directors' Plan prior to July 1995 have been adjusted to reflect the July 1995 5% common stock dividend (Note 12). In February 1994, the Board of Directors granted additional vested options to purchase 42,000 shares of SMT's common stock at an exercise price of $1.78 per share, the fair market value of the common stock at the date of grant, to two non-management members of the Board of Directors. During June and September 1996, the two non-management members of the Board of Directors (one now a former director), exercised the 42,000 options and sold 42,000 shares of common stock received upon the option exercise. SMT realized net proceeds of approximately $75,000 from the exercise of the 42,000 options. In January 1997, SMT granted a 7% common stock dividend. The aforementioned number of options to purchase shares of common stock and the exercise prices of such options reported above have been adjusted to reflect the January 1997 dividend (Note 12). SFAS 123 requires companies who continue to apply APB Opinion No. 25 to account for their stock-based employee compensation arrangements to provide pro forma net income and earnings per share as if the fair value based method had been used to account for compensation cost (Note 2). The per share weighted average fair value of stock options granted during 1995 and 1996 approximated $672,000 and $393,000 on the date of grant F-38 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) using the Black Scholes option--pricing model with the following weighted- average assumptions: 1995--expected dividend yield 0.0%, risk-free interest rate of 7.05%, expected volatility of the stock 33%, and expected life of three years; 1996--expected dividend yield 0.0%, risk-free interest rate of 7.05%, expected volatility of the stock of 33%, an expected life of three years. Accordingly, pro forma net income and earnings per share would have been $771,000 ($.37 per share) and $2,017,000 ($.54 per share) for the years ended December 31, 1995 and 1996, respectively, if SMT had accounted for its stock based employee compensation arrangements using the fair value method. The 1995 and 1996 effects of applying SFAS 123 for providing pro forma disclosures are not likely to be representative of the effects on pro forma net income and earnings per share for future years because the number of option grants and the fair value assigned to the grants could differ. 8. BENEFIT PLANS SMT maintains an annual bonus plan for key executives and employees which is based primarily upon the pre-tax earnings of SMT. SMT expensed approximately $115,000, $348,000 and $584,000 for the program during 1994, 1995 and 1996, respectively. SMT maintains and administers an employee savings plan pursuant to Internal Revenue Code Section 401(k). The Plan provides for discretionary contributions as determined by SMT's Board of Directors. SMT contributed approximately $18,000, $18,000 and $34,000 to the Plan in 1994, 1995 and 1996, respectively. 9. RELATED PARTY TRANSACTIONS A former shareholder/director of SMT was also a consultant to SMT and SMT had entered into a five-year consulting agreement with him through November 1996 pursuant to which he was to receive a fee of $75,000 per year. On March 27, 1996, SMT prepaid the remaining $50,000 due under the Consulting Agreement and terminated the Consultant Agreement. Fees paid to this former shareholder/director totaled approximately $75,000 for each of the past three years. Prior to July 1, 1995, SMT subleased certain truck cabs from Shared Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an independent third party leasing company. Effective July 1, 1995, SME released SMT from its obligations under ten long-term subleases in exchange for the issuance to SME of 120,000 unregistered common shares valued at $3 per share, the weighted average closing price for the stock for the prior thirty trading days. SMT received an opinion from an independent financial advisor that the transaction was fair to SMT and its shareholders. At the same time, with the concurrence of the third party leasing company, SMT assumed SME's obligations under its original lease and modified that lease by (1) extending the lease term by one additional year and (2) adding one additional truck cab to the schedule of leased property with a corresponding increase in base rental payments. The $360,000 value of the shares represents the present value of the excess of the sublease payments over the original lease payments. SMT has capitalized the $360,000 and is amortizing this prepaid rent over a period which approximates the lease term. SME was one hundred percent beneficially owned by certain officers/directors and a former director/consultant of SMT who owned approximately 14% of SMT's outstanding common shares. Total rental expense paid to SME for the years ended December 31, 1994 and 1995 was approximately $257,000 and $180,000, respectively (Note 3). Certain shareholders/officers of SMT, who own approximately 14% of the outstanding common stock of SMT, also collectively owned 50% of the outstanding capital stock of Upstate MRI, Inc., a.k.a., Virginia MRI, Inc. ("VA MRI"), which owned and operated a mobile MRI system which provided service in Virginia and North Carolina. SMT and the shareholders/officers of SMT guaranteed the lease on such mobile MRI system. F-39 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) On June 1, 1993, SMT entered into a one-year operating lease with VA MRI where SMT leased the VA MRI Mobile System ("VA Mobile System") and related service contracts in return for a monthly rental of $58,000, which lease was renewed on June 1, 1994. A previously negotiated management agreement between VA MRI and SMT, pursuant to which SMT received $5,000 per month in administrative fees, plus reimbursement of all expenses, in return for managing the operations of VA MRI was terminated. On November 14, 1994, SMT purchased the VA Mobile System in consideration for the assumption of all of VA MRI's lease obligations totaling approximately $400,000 (approximate fair market value of the equipment). In addition, VA MRI transferred and assigned to SMT its rights in the service contracts related to the VA Mobile System in consideration for the forgiveness of the remaining approximately $50,000 owed to SMT pursuant to a note and the payment by SMT of $44,000. SMT capitalized the approximately $94,000 as contract acquisition costs which are being amortized over the term of the service contracts which approximates four years (Note 2). In addition, on November 14, 1994, upon completion of the VA Mobile System purchase, SMT traded in the VA Mobile System and upgraded this MRI system to a General Electric 1.0 Tesla Signa which SMT has financed with a 66 month lease requiring monthly payments of approximately $41,000. This new lease transfers the ownership of such mobile MRI system to SMT at the completion of the lease. The original VA Mobile System lease assumed by SMT has been terminated in conjunction with this transaction. A certain director of SMT is a director of, consultant to and shareholder of DVI Inc., the parent of DVI Financial Services Inc. ("DVI"). During 1992 and 1993, SMT entered into numerous leasing transactions with DVI pertaining to both continuing and discontinued operations involving total financing of approximately $15.6 million. During 1994, SMT did not enter into any new leases with DVI and refinanced with third parties $3.2 million of leases held by DVI. During the first quarter of 1995, SMT refinanced its remaining leases with DVI, totaling approximately $6.5 million, with third- party lease companies. Interest rates under financing agreements with DVI ranged from 11% to 14%. During 1996, SMT financed the acquisition of a new mobile MRI system with DVI. SMT and DVI entered into a 60 month capital lease financing approximately $1.5 million at an interest rate of approximately 9.5%. Total payments to DVI during 1994, 1995 and 1996 with respect to capital lease obligations were approximately $3.9 million, $440,000 and $100,000, respectively, including $1.4 million, $87,000, and $36,000, respectively, of interest expense associated with such capital leases. In March 1995, DVI sold 368,000 shares of SMT's common stock which it had received during SMT's initial public offering, pursuant to registration statements under the Securities Act of 1933, as amended. 10. COMMITMENTS AND CONTINGENCIES The lease for SMT's principal facility expires in April 1999. Rent expense for SMT's principal facility was $69,000, $76,000 and $76,000 for 1994, 1995 and 1996, respectively. Future minimum lease payments under this lease are as follows:
YEAR ENDING DECEMBER FUTURE MINIMUM 31, LEASE PAYMENTS -------- -------------- 1997.............................. $ 87,900 1998.............................. 87,900 1999.............................. 29,300 -------- Total............................. $205,100 ========
F-40 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) Pursuant to capital lease obligations (Note 3) and related maintenance contracts, which begin upon expiration of the manufacturer's warranty period of generally 12 to 18 months and which contracts expire at various dates through the year 2001, SMT is currently obligated to pay approximately $118,000 per month for maintenance of equipment. In November 1992, SMT issued a letter-of-credit in the amount of $198,500 pursuant to a lease transaction related to its freestanding full-service diagnostic imaging center (Note 13). In exchange for restructuring the terms of the debt of this Center, SMT increased the outstanding letter-of-credit to an aggregate $400,000. In November 1994, SMT issued a letter-of-credit in the amount of $270,000 related to the purchase and financing of a new mobile MRI system. The lessor holding this letter-of-credit allowed the letter-of-credit to terminate on October 31, 1996. In relation to the refinancing of four mobile MRI systems in February and March 1995 (Note 3), SMT issued two letters-of-credit in the aggregate amount of $930,000. In February 1996, the lessor holding one of the letters-of-credit totaling $330,000 allowed the letter-of-credit to expire. On July 31, 1996, SMT refinanced two MRI systems which had previously been refinanced in March 1995 to more favorable lease terms. As a result of this refinancing, the $600,000 letter-of-credit which had been issued in March 1995 was terminated (Note 3). SMT must maintain a cash balance of $400,000 on deposit with the bank which issued the aforementioned letter-of-credit. 11. SUPPLEMENTAL CASH FLOW INFORMATION SMT entered into various capital leases or financing arrangements (including new MRI systems and upgrades) aggregating approximately $4,350,000, $4,800,000 and $15,135,000 during 1994, 1995 and 1996, respectively. SMT also entered into similar arrangements aggregating approximately $5,715,000 and $3,000,000 during the six months ended June 30, 1996 and 1997, respectively. These amounts were recorded as long-term debt and obligations under capital leases and as mobile MRI equipment. SMT refinanced various capital leases during 1994, 1995 and 1996 aggregating approximately $3,231,000, $7,092,000 and $2,474,000, respectively. Interest paid during 1994, 1995 and 1996 was approximately $1,474,000, $1,736,000 and $2,062,000, respectively. Taxes paid during 1994, 1995 and 1996 approximated $46,000, $71,000 and $240,000. 12. COMMON STOCK DIVIDENDS On July 10, 1995, SMT issued 120,400 common shares in conjunction with a 5% common stock dividend for all shareholders of record on June 30, 1995. As a result of the stock dividend, approximately $323,000 was charged to accumulated deficit and, in accordance with Accounting Principles Board Opinion 15, "Earnings Per Share", (APB 15), SMT reflected the 5% common stock dividend in calculating earnings per share for 1994. F-41 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) On January 14, 1997, SMT issued 247,130 common shares in accordance with a 7% common stock dividend for all shareholders of record on January 10, 1997. The December 31, 1996 financial statements have been adjusted to reflect this post balance sheet equity activity (Note 2). Further, in accordance with APB 15, SMT has reflected the 7% common stock dividend in calculating earnings per share for all periods presented (Note 2). In accordance with SMT's Warrant Agreement, SMT's publicly-traded Warrants were recapitalized to reflect the common stock dividend. As a result, each Warrant certificate entitled the holder to purchase 1.1235 shares of stock for $7.00. In July 1995, SMT issued a similar 5% common stock dividend. Such publicly traded warrants expired on March 4, 1997 (Note 18). 13. DISCONTINUED OPERATIONS On December 30, 1993, SMT formally adopted a plan to sell its freestanding full-service diagnostic imaging center and its radiation oncology center during 1994 and 1995. The following table presents net revenues, losses from discontinued operations, losses on disposal of discontinued operations and selected balance sheet information relating to the freestanding full-service diagnostic imaging and radiation oncology businesses as of, and for the years ended, December 31, 1994 and 1995:
1994 1995 ---------- -------- Net revenues............................................ $1,660,077 $821,000 Loss from discontinued operations....................... -- -- Loss on disposal of discontinued operations, net of tax benefit of $68,000 in 1994............................. 132,000 -- Accounts receivable, net................................ 148,189 -- Leased medical equipment, net........................... 1,305,897 -- Leasehold improvements, net............................. 277,176 -- Deferred costs, net..................................... 197,297 -- Other assets, net....................................... 137,291 -- Accounts payable and accrued expenses................... 88,154 -- Long-term debt and capital lease obligations............ 1,305,728 -- Reserve for loss on discontinued operations............. 456,302 --
SMT sold substantially all of the assets of the Auburn Regional Center for Cancer Care on October 31, 1994. The sale price of the Center was approximately $1.3 million comprised of $400,000 in cash and the assumption of the Center's liabilities. SMT remains obligated on approximately $270,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have SMT released from these leases and has secured its obligations to SMT to perform on these leases through a pledge of certain assets in favor of SMT (Note 3). SMT had previously established a discontinued operations reserve and accordingly, no gain or loss was recorded as a result of this sale. In January 1995, SMT restructured the majority of the long-term debt and capital lease obligations of the freestanding imaging center resulting in debt forgiveness of approximately $300,000, a lower interest rate and extension of the term to 66 months, including interest only payments for the first six months. The debt forgiveness was considered in determining the adequacy of the reserve for loss on discontinued operations as of December 31, 1994. In relation to this debt restructuring, SMT increased the letter-of-credit outstanding to $400,000 (Note 10). F-42 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) On June 30, 1995, SMT completed the sale of substantially all of the assets of its remaining freestanding diagnostic imaging center, Airport Regional Imaging Center ("Airport Center"), located in Coraopolis, Pennsylvania for a total sale price of approximately $300,000, including cash and net trade receivables. Although the buyer assumed all future operating liabilities of the Airport Center, SMT remains obligated on approximately $600,000 of capital leases as of December 31, 1996. The buyer has agreed to use its best efforts to have SMT released from these leases and has secured its obligations to SMT to perform on these leases through a pledge of stock and certain assets in favor of SMT (Note 3). SMT had previously established a discontinued operations reserve and accordingly, no gain or loss was recognized as a result of this sale. 14. SALE OF PARTNERSHIP INTERESTS On June 30, 1995, in conjunction with the sale of the Airport Center which had been treated as a discontinued operation (Note 13), SMT sold its majority ownership and general partner rights in four cardiac care partnerships for a total sale price of $300,000 comprised of $200,000 in cash and a $100,000, thirty-month note. SMT recognized a pre-tax gain on this sale of $48,219. The partnerships, which constituted approximately seven percent of SMT's revenues, had total assets of approximately $1.4 million, comprised primarily of diagnostic equipment and accounts receivable, and total liabilities of approximately $1.2 million comprised primarily of capital lease obligations associated with the diagnostic equipment. 15. LITIGATION SMT had been named as a defendant, along with a hospital which contracts for SMT's MRI services, in a claim filed by a woman who alleged to have incurred partial paralysis as a result of being mishandled during an MRI procedure. The claim had been filed for $6.0 million in damages. The claim was settled by SMT's insurance company in November 1996 with no admission of liability by SMT and no financial effect to SMT. 16. ACQUISITION On March 21, 1996, SMT purchased certain assets of a mobile provider which operated mobile units in the state of North Carolina (the "Seller"). The purchase price approximated $600,000 in cash (net of negotiated trade-in value of approximately $500,000 (which approximated the purchase price of the systems acquired) for two of the Seller's mobile MRI systems) in exchange for MRI Programs including Certificate of Need licenses or exemptions and certain customer service contracts. SMT traded-in and upgraded one of the purchased systems to newer technology in April 1996 and traded-in and upgraded the second system during July 1996 (Note 3). 17. SALES TAX REFUND During September 1996, SMT received formal notification of a state sales tax refund of approximately $300,000, net of expenses. The refund is the result of sales tax paid to a certain state over a period of time which SMT determined (by obtaining a private letter ruling from the state) was actually exempt from such tax. Payment of the refund was received in January 1997. 18. WARRANT CONVERSION During January through March 4, 1997 (the Warrants expired at 5:00 p.m. on March 4, 1997) 1,677,000 Warrants (Note 5) were exercised and SMT issued 1,882,000 shares of common stock of SMT. SMT received net cash proceeds of approximately $11.7 million as a result of such Warrant exercises. The Warrants ceased trading on March 5, 1997. F-43 SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) 19. EXTINGUISHMENT OF DEBT (UNAUDITED) During March 1997, SMT paid-off the remaining principal balance of three capital lease obligations totaling $4,236,000. The total amount paid to extinguish the capital leases totaled $4,532,000. The difference between the amount paid to extinguish the capital leases and the net carrying amount of the debt totaled $296,000, relating primarily to pre-payment penalties, and has been recorded as an extraordinary loss, net of income taxes, in accordance with Accounting Principles Board Opinion No. 26 "Early Extinguishment of Debt" (APB 26). The interest rates under the capital leases ranged from 10.6% to 13.5%. The monthly cashflow savings approximates $128,000 and the interest expense savings for 1997 approximates $400,000 before income taxes. 20. SUBSEQUENT EVENTS (UNAUDITED) On June 23, 1997, SMT signed a definitive agreement with Three Rivers Acquisition Corp. ("Three Rivers"), an affiliate of Apollo Management, L.P. ("Apollo"), pursuant to which Three Rivers agreed to acquire all of the outstanding shares of SMT for $11.75 per share through a cash tender offer which commenced June 30, 1997, to be followed by a merger. The total transaction is valued at approximately $100 million including outstanding stock options and warrants and the assumption of debt. On August 5, 1997, Three Rivers successfully completed its tender offer for all of the outstanding shares of common stock of SMT. The depository for the offer informed Three Rivers that 5,280,297 shares (91.9% of the outstanding shares) were validly tendered and not withdrawn prior to the expiration of the offer, including 2,841 shares tendered pursuant to notice of guaranteed delivery procedures. All shares validly tendered and not withdrawn were accepted for payment of $11.75 per share in cash. The remaining shares of SMT will be converted into the right to receive $11.75 per share in cash in a merger between SMT and Three Rivers. The merger is expected to be consummated in September 1997. On August 5, 1997, Three Rivers Holding Corp., Three Rivers, SMT and various lenders entered into an $80 million credit facility that was used to fund a portion of the cash tender and to refinance approximately $19 million of SMT indebtedness. The remainder of the credit facility will be used for working capital requirements and general corporate purposes of SMT. The remainder of the cash tender offer was funded with approximately $33.6 million from Three Rivers. SMT accrued $220,000 as of June 30, 1997 for professional fees related to the aforementioned merger and tender offer. The fees were primarily related to legal and accounting services. On July 23, 1997, Alliance Imaging, Inc. ("Alliance") entered into an Agreement and Plan of Merger (the "Recapitalization Merger Agreement"). Under the terms of the Recapitalization Merger Agreement, an entity formed by Apollo, will merge with and into Alliance (the "Recapitalization"). In connection with the Recapitalization and subject to certain conditions, Alliance will acquire all the shares of common stock of Three Rivers. F-44 SMT HEALTH SERVICES INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA Summarized quarterly unaudited financial data for the years ended December 31, 1995 and 1996, and the six month period ended June 30, 1997 follows:
THREE MONTHS ENDED ----------------------------------------------------------------- MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995 -------------- ------------- ------------------ ----------------- Revenues................ $3,644,765 $3,851,784 $3,821,904 $3,701,975 Operating expenses, excluding depreciation. 1,366,635 1,487,476 1,327,119 1,214,891 Depreciation and amortization........... 936,510 919,897 869,543 953,296 Selling, general and administrative expenses............... 564,559 598,235 652,536 656,693 Interest expense, net... 419,362 423,084 389,525 388,163 Income before income taxes.................. 330,608 448,496 583,181 488,932 Net income.............. 241,608 329,496 431,181 370,932 Earnings per common share: Continuing operations. $ 0.09 $ 0.11 $ 0.13 $ 0.13 Discontinued operations........... -- -- -- -- ---------- ---------- ---------- ---------- Net income per share.. $ 0.09 $ 0.11 $ 0.13 $ 0.13 ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding..... 2,705,000 2,705,000 2,834,000 2,838,000 ========== ========== ========== ========== THREE MONTHS ENDED ----------------------------------------------------------------- MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 -------------- ------------- ------------------ ----------------- Revenues................ $4,128,035 $4,596,571 $4,754,324 $5,543,024 Operating expenses, excluding depreciation. 1,365,973 1,524,754 1,586,903 1,802,285 Depreciation and amortization........... 989,174 1,119,823 1,198,155 1,417,757 Selling, general and administrative expenses............... 682,266 690,967 629,144 875,044 Interest expense, net... 404,141 458,032 457,392 531,283 Income before income taxes.................. 686,481 802,995 1,182,730 916,655 Net income.............. 457,481 562,995 915,730 474,655 Earnings per common share: Primary: Net income per share.. $ 0.13 $ 0.14 $ 0.20 $ 0.14 ========== ========== ========== ========== Fully diluted: Net income per share... $ 0.13 $ 0.14 $ 0.20 $ 0.12 ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding..... 2,840,000 2,998,000 3,402,000 3,689,000 ========== ========== ========== ========== THREE MONTHS ENDED ---------------------------- MARCH 31, 1997 JUNE 30, 1997 -------------- ------------- Revenues................ $6,239,307 $6,801,955 Operating expenses, excluding depreciation. 1,985,299 2,167,459 Depreciation and amortization........... 1,559,792 1,633,880 Selling, general and administrative expenses............... 941,871 965,461 Interest expense, net... 500,577 304,453 Income before income taxes and extraordinary loss................... 1,251,768 1,483,702 Extraordinary loss, net of taxes............... 181,000 -- Net income.............. 580,768 878,702 Earnings per common share: Earnings before extraordinary item... $ 0.15 $ 0.15 Extraordinary loss per share................ (0.03) -- ---------- ---------- Net income per share.. $ 0.12 $ 0.15 ========== ========== Weighted average common and common equivalent shares outstanding..... 4,443,000 5,718,000 ========== ==========
Note: Weighted average common and common equivalent shares outstanding for all periods have been adjusted to reflect a 1995 5% common stock dividend and a January 1997 7% common stock dividend. F-45 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ----------------- TABLE OF CONTENTS PAGE Available Information...................................................... i Incorporation of Certain Documents by Reference............................ i Prospectus Summary......................................................... 1 Risk Factors............................................................... 11 The Transactions........................................................... 16 Use of Proceeds............................................................ 17 Pro Forma Capitalization................................................... 18 Unaudited Pro Forma Combined Consolidated Financial Information............ 19 Selected Historical Consolidated Financial Information of Alliance......... 26 Selected Historical Consolidated Financial Information of SMT.............. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 28 Industry................................................................... 38 Business................................................................... 40 Management................................................................. 49 Principal Stockholders..................................................... 57 Certain Relationships and Related Transactions............................. 58 Description of the Credit Agreement........................................ 59 Description of the Notes................................................... 61 Underwriting............................................................... 87 Legal Matters.............................................................. 88 Experts.................................................................... 88 Index to Consolidated Financial Statements................................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -------------- PROSPECTUS -------------- $170,000,000 ALLIANCE IMAGING, INC. % SENIOR SUBORDINATED NOTES DUE 2005 JOINT BOOK-RUNNING MANAGERS BT ALEX. BROWN SMITH BARNEY INC. ----------------- SALOMON BROTHERS INC , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee. SEC registration fee......................................... $51,515.00 NASD filing fee.............................................. 17,500.00 Blue sky fees and expenses................................... * Printing and engraving expenses.............................. * Legal fees and expenses...................................... * Accounting fees and expenses................................. * Trustee fees and expenses.................................... * Miscellaneous................................................ * ---------- Total...................................................... $ * ==========
- -------- * To be provided by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Restated Certificate of Incorporation, By-Laws and indemnification agreements with officers and directors provide for indemnification to the full extent permitted by the laws of the State of Delaware against and with respect to threatened, pending or completed actions, suits or proceedings arising from or alleged to arise from, a party's actions or omissions as a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust or other enterprise which has served in such capacity at the request of the Company if such acts or omissions occurred or were or are alleged to have occurred, while said party was a director or officer of the Company; provided, however, the Company shall not indemnify any director or officer in an action against the Company unless the Company shall have consented to such action. Generally, under Delaware law, indemnification will only be available where an officer or director can establish that he/she acted in good faith and in a manner which was reasonably believed to be in or not opposed to the best interests of the Company. Section 145 of the Delaware Law provides that a corporation may indemnify a director, officer, employee or agent made a party to an action by reason of the fact that such person was a director, officer, employee or agent of the corporation or was serving at the request of the corporation against expenses actually incurred by such person in connection with such action if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interest of the corporation with respect to any criminal action, and had no reasonable cause to believe his conduct was unlawful. Delaware Law does not permit a corporation to eliminate a director's duty of care, and the provisions of the Company's Amended and Restated Certificate of Incorporation have no effect on the availability of equitable remedies such as injunction or rescission, based upon a director's breach of the duty of care. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions and agreements, the Company has been informed that in the opinion of the Staff of the Securities and Exchange Commission such indemnification is against policy as expressed in the Securities Act and is therefore unenforceable. Reference is made to the form of Underwriting Agreement filed as Exhibit 1 to this Registration Statement, which provides for indemnification of the directors and officers of the Company signing the Registration Statement and certain controlling persons of the Company against certain liabilities, including those arising under the Securities Act, in certain instances by the Underwriters. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. NOTE EXHIBIT DESCRIPTION - ----------- ---- -------------------------------------------------------------------------- 1 (12) Form of Underwriting Agreement. 2.1 (10) Agreement and Plan of Merger dated as of July 23, 1997 between Alliance and Newport Investment LLC (the "Recapitalization Merger Agreement"). 2.2 (11) Amendment No. 1, dated as of August 13, 1997, to the Recapitalization Merger Agreement. 2.3 (11) Guaranty Letter dated July 22, 1997, from AJF III to Alliance. 3.1 (11) Form of Amended and Restated Certificate of Incorporation of Alliance. 3.2 (13) By-Laws of Alliance, as amended. 4.1 (12) Form of Indenture for the % Senior Subordinated Notes due 2005 (including the Form of Note as Exhibit A thereto) between the Company and , as trustee. 5 (13) Opinion of O'Sullivan Graev & Karabell, LLP. 9.1 (1) Amended and Restated Voting Trust Agreement between Donaldson, Lufkin & Jenrette Capital Corporation and Meridian Trust Company dated December 29, 1988. 10.1 (10) Stockholder Agreement dated as of July 23, 1997 among Newport Investment LLC and the stockholders of Alliance party thereto. 10.2 (4) Registration Rights Agreement dated as of December 31, 1994 among the Registrant, the Senior Noteholders and the Senior Subordinated Debentureholders. 10.3 (7) Amended and Restated 1991 Stock Option Plan of Alliance, including forms of agreement used thereunder. 10.4 (1) Form of Indemnification Agreement between Alliance and its directors and/or officers. 10.5 (2) Georgia Magnetic Imaging Center, Ltd. Limited Partnership Agreement dated as of March 22, 1985. 10.6 (2) Amendment to Georgia Magnetic Imaging Center, Ltd., Limited Partnership Agreement, dated as of July 1, 1993. 10.7 (3) Employment Agreement dated as of September 9, 1993 between Alliance and Terry A. Andrues. 10.8 (3) Employment Agreement dated as of September 9, 1993 between Alliance and Jay A. Mericle. 10.9 (9) Amended and Restated Employment Agreement dated as of May 15, 1997 between Alliance and Terrence M. White. 10.10 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Neil M. Cullinan. 10.11 (3) Employment Agreement dated as of June 6, 1994 between Alliance and Cheryl A. Ford. 10.12 (5) Employment Agreement dated July 7, 1995 between Alliance and Michael W. Grismer. 10.13 (11) Employment Agreement dated as of July 23, 1997 between Alliance and Richard N. Zehner. 10.14 (11) Employment Agreement dated as of July 23, 1997 between Alliance and Vincent S. Pino. 10.15 (11) Agreement Not to Compete dated as of July 23, 1997 among Newport Investment LLC, Alliance, Richard N. Zehner and Vincent S. Pino. 10.16 (11) Employment Agreement dated as of June 24, 1997 between SMT Health Services Inc. and Jeff D. Bergman. 10.17 (9) Amended and Restated Long-Term Executive Incentive Plan dated as of July 22, 1997.
II-2 10.18 (6) Agreement and Plan of Merger, dated as of April 16, 1996, among Alliance, Alliance Imaging of Pennsylvania, Inc. and Royal Medical Health Services Inc. 10.19 (6) Acquisition Agreement, among Alliance, A&M Trucking Inc. and each of Mark J. Graham and Albert F. Calfo, II, dated April 16, 1996. 10.20 (8) Stock Purchase Agreement, dated as of March 25, 1997, between Alliance and General Electric Company. 10.21 (13) Form of Credit Agreement. 10.22 (13) 1997 Three Rivers Holding Corp. Stock Option Plan, including forms of agreement used thereunder. 10.23 (13) Form of Three Rivers Holding Corp. Rollover Stock Option Plan. 11 (11) Statement of Computation of Per Share Earnings. 12.1 (14) Statement of Computation of Earnings to Fixed Charges of Alliance. 12.2 (14) Statement of Computation of Earnings to Fixed Charges of SMT. 21 (11) List of Subsidiaries. 23.1 (12) Consent of Ernst & Young LLP. 23.2 (12) Consent of KPMG Peat Marwick LLP. 23.3 Consent of O'Sullivan Graev & Karabell, LLP (included in Exhibit 5). 24.1 (14) Power of Attorney. 25 (13) Statement of Eligibility of [Trustee]. 27.1 (14) Financial Data Schedule.
- -------- (1) Incorporated by reference herein to the indicated exhibits filed in response to Item 16, "Exhibits" of Alliance's Registration Statement on Form S-1, No. 33-40805, initially filed on May 24, 1991. (2) Incorporated by reference herein to the indicated exhibits filed in response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. (3) Incorporated by reference herein to the indicated exhibit filed in response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. (4) Incorporated by reference herein to Exhibit 4.5 filed in response to Item 7, "Exhibits" of Alliance's Form 8-K Current Report dated January 25, 1995. (5) Incorporated by reference herein to Exhibit 10.36 filed in response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (6) Incorporated by reference herein to the indicated Exhibit filed in response to Item 6(a), "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (7) Incorporated by reference herein to Exhibits filed with Alliance's Registration Statement on Form S-1, No. 33-40805, initially filed on May 24, 1991 and Alliance's definitive Proxy Statement with respect to its Annual Meeting of Shareholders held May 16, 1996. (8) Incorporated by reference herein to the indicated Exhibit in response to Item 14(a)(3), "Exhibits" of Alliance's Annual Report on Form 10-K for the year ending December 31, 1996. (9) Incorporated by reference to indicated exhibits filed in response to Item 6, "Exhibits" of Alliance's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (10) Incorporated by reference herein to the indicated exhibits filed in response to Item 5, "Exhibits" of Alliance's Form 8-K Current Report dated August 1, 1997. (11) Incorporated by reference to the indicated exhibits filed in response to Item 21, "Exhibits" of Alliance's Registration Statement on Form S-4, No 333-33787, initially filed on August 15, 1997. (12) Filed herewith. (13) To be filed by amendment. (14) Previously filed. II-3 (b) Financial Statement Schedules Alliance Imaging, Inc. Report of Independent Auditors on Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts SMT Health Services Inc. Schedule II--Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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 the purpose of determining any liability under the Securities Act, 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. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 29th day of September, 1997. Alliance Imaging, Inc. By: /s/ Terrence M. White ------------------------------- Name: Terrence M. White Title:Senior Vice President, Chief Financial Officer and Secretary II-5 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed on the 29th day of September, 1997, by the following persons in the capacities indicated:
SIGNATURE TITLE * Chairman of the Board of - ------------------------------------ Directors, President and RICHARD N. ZEHNER Chief Executive Officer (Principal Executive Officer) * Executive Vice President, - ------------------------------------ Chief Operating Officer VINCENT S. PINO and Director /s/ Terrence M. White Senior Vice President, Chief - ------------------------------------ Financial Officer and TERRENCE M. WHITE Secretary (Principal Financial Officer) * Controller (Principal - ------------------------------------ Accounting Officer) MICHAEL W. GRISMER * Director - ------------------------------------ JAMES E. BUNCHER * Director - ------------------------------------ DOUGLAS M. HAYES Director - ------------------------------------ ROBERT B. WALEY-COHEN * Director - ------------------------------------ JOHN C. WALLACE /s/ Terrence M. White - ------------------------------------ *BY: TERRENCE M. WHITE ATTORNEY-IN-FACT
II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 29th day of September, 1997. SMT Acquisition Corp. By: /s/ Terrence M. White ---------------------------------- Name: Terrence M. White Title:Senior Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed on the 29th day of September, 1997, by the following persons in the capacities indicated:
SIGNATURE TITLE --------- ----- Chairman of the * Board of Directors, - ------------------------------------- President and Chief RICHARD N. ZEHNER Executive Officer (Principal Executive Officer) Executive Vice * President, Chief - ------------------------------------- Operating Officer VINCENT S. PINO and Director /s/ Terrence M. White Senior Vice - ------------------------------------- President, Chief TERRENCE M. WHITE Financial Officer, Secretary and Director (Principal Financial Officer) Controller * (Principal - ------------------------------------- Accounting Officer) MICHAEL W. GRISMER /s/ Terrence M. White - ------------------------------------- *BY: TERRENCE M. WHITE ATTORNEY-IN-FACT
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 29th day of September, 1997. Royal Medical Health Services, Inc. By: /s/ Terrence M. White ---------------------------------- Name: Terrence M. White Title:Senior Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed on the 29th day of September, 1997, by the following persons in the capacities indicated:
SIGNATURES TITLE ---------- ----- Chairman of the * Board of Directors, - ------------------------------------- President and Chief RICHARD N. ZEHNER Executive Officer (Principal Executive Officer) Executive Vice * President, Chief - ------------------------------------- Operating Officer VINCENT S. PINO and Director Senior Vice /s/ Terrence M. White President, Chief - ------------------------------------- Financial Officer, TERRENCE M. WHITE Secretary and Director (Principal Financial Officer) Controller * (Principal - ------------------------------------- Accounting Officer) MICHAEL W. GRISMER /s/ Terrence M. White - --------------------------------- *By: Terrence M. White Attorney-in-Fact
II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 29th day of September, 1997. Alliance Imaging of Central Georgia, Inc. By: /s/ Terrence M. White ---------------------------------- Name: Terrence M. White Title:Senior Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed on the 29th day of September, 1997, by the following persons in the capacities indicated:
SIGNATURE TITLE --------- ----- Chairman of the * Board of Directors, - ------------------------------------- President and Chief RICHARD N. ZEHNER Executive Officer (Principal Executive Officer) Executive Vice * President, Chief - ------------------------------------- Operating Officer VINCENT S. PINO and Director Senior Vice /s/ Terrence M. White President, Chief - ------------------------------------- Financial Officer, TERRENCE M. WHITE Secretary and Director (Principal Financial Officer) Controller * (Principal - ------------------------------------- Accounting Officer) MICHAEL W. GRISMER /s/ Terrence M. White - ----------------------------------- *By: Terrence M. White Attorney-in-Fact
II-9 INDEPENDENT AUDITORS REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors Alliance Imaging, Inc. We have audited the consolidated financial statements of Alliance Imaging, Inc. as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 21, 1997, except for Note 4, as to which the date is March 26, 1997, and Note 9, as to which the date is July 23, 1997 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Orange County, California February 21, 1997, except for Note 4, as to which the date is March 26, 1997, and Note 9, as to which the date is July 23, 1997 S-1 ALLIANCE IMAGING, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE DEDUCTIONS BALANCE AT ADDITIONS (BAD DEBT AT END BEGINNING CHARGED TO WRITE- OF OF PERIOD EXPENSE OFFS) PERIOD --------- ---------- ---------- -------- Year ended December 31, 1994 Allowance for Doubtful Accounts....... $360,000 $609,000 $(581,000) $388,000 ======== ======== ========= ======== Year ended December 31, 1995 Allowance for Doubtful Accounts....... $388,000 $ -- $ (21,000) $367,000 ======== ======== ========= ======== Year ended December 31, 1996 Allowance for Doubtful Accounts....... $367,000 $567,000 $(421,000) $513,000 ======== ======== ========= ========
S-2 INDEPENDENT AUDITORS REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors SMT Health Services Inc.: Under date of January 31, 1997, except as to Note 18 which is as of March 4, 1997, we reported on the consolidated balance sheets of SMT Health Services Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the registration statement. This financial statement schedule is the responsibility of SMT's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 31, 1997, except as for Note 18 which is as of March 4, 1997 S-3 SMT HEALTH SERVICES INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS ADDITIONS BALANCE BEGINNING CHARGED TO CHARGED TO AT END DESCRIPTIONS OF PERIOD COSTS & EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD ------------ ---------- ---------------- -------------- ---------- --------- YEAR ENDED DECEMBER 31, 1994 Provision for loss on disposal of discontinued operations............. $1,400,000 $200,000 $ -- $1,144,000 $456,000 ========== ======== ===== ========== ======== Valuation allowance related to deferred tax assets................. $ 487,500 $ -- $ -- $ 72,500 $415,000 ========== ======== ===== ========== ======== Allowance for doubtful accounts............... $ 13,000 $ -- $ -- $ 13,000 $ -- ========== ======== ===== ========== ======== YEAR ENDED DECEMBER 31, 1995 Provision for loss on disposal of discontinued operations............. $ 456,000 $ -- $ -- $ 456,000 $ -- ========== ======== ===== ========== ======== Valuation allowance related to deferred tax assets................. $ 415,000 $ -- $ -- $ 312,000 $103,000 ========== ======== ===== ========== ======== YEAR ENDED DECEMBER 31, 1996 Valuation allowance related to deferred tax assets................. $ 103,000 $ -- $ -- $ 103,000 $ -- ========== ======== ===== ========== ========
S-4 EX-1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 ALLIANCE IMAGING, INC. $170,000,000 [ ]% Senior Subordinated Notes due 2005 UNDERWRITING AGREEMENT ---------------------- [ ], 1997 BT Alex. Brown Incorporated Smith Barney Inc. Salomon Brothers Inc c/o BT Alex. Brown Incorporated One Bankers Trust Plaza New York, New York 10005 Ladies and Gentlemen: Alliance Imaging, Inc., a Delaware corporation ("Alliance"), hereby -------- confirms its agreement with you (the "Underwriters") as set forth below. ------------ 1. The Securities. Subject to the terms and conditions herein -------------- contained, Alliance proposes to issue and sell to the Underwriters (the "Offering") $170,000,000 aggregate principal amount of its Senior Subordinated -------- Notes due 2005 (the "Notes"). The Notes will be issued pursuant to an indenture ----- (the "Indenture") to be entered into among Alliance, as issuer, the Guarantors --------- (as defined below) and [ ], as trustee (the "Trustee"). ------- The Notes will be unconditionally guaranteed (the "Guarantees") on a ---------- senior subordinated basis by SMT Acquisition Corp., a Delaware corporation, Royal Medical Health Services, Inc., a Pennsylvania corporation, and Alliance Imaging of Central Georgia, Inc., a Georgia corporation (collectively, the "Guarantors"), each of which is a wholly owned subsidiary of Alliance. The - ----------- Notes and the Guarantees are collectively referred to as the "Securities". ---------- Alliance and the Guarantors are collectively referred to as the "Issuers". ------- The Notes are being sold in connection with the recapitalization of Alliance (the "Recapitalization") which will be effected pursuant to an ---------------- Agreement and Plan of Merger dated as of July 23, 1997, as amended, whereby Newport Acquisition Company ("Newco"), a Delaware corporation, will be merged ----- with -2- and into Alliance with Alliance being the surviving corporation. The Recapitalization will be consummated concurrently with the Offering. Immediately following the Recapitalization, Alliance will acquire (the "SMT Acquisition") SMT Health Services Inc., a Delaware corporation ("SMT"), by --------------- --- merging SMT Acquisition Corp. into Three Rivers Holding Corp., a Delaware corporation and the parent corporation of SMT. In connection with the Recapitalization and the SMT Acquisition, Alliance will execute an agreement (the "Credit Agreement") with Bankers Trust Company, as agent, and certain ---------------- lenders thereto to provide Alliance a loan commitment of up to $200 million. The Offering, the Recapitalization, the SMT Acquisition and the related borrowings under the Credit Agreement are collectively referred to as the "Transactions". The Securities, the Indenture and this Agreement are ------------ collectively referred to herein as the "Operative Documents". ------------------- The consummation of the Transactions, and other transactions contemplated thereby, will be concurrent, and the Offering is conditioned upon consummation of the other components of the Transactions. 2. Representations and Warranties. The Issuers represent and warrant ------------------------------ to and agree with the Underwriters that: (a) A registration statement on Form S-2, including a prospectus, subject to completion, has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended ---------- (together with the rules and regulations of the Commission promulgated thereunder, the "Act"), by Alliance with respect to the Securities (File --- No. 333- ), and one or more amendments to such registration statement also have been so filed. If such registration statement has been declared effective, either (i) an additional registration statement relating to the Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") (the "Rule 462(b) Registration Statement") under the Act ----------- ---------------------------------- and, if so filed, has become effective -3- upon filing pursuant to Rule 462(b) and the Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to Rule 462(b) and upon such filing the Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. After the execution of this Agreement, Alliance will file with the Commission either (x) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement) with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Underwriters prior to the execution of this Agreement, or (y) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including any 462(b) Registration Statement and including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration ---------------------- statement, as amended at the time when it was or is declared effective, including any 462(b) Registration Statement and including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" ---------------------- means each prospectus, subject to completion, filed with such registration statement or any amendment thereto (including the prospectus, subject to completion, if any, included in such Registration Statement or any amendment thereto at the time it was or is declared effective); and the term "Prospectus" means the prospectus included in the Registration ---------- Statement, in the form in which such prospectus was filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b) with respect to any such Registration Statement, such term means the prospectus included in such Registration Statement. Any reference herein to any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto shall be deemed to refer to and include the documents incorporated therein by reference pursuant to Item 12 of Form S-2 under the Act, as of the date of such Preliminary Prospectus or the Prospectus (all such incorporated documents being herein called the "Incorporated Documents"). ---------------------- -4- (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (x) complied in all material respects with the requirements of the Act and (y) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (1) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with, the requirements of the Act and (2) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing the Prospectus or amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date (as defined in Section 3), the Prospectus, as amended or supplemented at such time, (i) complied or will comply in all material respects with the requirements of the Act and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Each document incorporated by reference in any Preliminary Prospectus or the Prospectus, when filed with the Commission, (A) complied in all material respects with the requirements of the Act and the Exchange Act and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to Alliance by the Underwriters specifically for use therein or to the Statement of Eligibility and Qualification (the "Form T-1") under the Trust Indenture Act of 1939, as amended (the "Trust -------- ----- Indenture Act"), of the Trustee filed as an exhibit to the Registration ------------- Statement. -5- (c) At the Closing Date after giving effect to the Transactions, Alliance will have the authorized, issued and outstanding capitalization set forth in the Prospectus under the caption "Pro Forma Capitalization"; all of the outstanding shares of capital stock of Alliance are duly authorized and validly issued, fully paid and nonassessable and not issued in violation of any preemptive or similar rights. Except as described in the Prospectus, all of the outstanding shares of capital stock of Alliance when issued were free and clear of all liens, encumbrances, equities and claims or restrictions on transferability (other than those imposed by the Act and the securities or "Blue Sky" laws of certain jurisdictions), or voting; except as described in the Prospectus, there are no (i) options, warrants or other rights to purchase, (ii) agreements or other obligations to issue or (iii) other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in Alliance. Except as described in the Registration Statement, Alliance does not own, directly or indirectly, any shares of capital stock or any other equity or long-term debt securities or have any equity interest in any firm, partnership, joint venture or other entity. (d) Alliance, the subsidiaries of Alliance listed on Exhibit A attached hereto (each, a "Subsidiary" and collectively, the "Subsidiaries") ---------- ------------ and, to the best knowledge of Alliance, SMT, are duly incorporated, validly existing and in good standing as corporations under the laws of their respective jurisdictions of incorporation, with all requisite corporate power and authority (corporate or otherwise) to own or lease their properties and conduct their businesses as now conducted. Each of Alliance, to the best knowledge of Alliance, SMT, and the Subsidiaries is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its businesses requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, condition (financial or other) or results of operations or prospects of Alliance and the Subsidiaries, taken as a whole (any such event, a "Material Adverse Effect"). ----------------------- (e) Alliance and each of the Guarantors has all requisite corporate power and authority to execute, deliver and perform its respective obligations under this Agreement and the other Operative Documents and to consummate -6- the transactions contemplated hereby and thereby, including, without limitation, the power and authority to issue, sell and deliver the Securities as contemplated by this Agreement. (f) This Agreement has been duly and validly authorized, executed and delivered by Alliance and each of the Guarantors. (g) The Notes have been duly and validly authorized by Alliance for issuance and conform in all material respects to the description thereof in the Prospectus. The Notes, when executed by Alliance and authenticated by the Trustee in accordance with the provisions of the Indenture, and delivered to and paid for by the Underwriters in accordance with the terms hereof, will have been duly executed, issued and delivered and will constitute valid and binding obligations of Alliance, entitled to the benefits of the Indenture enforceable against Alliance in accordance with their terms, except that (i) the enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (B) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law), (each of clauses (A) and (B), an "Enforceability Limitation") and ------------------------- (ii) the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. (h) The Guarantees have been duly and validly authorized for issuance and sale to the Underwriters by the Guarantors and, when the Notes are duly and validly authorized, executed, issued and authenticated in accordance with the terms of the Indenture and delivered against payment therefor in accordance with the terms hereof, will be the valid and binding obligations of each of the Guarantors, enforceable against each of the Guarantors in accordance with their terms and entitled to the benefits of the Indenture, except that the enforcement thereof may be subject to the Enforceability Limitations and the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. -7- (i) The Indenture has been duly authorized by Alliance and each of the Guarantors and, when executed and delivered by Alliance and each of the Guarantors (assuming the due authorization, execution and delivery thereof by the Trustee), will constitute a valid and binding agreement of Alliance and the Guarantors, enforceable against each of them in accordance with its terms, except that the enforcement thereof may be subject to the Enforceability Limitations and the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. The Indenture has been qualified under the Trust Indenture Act and complies as to form in all material respects with the requirements of the Trust Indenture Act. (j) The Credit Agreement has been duly authorized by Alliance and each of the Guarantors and, when duly executed and delivered by Alliance, will be the valid and binding obligation of Alliance and the Guarantors enforceable against each of them in accordance with its terms, except that the enforcement thereof may be subject to the Enforceability Limitations and the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. (k) Alliance and each of the Guarantors has the requisite corporate power and authority to enter into the Transactions (to the extent each is a party thereto). (l) Except as described in the Prospectus, no consent, approval, authorization or order of any court or governmental agency or body is required for the performance of the Operative Documents or the Transactions by Alliance and the Guarantors or of any of the transactions contemplated hereby or thereby, except such as have been obtained or are contemplated to be obtained by the Prospectus and such as may be required under the Act, the Trust Indenture Act or state securities or "Blue Sky" laws in connection with the purchase and distribution of the Securities by the Underwriters and in connection with the Transactions. Neither Alliance or any of the Subsidiaries is (i) in violation of its certificate of incorporation or bylaws, (ii) in violation of any statute, judgment, decree, order, rule or regulation applicable to any of them or any of their respective properties or assets which violation would have a Material Adverse Effect, or (iii) in -8- default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or other agreement or instrument to which any of them is subject (collectively, the "Contracts"), which default would have a --------- Material Adverse Effect. (m) The execution, delivery and performance by Alliance and the Guarantors of the Operative Documents and the consummation of the Transactions (to the extent each such person is a party thereto) and the transactions contemplated hereby and thereby will not conflict with or constitute or result in a breach or violation of any of (x) the terms or provisions of, or constitute a default by any of them under, any of the Contracts, which conflict, breach, violation or default, individually or in the aggregate, would have a Material Adverse Effect, (y) the certificate of incorporation or bylaws of any such person, or (z) any statute, judgment, decree, order, rule or regulation (excluding state securities and "Blue Sky" laws) of any court or governmental agency or other body applicable to any such person, or any of their respective properties, which conflict, breach, violation or default, individually or in the aggregate, would have a Material Adverse Effect. (n) Each of the Transactions conforms in all material respects to the description thereof in the Prospectus. (o) The fair value and present fair saleable value of the assets of Alliance and each of the Guarantors exceeds the sum of its stated liabilities and identified contingent liabilities; and (y) after giving effect to the Transactions and the consummation of the transactions contemplated thereby and by the Prospectus, Alliance and each of the Guarantors will not be (a) left with unreasonably small capital with which to carry on its business as it is proposed to be conducted, (b) unable to pay its debts (contingent or otherwise) as they mature or (c) insolvent. (p) The audited and unaudited consolidated financial statements of Alliance and SMT, and the related notes included in the Prospectus present fairly in all material respects the consolidated financial position, results of operations and cash flows of Alliance and, to the best knowledge of Alliance, of SMT at the dates and for the periods to which they relate, and have been prepared in ac- -9- cordance with generally accepted accounting principles applied on a consistent basis. (q) The pro forma financial statements and other pro forma financial information (including the notes thereto) included in the Prospectus have been prepared in accordance with applicable requirements of Regulation S-X promulgated under the Exchange Act and have been properly computed on the bases described therein. The assumptions used in the preparation of the pro forma financial statements and other pro forma financial information included in the Prospectus are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein in all material respects. (r) Ernst & Young LLP and KPMG Peat Marwick LLP, which have audited certain of such financial statements and schedules as set forth in their reports included in the Registration Statement and the Prospectus, are independent public accounting firms as required by the Act. (s) Except as described in the Prospectus, there is not pending or, to the knowledge of Alliance, threatened any action, suit, proceeding, inquiry or investigation to which Alliance or the Guarantors or, to the best knowledge of Alliance, SMT or any of their respective property is subject, before or brought by any court or governmental agency or body, which could reasonably be expected to have a Material Adverse Effect. (t) Alliance, the Guarantors and, to the best knowledge of Alliance, SMT have obtained all licenses, permits, franchises and other governmental authorizations necessary to conduct their respective business as described in the Prospectus and the lack of which would have a Material Adverse Effect. (u) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and except as described therein or contemplated thereby, none of Alliance or the Guarantors has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business. (v) Except as described in the Prospectus, (A) each of Alliance, the Guarantors and, to the best knowledge of -10- Alliance, SMT is in compliance with and not subject to liability under applicable Environmental Laws (as defined below), (B) each of Alliance, the Guarantors and, to the best knowledge of Alliance, SMT has made all filings and provided all notices required under any applicable Environmental Law, and is in compliance with all permits required under any applicable Environmental Laws, (C) there is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter or request for information pending or threatened against Alliance, any of the Guarantors or, to the best knowledge of Alliance, against SMT under any Environmental Law, (D) no lien, charge, encumbrance or restriction has been recorded under any Environmental Law with respect to any assets, facility or property owned, operated, leased or controlled by Alliance, any of the Guarantors or, to the best knowledge of Alliance, by SMT, (E) none of Alliance, the Guarantors or, to the best knowledge of Alliance, SMT, has received notice that it has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or any comparable state law, and (F) no ------ property or facility of Alliance, any of the Guarantors or, to the best knowledge of Alliance, of SMT, is (i) listed or, to Alliance's knowledge, proposed for listing on the National Priorities List under CERCLA or is (ii) listed in the Comprehensive Environmental Response, Compensation, Liability Information System List promulgated pursuant to CERCLA, or, to Alliance's knowledge, on any comparable list maintained by any state or local governmental authority; except, in the case of clauses (A), (B) and (D) for such noncompliance with applicable Environmental Laws, failures to make filings and provide notices under applicable Environmental Laws and recording of liens, charges, encumbrances or restrictions under any Environmental Laws that, individually or in the aggregate, has not had a Material Adverse Effect and would not reasonably be expected to have a Material Adverse Effect. For purposes of this Agreement, "Environmental Laws" means the common law ------------------ and all applicable federal, state and local laws or regulations, codes, orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder, relating to pollution or protection of public health and safety or the environment, including, without limitation, laws relating to (i) emissions, discharges, releases or threatened releases of hazardous materials -11- into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), (ii) the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of hazardous materials, and (iii) underground and above ground storage tanks and related piping, and emissions, discharges, releases or threatened releases therefrom. (w) There is no strike, labor dispute, slowdown or work stoppage with the employees of Alliance or, to the best knowledge of Alliance, of SMT, or any of the Guarantors which is pending or, to the knowledge of Alliance, threatened. (x) Each of Alliance, the Guarantors and, to the best knowledge of Alliance, SMT, carries insurance (including self-insurance) in such amounts and covering such risks as would be obtained by companies in the same or similar businesses in the ordinary course for the conduct of its business and the value of its properties. (y) Each of Alliance, the Guarantors and, to the best knowledge of Alliance, SMT, has good title to all personal property described in the Prospectus as being owned by it and good and marketable title to a leasehold estate in the real and personal property described in the Prospectus as being leased by it free and clear of all liens, charges, encumbrances or restrictions, except as described in the Prospectus or to the extent the failure to have such title or the existence of such liens, charges, encumbrances or restrictions would not, individually or in the aggregate, have a Material Adverse Effect. (z) None of Alliance, the Guarantors or, to the best knowledge of Alliance, SMT, has any liability for any prohibited transaction or accumulated funding deficiency (within the meaning of Section 412 of the Code) or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which ----- Alliance or any of the Guarantors makes or ever has made a contribution and in which any employee of Alliance or any of the Guarantors is or has ever been a participant. With respect to such plans, Alliance and each of the Guarantors is in compliance in all material respects with all applicable provisions of ERISA. -12- (aa) Neither Alliance nor any of the Guarantors or any agent acting on behalf of them, has taken or will take any action that might cause this Agreement or the issuance or sale of the Securities to violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System as in effect on the Closing Date. (bb) Neither Alliance nor any of the Guarantors is now, and after giving effect to the Transactions and the other transactions contemplated by the Prospectus will be, required to register as an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (cc) All taxes, assessments, fees and other charges (including, without limitation, withholding taxes, penalties, and interest) due or claimed to be due from Alliance, the Guarantors and, to the best knowledge of Alliance, from SMT, that are due and payable have been paid, other than those being contested in good faith or those currently payable without penalty or interest and for which an adequate reserve or accrual has been established in accordance with generally accepted accounting principles, and except where the failure so to pay would not, individually or in the aggregate, have a Material Adverse Effect. Neither Alliance or any of the Guarantors knows of any actual or proposed additional tax assessments for any fiscal period against Alliance, the Guarantors nor SMT, individually or in the aggregate, which would have a Material Adverse Effect. (dd) Alliance has delivered to the Underwriters a true and correct copy of each of the documents contemplated by the Transactions, together with all related agreements and all schedules and exhibits thereto, and there shall have been no material amendments, alterations, modifications or waivers of any of the provisions of any such documents since their respective dates of execution, other than any such amendments, alterations, modifications and waivers as to which the Underwriters have been advised in writing and which would be required to be disclosed in the Prospectus; and to the best knowledge of Alliance and the Guarantors there exists no event or condition which would constitute a default or an event of default under any of the documents contemplated by the Transactions which would result in a Material Adverse Effect or materially adversely affect the ability of Alliance and the Guarantors to consummate the Transactions. -13- Any certificate signed by any officer of Alliance or any of the Guarantors and delivered to the Underwriters or to counsel for the Underwriters shall be deemed a joint and several representation and warranty by Alliance and the Guarantors to each Underwriter as to the matters covered thereby. 3. Purchase, Sale and Delivery of the Securities. On the basis of the --------------------------------------------- representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, Alliance agrees to issue and sell to the Underwriters, and each of the Underwriters severally agrees to purchase from Alliance, at [ ]% of their principal amount, the respective aggregate principal amounts of the Notes set forth opposite their respective names on Exhibit B hereto. The obligations of the Underwriters under this Agreement are several and not joint. One or more certificates in definitive form for the Notes that the Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Underwriters request upon notice to Alliance at least two business days prior to the Closing Date, shall be delivered by or on behalf of Alliance, against payment by or on behalf of the Underwriters, of the purchase price therefor by wire transfer of immediately available funds to the account of Alliance previously designated by it in writing. Such delivery of and payment for the Securities shall be made at the offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, at 10:00 a.m. New York time, on [ ], 1997, or at such other place, time or date as the Underwriters and Alliance may agree upon, such time and date of delivery against payment being herein referred to as the "Closing Date." Alliance will make such certificate or ------------ certificates for the Notes available for checking and packaging by the Underwriters at the offices in New York, New York of BT Securities Corporation at least 24 hours prior to the Closing Date. 4. Offering by the Underwriters. After the Registration Statement ---------------------------- becomes effective, the Underwriters propose to offer for sale to the public the Securities at the price and upon the terms set forth in the Prospectus. 5. Certain Covenants. Each of the Issuers covenants and agrees with ----------------- the Underwriters that: (a) The Issuers will use all reasonable efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective promptly. If, at the time -14- the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the rules and regulations of the Commission under the Act, then immediately following the execution of this Agreement, the Issuers will prepare, and thereafter the Issuers will file or transmit for filing with the Commission in accordance with such Rule 430A and Rule 424(b) of the rules and regulations of the Commission under the Act, copies of an amended Prospectus relating to such Registration Statement, or, if required by such Rule 430A, a post-effective amendment to such Registration Statement (including an amended Prospectus), containing all information so omitted. The Issuers will give each Underwriter notice of their intention to file any amendment to any Registration Statement (including any post-effective amendment) or any amendment or supplement to any Prospectus (including any revised prospectus which the Issuers propose for use by the Underwriters in connection with the offering of the Securities which differs from any prospectus on file at the Commission at the time the Registration Statement including such prospectus becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the rules and regulations of the Commission under the Act), will furnish the Underwriters with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Underwriters shall reasonably object in writing or which is not in compliance with the Act. The Issuers will advise the Underwriters, promptly after any of them receive notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Underwriters of such filing or effectiveness. (b) The Issuers will advise the Underwriters, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or any Prospectus, or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commis- -15- sion for amending any Registration Statement, for amending or supplementing the Prospectus or for additional information. The Issuers will use their best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Issuers will cooperate with the Underwriters in arranging for the qualification of the Notes for offering and sale under the securities or "Blue Sky" laws of such jurisdictions as the Underwriters may designate and will continue such qualifications in effect for as long as may be necessary to complete the initial distribution of the Notes by the Underwriters; provided, however, that in connection therewith the Issuers -------- ------- shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction, to take any other action that would subject it to general service of process or to taxation in respect of doing business. (d) If, at any time when a Prospectus relating to the Securities is required to be delivered under the Act, any event shall occur as a result of which it is necessary, in the opinion of counsel for the Underwriters, to amend or supplement any Prospectus in order to make such Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Act and the Exchange Act, the Issuers shall (subject to Section 5(a)) forthwith amend or supplement such Prospectus so that, as so amended or supplemented, such Prospectus will 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 the light of the circumstances existing at the time it is delivered to a purchaser, not misleading and will comply with the Act and the Exchange Act, and the Issuers will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (e) The Issuers will without charge, provide (i) to each Underwriter and to counsel for the Underwriters a signed copy of each registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) and (ii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of -16- the Preliminary Prospectus or Prospectus or any amendment or supplement thereto as the Underwriters may reasonably request. (f) Subject to Section 5(a), the Issuers will timely complete all required filings and otherwise comply fully in a timely manner with all provisions of the Exchange Act and promptly file all reports and any definitive proxy or information statements required to be filed by the Issuers with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offer or sale of any of the Notes. (g) The Issuers will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earning statement (in form complying with the provisions of Rule 158 of the rules and regulations of the Commission under the Act) covering a twelve-month period beginning not later than the first day of the fiscal quarter of the Issuers next following the "effective date" (as defined in Rule 158) of the Registration Statement. (h) The Issuers will apply the net proceeds from the sale of the Securities as set forth in the Prospectus. (i) Prior to the Closing Date, the Issuers will furnish to the Underwriters, as soon as they have been prepared by or are available to the Issuers, a copy of any unaudited interim financial statements of the Issuers for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus. (j) Upon consummation of the SMT Acquisition, the Issuers will cause SMT to enter into a supplemental indenture to the Indenture providing for the guarantee by SMT of the Notes on a senior subordinated basis. 6. Expenses. The Issuers agree to pay all costs and expenses incident -------- to the performance of their obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 10 hereof, including, but not limited to, all costs and expenses incident to (i) the printing, word processing or other production of documents with respect to such transac- -17- tions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendments thereto, any Preliminary Prospectus and any Prospectus and any amendments or supplements thereto, and any "Blue Sky" memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Issuers, (iv) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, (v) the qualification of the Securities under state securities and "Blue Sky" laws, including filing fees and reasonable fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) expenses in connection with any meetings with prospective investors in the Securities, (viii) fees and expenses of the Trustee, including fees and expenses of its counsel, (ix) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Underwriters to be paid for by the Underwriters), and (x) any fees charged by investment rating agencies for the rating of the Securities. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated or because of any failure, refusal or inability on the part of the Issuers to perform all obligations and satisfy all conditions on their part to be performed or satisfied hereunder (other than solely by reason of a default by the Underwriters of their obligations hereunder after all conditions hereunder have been satisfied in accordance herewith), the Issuers agree to promptly reimburse the Underwriters upon demand for all out-of-pocket expenses (including all counsel fees and disbursements) that shall have been incurred by the Underwriters in connection with the proposed purchase and sale of the Securities and any other transactions contemplated by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligation of the ------------------------------------------- Underwriters to purchase and pay for the Securities are subject to the accuracy of the representations and warranties contained herein, to the performance by the Issuers of their covenants and agreements hereunder and in satisfaction of the following additional conditions: (a) If the registration statement originally filed with respect to the Securities, or any amendment thereto filed prior to the Closing Date has not been declared ef- -18- fective as of the time of execution hereof, such registration statement or such amendment shall have been declared effective not later than 12:00 noon, New York City time, on the date on which the amendment to such registration statement originally filed with respect to the Securities, or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission, or such later time and date as shall have been consented to by the Underwriters; if required, the Prospectus and any amendment or supplement thereto shall have been filed in accordance with Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto or the qualification of the Indenture under the Trust Indenture Act shall have been issued and no proceedings for that purpose shall have been instituted or to the knowledge of the Issuers or the Underwriters, shall be threatened or contemplated by the Commission. (b) The Underwriters shall have received an opinion in form and substance satisfactory to the Underwriters, dated the Closing Date, of O'Sullivan Graev and Karabell LLP, special counsel to the Issuers, substantially in the form of Exhibit C hereto. (c) The Underwriters shall have received an opinion in form and substance satisfactory to the Underwriters, dated the Closing Date, of Irell & Manella LLP, general counsel to the Issuers, substantially in the form of Exhibit D hereto. (d) The Underwriters shall have received an opinion in form and substance satisfactory to the Underwriters, dated the Closing Date, of [ ], Pennsylvania counsel to Alliance, substantially in the form of Exhibit E hereto. (e) The Underwriters shall have received an opinion in form and substance satisfactory to the Underwriters, dated the Closing Date, of [ ], Georgia counsel to the Issuers, substantially in the form of Exhibit F hereto. (f) The Underwriters shall have received an opinion, dated the Closing Date, of Cahill Gordon & Reindel, counsel for the Underwriters, with respect to the sufficiency of certain corporate proceedings and other legal matters -19- relating to this Agreement, and such other related matters as the Underwriters may require. In rendering such opinion, Cahill Gordon & Reindel shall have received and may rely upon such certificates and other documents and information as they may reasonably request to pass upon such matters. In addition, in rendering their opinion, Cahill Gordon & Reindel may state that their opinion is limited to matters of New York, Delaware corporate and federal law. (g) The Underwriters shall have received from Ernst & Young LLP, independent public accountants for Alliance, and KPMG Peat Marwick LLP, independent public accountants for SMT, letters dated, respectively, the date hereof and the Closing Date, in form and substance satisfactory to the Underwriters. (h) The Underwriters shall have received an opinion from Houlihan, Lokey, Howard & Zukin, Inc. in form and substance satisfactory to the Underwriters, regarding the solvency of Alliance at the Closing Date and immediately after giving effect to the Transactions and the other transactions contemplated thereby. (i) The representations and warranties of the Issuers contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date (other than to the extent any such representation or warranty is expressly made as to a certain date); and the Issuers shall have complied in all material respects with all agreements and satisfied all conditions on their part to be performed or satisfied hereunder at or prior to the Closing Date. (j) The Recapitalization, the SMT Acquisition and the transactions contemplated thereby shall have been consummated concurrently with the Offering. (k) The Credit Agreement shall have been executed and delivered by all parties thereto. (l) Subsequent to the respective dates of the most recent financial statements of Alliance and SMT contained in the Prospectus, there shall have been no material adverse change in the business, condition (financial or other) results of operations or prospects of Alliance and the Subsidiaries taken as a whole (a "Material Adverse Change") or any ----------------------- development which could reasonably be ex- -20- pected to result in a Material Adverse Change, except as set forth in, or contemplated by, the Prospectus. (m) None of the issuance and sale of the Securities pursuant to this Agreement or the other Transactions shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued or any action, suit or proceeding shall have been commenced with respect to this Agreement or the Transactions before any court or governmental authority. (n) The Underwriters shall have received certificates, dated the Closing Date, of the appropriate officers of Alliance and each of the Guarantors as to such person, to the effect that: (A) The representations and warranties of such person in this Agreement are true and correct in all material respects as if made on and as of the Closing Date and such person has performed in all material respects all covenants and agreements and satisfied in all material respects all conditions on its part to be performed or satisfied at or prior to the Closing Date; (B) No stop order suspending the effectiveness of the Registration Statement or any amendment thereto or the qualification of the Indenture under the Trust Indenture Act has been issued, and no proceedings for those purposes have been instituted or, to the best of such person's knowledge, are threatened or contemplated by the Commission; and (C) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any Material Adverse Change except as set forth in or contemplated by the Prospectus. (o) On the Closing Date, Alliance and SMT shall have, to the extent each is a party thereto, complied in all material respects with all agreements and covenants in all documents contemplated by the Transactions and satisfied all conditions specified therein to be complied with or performed at or prior to the Closing Date, and each of the documents contemplated by the Transactions shall be in full force and effect. -21- (p) On the Closing Date, the Underwriters shall have received copies of all certificates, documents and opinions, reasonably requested by the Underwriters, delivered by Alliance and SMT or any of their counsels and such other certificates, documents and opinions reasonably obtainable by Alliance and SMT pursuant to the Transactions. (q) On the Closing Date, the Certificate of Merger with respect to the SMT Acquisition shall have been filed with the Secretary of State of the State of Delaware. On or before the Closing Date, the Underwriters shall have received such further documents, opinions, certificates and schedules or instruments relating to the business, corporate, legal and financial affairs of Alliance, Newco and SMT as they shall have theretofore reasonably requested. All such opinions, certificates, letters, schedules, documents or instruments delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Underwriters. The Issuers shall furnish to the Underwriters such conformed copies of such opinions, certificates, letters, schedules, documents and instruments in such quantities as the Underwriters shall reasonably request. 8. Indemnification and Contribution. (a) Each of the Issuers agree, -------------------------------- jointly and severally, to indemnify and hold harmless each Underwriter, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto or any Preliminary Prospectus or any Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by any of the Issuers or based upon written information furnished by or on behalf of any of the Issuers filed in any jurisdiction in order to qualify the Securities under the securities or "Blue Sky" laws thereof or filed with the Commission or -22- any securities association or securities exchange (each, an "Application") or (ii) the omission or alleged omission to state, in the Registration Statement or any amendment thereto, any Preliminary Prospectus or any Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and will reimburse, as incurred, each Underwriter and each such controlling person for any reasonable and documented out-of- pocket legal or other expenses reasonably incurred by the Underwriters or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that none of the -------- ------- Issuers will be liable in any such case to an Underwriter to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus or any Prospectus or any amendment or supplement thereto, or any Application in reliance upon and in conformity with written information furnished to the Issuers by or on behalf of any of such Underwriter specifically for use therein; and provided, further, that -------- ------- none of the Issuers will be liable to an Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter in reliance upon the Preliminary Prospectus or Prospectus but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of such Prospectus or Prospectus (as so amended or supplemented) is required by the Act, unless such failure to deliver such Prospectus (as amended or supplemented) was a result of noncompliance by the Issuers with Section 5(e)(ii) of this Agreement. This indemnity agreement will be in addition to any liability that the Issuers may otherwise have to the indemnified parties. None of the Issuers will, without the prior written consent of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened -23- claim, action, suit or proceeding in respect of which indemnification from the Underwriters may be sought hereunder (whether or not the Underwriters or any person who controls either of the Underwriters within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Underwriters and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Issuers, their directors, officers who signed the Registration Statement and each person, if any, who controls any of the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which any of the Issuers or any such director, officer or controlling person may become subject under the Act, the Exchange Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or any Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in any Registration Statement or any amendment thereto, any Preliminary Prospectus or any Prospectus or any amendment or supplement thereto, or any Application, or necessary to make the statements therein (in the case of any Preliminary Prospectus, any Prospectus or any amendment or supplement thereto or any Application, in the light of the circumstances under which such statements were made) not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Issuers by or on behalf of such Underwriter specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any reasonable and documented out-of-pocket legal or other expenses reasonably incurred by the Issuers or any such director, officer or controlling person in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability that the Underwriters may otherwise have to the indemnified parties. The Underwriters will not, without -24- the prior written consent of the Issuers, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification from the Issuers may be sought hereunder (whether or not any of the Issuers or any person who controls any of the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release any of the Issuers and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8 except to the extent that such omission results in the forfeiture by the indemnifying party of substantial rights and defenses. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the - -------- ------- indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties that are different from or in addition to those available to any such indemnifying party such that representation of both the indemnified parties and the indemnifying parties by the same counsel is inappropriate then the indemnifying parties shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable and documented out-of-pocket costs of investigation, subsequently incurred by such indemni- -25- fied party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Underwriters in the case of paragraph (a) of this Section 8 or Alliance in the case of paragraph (b) of this Section 8, representing the indemnified parties under such paragraph (a) or paragraph (b), as the case may be, who are parties to such action or actions) or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying parties. After such notice from the indemnifying parties to such indemnified party (so long as the indemnified party shall have informed the indemnifying parties of such action in accordance with this Section 8 on a timely basis prior to the indemnified party seeking indemnification hereunder), the indemnifying parties will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8, in which case the indemnified party may effect such a settlement without such consent. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative benefits received by the Issuers on the one hand and the Underwriters on the other shall be deemed to be in the -26- same proportion as the total proceeds from the offering of the Securities (before deducting expenses other than underwriting discounts and commissions) received by the Issuers bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuers on the one hand, or the Underwriters on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Issuers and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Issuers on the one hand and the Underwriters on the other hand were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). Notwithstanding any other provision of this paragraph (d), the Underwriters shall not be obligated to make contributions hereunder that in the aggregate exceed the total underwriting discounts and commissions received by the Underwriters under this Agreement, less the aggregate amount of any damages that the Underwriters have otherwise been required to pay by reason of the untrue or alleged untrue statements or the omissions or alleged omissions to state a material fact, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person, if any, who controls any of the Underwriters within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Underwriters, and each director and each officer of the Issuers who signed the Registration Statement and each person, if any, who controls the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Issuers. 9. Survival Clause. The respective representations, warranties, --------------- agreements, covenants, indemnities and other statements of the Issuers, their officers and the Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Issuers, any of their officers or directors, the Underwriters or any controlling person referred to in -27- Section 8 hereof and (ii) delivery of and payment for the Securities, and shall be binding upon and shall inure to the benefit of, any successors, assigns, heirs, personal representatives of the Issuers, the Issuers, the Underwriters and indemnified parties referred to in Section 8 hereof. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 10. Termination. (a) This Agreement may be terminated in the sole ----------- discretion of the Underwriters by notice to Alliance given in the event that the Issuers shall have failed, refused or been unable to satisfy all conditions on their part to be performed or satisfied hereunder on or prior to the Closing Date or, if at or prior to the Closing Date: (i) The Issuers shall have sustained any loss or interference with respect to their respective businesses or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, which loss or interference has had or has a Material Adverse Effect, or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of any of the Issuers), in the business, condition (financial or other), results of operations or prospects of Alliance and the Subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in securities generally on the New York Stock Exchange, Inc., the American Stock Exchange or the Nasdaq Stock Market shall have been suspended or minimum or maximum prices shall have been established on any such exchange; (iii) a banking moratorium shall have been declared by New York or United States authorities; (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (c) any material change in the financial markets of the United States which, in the sole judgment of the Under- -28- writers, makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof; or (v) any securities of the Issuers shall have been downgraded or placed on any "watch list" for possible downgrading by any nationally recognized statistical rating organization. (b) Termination of this Agreement pursuant to this Section 10 shall be without liability of any party to any other party except as provided in Section 9 hereof. 11. Information Supplied by the Underwriters. The statements set forth ---------------------------------------- in the last paragraph on the front cover page, the last paragraph on page ii, and the third paragraph, the second sentence in the fourth paragraph and the sixth and seventh paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished by the Underwriters to the Issuers for the purposes of Section 8 hereof. 12. Notices. All communications hereunder shall be in writing and, if ------- sent to the Underwriters, shall be mailed, delivered or telecopied and confirmed in writing to the Underwriters c/o BT Alex. Brown Incorporated, One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10005, Attention: Corporate Finance Department, and with a copy to Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, Attention: James J. Clark. If sent to the Issuers, shall be mailed, delivered or telecopied confirmed in writing, to Alliance Imaging, Inc., 1065 North PacifiCenter Drive, Suite 200, Anaheim, California 92806, and with copies to O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112, Attention: John J. Suydam, and Irell & Manella LLP, 333 South Hope Street, Suite 3300, Los Angeles, California 90071, Attention: Anthony T. Iler. 13. Successors. This Agreement shall inure to the benefit of and be ---------- binding upon the Underwriters, the Issuers and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemni- -29- ties of the Issuers contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control the Underwriters within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Issuers, their officers who have signed the Registration Statement and any person or persons who controls the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from the Underwriters will be deemed a successor because of such purchase. 14. Entire Agreement. This Agreement constitutes the entire agreement ---------------- among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof. 15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, -------------- AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW. 16. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Issuers and the Underwriters. Very truly yours, ISSUER: ALLIANCE IMAGING, INC. By: ----------------------------------- Name: Title: GUARANTORS: SMT ACQUISITION CORP. By: ----------------------------------- Name: Title: ROYAL MEDICAL HEALTH SERVICES, INC. By: ----------------------------------- Name: Title: -2- ALLIANCE IMAGING OF CENTRAL GEORGIA, INC. By: ----------------------------------- Name: Title: -3- The foregoing Agreement is hereby confirmed and accepted as of the date first above written. BT ALEX. BROWN INCORPORATED By: ------------------------------ Name: Title: SMITH BARNEY INC. By: ------------------------------ Name: Title: SALOMON BROTHERS INC By: ------------------------------ Name: Title: Exhibit A Subsidiaries ------------ [To be provided by O'Sullivan Graev & Karabell] Exhibit B Underwriter Principal Amount of Notes - ----------- ------------------------- BT Alex. Brown Incorporated $ Smith Barney Inc. Salomon Brothers Inc _________________ $170,000,000 Exhibit C --------- Form of Opinion of O'Sullivan Graev & Karabell, LLP --------------------------------------------------- [To be amended] 1. Each of Alliance and the Guarantors have been duly incorporated and are validly existing and in good standing under the laws of their respective states of incorporation with corporate power and authority to own or lease their properties and to conduct their businesses as now conducted as described in each Prospectus. 2. Each of Alliance and the Guarantors has the corporate power and authority to execute, deliver and perform its respective obligations under the Underwriting Agreement, the Indenture and the Securities and to issue the Securities to be issued by it pursuant to the Indenture. 3. To the best of our knowledge, there is no action, suit, proceeding or investigation pending or threatened against or affecting any of Alliance or the Guarantors, any of their respective subsidiaries or any of their respective properties or assets in any court or before any governmental authority or arbitration board or tribunal that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge any of the Transactions. 4. The Indenture has been duly authorized, executed and delivered by Alliance and the Guarantors and (assuming due authorization, execution and delivery by the Trustee) is the valid and legally binding agreement of Alliance and each of the Guarantors, enforceable against Alliance and each of the Guarantors in accordance with its terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law). 5. The Notes have been duly and validly authorized by Alliance for issuance and, when executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Underwriters in accordance with the terms -2- of the Underwriting Agreement, will conform in all material respects to the description thereof in the Registration Statement and will be the legally valid and binding obligations of Alliance, enforceable against Alliance in accordance with their terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law). 6. The Guarantees have been duly authorized by each of the Guarantors for issuance and, when executed and delivered in accordance with the terms of the Indenture, will conform in all material respects to the description thereof in the Registration Statement and will be the legally valid and binding obligations of each of the Guarantors, enforceable against each of the Guarantors in accordance with their terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law). 7. The Underwriting Agreement has been duly authorized, executed and delivered by Alliance and the Guarantors; the execution and delivery of the Underwriting Agreement, the Indenture and the Securities by Alliance and the Guarantors, and the issuance and sale of the Securities pursuant to the Underwriting Agreement and the performance of the Transactions do not and will not conflict with or constitute or result in a breach or a default under (or an event which with notice or passage of time or both would constitute a default under) or violation of or cause an acceleration of any obligation under, or on any properties or assets of Alliance or any Guarantor with respect to (i) the terms or provisions of any Contract known to such counsel to which Alliance or any Guarantor is a party, except for any such conflict, breach, violation, default or event which would not, individually or in the aggregate, have a Material Adverse Effect, or (ii) the certificate of incorporation or bylaws of Alliance or any Guarantor, or (iii) any statute, rule or regulation known to such counsel to be of general applicability to, or any judgment, decree or order known to such counsel to be applicable to, Alliance or any Guarantor or any of their respective properties or assets, ex- -3- cept for any such conflict, breach or violation which would not, individually or in the aggregate, have a Material Adverse Effect. 8. To the best of our knowledge, no consent, approval, authorization or order of, or filing with any or governmental entity or body is required for the issuance and sale of the Securities by Alliance and the Guarantors pursuant to the Underwriting Agreement or pursuant to the Indenture, except (i) such as have been obtained or made under the Act or the Trust Indenture Act or otherwise, and (ii) such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters. 9. The Indenture has been duly qualified under the Trust Indenture Act. 10. The Registration Statement has become effective under the Act and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Act and no proceedings therefor have been initiated by the Commission. Any required filing of the Prospectus pursuant to Rule 424(b) under the Act has been made in accordance with Rules 424(b) and 430A under the Act. 11. The Registration Statement and the Prospectus comply as to form in all material respects with the applicable requirements for registration statements on Form S-2 under the Act, the Trust Indenture Act and the rules and regulations of the Commission thereunder; it being understood, however, that we express no opinion with respect to the financial statements, schedules and other financial and statistical data included in or omitted from the Registration Statement or Prospectus. 12. To the best of our knowledge, there are no contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. 13. The Transactions conform in all material respects to the descriptions thereof in the Prospectus. In addition, we have participated in conferences with officers and other representatives of Alliance and the Guarantors, representatives of the independent public accountants for Alliance and the Guarantors and SMT and your representatives, at which the contents of the Registration Statement and the -4- Prospectus and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and have not made any independent check or verification thereof, during the course of such participation (relying as to materiality to a large extent upon the statements of officers and other representatives of Alliance and the Guarantors), no facts came to our attention that caused us to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that we express no opinion with respect to the financial statements, schedules and other financial and statistical data included in or omitted from the Registration Statement or the Prospectus or with respect to the Form T-1. EX-4.1 3 FORM OF INDENTURE EXHIBIT 4.1 =============================================================================== ALLIANCE IMAGING, INC., as Issuer, the GUARANTORS named herein, as Guarantors, and [ ], as Trustee --------------------- INDENTURE Dated as of , 1997 --------------------- up to $270,000,000 [ ]% Senior Subordinated Notes due 2005 ================================================================================ CROSS-REFERENCE TABLE TIA Indenture Section Section - ------- ----------- 310(a)(1).................................................. 7.10 (a)(2).................................................. 7.10 (a)(3).................................................. N.A. (a)(4).................................................. N.A. (a)(5).................................................. 7.08; 7.10 (b)..................................................... 7.08; 7.10; 13.02 (c)..................................................... N.A. 311(a)..................................................... 7.11 (b)..................................................... 7.11 (c)..................................................... N.A. 312(a).................................................. 2.05 (b)..................................................... 13.03 (c)..................................................... 13.03 313(a)..................................................... 7.06 (b)(1).................................................. 7.06 (b)(2).................................................. 7.06 (c)..................................................... 7.06; 13.02 (d)..................................................... 7.06 314(a)..................................................... 4.08; 4.10; 13.02 (b)..................................................... N.A. (c)(1).................................................. 7.02; 13.04; 13.05 (c)(2).................................................. 7.02; 13.04; 13.05 (c)(3).................................................. N.A. (d)..................................................... N.A. (e)..................................................... 13.05 (f)..................................................... N.A. 315(a)..................................................... 7.01(b) (b)..................................................... 7.05 (c)..................................................... 7.01 (d)..................................................... 6.05; 7.01(c) (e)..................................................... 6.11 316(a)(last sentence)...................................... 2.09 (a)(1)(A)............................................... 6.05 (a)(1)(B)............................................... 6.04 (a)(2).................................................. 9.05 (b)..................................................... 6.07 (c)..................................................... 9.05 317(a)(1).................................................. 6.08 (a)(2).................................................. 6.09 (b)..................................................... 2.04 318(a)..................................................... 13.01 (c)..................................................... 13.01 - ----------------- N.A. means Not Applicable Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture TABLE OF CONTENTS
Page ---- ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions.................................................................1 SECTION 1.02. Incorporation by Reference of TIA..........................................26 SECTION 1.03. Rules of Construction......................................................27 ARTICLE TWO THE SECURITIES SECTION 2.01. Form and Dating............................................................27 SECTION 2.02. Execution and Authentication...............................................28 SECTION 2.03. Registrar and Paying Agent.................................................29 SECTION 2.04. Paying Agent To Hold Assets in Trust.......................................30 SECTION 2.05. Holder Lists...............................................................30 SECTION 2.06. Transfer and Exchange......................................................30 SECTION 2.07. Replacement Securities.....................................................32 SECTION 2.08. Outstanding Securities.....................................................33 SECTION 2.09. Treasury Securities........................................................33 SECTION 2.10. Temporary Securities.......................................................33 SECTION 2.11. Cancellation...............................................................34 SECTION 2.12. Defaulted Interest.........................................................34 SECTION 2.13. CUSIP Number...............................................................35 ARTICLE THREE REDEMPTION SECTION 3.01. Notices to Trustee.........................................................35 SECTION 3.02. Selection of Securities To Be Redeemed.....................................35 SECTION 3.03. Notice of Redemption.......................................................36 SECTION 3.04. Effect of Notice of Redemption.............................................37 SECTION 3.05. Deposit of Redemption Price................................................37 SECTION 3.06. Securities Redeemed in Part................................................37
-i- ARTICLE FOUR COVENANTS Page ---- SECTION 4.01. Payment of Securities......................................................38 SECTION 4.02. Maintenance of Office or Agency............................................38 SECTION 4.03. Limitation on Restricted Payments..........................................38 SECTION 4.04. Limitation on Incurrence of Additional Indebtedness........................41 SECTION 4.05. Corporate Existence........................................................41 SECTION 4.06. Payment of Taxes and Other Claims..........................................41 SECTION 4.07. Maintenance of Properties and Insurance....................................42 SECTION 4.08. Compliance Certificate; Notice of Default..................................42 SECTION 4.09. Compliance with Laws.......................................................43 SECTION 4.10. Reports to Holders.........................................................44 SECTION 4.11. Waiver of Stay, Extension or Usury Laws....................................44 SECTION 4.12. Limitations on Transactions with Affiliates................................44 SECTION 4.13. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries........................................46 SECTION 4.14. Limitation on Liens........................................................47 SECTION 4.15. Change of Control..........................................................48 SECTION 4.16. Limitation on Asset Sales..................................................50 SECTION 4.17. Prohibition on Incurrence of Senior Subordinated Debt......................54 SECTION 4.18. Additional Subsidiary Guarantees...........................................54 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. Merger, Consolidation and Sale of Assets...................................55 SECTION 5.02. Successor Corporation Substituted..........................................56 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default..........................................................57 SECTION 6.02. Acceleration...............................................................59 SECTION 6.03. Other Remedies.............................................................60 SECTION 6.04. Waiver of Past Defaults....................................................60 SECTION 6.05. Control by Majority........................................................60 SECTION 6.06. Limitation on Suits........................................................61
-ii- Page ---- SECTION 6.07. Rights of Holders To Receive Payment.......................................61 SECTION 6.08. Collection Suit by Trustee.................................................61 SECTION 6.09. Trustee May File Proofs of Claim...........................................62 SECTION 6.10. Priorities.................................................................62 SECTION 6.11. Undertaking for Costs......................................................63 ARTICLE SEVEN TRUSTEE SECTION 7.01. Duties of Trustee..........................................................63 SECTION 7.02. Rights of Trustee..........................................................65 SECTION 7.03. Individual Rights of Trustee...............................................66 SECTION 7.04. Trustee's Disclaimer.......................................................66 SECTION 7.05. Notice of Default..........................................................66 SECTION 7.06. Reports by Trustee to Holders..............................................67 SECTION 7.07. Compensation and Indemnity.................................................67 SECTION 7.08. Replacement of Trustee.....................................................68 SECTION 7.09. Successor Trustee by Merger, Etc...........................................70 SECTION 7.10. Eligibility; Disqualification..............................................70 SECTION 7.11. Preferential Collection of Claims Against Company..........................70 ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.01. Termination of the Company's Obligations...................................71 SECTION 8.02. Legal Defeasance and Covenant Defeasance...................................72 SECTION 8.03. Conditions to Legal Defeasance or Covenant Defeasance......................74 SECTION 8.04. Application of Trust Money.................................................76 SECTION 8.05. Repayment to the Company...................................................77 SECTION 8.06. Reinstatement..............................................................77 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders.................................................78 SECTION 9.02. With Consent of Holders....................................................78 SECTION 9.03. Effect on Senior Debt......................................................80 SECTION 9.04. Compliance with TIA........................................................80 SECTION 9.05. Revocation and Effect of Consents..........................................80 SECTION 9.06. Notation on or Exchange of Securities......................................81 SECTION 9.07. Trustee To Sign Amendments, Etc............................................81
-iii- ARTICLE TEN SUBORDINATION OF SECURITIES Page ---- SECTION 10.01. Securities Subordinated to Senior Debt....................................82 SECTION 10.02. Suspension of Payment When Senior Debt Is in Default......................82 SECTION 10.03. Securities Subordinated to Prior Payment of All Senior Debt on Dissolution, Liquidation or Reorganization of Company.....................................84 SECTION 10.04. Payments May Be Paid Prior to Dissolution.................................86 SECTION 10.05. Holders To Be Subrogated to Rights of Holders of Senior Debt..........................................................86 SECTION 10.06. Obligations of the Company Unconditional..................................86 SECTION 10.07. Notice to Trustee.........................................................87 SECTION 10.08. Reliance on Judicial Order or Certificate of Liquidating Agent.........................................................88 SECTION 10.09. Trustee's Relation to Senior Debt.........................................88 SECTION 10.10. Subordination Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior Debt......................89 SECTION 10.11. Securityholders Authorize Trustee To Effectuate Subordination of Securities...................................89 SECTION 10.12. This Article Ten Not To Prevent Events of Default.........................90 SECTION 10.13. Trustee's Compensation Not Prejudiced.....................................90 ARTICLE ELEVEN GUARANTEE OF SECURITIES SECTION 11.01. Unconditional Guarantee...................................................90 SECTION 11.02. Limitations on Guarantees.................................................92 SECTION 11.03. Execution and Delivery of Guarantee.......................................93 SECTION 11.04. Release of a Guarantor....................................................93 SECTION 11.05. Waiver of Subrogation.....................................................94 SECTION 11.06. Immediate Payment.........................................................95 SECTION 11.07. No Set-Off. 95 SECTION 11.08. Obligations Absolute......................................................95 SECTION 11.09. Obligations Continuing....................................................95 SECTION 11.10. Obligations Not Reduced...................................................96
-iv- Page ---- SECTION 11.11. Obligations Reinstated....................................................96 SECTION 11.12. Obligations Not Affected..................................................96 SECTION 11.13. Waiver. 98 SECTION 11.14. No Obligation To Take Action Against the Company..........................98 SECTION 11.15. Dealing with the Company and Others.......................................98 SECTION 11.16. Default and Enforcement...................................................99 SECTION 11.17. Amendment, Etc............................................................99 SECTION 11.18. Acknowledgment...........................................................100 SECTION 11.19. Costs and Expenses.......................................................100 SECTION 11.20. No Merger or Waiver; Cumulative Remedies.................................100 SECTION 11.21. Survival of Obligations..................................................100 SECTION 11.22. Guarantee in Addition to Other Obligations...............................100 SECTION 11.23. Severability.............................................................101 SECTION 11.24. Successors and Assigns...................................................101 ARTICLE TWELVE SUBORDINATION OF GUARANTEE SECTION 12.01. Guarantee Obligations Subordinated to Guarantor Senior Debt.........................................................101 SECTION 12.02. Suspension of Guarantee Obligations When Guarantor Senior Debt Is in Default....................................102 SECTION 12.03. Guarantee Obligations Subordinated to Prior Payment of All Guarantor Senior Debt on Dissolution, Liquidation or Reorganization of Such Guarantor....................................................103 SECTION 12.04. Payments May Be Paid Prior to Dissolution................................105 SECTION 12.05. Holders of Guarantee Obligations To Be Subrogated to Rights of Holders of Guarantor Senior Debt...................105 SECTION 12.06. Obligations of the Guarantors Unconditional..............................106 SECTION 12.07. Notice to Trustee........................................................106 SECTION 12.08. Reliance on Judicial Order or Certificate of Liquidating Agent........................................................107 SECTION 12.09. Trustee's Relation to Guarantor Senior Debt..............................107 SECTION 12.10. Subordination Rights Not Impaired by Acts or Omissions of the
-v- Page ---- Guarantors or Holders of Guarantor Senior Debt..................................................108 SECTION 12.11. Holders Authorize Trustee To Effectuate Subordination of Guarantee Obligations........................................109 SECTION 12.12. This Article Twelve Not To Prevent Events of Default.....................109 SECTION 12.13. Trustee's Compensation Not Prejudiced....................................110 ARTICLE THIRTEEN MISCELLANEOUS SECTION 13.01. TIA Controls.............................................................110 SECTION 13.02. Notices. 110 SECTION 13.03. Communications by Holders with Other Holders.............................111 SECTION 13.04. Certificate and Opinion as to Conditions Precedent.......................112 SECTION 13.05. Statements Required in Certificate or Opinion............................112 SECTION 13.06. Rules by Trustee, Paying Agent, Registrar................................113 SECTION 13.07. Legal Holidays...........................................................113 SECTION 13.08. Governing Law............................................................113 SECTION 13.09. No Adverse Interpretation of Other Agreements............................113 SECTION 13.10. No Recourse Against Others...............................................113 SECTION 13.11. Successors. 113 SECTION 13.12. Duplicate Originals......................................................114 SECTION 13.13. Severability.............................................................114 Signatures..............................................................................S-1 Exhibit A - Form of Security Exhibit B - Form of Guarantee Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture
-vi- INDENTURE dated as of , 1997 among ALLIANCE IMAGING, INC., a Delaware corporation (the "Company"), as Issuer, each of the Guarantors ------- named herein, as Guarantors, and [ ], a , as Trustee (the "Trustee"). ------- The Company has duly authorized the creation of an issue of [ ]% Senior Subordinated Notes due 2005 (the "Securities") and, to provide therefor, ---------- the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid and binding obligations of the Company and to make this Indenture a valid and binding agreement of the Company have been done. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Securities: ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. ----------- "Acquired Indebtedness" means Indebtedness of a Person or any of its --------------------- Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Restricted Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "Affiliate" means, with respect to any specified Person, any other --------- Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. -2- "Affiliate Transaction" has the meaning set forth in Section 4.12. --------------------- "Agent" means any Registrar, Paying Agent or co-Registrar. ----- "Apollo" means Apollo Management, L.P. and its affiliates. ------ "Asset Acquisition" means (a) an Investment by the Company or any ----------------- Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, ---------- transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; provided, however, -------- ------- that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $1.0 million, (ii) the sale or exchange of equipment in connection with the purchase or other acquisition of other equipment, in each case used in the business of the Company and its Restricted Subsidiaries, and (iii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under Section 5.01. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, -------------- state or foreign law for the relief of debtors. -3- "Board of Directors" means, as to any Person, the board of directors ------------------ of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a ---------------- resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any ------------ other day on which banking institutions in the City of New York are required or authorized by law or other governmental action to be closed. "Capitalized Lease Obligation" means, as to any Person, the ---------------------------- obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Capital Stock" means (i) with respect to any Person that is a ------------- corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person, and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "Cash Equivalents" means (i) marketable direct obligations issued by, ---------------- or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Ratings Services ("S&P") or Moody's --- Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more ------- than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing -4- within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250.0 million; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of one or more of the ----------------- following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates ----- thereof (whether or not otherwise in compliance with the provisions of this Indenture), other than to the Permitted Holders; (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of this Indenture); (iii) any Person or Group (other than the Permitted Holders) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; or (iv) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by the Permitted Holders or a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "Change of Control Date" has the meaning set forth in Section 4.16. ---------------------- "Change of Control Offer" has the meaning set forth in Section 4.16. ----------------------- "Change of Control Payment Date" has the meaning set forth in Section ------------------------------ 4.16. -5- "Commission" means the Securities and Exchange Commission. ---------- "Common Stock" of any Person means any and all shares, interests or ------------ other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company" means the party named as such in this Indenture until a ------- successor replaces it pursuant to this Indenture. "Consolidated EBITDA" means, with respect to any Person, for any ------------------- period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary, unusual or nonrecurring gains or losses), (B) Consolidated Interest Expense and (C) Consolidated Non-cash Charges less any non-cash items ---- increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any ---------------------------------------- Person, the ratio of Consolidated EBITDA of such Person during the two full fiscal quarters (the "Two Quarter Period") ending on or prior to the date of the ------------------ transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such ---------------- Person for the Two Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro --- forma basis for the period of such calculation to (i) the incurrence or - ----- repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Two Quarter Period or at any time subsequent to the last day of the Two Quarter Period and on or prior to the Transaction Date, as if -6- such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Two Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any pro forma expense and cost reductions and other operating improvements as determined in good faith by a responsible financial or accounting officer of the Company) attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Two Quarter Period) occurring during the Two Quarter Period or at any time subsequent to the last day of the Two Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Two Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any -------------------------- period, the sum, without duplication, of (i) Consolidated Interest Expense (excluding amortization or write-off of deferred financing costs), plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus -7- the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for ----------------------------- any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount and amortization or write-off of deferred financing costs (including the amortization of costs relating to interest rate caps or other similar agreements), (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP, minus interest income for such period. "Consolidated Net Income" means, with respect to any Person, for any ----------------------- period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom (a) after-tax gains -------- or losses from Asset Sales (without regard to the $1.0 million limitation set forth in the definition thereof) or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Restricted Subsidiary of the referent Person, (d) the net income (but not loss) of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by contract, operation of law or otherwise, (e) the net income of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Wholly Owned Restricted Subsidiary of the referent Person by such Person, (f) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued), and (g) in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent -8- Person's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Non-cash Charges" means, with respect to any Person, for ----------------------------- any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Covenant Defeasance" has the meaning set forth in Section 8.02. ------------------- "Credit Agreement" means the Credit Agreement to be dated as of the ---------------- Issue Date, between the Company, the lenders party thereto in their capacities as lenders thereunder and Bankers Trust Company, as administrative agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder (provided that such -------- increase in borrowings is permitted by Section 4.04) or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Currency Agreement" means any foreign exchange contract, currency ------------------ swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "Custodian" means any receiver, trustee, assignee, liquidator, --------- sequestrator or similar official under any Bankruptcy Law. "Default" means an event or condition the occurrence of which is, or ------- with the lapse of time or the giving of notice or both would be, an Event of Default. "Depository" shall mean The Depository Trust Company, New York, New ---------- York, or a successor thereto registered under the Exchange Act or other applicable statute or regulation. -9- "Designated Senior Debt" means (i) Indebtedness under or in respect of ---------------------- the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which, at the time of determination, has an aggregate principal amount of at least $25.0 million and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. "Disqualified Capital Stock" means that portion of any Capital Stock -------------------------- which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, on or prior to the Maturity Date of the Securities. "Equity Offering" means a public or private offering of Qualified --------------- Capital Stock (other than public offerings with respect to the Company's Common Stock on Form S-8) of the Company for aggregate net cash proceeds to the Company of at least $25.0 million. "Event of Default" has the meaning set forth in Section 6.01. ---------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ or any successor statute or statutes thereto. "fair market value" means, with respect to any asset or property, the ----------------- price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. -10- "Global Security" shall mean a Security which is executed by the --------------- Company and authenticated and delivered by the Trustee to the Depository or pursuant to the Depository's instruction, all in accordance with this Indenture and pursuant to a written order, which shall be registered in the name of the Depository or its nominee. "Guarantees" means the guarantees of the Securities of the Company by ---------- the Guarantors. "Guarantor" means (i) each of SMT Acquisition Corp., Royal Medical --------- Health Services, Inc. and Alliance Imaging of Central Georgia, Inc. and (ii) each of the Company's Restricted Subsidiaries that in the future executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of this Indenture as a Guarantor; provided that any Person -------- constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of this Indenture. "Guarantor Senior Debt" means with respect to any Guarantor, (i) the --------------------- principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of a Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing by any Guarantor in respect of, (x) all monetary obligations of every nature of a Guarantor under, or with respect to, the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, (y) all Interest Swap Obligations (including guarantees thereof) and (z) all obligations under Currency Agreements (including guarantees thereof), in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include (i) any Indebt- -11- edness of such Guarantor to a Restricted Subsidiary of such Guarantor, (ii) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of such Guarantor or any Restricted Subsidiary of such Guarantor (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or other taxes owed or owing by such Guarantor, (vi) that portion of any Indebtedness incurred in violation of the provisions of Section 4.04 (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (vi) if the holder(s) of such obligation or their representative and the Trustee shall have received an officers' certificate of the Company to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of this Indenture), (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company or any Guarantor and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor. "incur" has the meaning set forth in Section 4.04. ----- "Indebtedness" means with respect to any Person, without duplication, ------------ (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under cur- -12- rency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Indenture" means this Indenture, as amended or supplemented from time --------- to time in accordance with the terms hereof. "Independent Financial Advisor" means a firm (i) which does not, and ----------------------------- whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "Interest Payment Date" means the stated maturity of an installment of --------------------- interest on the Securities. "Interest Swap Obligations" means the obligations of any Person ------------------------- pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect ---------- loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such -13- Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For purposes of Section 4.03, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary of the Company at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary of the Company and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary of the Company at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment; provided that no -------- such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means , 1997. ---------- "Legal Defeasance" has the meaning set forth in Section 8.02. ---------------- "Lien" means any lien, mortgage, deed of trust, pledge, security ---- interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Maturity Date" means , 2005. ------------- -14- "Net Cash Proceeds" means, with respect to any Asset Sale, the ----------------- proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements, (c) repayment of Indebtedness that is required to be repaid in connection with such Asset Sale and (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Net Proceeds Offer" has the meaning set forth in Section 4.17. ------------------ "Net Proceeds Offer Amount" has the meaning set forth in Section 4.17. ------------------------- "Net Proceeds Offer Payment Date" has the meaning set forth in Section ------------------------------- 4.17. "Net Proceeds Offer Trigger Date" has the meaning set forth in Section ------------------------------- 4.17. "Obligations" means all obligations for principal, premium, interest, ----------- penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the ------- Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Controller, or the Secretary of such Person. "Officers' Certificate" means a certificate signed by two Officers of --------------------- the Company. -15- "Opinion of Counsel" means a written opinion from legal counsel which ------------------ opinion and counsel are reasonably acceptable to the Trustee. "Paying Agent" has the meaning set forth in Section 2.03. ------------ "Permitted Holders" means Apollo Management, L.P. and its affiliates. ----------------- "Permitted Indebtedness" means, without duplication, each of the ---------------------- following: (i) Indebtedness represented by $170.0 million aggregate principal amount of the Securities and the related Guarantees issued on the Issue Date; (ii) Indebtedness incurred pursuant to the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $200.0 million less the amount of all repayments and permanent commitment reductions under the Credit Agreement with Net Cash Proceeds of Asset Sales applied thereto as required by Section 4.16; (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon; (iv) Interest Swap Obligations covering Indebtedness of the Company or any of its Restricted Subsidiaries; provided, however, that such -------- ------- Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with this Indenture to the extent the notional principal amount of such Interest Swap Obligation does not, at the time of the incurrence thereof, exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; provided that in the -------- case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; -16- (vi) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Restricted Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company; provided that if as of any date any Person other than the -------- Company or a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary of the Company and is subject to no Lien; provided that (a) any Indebtedness of the Company to any Wholly Owned -------- Restricted Subsidiary of the Company is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under this Indenture and the Securities and (b) if as of any date any Person other than a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such -------- ------- Indebtedness is extinguished within two business days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (x) Indebtedness represented by Capitalized Lease Obligations and Purchase Money Indebtedness of the Company and its Restricted Subsidiaries incurred in the ordinary -17- course of business not to exceed $25.0 million at any one time outstanding; provided that all or a portion of the $25.0 million permitted to be -------- incurred under this clause (x) may, at the option of the Company, be incurred under the Credit Agreement instead of pursuant to Capitalized Lease Obligations or Purchase Money Indebtedness; (xi) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or a Subsidiary for the purpose of financing such acquisition; provided, however, that (a) such -------- ------- Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary of the Company (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (a)) and (b) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including non-cash proceeds (the fair market value of such noncash proceeds being measured at the time they are received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary of the Company in the ordinary course of business; (xiii) Refinancing Indebtedness; and (xiv) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $25.0 million at any one time outstanding (which amount may, but need not, be incurred in whole or in part under the Credit Agreement). "Permitted Investments" means (i) Investments by the Company or any --------------------- Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Wholly Owned Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Wholly Owned Restricted Subsidiary of the Company, provided that such Wholly Owned Re- -------- -18- stricted Subsidiary of the Company is not restricted from making dividends or similar distributions by contract, operation of law or otherwise; (ii) Investments in the Company by any Restricted Subsidiary of the Company; provided that any Indebtedness evidencing such Investment is unsecured - -------- and subordinated, pursuant to a written agreement, to the Company's obligations under the Securities and this Indenture; (iii) Investments in cash and Cash Equivalents; (iv) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not to exceed $1.0 million at any one time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with this Indenture; (vi) additional Investments (including joint ventures) not to exceed $20.0 million at any one time outstanding; (vii) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (viii) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with Section 4.16; and (ix) Investments of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time such Person merges or consolidates with the Company or any of its Restricted Subsidiaries, in either case in compliance with this Indenture; provided that such -------- Investments were not made by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such merger or consolidation. "Permitted Liens" means the following types of Liens: --------------- (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other -19- appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or asset -------- which is not leased property subject to such Capitalized Lease Obligation; (vii) Liens securing Capitalized Lease Obligations and Purchase Money Indebtedness permitted pursuant to clause (x) of the definition of "Permitted Indebtedness"; provided, however, that in the case of Purchase -------- ------- Money Indebtedness (A) the Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 180 days of such acquisition or construction or, in the case of a refinancing of any Purchase Money Indebtedness, within 180 days of such refinancing; -20- (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (xii) Liens in the ordinary course of business not exceeding $5.0 million at any one time outstanding that (a) are not incurred in connection with borrowing of money and (b) do not materially detract from the value of the property or materially impair its use; (xiii) Liens by reason of a judgment or decree not otherwise resulting in an Event of Default; (xiv) Liens securing Indebtedness permitted to be incurred pursuant to clause (xiv) of the definition of "Permitted Indebtedness"; (xv) Liens securing Indebtedness under Currency Agreements permitted under this Indenture; and (xvi) Liens securing Acquired Indebtedness incurred in accordance with Section 4.04; provided that (A) such Liens secured such Acquired -------- Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiar- -21- ies other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company. "Person" means an individual, partnership, corporation, unincorporated ------ organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Preferred Stock" of any Person means any Capital Stock of such Person --------------- that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Purchase Money Indebtedness" means Indebtedness of the Company and --------------------------- its Restricted Subsidiaries incurred in the normal course of business for the purpose of financing all or any part of the purchase price, or the cost of installation, construction or improvement, of property or equipment. "Qualified Capital Stock" means any Capital Stock that is not ----------------------- Disqualified Capital Stock. "Record Date" means the applicable Record Date specified in the ----------- Securities; provided that if any such date is not a Business Day, the Record -------- Date shall be the first day immediately preceding such specified day that is a Business Day. "Redemption Date," when used with respect to any Security to be --------------- redeemed, means the date fixed for such redemption pursuant to this Indenture and the Securities. "Redemption Price," when used with respect to any Security to be ---------------- redeemed, means the price fixed for such redemption, payable in immediately available funds, pursuant to this Indenture and the Securities. "Reference Date" has the meaning set forth in Section 4.03. -------------- "Refinance" means, in respect of any security or Indebtedness, to --------- refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebted- -22- ness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means any Refinancing by the Company or any ------------------------ Restricted Subsidiary of the Company of Indebtedness incurred or existing in accordance with Section 4.04 (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii) or (xiv) of the definition of "Permitted Indebtedness"), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; provided that (x) if such -------- Indebtedness being Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Securities, then such Refinancing Indebtedness shall be subordinate to the Securities at least to the same extent and in the same manner as the Indebtedness being Refinanced. "Registrar" has the meaning set forth in Section 2.03. --------- "Replacement Assets" has the meaning set forth in Section 4.16. ------------------ "Representative" means the indenture trustee or other trustee, agent -------------- or representative in respect of any Designated Senior Debt; provided that if, -------- and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "Responsible Officer" means, when used with respect to the Trustee, ------------------- any officer in the Corporate Trust Office of the Trustee including any vice president, assistant vice president, assistant secretary, treasurer, assistant treasurer, or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time -23- shall be such officers, respectively, or to whom any corporate trust matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Restricted Payment" has the meaning set forth in Section 4.03. ------------------ "Restricted Subsidiary" of any Person means any Subsidiary of such --------------------- Person which at the time of determination is not an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any direct or indirect ------------------------------ arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such property. "Securities Act" means the Securities Act of 1933, as amended, or any -------------- successor statute or statutes thereto. "Securityholder" or "Holder" means the Person in whose name a Security -------------- ------ is registered on the Registrar's books. "Senior Debt" means the principal of, premium, if any, and interest ----------- (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing by the Company in respect of, (x) all monetary obligations of every nature of the Company under the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, -24- fees, expenses and indemnities, (y) all Interest Swap Obligations (including guarantees thereof) and (z) all obligations under Currency Agreements (including guarantees thereof), in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not include (i) any Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness to, or guaranteed on behalf of, any director, officer or employee of the Company or any Subsidiary of the Company (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or other taxes owed or owing by the Company, (vi) that portion of any Indebtedness incurred in violation of Section 4.04 (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (vi) if the holder(s) of such obligation or their representative and the Trustee shall have received an officers' certificate of the Company to the effect that the incurrence of such Indebtedness does not (or, in the case of revolving credit Indebtedness, that the incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of this Indenture), (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of the Company. "Significant Subsidiary" shall have the meaning set forth in Rule ---------------------- 1.02(w) of Regulation S-X under the Securities Act. "Subsidiary", with respect to any Person, means (i) any corporation of ---------- which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Surviving Entity" has the meaning set forth in Section 5.01. ---------------- "TIA" means the Trust Indenture act of 1939 (15 U.S.C. (S)(S) 77aaa- --- 77bbbb), as amended, as in effect on the date -25- of the execution of this Indenture until such time as this Indenture is qualified under the TIA, and thereafter as in effect on the date on which this Indenture is qualified under the TIA, except as otherwise provided in Section 9.03. "Trustee" means the party named as such in this Indenture until a ------- successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Unrestricted Subsidiary" of any Person means (i) any Subsidiary of ----------------------- such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that (x) the -------- Company certifies to the Trustee that such designation complies with Section 4.03 and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.04 and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations of, and --------------------------- obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. -26- "U.S. Legal Tender" means such coin or currency of the United States ----------------- of America as at the time of payment shall be legal tender for the payment of public and private debts. "Weighted Average Life to Maturity" means, when applied to any --------------------------------- Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" of any Person means any ---------------------------------- Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. SECTION 1.02. Incorporation by Reference of TIA. --------------------------------- Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. -------------------- "indenture security holder" means a Holder or a Securityholder. ------------------------- "indenture to be qualified" means this Indenture. ------------------------- "indenture trustee" or "institutional trustee" means the Trustee. ----------------- --------------------- "obligor" on the indenture securities means the Company, any Guarantor ------- or any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein. -27- SECTION 1.03. 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 words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE TWO THE SECURITIES SECTION 2.01. Form and Dating. --------------- The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company and the Trustee shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its issuance and show the date of its authentication. Each Security shall have an executed Guarantee from each of the Guarantors endorsed thereon substantially in the form of Exhibit B. The terms and provisions contained in the Securities and the Guarantees shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. -28- SECTION 2.02. Execution and Authentication. ---------------------------- Two Officers, or an Officer and an Assistant Secretary, shall sign, or one Officer shall sign and one Officer or an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Securities for the Company and the Guarantees for each of the Guarantors by manual or facsimile signature. If an Officer whose signature is on a Security or Guarantee, as the case may be, was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security shall nevertheless be valid. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue on the Issue Date in the aggregate principal amount of $170,000,000 upon a written order of the Company in the form of an Officers' Certificate. In addition, the Trustee shall authenticate Securities for original issue after the Issue Date in the aggregate principal amount of up to $100,000,000 upon a written order of the Company in the form of an Officers' Certificate. Each such Officers' Certificate shall specify the amount of Securities to be authenticated and the date on which the Securities are to be authenticated. Such Securities shall initially be in the form of one or more Global Securities, which (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, the Securities to be issued, (ii) shall be registered in the name of the Depository for such Global Security or Securities or its nominee, (iii) shall be delivered by the Trustee to the Depository or pursuant to the Depository's instruction and (iv) shall bear a legend substantially to the following effect: "Unless and until this Global Security is exchanged in whole or in part for the individual Securities represented hereby, this Global Security may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or by a Depository or any such nominee to a successor Depository or a nominee of a successor Depository." The aggregate principal amount of Securities outstanding at any time may not exceed $270,000,000, except as provided in Section 2.07. -29- The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities 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 and Affiliates of the Company. The Securities shall be issuable only in registered form without coupons in denominations of $1,000 and integral multiples thereof. SECTION 2.03. Registrar and Paying Agent. -------------------------- The Company shall maintain an office or agency in the Borough of Manhattan, The City of New York, where (a) Securities may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) --------- Securities may be presented or surrendered for payment ("Paying Agent") and (c) ------------ notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in -------- ------- any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company may act as its own Registrar or Paying Agent except that for the purposes of Articles Three and Eight and Sections 4.15 and 4.16, neither the Company nor any Affiliate of the Company shall act as Paying Agent. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company, upon notice to the Trustee, may have one or more co- Registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any additional paying agent. The ------------ Company initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee, in advance, of the name and address of any such Agent. If the -30- Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. SECTION 2.04. Paying Agent To Hold Assets in Trust. ------------------------------------ The Company shall require each Paying Agent other than the Trustee to agree in writing that, subject to Article Four and Article Twelve, each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, or interest on, the Securities (whether such assets have been distributed to it by the Company or any other obligor on the Securities), and shall notify the Trustee of any Default by the Company (or any other obligor on the Securities) in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate such assets and hold them as a separate trust fund. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent shall have no further liability for such assets. SECTION 2.05. 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. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee. SECTION 2.06. Transfer and Exchange. --------------------- (a) When Securities are presented to the Registrar or a co-Registrar with a request to register the transfer of such Securities or to exchange such Securities for an equal principal amount of Securities of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Securi- - -------- ------- -31- ties surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's or co-Registrar's request. 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 or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchanges or transfers pursuant to Sections 2.02, 2.10, 3.06, 4.15, 4.16 or 9.06). The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Security (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Securities and ending at the close of business on the day of such mailing, (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Security being redeemed in part, and (iii) during a Change of Control Offer or an Net Proceeds Offer if such Security is tendered pursuant to such Change of Control Offer or Net Proceeds Offer and not withdrawn. A Global Security may be transferred, in whole but not in part, in the manner provided in this Section 2.06(a), only to a nominee of the Depository for such Global Security, or to the Depository, or a successor Depository for such Global Security selected or approved by the Company, or to a nominee of such successor Depository. (b) If at any time the Depository for the Global Security or Securities notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or Securities or the Company becomes aware that the Depository has ceased to be a clearing agency registered under the Exchange Act, the Company shall appoint a successor Depository with respect to such Global Security or Securities. If a successor Depository for such Global Security or Securities has not been appointed within 120 days after the Company receives such notice or becomes aware of such ineligibility, the Company shall execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Securities, shall authenticate and deliver, Securities in definitive form, in an aggregate principal amount at maturity equal to the principal amount at maturity of the Global Security representing such Securities, in exchange for such Global Security. The Company shall reimburse the Registrar, the Depository and the Trustee -32- for expenses they incur in documenting such exchanges and issuances of Securities in definitive form. The Company may at any time and in its sole discretion determine that the Securities shall no longer be represented by such Global Security or Securities. In such event the Company will execute, and the Trustee, upon receipt of a written order for the authentication and delivery of individual Securities in exchange in whole or in part for such Global Security or Securities, will authenticate and deliver individual Securities in definitive form in an aggregate principal amount equal to the principal amount of such Global Security or Securities in exchange for such Global Security or Securities. In any exchange provided for in any of the preceding two paragraphs, the Company will execute and the Trustee will authenticate and deliver individual Securities in definitive registered form in authorized denominations. Upon the exchange of a Global Security for individual Securities, such Global Security shall be cancelled by the Trustee. Securities issued in exchange for a Global Security pursuant to this Section 2.06(b) shall be registered in such names and in such authorized denominations as the Depository for such Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Securities to the persons in whose names such Securities are so registered. None of the Company, the Trustee, any Paying Agent or the Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. SECTION 2.07. Replacement Securities. ---------------------- If a mutilated Security is surrendered to the Trustee or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Security is replaced. The Company may charge such Holder for its reasonable out-of-pocket expenses in replacing a Security pur- -33- suant to this Section 2.07, including reasonable fees and expenses of counsel. Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. ---------------------- Securities outstanding at any time are all the Securities that have been authenticated by the Trustee except those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company, the Guarantors or any of their respective Affiliates holds the Security. If a Security is replaced pursuant to Section 2.07 (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. A mutilated Security ceases to be outstanding ---- ---- upon surrender of such Security and replacement thereof pursuant to Section 2.07. If the principal amount of any Security is considered paid under Section 4.01, it ceases to be outstanding and interest ceases to accrue. If on a Redemption Date or the Maturity Date the Paying Agent (other than the Company or a Subsidiary) holds U.S. Legal Tender or U.S. Government obligations sufficient to pay all of the principal and interest due on the Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. SECTION 2.09. Treasury Securities. ------------------- In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, any of its Subsidiaries or any of their respective Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that the Trustee knows or has reason to know are so owned shall be disregarded. SECTION 2.10. Temporary Securities. -------------------- Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate tem- -34- porary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until such exchange, temporary Securities shall be entitled to the same rights, benefits and privileges as definitive Securities. Notwithstanding the foregoing, so long as the Securities are represented by a Global Security, such Global Security may be in typewritten form. SECTION 2.11. Cancellation. ------------ The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Company or a Subsidiary), and no one else, shall cancel and, at the written direction of the Company, shall dispose of all Securities surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.07, the Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. If the Company or any Guarantor shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. SECTION 2.12. Defaulted Interest. ------------------ If the Company defaults in a payment of interest on the Securities, it shall, unless the Trustee fixes another record date pursuant to Section 6.10, pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. -35- SECTION 2.13. CUSIP Number. ------------ The Company in issuing the Securities may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state -------- ------- that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. ARTICLE THREE REDEMPTION SECTION 3.01. Notices to Trustee. ------------------ If the Company elects to redeem Securities pursuant to Paragraph 6 or Paragraph 7 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the Redemption Price and the principal amount of Securities to be redeemed. The Company shall give notice of redemption to the Paying Agent and Trustee at least 30 days but not more than 60 days before the Redemption Date (unless a shorter notice shall be agreed to by the Trustee in writing), together with an Officers' Certificate stating that such redemption will comply with the conditions contained herein. SECTION 3.02. Selection of Securities To Be Redeemed. -------------------------------------- In the event that less than all of the Securities are to be redeemed at any time, selection of such Securities for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or, if the Securities are not then listed on a national securities exchange, on a pro rata basis, by lot --- ---- or by such method as the Trustee shall deem fair and appropriate; provided, -------- however, that no Securities of a principal amount of $1,000 or less shall be - ------- redeemed in part; and provided, further, that if a partial redemption is made -------- ------- with the net cash proceeds of an Equity Offering, selection of the Securities or portions thereof for redemption shall be made by the Trustee only on a pro rata --- ---- basis or on as nearly a pro rata basis as is practicable (subject to the --- ---- procedures of the Depository), unless such method is otherwise prohibited. -36- SECTION 3.03. Notice of Redemption. -------------------- At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first class mail, postage prepaid, to each Holder whose Securities are to be redeemed at its registered address. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. Each notice for redemption shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price and the amount of accrued interest, if any, to be paid; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price plus accrued interest, if any; (5) that, unless the Company defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Securities redeemed; (6) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, and upon surrender of such Security, a new Security or Securities in aggregate principal amount equal to the unredeemed portion thereof will be issued; (7) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof) to be redeemed, as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption; and (8) the Paragraph of the Securities pursuant to which the Securities are to be redeemed. -37- The notice, if mailed in a manner herein provided, shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. SECTION 3.04. Effect of Notice of Redemption. ------------------------------ Once notice of redemption is mailed in accordance with Section 3.03, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price plus accrued interest, if any. Upon surrender to the Trustee or Paying Agent, such Securities called for redemption shall be paid at the Redemption Price (which shall include accrued interest thereon to the Redemption Date), but installments of interest, the maturity of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant Record Dates. SECTION 3.05. Deposit of Redemption Price. --------------------------- On or before 11:00 a.m New York time on the Redemption Date, the Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price plus accrued interest, if any, of all Securities to be redeemed on that date. If the Company complies with the preceding paragraph, then, unless the Company defaults in the payment of such Redemption Price plus accrued interest, if any, interest on the Securities to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment. SECTION 3.06. Securities Redeemed in Part. --------------------------- Upon surrender of a Security that is to be redeemed in part only, the Trustee shall upon written instruction from the Company authenticate for the Holder a new Security or Securities in a principal amount equal to the unredeemed portion of the Security surrendered. -38- ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Securities. --------------------- The Company shall pay the principal of and interest on the Securities in the manner provided in the Securities. An installment of principal of or interest on the Securities shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date U.S. Legal Tender designated for and sufficient to pay the installment. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 4.02. Maintenance of Office or Agency. ------------------------------- The Company shall maintain in the Borough of Manhattan, The City of New York, the office or agency required under Section 2.03. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 11.02. SECTION 4.03. Limitation on Restricted Payments. --------------------------------- The Company shall not, and shall not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Securities or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of such ------------------ Restricted Pay- -39- ment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.04 or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned subsequent to the Issue Date and on or prior to the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting ---------------- period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company; plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock; plus (z) without duplication, the sum of (1) the aggregate amount returned in cash on or with respect to Investments (other than Permitted Investments) made subsequent to the Issue Date whether through interest payments, principal payments, dividends or other distributions or payments, (2) the net cash proceeds received by the Company or any Restricted Subsidiary of the Company from the disposition of all or any portion of such Investments (other than to a Subsidiary of the Company) and (3) upon redesignation of an Unrestricted Subsidiary of the Company as a Restricted Subsidiary of the Company, the fair market value of such Subsidiary; provided, -------- however, that the sum of clauses (1), (2) and (3) above shall not exceed the - ------- aggregate amount of all such Investments made subsequent to the Issue Date. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of such dividend if the dividend would have been permitted on the date of declaration; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any shares of Capital Stock of the Company, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Sub- -40- sidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any Indebtedness of the Company that is subordinate or junior in right of payment to the Securities either (i) solely in exchange for shares of Qualified Capital Stock of the Company, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of Default shall have occurred and be continuing, repurchases by the Company of Common Stock of the Company from employees of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment of such employees, in an aggregate amount not to exceed $5.0 million in any calendar year (with unused amounts in any calendar year being carried over to succeeding years subject to a maximum of $7.5 million in any calendar year); (5) the declaration and payment of dividends to holders of any class or series of Preferred Stock (other than Disqualified Capital Stock) issued after the Issue Date, provided that for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date of issuance of such Preferred Stock, after giving effect to such issuance on a pro forma basis, the Company would have had a Consolidated --- ----- Fixed Charge Coverage Ratio of at least 1.75 to 1.00; (6) the payment of dividends on the Company's Common Stock, following the first public offering of the Company's Common Stock after the Issue Date, of up to 6% per annum of the net proceeds received by the Company in such public offering, other than public offerings with respect to the Company's Common Stock registered on Form S-8; (7) the repurchase, retirement or other acquisition or retirement for value of equity interests of the Company in existence on the Issue Date and from the persons holding such equity interests on the Issue Date and which are not held by Apollo or any of its Affiliates or members of management of the Company and its Subsidiaries on the Issue Date (including any equity interests issued in respect of such equity interests as a result of a stock split, recapitalization, merger, combination, consolidation or similar transaction), provided, however, -------- ------- that the Company shall be permitted to make Restricted Payments under this clause only if after giving effect thereto, the Company would be permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.04 and (8) other Restricted Payments in an aggregate amount not to exceed $5.0 million. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of -41- the immediately preceding paragraph, amounts expended pursuant to clauses (1), (2), (4), (5), (6), (7) and (8) shall be included in such calculation. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company's latest available internal quarterly financial statements. SECTION 4.04. Limitation on Incurrence of Additional Indebtedness. --------------------------- The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness ----- (other than Permitted Indebtedness); provided, however, that if no Default or -------- ------- Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any of the Guarantors may incur Indebtedness (including, without limitation, Acquired Indebtedness) and Restricted Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 1.75 to 1.0 if such incurrence is on or prior to December 31, 1999 and 2.0 to 1.0 if such incurrence is thereafter. SECTION 4.05. Corporate Existence. ------------------- Except as otherwise permitted by Article Five, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of each such Restricted Subsidiary and the rights (charter and statutory) and material franchises of the Company and each of its Restricted Subsidiaries. SECTION 4.06. Payment of Taxes and Other Claims. --------------------------------- The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, -42- (a) all material taxes, assessments and governmental charges levied or imposed upon it or any of its Subsidiaries or upon the income, profits or property of it or any of its Restricted Subsidiaries and (b) all lawful claims for labor, materials and supplies which, in each case, if unpaid, might by law become a material liability or Lien upon the property of it or any of its Restricted Subsidiaries; provided, however, that the Company shall not be required to pay -------- ------- or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made. SECTION 4.07. Maintenance of Properties and Insurance. --------------------------------------- (a) The Company shall cause all material properties owned by or leased by it or any of its Restricted Subsidiaries used or useful to the conduct of its business or the business of any of its Restricted Subsidiaries to be maintained and kept in normal condition, repair and working order and supplied with all necessary equipment and shall cause to be made all repairs, renewals, replacements, and betterments thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this -------- ------- Section 4.07 shall prevent the Company or any of its Restricted Subsidiaries from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors of the Company or any such Restricted Subsidiary desirable in the conduct of the business of the Company or any such Restricted Subsidiary, and if such discontinuance or disposal is not adverse in any material respect to the Holders. (b) The Company shall maintain, and shall cause its Restricted Subsidiaries to maintain, insurance with responsible carriers against such risks and in such amounts, and with such deductibles, retentions, self-insured amounts and co-insurance provisions, as are customarily carried by similar businesses of similar size, including property and casualty loss, workers' compensation and interruption of business insurance. SECTION 4.08. Compliance Certificate; Notice of Default. ----------------------------------------- (a) The Company shall deliver to the Trustee, within 120 days after the close of each fiscal year an Officers' Certificate stating that a review of the activities of the Company -43- has been made under the supervision of the signing officers with a view to determining whether it 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 knowledge the Company during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant and no Default or Event of Default occurred during such year and at the date of such certificate there is no Default or Event of Default that has occurred and is continuing or, if such signers do know of such Default or Event of Default, the certificate shall describe its status with particularity. The Officers' Certificate shall also notify the Trustee should the Company elect to change the manner in which it fixes its fiscal year end. (b) The annual financial statements delivered pursuant to Section 4.10 shall be accompanied by a written report of the Company's independent accountants (who shall be a firm of established national reputation) that in conducting their audit of such financial statements nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four, Five or Six of this Indenture insofar as they relate to accounting matters or, if any such violation has occurred, specifying the nature and 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. (c) The Company shall deliver to the Trustee, forthwith upon becoming aware of any Default or Event of Default in the performance of any covenant, agreement or condition contained in this Indenture, an Officers' Certificate specifying the Default or Event of Default and describing its status with particularity. SECTION 4.09. Compliance with Laws. -------------------- The Company shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of the Company and its Subsidiaries taken as a whole. -44- SECTION 4.10. Reports to Holders. ------------------ The Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA (S) 314(a). SECTION 4.11. Waiver of Stay, Extension or Usury Laws. --------------------------------------- Each of the Company and each Guarantor 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 or extension law or any usury law or other law that would prohibit or forgive the Company or such Guarantor from paying all or any portion of the principal of and/or interest on the Securities or the Guarantee of any such Guarantor as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture, and (to the extent that it may lawfully do so) each hereby expressly waives all benefit or advantage of any such law, and covenants that it will not 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 had been enacted. SECTION 4.12. Limitations on Transactions with Affiliates. ------------------------------------------- (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate --------- Transaction"), other than (x) Affiliate Transactions permitted under paragraph - ----------- (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable -45- transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $1.0 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $10.0 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in clause (a) shall not apply to (i) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors; (ii) transactions exclusively between or among the Company and any of its Wholly Owned Restricted Subsidiaries or exclusively between or among such Wholly Owned Restricted Subsidiaries, provided such transactions are not -------- otherwise prohibited by this Indenture; (iii) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by this Indenture; (v) transactions in which the Company or any of its Restricted Subsidiaries, as the case may be, delivers to the Trustee a letter from an Independent Financial Advisor stating that such transaction is fair to the Company or such Restricted Subsidiary from a financial point of view or meets the requirements of the first sentence of paragraph (a) above; (vi) the existence of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agree- -46- ment related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that -------- ------- the existence of, or the performance by the Company or any of its Restricted Subsidiaries of obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after that Issue Date shall only be permitted by this clause to the extent that the terms of any such, amendment or new agreement are not otherwise disadvantageous to the holders of the Securities in any material respect; (vii) loans to employees of the Company and its Subsidiaries which are approved by the Board of Directors of the Company in good faith; (viii) the payment of all fees and expenses related to the Transactions; and (ix) transactions with customers, clients, suppliers, or purchasers or sellers of goods or services, in each case in the ordinary course of business and otherwise in compliance with the terms of this Indenture, which are fair to the Company or its Restricted Subsidiaries, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. SECTION 4.13. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. ---------------------------------------- The Company shall not, and shall not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) this Indenture; (3) the Credit Agreement; (4) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary of the Company; (5) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (7) purchase money obligations for property acquired in the ordinary course of -47- business that impose restrictions of the nature discussed in clause (c) above on the property so acquired; (8) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Restricted Subsidiary of the Company pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (9) secured Indebtedness otherwise permitted to be incurred pursuant to Section 4.04 and Section 4.14; (10) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business; (11) an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clauses (1) through (10) above; provided, however, that the provisions relating to such encumbrance or - -------- ------- restriction contained in any such Indebtedness are no less favorable to the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clauses; or (12) an agreement governing Indebtedness permitted to be incurred pursuant to Section 4.04; provided that the provisions relating to such -------- encumbrance or restriction contained in such Indebtedness are no less favorable to the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions contained in the Credit Agreement as in effect on the Issue Date. SECTION 4.14. Limitation on Liens. ------------------- The Company shall not, and shall not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Securities, the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Securities are equally and ratably secured, except for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Securities and the Guarantees; (D) Liens of the -48- Company or a Wholly Owned Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions of this Indenture; provided, however, that such -------- ------- Liens (A) are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and (B) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted Liens. SECTION 4.15. Change of Control. ----------------- (a) Upon the occurrence of a Change of Control, the Company shall be obligated to make an offer to purchase (the "Change of Control Offer"), and ----------------------- shall purchase, on a Business Day (the "Change of Control Payment Date") as ------------------------------ described below, all of the then outstanding Securities at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the Change of Control Payment Date. The Change of Control Offer shall remain open for at least 20 Business Days and until the close of business on the Change of Control Payment Date. (b) Prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full and terminate all commitments under Indebtedness under the Credit Agreement and all other Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and all other such Senior Debt and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the Credit Agreement and all other Senior Debt to permit the repurchase of the Securities as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Securities pursuant to the provisions described below. The Company's failure to comply with the covenant described in the immediately preceding sentence shall constitute an Event of Default described in clause (c) and not in clause (b) of Section 6.01. (c) Within 30 days following the date upon which a Change of Control occurs (the "Change of Control Date"), the ---------------------- -49- Company shall send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Change of Control Offer. Such notice shall state: (1) that the Change of Control Offer is being made pursuant to this Section 4.15 and that all Securities tendered and not withdrawn will be accepted for payment; (2) the purchase price (including the amount of accrued interest) and the Change of Control Payment Date, which shall be a Business Day, that is not earlier than 30 days or later than 60 days from the date such notice is mailed; (3) that any Security not tendered will continue to accrue interest; (4) that, unless the Company defaults in making payment therefor, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; (7) that Holders whose Securities are purchased only in part will be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered; and -50- (8) the circumstances and relevant facts regarding such Change of Control. On or before the Change of Control Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price plus accrued interest, if any, of all Securities so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price plus accrued interest, if any, and the Trustee shall promptly authenticate and mail to such Holders new Securities equal in principal amount to any unpurchased portion of the Securities surrendered. Any Securities not so accepted shall be promptly mailed by the Company to the Holder thereof. For purposes of this Section 4.15, the Trustee shall act as the Paying Agent. Any amounts remaining after the purchase of Securities pursuant to a Change of Control Offer shall be returned by the Trustee to the Company. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the purchase of Securities pursuant to a Change of Control Offer. To the extent the provisions of any securities laws or regulations conflict with the provisions of this Section 4.15, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.15 by virtue thereof. SECTION 4.16. Limitation on Asset Sales. ------------------------- The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such -51- disposition; provided that the amount of (a) any liabilities (as shown -------- on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Securities) that are assumed by the transferee of any such assets, and (b) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days after such Asset Sale (to the extent of the cash received) shall be deemed to be cash for the purposes of this provision; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility, (B) to make an Investment in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date or in businesses the same, similar or reasonably related thereto ("Replacement Assets"), or (C) a ------------------ combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate ------------------------------- amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") ------------------------- shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer ------------------ ------------------ Payment Date") not less than 30 nor more than 45 days following the applicable - ------------ Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that -------- amount of Securities equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, -------- ------- that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for -52- cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $5.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $5.0 million, shall be applied as required pursuant to this paragraph). In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Restricted Subsidiaries as an entirety to a Person in a transaction permitted by Section 5.01, the successor corporation shall be deemed to have sold the properties and assets of the Company and its Restricted Subsidiaries not so transferred for purposes of this covenant, and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant. Notice of each Net Proceeds Offer pursuant to this Section 4.16 shall be mailed or caused to be mailed, by first class mail, by the Company within 25 days following the applicable Net Proceeds Offer Trigger Date to all Holders at their last registered addresses, with a copy to the Trustee. A Net Proceeds Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms: (1) that the Net Proceeds Offer is being made pursuant to this Section 4.16 and that all Securities tendered will be accepted for payment; provided, however, that if the principal amount of Securities tendered in -------- ------- the Net Proceeds Offer exceeds the aggregate amount of Net Proceeds Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis; (2) the purchase price (including the amount of accrued interest, if any) and the purchase date (which shall be no earlier than 30 days nor later than 45 days from the -53- date such notice is mailed, other than as may be required by applicable law); (3) that any Security not tendered will continue to accrue interest; (4) that, unless the Company defaults in making payment therefor, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Net Proceeds Offer Payment Date; (5) that Holders electing to have a Security purchased pursuant to the Net Proceeds Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Net Proceeds Offer Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the second Business Day prior to the Net Proceeds Offer Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; and (7) that Holders whose Securities are purchased only in part will be issued new Securities in a principal amount at maturity equal to the unpurchased portion of the Securities surrendered. On or before the Net Proceeds Offer Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price, plus accrued interest, if any, of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price, plus accrued interest, if any, thereon. Any Security not so accepted shall be promptly mailed by the Company to the Holder thereof. For purposes of this Section 4.16, the Trustee shall act as the Paying Agent. Any amounts remaining -54- after the purchase of Securities pursuant to a Net Proceeds Offer shall be returned by the Trustee to the Company. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.16, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.16 by virtue thereof. SECTION 4.17. Prohibition on Incurrence of Senior Subordinated Debt. ------------------------- The Company and the Guarantors shall not incur or suffer to exist Indebtedness that is senior in right of payment to the Securities or the Guarantees, as the case may be, and subordinate in right of payment by its terms to any other Indebtedness of the Company or such Guarantor, as the case may be. SECTION 4.18. Additional Subsidiary Guarantees. -------------------------------- If the Company or any of its Restricted Subsidiaries transfers or causes to be transferred, in one transaction or a series of related transactions, any property to any domestic Restricted Subsidiary that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another domestic Restricted Subsidiary having total equity value in excess of $1.0 million, then such transferee or acquired or other Restricted Subsidiary shall (i) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Securities and this Indenture on the terms set forth in this Indenture and (ii) deliver to the Trustee an Opinion of Counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of this Indenture. -55- ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. Merger, Consolidation and Sale of Assets. ---------------------------------------- (a) The Company shall not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be ---------------- a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Securities and the performance of every covenant of the Securities and this Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction on a pro forma basis and the assumption contemplated by --- ----- clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.04; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity, as the -56- case may be, shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied. Notwithstanding the foregoing, the merger of the Company with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction shall be permitted. (b) For purposes of the foregoing paragraph (a), the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 5.02. Successor Corporation Substituted. --------------------------------- (a) Upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.01 in which the Company is not the continuing corporation, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture and the Securities with the same effect as if such Surviving Entity had been named as such. (b) Each Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and this Indenture in connection with any transaction complying with the provisions of Section 4.16) shall not, and the Company shall not cause or permit any Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Guarantor unless: (i) the entity formed by or surviving any such consolidation or merger (if other than the Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) such entity as- -57- sumes by supplemental indenture all of the obligations of the Guarantor on the Guarantee; (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the Company could satisfy the provisions --- ----- of clause (ii) of Section 5.01(a). Any merger or consolidation of a Guarantor with and into the Company (with the Company being the surviving entity) or another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company need only comply with clause (iv) of Section 5.01(a). ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default. ----------------- Each of the following shall be an "Event of Default": ---------------- (a) the failure to pay interest on any Securities when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by Articles Ten and Twelve of this Indenture); (b) the failure to pay the principal on any Securities, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Securities tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by Articles Ten and Twelve of this Indenture); (c) a default in the observance or performance of any other covenant or agreement contained in this Indenture, which default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Securities; (d) the failure to pay at final stated maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Com- -58- pany, or the acceleration of the final stated maturity of any such Indebtedness if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final stated maturity or which has been accelerated, aggregates $5.0 million or more at any time; (e) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (f) the Company or any of its Significant Subsidiaries (i) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (ii) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (iii) consents to the appointment of a custodian of it or for substantially all of its property, (iv) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (v) makes a general assignment for the benefit of its creditors or (vi) takes any corporate action to authorize or effect any of the foregoing; (g) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of the Company or any of its Significant Subsidiaries in an involuntary case or proceeding under any Bankruptcy Law, which shall (i) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of the Company or any of its Significant Subsidiaries, (ii) appoint a Custodian of the Company or any of its Significant Subsidiaries or for substantially all of any of its property or (iii) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) any of the Guarantees ceases to be in full force and effect or any of the Guarantees is declared to be null and void and unenforceable or any of the Guarantees is found to be invalid or any of the Guarantors denies its liability under its Guarantee (other than by reason of release of such Guarantor in accordance with the terms of this Indenture). -59- SECTION 6.02. Acceleration. ------------ If an Event of Default (other than an Event of Default specified in clause (f) or (g) of Section 6.01 above with respect to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Securities may declare the principal of and accrued interest on all the Securities to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) ------------------- shall become immediately due and payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become immediately due and payable upon the first to occur of an acceleration under the Credit Agreement or 5 business days after receipt by the Company and the Representative under the Credit Agreement of such Acceleration Notice. If an Event of Default specified in clause (f) or (g) of Section 6.01 above with respect to the Company occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Securities 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. At any time after a declaration of acceleration with respect to the Securities as described in the preceding paragraph, the Holders of a majority in principal amount of the Securities may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (f) or (g) of Section 6.01, the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. -60- SECTION 6.03. Other Remedies. -------------- If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder 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. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. SECTION 6.04. Waiver of Past Defaults. ----------------------- Subject to Sections 2.09, 6.07 and 9.02, the Holders of not less than a majority in principal amount of the outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or interest on any Security as specified in clauses (a) and (b) of Section 6.01. The Company shall deliver to the Trustee an Officers' Certificate stating that the requisite percentage of Holders have consented to such waiver and attaching copies of such consents. When a Default or Event of Default is waived, it is cured and ceases. SECTION 6.05. Control by Majority. ------------------- The Holders of not less than a majority in principal amount of the outstanding Securities 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. Subject to Section 7.01, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of another Securityholder, or that may involve the Trustee in personal liability; provided -------- 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 dis- -61- cretion against any loss or expense caused by taking such action or following such direction. SECTION 6.06. Limitation on Suits. ------------------- A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holder or Holders of at least 25% in principal amount of the outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 45 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (5) during such 45-day period the Holder or Holders of a majority in principal amount of the outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over such other Securityholder. SECTION 6.07. Rights of Holders To Receive Payment. ------------------------------------ Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, 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. SECTION 6.08. Collection Suit by Trustee. -------------------------- If an Event of Default in payment of principal or interest specified in clause (a) or (b) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or -62- any other obligor on the Securities for the whole amount of principal and accrued interest and fees remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum --- ----- borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. 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 (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Securityholders allowed in any judicial proceedings relating to the Company, its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Securityholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. SECTION 6.10. Priorities. ---------- If the Trustee collects any money or property pursuant to this Article Six, it shall pay out the money or property in the following order: First: to the Trustee for amounts due under Section 7.07; Second: to Holders for interest accrued on the Securities, ratably, without preference or priority of any -63- kind, according to the amounts due and payable on the Securities for interest; Third: to Holders for principal amounts due and unpaid on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal; and Fourth: to the Company or, if applicable, the Guarantors, as their respective interests may appear. The Trustee, upon prior notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. 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 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 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the outstanding Securities. ARTICLE SEVEN TRUSTEE SECTION 7.01. Duties of Trustee. ----------------- (a) If a Default or 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 his or her own affairs. (b) Except during the continuance of a Default or an Event of Default: -64- (1) The Trustee need perform only those duties as are specifically set forth herein or in the TIA and no duties, covenants, responsibilities or obligations shall be implied in this Indenture against the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates (including Officers' Certificates) or opinions (including Opinions of Counsel) 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. (c) Notwithstanding anything to the contrary herein, 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: (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.01. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) 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 6.05. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or take any action at the request or direction of Holders if it shall have reasonable grounds for believing that repayment of such funds is not assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to this Section 7.01. (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 -65- need not be segregated from other funds except to the extent required by law. (g) In the absence of bad faith, negligence or willful misconduct on the part of the Trustee, the Trustee shall not be responsible for the application of any money by any Paying Agent other than the Trustee. SECTION 7.02. Rights of Trustee. ----------------- Subject to Section 7.01: (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. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate and an Opinion of Counsel, which shall conform to the provisions of Section 13.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) 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 reasonably believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. -66- (g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate (including any Officers' Certificate), statement, instrument, opinion (including any Opinion of Counsel), notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, upon reasonable notice to the Company, to examine the books, records, and premises of the Company, personally or by agent or attorney. (h) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. (i) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty. SECTION 7.03. Individual Rights of Trustee. ---------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. -------------------- The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or any document issued in connection with the sale of Securities or any statement in the Securities other than the Trustee's certificate of authentication. The Trustee makes no representations with respect to the effectiveness or adequacy of this Indenture. SECTION 7.05. Notice of Default. ----------------- If a Default or an Event of Default occurs and is continuing and the Trustee receives actual notice of such De- -67- fault or Event of Default, the Trustee shall mail to each Securityholder notice of the uncured Default or Event of Default within 60 days after such Default or Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal of, or interest on, any Security, including an accelerated payment and the failure to make payment on the Change of Control Payment Date pursuant to a Change of Control Offer or the Net Proceeds Offer Payment Date pursuant to a Net Proceeds Offer, the Trustee may withhold the notice if and so long as the Board of Directors, the executive committee, or a trust committee of directors and/or Responsible Officers, of the Trustee in good faith determines that withholding the notice is in the interest of the Securityholders. SECTION 7.06. Reports by Trustee to Holders. ----------------------------- Within 60 days after each May 15, beginning with the first May 15 following the date of this Indenture, the Trustee shall, to the extent that any of the events described in TIA (S) 313(a) occurred within the previous twelve months, but not otherwise, mail to each Securityholder a brief report dated as of such date that complies with TIA (S) 313(a). The Trustee also shall comply with TIA (S)(S) 313(b), 313(c) and 313(d). A copy of each report at the time of its mailing to Securityholders shall be mailed to the Company and filed with the Commission and each securities exchange, if any, on which the Securities are listed. The Company shall notify the Trustee if the Securities become listed on any securities exchange or of any delisting thereof and the Trustee shall comply with TIA (S) 313(d). SECTION 7.07. Compensation and Indemnity. -------------------------- The Company shall pay to the Trustee from time to time reasonable compensation 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 disbursements, expenses and advances (including reasonable fees and expenses of counsel) incurred or made by it in addition to the compensation for its services, except any such disbursements, expenses and advances as may be attributable to the Trustee's negligence, bad faith or willful misconduct. Such expenses shall include the reasonable fees and expenses of the Trustee's agents and counsel. -68- The Company shall indemnify the Trustee and its agents, employees, officers, stockholders and directors for, and hold them harmless against, any loss, liability or expense incurred by them except for such actions to the extent caused by any negligence, bad faith or willful misconduct on their part, arising out of or in connection with the acceptance or administration of this trust including the reasonable costs and expenses of defending themselves against or investigating any claim or liability in connection with the exercise or performance of any of the Trustee's rights, powers or duties hereunder. The Trustee shall notify the Company promptly of any claim asserted against the Trustee or any of its agents, employees, officers, stockholders and directors for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee and its agents, employees, officers, stockholders and directors subject to the claim may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; provided, however, that the Company will not be required to pay such -------- ------- fees and expenses if it assumes the Trustee's defense and there is no conflict of interest between the Company and the Trustee and its agents, employees, officers, stockholders and directors subject to the claim in connection with such defense as reasonably determined by the Trustee. The Company need not pay for any settlement made without its written consent. 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. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a senior claim prior to the Securities against all money or property held or collected by the Trustee, in its capacity as Trustee, except assets or money held in trust to pay principal of or interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in clause (f) or (g) of Section 6.01 occurs, such expenses and the compensation for such services shall be paid to the extent allowed under any Bankruptcy Law. SECTION 7.08. Replacement of Trustee. ---------------------- The Trustee may resign at any time by so notifying the Company in writing. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee by -69- so notifying the Company and the Trustee and may appoint a successor Trustee. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee 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 notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer, after payment of all sums then owing to the Trustee pursuant to Section 7.07, all property held by it as Trustee to the successor Trustee, subject to the Lien provided in Section 7.07, 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. A successor Trustee shall mail notice of its succession to each Securityholder. If a successor Trustee 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 principal amount of the outstanding Securities 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 Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. -70- SECTION 7.09. Successor Trustee by Merger, Etc. -------------------------------- If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee; provided that such -------- corporation shall be otherwise qualified and eligible under this Article Seven. SECTION 7.10. Eligibility; Disqualification. ----------------------------- This Indenture shall always have a Trustee who satisfies the requirement of TIA (S)(S) 310(a)(1), 310(a)(2) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. In addition, if the Trustee is a corporation included in a bank holding company system, the Trustee, independently of the bank holding company, shall meet the capital requirements of TIA (S) 310(a)(2). The Trustee shall comply with TIA (S) 310(b); provided, -------- however, that there shall be excluded from the operation of TIA (S) 310(b)(1) - ------- any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if the requirements for such exclusion set forth in TIA (S) 310(b)(1) are met. The provisions of TIA (S) 310 shall apply to the Company and any other obligor of the Securities. SECTION 7.11. Preferential Collection of Claims Against Company. ------------------------------------------------- The Trustee, in its capacity as Trustee hereunder shall comply with TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated. -71- ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.01. Termination of the Company's Obligations. ---------------------------------------- The Company may terminate its obligations under the Securities and this Indenture, except those obligations referred to in the penultimate paragraph of this Section 8.01, if all Securities previously authenticated and delivered (other than destroyed, lost or stolen Securities which have been replaced or paid or Securities for whose payment U.S. Legal Tender has theretofore been deposited with the Trustee or the Paying Agent in trust or segregated and held in trust by the Company and thereafter repaid to the Company, as provided in Section 8.05) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder, or if: (a) either (i) pursuant to Article Three, the Company shall have given notice to the Trustee and mailed a notice of redemption to each Holder of the redemption of all of the Securities under arrangements satisfactory to the Trustee for the giving of such notice or (ii) all Securities have otherwise become due and payable hereunder; (b) the Company shall have irrevocably deposited or caused to be deposited with the Trustee or a trustee satisfactory to the Trustee, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds in trust solely for the benefit of the Holders of that purpose, U.S. Legal Tender in such amount as is sufficient without consideration of reinvestment of such interest, to pay principal of, premium, if any, and interest on the outstanding Securities to maturity or redemption; provided that the Trustee shall have been -------- irrevocably instructed to apply such U.S. Legal Tender to the payment of said principal, premium, if any, and interest with respect to the Securities and provided, further, that from and after the time of deposit, -------- ------- the money deposited shall not be subject to the rights of holders of Senior Debt or Guarantor Senior Debt pursuant to the provisions of Article Ten or Twelve, as the case may be; (c) no Default or Event of Default with respect to this Indenture or the Securities shall have occurred and be continuing on the date of such deposit or shall occur -72- as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (d) the Company shall have paid all other sums payable by it hereunder; and (e) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent providing for or relating to the termination of the Company's obligations under the Securities and this Indenture have been complied with. Such Opinion of Counsel shall also state that such satisfaction and discharge does not result in a default under the Credit Agreement or any other agreement or instrument then known to such counsel that binds or affects the Company. Notwithstanding the foregoing paragraph, the Company's obligations in Sections 2.05, 2.06, 2.07, 2.08, 4.01, 4.02, 7.07, 8.05 and 8.06 shall survive until the Securities are no longer outstanding pursuant to the last paragraph of Section 2.08. After the Securities are no longer outstanding, the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. After such delivery or irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified above. SECTION 8.02. Legal Defeasance and Covenant Defeasance. ---------------------------------------- (a) The Company may, at its option by Board Resolution of the Board of Directors of the Company, at any time, elect to have either paragraph (b) or (c) below be applied to all outstanding Securities upon compliance with the conditions set forth in Section 8.03. (b) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (b), the Company shall, subject to the satisfaction of the conditions set forth in Section 8.03, be deemed to have been discharged from its obligations with respect to all outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "Legal ----- Defeasance"). For this purpose, Legal Defeasance means that the Company shall - ---------- be deemed to have paid -73- and discharged the entire Indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.04 hereof and the other Sections of this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Securities and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), and Holders of the Securities and any amounts deposited under Section 8.03 hereof shall cease to be subject to any obligations to, or the rights of, any holder of Senior Debt under Article Ten or otherwise, except for the following provisions, which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Securities to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of and interest on such Securities when such payments are due, (ii) the Company's obligations with respect to such Securities under Article Two and Section 4.02 hereof, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (iv) this Article Eight. Subject to compliance with this Article Eight, the Company may exercise its option under this paragraph (b) notwithstanding the prior exercise of its option under paragraph (c) hereof. (c) Upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (c), the Company shall, subject to the satisfaction of the conditions set forth in Section 8.03 hereof, be released from its obligations under the covenants contained in Sections 4.03, 4.04 and Sections 4.12 through 4.18 and Article Five hereof with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Securities shall ------------------- thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Securities shall not be deemed outstanding for accounting purposes) and Holders of the Securities and any amounts deposited under Section 8.03 hereof shall cease to be subject to any obligations to, or the rights of, any holder of Senior Debt under Article Ten or otherwise. For this purpose, such Covenant Defeasance means that, with respect to the outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether -74- directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(c) hereof, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. In addition, upon the Company's exercise under paragraph (a) hereof of the option applicable to this paragraph (c), subject to the satisfaction of the conditions set forth in Section 8.03 hereof, Sections 6.01(c), 6.01(d) and 6.01(e) shall not constitute Events of Default. SECTION 8.03. Conditions to Legal Defeasance or Covenant Defeasance. ------------------------------ The following shall be the conditions to the application of either Section 8.02(b) or 8.02(c) hereof to the outstanding Securities: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. Legal Tender or U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment on the Securities, U.S. Legal Tender, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the Securities on the stated date for payment thereof or on the applicable redemption date, as the case may be; (b) in the case of an election under Section 8.02(b) hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal -75- Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.02(c) hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the Securities will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the incurrence of Indebtedness all or a portion of the proceeds of which will be used to defease the Securities pursuant to this Article Eight concurrently with such incurrence) or insofar as Sections 6.01(f) and 6.01(g) hereof are concerned, at any time in the period ending on the 91st day after the date of such deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (g) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; and (h) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (i) the trust -76- funds will not be subject to any rights of any holders of Senior Debt, including, without limitation, those arising under this Indenture, and (ii) assuming no intervening bankruptcy or insolvency of the Company between the date of deposit and the 91st day following the deposit and that no Holder is an insider of the Company, after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable Bankruptcy Law. Notwithstanding the foregoing, the Opinion of Counsel required by clause (b) above of this Section 8.03 need not be delivered if all Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable on the Maturity Date within one year or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. SECTION 8.04. Application of Trust Money. -------------------------- The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or U.S. Government Obligations deposited with it pursuant to this Article Eight, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of and interest on the Securities. The Trustee shall be under no obligation to invest said U.S. Legal Tender or U.S. Government Obligations except as it may agree with the Company. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Legal Tender or U.S. Government Obligations deposited pursuant to Section 8.03 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the Company's request any U.S. Legal Tender or U.S. Government Obligations held by it as provided in Section 8.03 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. -77- SECTION 8.05. Repayment to the Company. ------------------------ Subject to this Article Eight, the Trustee and the Paying Agent shall promptly pay to the Company upon request any excess U.S. Legal Tender or U.S. Government Obligations held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years; provided that the -------- Trustee or such Paying Agent, before being required to make any payment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein which shall be at least 30 days from the date of such publication or mailing any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person. SECTION 8.06. Reinstatement. ------------- If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender or U.S. Government Obligations in accordance with this Article Eight by reason of any legal proceeding or 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 Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article Eight until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender or U.S. Government Obligations in accordance with this Article Eight; provided that if the Company has made any -------- payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the U.S. Legal Tender or U.S. Government Obligations held by the Trustee or Paying Agent. -78- ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders. -------------------------- The Company, the Guarantors and the Trustee, together, may amend or supplement this Indenture, the Securities or the Guarantees without notice to or consent of any Securityholder: (1) to cure any ambiguity, defect or inconsistency; (2) to evidence the succession in accordance with Article Five hereof of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; (4) to make any other change that does not adversely affect the rights of any Securityholders hereunder in any material respect; (5) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; or (6) to add or release any Guarantor pursuant to the terms of this Indenture; provided that the Company has delivered to the Trustee an Opinion of Counsel and - -------- an Officers' Certificate, each stating that such amendment or supplement complies with the provisions of this Section 9.01. SECTION 9.02. With Consent of Holders. ----------------------- Subject to Section 6.07, the Company, the Guarantors and the Trustee, together, with the written consent of the Holder or Holders of at least a majority in aggregate principal amount of the outstanding Securities, may amend or supplement this Indenture, the Securities or the Guarantees, without notice to any other Securityholders. Subject to Section 6.07, the Holder or Holders of a majority in aggregate principal amount of the outstanding Securities may waive compliance by -79- the Company with any provision of this Indenture, the Securities or the Guarantees without notice to any other Securityholder. Without the consent of each Securityholder affected, however, no amendment, supplement or waiver, including a waiver pursuant to Section 6.04, may: (1) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or change or have the effect of changing the time for payment of interest, including default interest, on any Security; (3) reduce the principal of or change or have the effect of changing the fixed maturity of any Security, or change the date on which any Securities may be subject to redemption or repurchase, or reduce the redemption or purchase price therefor; (4) make any Securities payable in money other than that stated in the Securities; (5) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of and interest on such Security on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of the Securities to waive Defaults or Events of Default; (6) make any changes in Section 6.04, 6.07 or this Section 9.02; (7) modify or change any provision of this Indenture or the related definitions affecting the subordination or ranking of the Securities or any Guarantee, in a manner which adversely affects the Holders; (8) amend, modify or change in any material respect the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or, modify any of the provisions or definitions with respect thereto; or (9) release any Guarantor from any of its obligations under its Guarantee or this Indenture otherwise than in accordance with the terms of this Indenture. -80- It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. Effect on Senior Debt. --------------------- No amendment of this Indenture shall adversely affect the rights of any holder of Senior Debt or Guarantor Senior Debt under Article Ten or Article Twelve, as the case may be, of this Indenture, without the consent of such holder. SECTION 9.04. Compliance with TIA. ------------------- From the date on which this Indenture is qualified under the TIA, every amendment, waiver or supplement of this Indenture, the Securities or the Guarantees shall comply with the TIA as then in effect. SECTION 9.05. Revocation and Effect of Consents. --------------------------------- Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by notice to the Trustee or the Company received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. 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, supplement or waiver which record date shall be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, -81- those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder, unless it makes a change described in any of clauses (1) through (9) of Section 9.02, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security; provided that any such waiver -------- shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. SECTION 9.06. Notation on or Exchange of Securities. ------------------------------------- If an amendment, supplement or waiver changes the terms of a Security, the Company may require the Holder of the Security to deliver it to the Trustee. The Company may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or issue a new Security shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.07. Trustee To Sign Amendments, Etc. ------------------------------- The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided that the Trustee may, but -------- shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate each stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture and constituted the legal, valid and binding obligations of the -82- Company enforceable in accordance with its terms. Such Opinion of Counsel shall be at the expense of the Company. ARTICLE TEN SUBORDINATION OF SECURITIES SECTION 10.01. Securities Subordinated to Senior Debt. -------------------------- Anything herein to the contrary notwithstanding, the Company, for itself and its successors, and each Holder, by his or her acceptance of Securities, agrees that the payment of all Obligations owing to the Holders in respect of the Securities is subordinated, to the extent and in the manner provided in this Article Ten, to the prior payment in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Senior Debt, of all Obligations on Senior Debt. This Article Ten shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt and such holders are made obligees hereunder and any one or more of them may enforce such provisions. SECTION 10.02. Suspension of Payment When Senior Debt Is in Default. - ------------------- (a) Unless Section 10.03 shall be applicable, if any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Senior Debt (a "Payment Default"), then no --------------- payment of any kind or character shall be made by or on behalf of the Company or any other Person on its or their behalf with respect to any Obligations on the Securities or to acquire any of the Securities for cash or property or otherwise and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Senior Debt as to which such Payment Default relates shall have been discharged or paid in full in cash or Cash Equivalents, after which the Company shall resume making any and all required payments in respect of the Securities, including any missed payments. -83- (b) Unless Section 10.03 shall be applicable, if any other event of default (other than a Payment Default) occurs and is continuing with respect to any Designated Senior Debt (as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt) permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof (a "Non-payment Default") and if the Representative for the ------------------- respective issue of Designated Senior Debt gives notice of the event of default to the Trustee (a "Default Notice"), then, unless and until all events of -------------- default have been cured or waived or have ceased to exist or the Trustee receives notice thereof from the Representative for the respective issue of Designated Senior Debt terminating the Payment Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Payment Blockage Period"), neither the Company nor any other Person on its - ------------------------ behalf shall (x) make any payment of any kind or character with respect to any Obligations on the Securities or (y) acquire any of the Securities for cash or property or otherwise. Notwithstanding anything herein to the contrary, (x) in no event will a Payment Blockage Period extend beyond 180 days from the date the payment on the Securities was due and (y) only one such Payment Blockage Period may be commenced within any 360 consecutive days. For all purposes of this Section 10.02(b), no event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action, or any breach of any financial covenants for a period commencing after the date of commencement of such Payment Blockage Period that, in either case, would give rise to an event of default pursuant to any provisions under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose). (c) In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder when such payment is prohibited by the foregoing provisions of this Section 10.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt (pro rata to such holders on the basis of the respective amount of Senior Debt held by such holders) or their respective Representatives, as their respective interests may appear. The Trustee shall be entitled to rely on information -84- regarding amounts then due and owing on the Senior Debt, if any, received from the holders of Senior Debt (or their Representatives) or, if such information is not received from such holders or their Representatives, from the Company and only amounts included in the information provided to the Trustee shall be paid to the holders of Senior Debt. Nothing contained in this Article Ten shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Section 6.02 or to pursue any rights or remedies hereunder; provided that all Senior Debt thereafter due or declared to -------- be due shall first be paid in full in cash or Cash Equivalents before the Holders are entitled to receive any payment of any kind or character with respect to Obligations on the Securities. SECTION 10.03. Securities Subordinated to Prior Payment of All Senior Debt on Dissolution, Liquidation or Reorganization of Company. ----------------------------------------- (a) Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding-up, reorganization, assignment for the benefit of creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company or its property, whether voluntary or involuntary, all Obligations due or to become due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the Securities, or for the acquisition of any of the Securities for cash or property or otherwise. Upon any such dissolution, winding-up, liquidation, reorganization, receivership or similar proceeding, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Securities or the Trustee under this Indenture would be entitled, except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Holders or by the Trustee under this Indenture if received by them, directly to the holders of Senior Debt (pro rata to such holders on the basis of the respective amounts of Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pur- -85- suant to which any of such Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash or Cash Equivalents after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Senior Debt. (b) To the extent any payment of Senior Debt (whether by or on behalf of the Company, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then, if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Debt or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. (c) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by any Holder when such payment or distribution is prohibited by this Section 10.03(c), such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt (pro rata to such holders on the basis of the respective amount of Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Senior Debt remaining unpaid until all such Senior Debt has been paid in full in cash or Cash Equivalents, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such Senior Debt. (d) The consolidation of the Company with, or the merger of the Company with or into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of all or substantially all of its assets, to another corporation upon the terms and conditions provided in Article Five hereof and as long as permitted under the terms of the Senior Debt shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, assume the Company's obligations hereunder in accordance with Article Five hereof. -86- SECTION 10.04. Payments May Be Paid Prior to Dissolution. -------------------------- Nothing contained in this Article Ten or elsewhere in this Indenture shall prevent (i) the Company, except under the conditions described in Sections 10.02 and 10.03, from making payments at any time for the purpose of making payments of principal of and interest on the Securities, or from depositing with the Trustee any moneys for such payments, or (ii) in the absence of actual knowledge by the Trustee that a given payment would be prohibited by Section 10.02 or 10.03, the application by the Trustee of any moneys deposited with it for the purpose of making such payments of principal of, and interest on, the Securities to the Holders entitled thereto unless at least two Business Days prior to the date upon which such payment would otherwise become due and payable a Trust Officer shall have actually received the written notice provided for in the first sentence of Section 10.02(b) or in Section 10.07 (provided that, --------- notwithstanding the foregoing, such application shall otherwise be subject to the provisions of Section 10.02(a) and Section 10.03). The Company shall give prompt written notice to the Trustee of any dissolution, winding-up, liquidation or reorganization of the Company. SECTION 10.05. Holders To Be Subrogated to Rights of Holders of Senior Debt. ---------------------------------- Subject to the payment in full in cash or Cash Equivalents of all Senior Debt, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt until the Securities shall be paid in full; and, for the purposes of such subrogation, no such payments or distributions to the holders of the Senior Debt by or on behalf of the Company, or by or on behalf of the Holders by virtue of this Article Ten, which otherwise would have been made to the Holders shall, as between the Company and the Holders, be deemed to be a payment by the Company to or on account of the Senior Debt, it being understood that the provisions of this Article Ten are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Debt, on the other hand. SECTION 10.06. Obligations of the Company Unconditional. ---------------------------------------- Nothing contained in this Article Ten or elsewhere in this Indenture or in the Securities is intended to or shall im- -87- pair, as among the Company, its creditors other than the holders of Senior Debt, and the Holders, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of and any interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent the Holder of any Security or the Trustee on its behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, in respect of cash, property or securities of the Company received upon the exercise of any such remedy. SECTION 10.07. Notice to Trustee. ----------------- The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Ten. Regardless of anything to the contrary contained in this Article Ten or elsewhere in this Indenture, the Trustee shall not be charged with knowledge of the existence of any default or event of default with respect to any Senior Debt or of any other facts which would prohibit the making of any payment to or by the Trustee unless and until the Trustee shall have received notice in writing from the Company, or from a holder of Senior Debt or a Representative therefor, together with proof satisfactory to the Trustee of such holding of Senior Debt or of the authority of such Representative, and, prior to the receipt of any such written notice, the Trustee shall be entitled to assume (in the absence of actual knowledge to the contrary) that no such facts exist. In the event that the Trustee determines in good faith that any evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article Ten, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amounts of Senior Debt 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 Ten, 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 such payment. -88- SECTION 10.08. Reliance on Judicial Order or Certificate of Liquidating Agent. -------------------------------- Upon any payment or distribution of assets of the Company referred to in this Article Ten, the Trustee, subject to the provisions of Article Seven hereof, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any insolvency, bankruptcy, receivership, dissolution, winding-up, liquidation, reorganization or similar case or proceeding is pending, or upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Ten. SECTION 10.09. Trustee's Relation to Senior Debt. --------------------------------- The Trustee and any agent of the Company or the Trustee shall be entitled to all the rights set forth in this Article Ten with respect to any Senior Debt which may at any time be held by it in its individual or any other capacity to the same extent as any other holder of Senior Debt and nothing in this Indenture shall deprive the Trustee or any such agent of any of its rights as such holder. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Ten, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt. Whenever a distribution is to be made or a notice given to holders or owners of Senior Debt, the distribution may be made and the notice may be given to their Representative, if any. -89- SECTION 10.10. Subordination Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior Debt. ----------------------------------- No right of any present or future holders of any Senior Debt to enforce subordination as provided herein shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee, without incurring responsibility to the Trustee or the Holders of the Securities and without impairing or releasing the subordination provided in this Article Ten or the obligations hereunder of the Holders of the Securities to the holders of the Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt, or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the payment or collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 10.11. Securityholders Authorize Trustee To Effectuate Subordination of Securities. -------------------------------------- Each Holder of Securities by its acceptance of them authorizes and expressly directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate, as between the holders of Senior Debt and the Holders of Securities, the subordination provided in this Article Ten, and appoints the Trustee its attorney-in-fact for such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of credits or otherwise) tending towards liquidation of the business and assets of the Company, the filing of a claim for the unpaid balance of its -90- Securities and accrued interest in the form required in those proceedings. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Debt or their Representative are or is hereby authorized to have the right to file and are or is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Debt or their Representative to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Debt or their Representative to vote in respect of the claim of any Holder in any such proceeding. SECTION 10.12. This Article Ten Not To Prevent Events of Default. ------------------------- The failure to make a payment on account of principal of or interest on the Securities by reason of any provision of this Article Ten will not be construed as preventing the occurrence of an Event of Default. SECTION 10.13. Trustee's Compensation Not Prejudiced. ---------------------- Nothing in this Article Ten will apply to amounts due to the Trustee pursuant to other sections of this Indenture. ARTICLE ELEVEN GUARANTEE OF SECURITIES SECTION 11.01. Unconditional Guarantee. ----------------------- Subject to the provisions of this Article Eleven, each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably guarantees, on a senior subordinated basis (such guarantees to be referred to herein as a "Guarantee") to each Holder of a Security authenticated and --------- delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of -91- this Indenture, the Securities or the obligations of the Company or any other Guarantors to the Holders or the Trustee hereunder or thereunder, that: (a) the principal of, premium, if any, and interest on the Securities shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Securities relating thereto, by acceleration or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Securities and all other obligations of the Company or the Guarantors to the Holders or the Trustee hereunder or thereunder (including amounts due the Trustee under Section 7.07 hereof) and all other obligations shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company to the Holders under this Indenture or under the Securities, for whatever reason, each Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under this Indenture or the Securities shall constitute an event of default under this Guarantee, and shall entitle the Holders of Securities to accelerate the obligations of the Guarantors hereunder in the same manner and to the same extent as the obligations of the Company. Each of the Guarantors hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, any release of any other Guarantor, the recovery of any judgment against the Company, any action to enforce the same, whether or not a Guarantee is affixed to any particular Security, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each of the Guarantors hereby waives the benefit of diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Guarantee shall not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and this Guarantee. -92- This Guarantee is a guarantee of payment and not of collection. If any Holder or the Trustee is required by any court or otherwise to return to the Company or to any Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or such Guarantor, any amount paid by the Company or such Guarantor to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between it, on the one hand, and the Holders of Securities and the Trustee, on the other hand, (a) subject to this Article Eleven, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (b) in the event of any acceleration of such obligations as provided in Article Six hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. No stockholder, officer, director, employee or incorporator, past, present or future, or any Guarantor, as such, shall have any personal liability under this Guarantee by reason of his, her or its status as such stockholder, officer, director, employee or incorporator. Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor, determined in accordance with GAAP. SECTION 11.02. Limitations on Guarantees. ------------------------- The obligations of each Guarantor under its Guarantee are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each --- ---- Guarantor, determined in accordance with GAAP. -93- SECTION 11.03. Execution and Delivery of Guarantee. ----------------------------------- To further evidence the Guarantee set forth in Section 11.01, each Guarantor hereby agrees that a notation of such Guarantee, substantially in the form of Exhibit B hereto, shall be endorsed on each Security authenticated and --------- delivered by the Trustee. Such Guarantee shall be executed on behalf of each Guarantor by either manual or facsimile signature of two Officers of each Guarantor, each of whom, in each case, shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Security. Each of the Guarantors hereby agrees that its Guarantee set forth in Section 11.01 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Guarantee. If an Officer of a Guarantor whose signature is on this Indenture or a Guarantee no longer holds that office at the time the Trustee authenticates the Security on which such Guarantee is endorsed or at any time thereafter, such Guarantor's Guarantee of such Security shall nevertheless be valid. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Indenture on behalf of each Guarantor. SECTION 11.04. Release of a Guarantor. ---------------------- (a) If no Default exists or would exist under this Indenture, upon the sale or disposition of all of the Capital Stock of a Guarantor by the Company, in a transaction or series of related transactions that either (i) does not constitute an Asset Sale or (ii) constitutes an Asset Sale the Net Cash Proceeds of which are applied in accordance with Section 4.16, or upon the consolidation or merger of a Guarantor with or into any Person in compliance with Article Five (in each case, other than to the Company or an Affiliate of the Company), or if any Guarantor is dissolved or liquidated in accordance with this Indenture, such Guarantor's Guarantee will be automatically discharged and released from all obligations under this Article Eleven without any further action required on the part of the Trustee or any Holder. Any Guarantor not so released or the entity surviving such Guarantor, as applicable, shall remain or -94- be liable under its Guarantee as provided in this Article Eleven. (b) The Trustee shall deliver an appropriate instrument evidencing the release of a Guarantor upon receipt of a request by the Company or such Guarantor accompanied by an Officers' Certificate and an Opinion of Counsel certifying as to the compliance with this Section 11.04; provided, however, that -------- ------- the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Officers Certificates of the Company. The Trustee shall execute any documents reasonably requested by the Company or a Guarantor in order to evidence the release of such Guarantor from its obligations under its Guarantee endorsed on the Securities and under this Article Eleven. Except as set forth in Articles Four and Five and this Section 11.04, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor. SECTION 11.05. Waiver of Subrogation. --------------------- Until this Indenture is discharged and all of the Securities are discharged and paid in full, each Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Company's obligations under the Securities or this Indenture and such Guarantor's obligations under this Guarantee and this Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim or remedy of the Holders against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders of Securities under the Securities, this Indenture, or any other document or in- -95- strument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether matured or unmatured, in accordance with the terms of this Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 11.05 is knowingly made in contemplation of such benefits. SECTION 11.06. Immediate Payment. ----------------- Each Guarantor agrees to make immediate payment to the Trustee on behalf of the Holders of all Obligations owing or payable to the respective Holders upon receipt of a demand for payment therefor by the Trustee to such Guarantor in writing. SECTION 11.07. No Set-Off. ---------- Each payment to be made by a Guarantor hereunder in respect of the Obligations shall be payable in the currency or currencies in which such Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature. SECTION 11.08. Obligations Absolute. -------------------- The obligations of each Guarantor hereunder are and shall be absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor hereunder which may not be recoverable from such Guarantor on the basis of a Guarantee shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof. SECTION 11.09. Obligations Continuing. ---------------------- The obligations of each Guarantor hereunder shall be continuing and shall remain in full force and effect until all the obligations have been paid and satisfied in full. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of this continued liability hereunder and under any other instrument or instruments in such form as counsel to the Trustee may advise -96- and as will prevent any action brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of a Guarantor so to do, it hereby irrevocably appoints the Trustee the attorney and agent of such Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in force the liability of such Guarantor hereunder. SECTION 11.10. Obligations Not Reduced. ----------------------- The obligations of each Guarantor hereunder shall not be satisfied, reduced or discharged solely by the payment of such principal, premium, if any, interest, fees and other monies or amounts as may at any time prior to discharge of this Indenture pursuant to Article Eight be or become owing or payable under or by virtue of or otherwise in connection with the Securities or this Indenture. SECTION 11.11. Obligations Reinstated. ---------------------- The obligations of each Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the obligations of any Guarantor hereunder (whether such payment shall have been made by or on behalf of the Company or by or on behalf of a Guarantor) is rescinded or reclaimed from any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Company or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Company is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Company, all such Indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Guarantor as provided herein. SECTION 11.12. Obligations Not Affected. ------------------------ The obligations of each Guarantor hereunder shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment hereunder (and whether or not known or consented to by any Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim against any Guarantor hereunder or -97- might operate to release or otherwise exonerate any Guarantor from any of its obligations hereunder or otherwise affect such obligations, whether occasioned by default of any of the Holders or otherwise, including, without limitation: (a) any limitation of status or power, disability, incapacity or other circumstance relating to the Company or any other Person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding-up or other proceeding involving or affecting the Company or any other Person; (b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or other obligation of the Company or any other Person under this Indenture, the Securities or any other document or instrument; (c) any failure of the Company, whether or not without fault on its part, to perform or comply with any of the provisions of this Indenture or the Securities, or to give notice thereof to a Guarantor; (d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the Company or any other Person or their respective assets or the release or discharge of any such right or remedy; (e) the granting of time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (f) any change in the time, manner or place of payment of, or in any other term of, any of the Securities, or any other amendment, variation, supplement, replacement or waiver of, or any consent to departure from, any of the Securities or this Indenture, including, without limitation, any increase or decrease in the principal amount of or premium, if any, or interest on any of the Securities; (g) any change in the ownership, control, name, objects, businesses, assets, capital structure or constitution of the Company or a Guarantor; (h) any merger or amalgamation of the Company or a Guarantor with any Person or Persons; -98- (i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Obligations or the obligations of a Guarantor under its Guarantee; and (j) any other circumstance, including release of the Guarantor pursuant to Section 11.04 (other than by complete, irrevocable payment) that might otherwise constitute a legal or equitable discharge or defense of the Company under this Indenture or the Securities or of a Guarantor in respect of its Guarantee hereunder. SECTION 11.13. Waiver. ------ Without in any way limiting the provisions of Section 11.01 hereof, each Guarantor hereby waives notice of acceptance hereof, notice of any liability of any Guarantor hereunder, notice or proof of reliance by the Holders upon the obligations of any Guarantor hereunder, and diligence, presentment, demand for payment on the Company, protest, notice of dishonor or non-payment of any of the Obligations, or other notice or formalities to the Company or any Guarantor of any kind whatsoever. SECTION 11.14. No Obligation To Take Action Against the Company. ------------------------------------ Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies or to take any other steps under any security for the Obligations or against the Company or any other Person or any property of the Company or any other Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities and obligations under their Guarantees or under this Indenture. SECTION 11.15. Dealing with the Company and Others. ----------------------------------- The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may -99- (a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (b) take or abstain from taking security or collateral from the Company or from perfecting security or collateral of the Company; (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Company or any third party with respect to the obligations or matters contemplated by this Indenture or the Securities; (d) accept compromises or arrangements from the Company; (e) apply all monies at any time received from the Company or from any security upon such part of the Obligations as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and (f) otherwise deal with, or waive or modify their right to deal with, the Company and all other Persons and any security as the Holders or the Trustee may see fit. SECTION 11.16. Default and Enforcement. ----------------------- If any Guarantor fails to pay in accordance with Section 11.06 hereof, the Trustee may proceed in its name as trustee hereunder in the enforcement of the Guarantee of any such Guarantor and such Guarantor's obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Guarantor the obligations. SECTION 11.17. Amendment, Etc. -------------- No amendment, modification or waiver of any provision of this Indenture relating to any Guarantor or consent to any departure by any Guarantor or any other Person from any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee. -100- SECTION 11.18. Acknowledgment. -------------- Each Guarantor hereby acknowledges communication of the terms of this Indenture and the Securities and consents to and approves of the same. SECTION 11.19. Costs and Expenses. ------------------ Each Guarantor shall pay on demand by the Trustee any and all costs, fees and expenses (including, without limitation, legal fees on a solicitor and client basis) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Guarantee. SECTION 11.20. No Merger or Waiver; Cumulative Remedies. ---------------------------------------- No Guarantee shall operate by way of merger of any of the obligations of a Guarantor under any other agreement, including, without limitation, this Indenture. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under this Indenture or the Securities, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under this Indenture or the Securities preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in the Guarantee and under this Indenture, the Securities and any other document or instrument between a Guarantor and/or the Company and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privilege provided by law. SECTION 11.21. Survival of Obligations. ----------------------- Without prejudice to the survival of any of the other obligations of each Guarantor hereunder, the obligations of each Guarantor under Section 11.01 shall survive the payment in full of the Obligations and shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Company or any Guarantor. SECTION 11.22. Guarantee in Addition to Other Obligations. ------------------------------------------ The obligations of each Guarantor under its Guarantee and this Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to this Indenture or the Securities and any -101- guarantees or security at any time held by or for the benefit of any of them. SECTION 11.23. Severability. ------------ Any provision of this Article Eleven which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction unless its removal would substantially defeat the basic intent, spirit and purpose of this Indenture and this Article Eleven. SECTION 11.24. Successors and Assigns. ---------------------- Each Guarantee shall be binding upon and inure to the benefit of each Guarantor and the Trustee and the other Holders and their respective successors and permitted assigns, except that no Guarantor may assign any of its obligations hereunder or thereunder. ARTICLE TWELVE SUBORDINATION OF GUARANTEE SECTION 12.01. Guarantee Obligations Subordinated to Guarantor Senior Debt. ---------------------------------- Anything herein to the contrary notwithstanding, each of the Guarantors, for itself and its successors, and each Holder, by his or her acceptance of Guarantees, agrees that the payment of all Obligations owing to the Holders in respect of its Guarantee (collectively, as to any Guarantor, its "Guarantee Obligations") is subordinated, to the extent and in the manner --------------------- provided in this Article Twelve, to the prior payment in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Guarantor Senior Debt, of all Obligations on Guarantor Senior Debt of such Guarantor. This Article Twelve shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Guarantor Senior Debt, and such provisions are made for the benefit of the holders of Guarantor Senior Debt and such holders are made obligees hereunder and any one or more of them may enforce such provisions. -102- SECTION 12.02. Suspension of Guarantee Obligations When Guarantor Senior Debt Is in Default. ----------------------------------------- (a) Unless Section 12.03 shall be applicable, if any Payment Default occurs and is continuing with respect to any Guarantor Senior Debt, then no payment of any kind or character shall be made by or on behalf of such Guarantor or any other Person on its behalf with respect to any Guarantee Obligations or to acquire any of the Securities for cash or property or otherwise and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Guarantor Senior Debt shall have been discharged or paid in full in cash or Cash Equivalents, after which such Guarantor shall resume making any and all required payments in respect of its obligations under this Guarantee, including any missed payments. (b) Unless Section 12.03 shall be applicable, if any Non-payment Default occurs and is continuing with respect to any Designated Senior Debt under which a Guarantor is a primary obligor or which is guaranteed by a Guarantor (which obligation or guarantee constitutes Guarantor Senior Debt of such Guarantor) (as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt) and if the Representative for the respective issue of Designated Senior Debt gives a Default Notice to the Trustee, then, unless and until all events of default have been cured or waived or have ceased to exist or the Trustee receives notice thereof from the Representative for the respective issue of Designated Senior Debt terminating the Guarantor Payment Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Guarantor Payment Blockage -------------------------- Period"), neither such Guarantor nor any other Person on its behalf shall (x) - ------ make any payment of any kind or character with respect to any Obligations on its Guarantee or (y) acquire any of the Securities for cash or otherwise. Notwithstanding anything herein to the contrary, (x) in no event will a Guarantor Payment Blockage Period extend beyond 180 days from the date the payment on a Guarantee was due and (y) only one such Guarantor Payment Blockage Period may be commenced within any 360 consecutive days. For all purposes of this Section 12.02(b), no event of default which existed or was continuing on the date of the commencement of any Guarantor Payment Blockage Period with respect to the Designated Senior Debt of a Guarantor shall be, or be made, the basis for the commencement of a second Guarantor Payment Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive -103- days (it being acknowledged that any subsequent action, or any breach of any financial covenants for a period commencing after the date of commencement of such Guarantor Payment Blockage Period that, in either case, would give rise to an event of default pursuant to any provisions under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose). (c) In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder when such payment is prohibited by the foregoing provisions of this Section 12.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Guarantor Senior Debt (pro rata to such holders on the basis of the respective amount of Guarantor Senior Debt held by such holders) or their respective Representatives, as their respective interests may appear. The Trustee shall be entitled to rely on information regarding amounts then due and owing on the Guarantor Senior Debt, if any, received from the holders of Guarantor Senior Debt (or their Representatives) or, if such information is not received from such holders or their Representatives, from a Guarantor and only amounts included in the information provided to the Trustee shall be paid to the holders of Guarantor Senior Debt. SECTION 12.03. Guarantee Obligations Subordinated to Prior Payment of All Guarantor Senior Debt on Dissolution, Liquidation or Reorganization of Such Guarantor. --------------------------------------- (a) Upon any payment or distribution of assets of any Guarantor of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding-up, reorganization, assignment for the benefit of creditors or marshaling of assets of such Guarantor or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to such Guarantor or its property, whether voluntary or involuntary, all Obligations due or to become due upon all Guarantor Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Guarantor Senior Debt, before any payment or distribution of any kind or character is made on account of any Guarantee Obligations or for the acquisition of any of the Securities for cash or property or otherwise. Upon any such dissolution, winding-up, liquidation, reorganization, receivership or similar proceeding, any payment or distribution of assets of such Guarantor of any kind or character, whether in cash, property or securities, to which -104- the Holders or the Trustee under this Indenture would be entitled, except for the provisions hereof, shall be paid by such Guarantor or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Holders or by the Trustee under this Indenture if received by them, directly to the holders of Guarantor Senior Debt (pro rata to such holders on the basis of the respective amounts of Guarantor Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Guarantor Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Guarantor Senior Debt remaining unpaid until all such Guarantor Senior Debt has been paid in full in cash or Cash Equivalents after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Guarantor Senior Debt. (b) To the extent any payment of Guarantor Senior Debt (whether by or on behalf of a Guarantor, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then, if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Guarantor Senior Debt or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. (c) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by any Holder when such payment or distribution is prohibited by this Section 12.03(c), such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Guarantor Senior Debt (pro rata to such holders on the basis of the respective amount of Guarantor Senior Debt held by such holders) or their respective Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Guarantor Senior Debt may have been issued, as their respective interests may appear, for application to the payment of Guarantor Senior Debt remaining unpaid until all such Guarantor Senior Debt has been paid in full in cash or Cash Equivalents, after giving effect to any concurrent payment, distribution or provi- -105- sion therefor to or for the holders of such Guarantor Senior Debt. (d) The consolidation of any Guarantor with, or the merger of any Guarantor with or into, another corporation or the liquidation or dissolution of a Guarantor following the conveyance or transfer of all or substantially all of its assets, to another corporation upon the terms and conditions provided in Article Five hereof and as long as permitted under the terms of the Guarantor Senior Debt shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, assumes the Guarantee of such Guarantor hereunder in accordance with Article Five hereof. SECTION 12.04. Payments May Be Paid Prior to Dissolution. -------------------------- Nothing contained in this Article Twelve or elsewhere in this Indenture shall prevent (i) any Guarantor, except under the conditions described in Sections 12.02 and 12.03, from making payments at any time for the purpose of making payments on Guarantee Obligations, or from depositing with the Trustee any moneys for such payments, or (ii) in the absence of actual knowledge by the Trustee that a given payment would be prohibited by Section 12.02 or 12.03, the application by the Trustee of any moneys deposited with it for the purpose of making such payments on Guarantee Obligations to the Holders entitled thereto unless at least two Business Days prior to the date upon which such payment would otherwise become due and payable a Trust Officer shall have actually received the written notice provided for in the first sentence of Section 12.02(b) or in Section 12.07 (provided that, notwithstanding the foregoing, such -------- application shall otherwise be subject to the provisions of Section 12.02(a) and Section 12.03). Each Guarantor shall give prompt written notice to the Trustee of any dissolution, winding-up, liquidation or reorganization of such Guarantor. SECTION 12.05. Holders of Guarantee Obligations To Be Subrogated to Rights of Holders of Guarantor Senior Debt. --------------------------------- Subject to the payment in full in cash or Cash Equivalents of all Guarantor Senior Debt, the Holders of Guarantee Obligations of any Guarantor shall be subrogated to the rights of the holders of Guarantor Senior Debt of such Guarantor to receive payments or distributions of cash, property or -106- securities of such Guarantor applicable to such Guarantor Senior Debt until all amounts owing on or in respect of the Guarantee Obligations shall be paid in full; and, for the purposes of such subrogation, no such payments or distributions to the holders of such Guarantor Senior Debt by or on behalf of such Guarantor, or by or on behalf of the Holders by virtue of this Article Twelve, which otherwise would have been made to the Holders shall, as between such Guarantor and the Holders, be deemed to be a payment by such Guarantor to or on account of such Guarantor Senior Debt, it being understood that the provisions of this Article Twelve are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Guarantor Senior Debt, on the other hand. SECTION 12.06. Obligations of the Guarantors Unconditional. ------------------------------------------- Nothing contained in this Article Twelve or elsewhere in this Indenture or in the Guarantees is intended to or shall impair, as among the Guarantors, their creditors other than the holders of Guarantor Senior Debt, and the Holders, the obligation of the Guarantors, which is absolute and unconditional, to pay to the Holders all amounts due and payable under the Guarantees as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Guarantors other than the holders of the Guarantor Senior Debt, nor shall anything herein or therein prevent any Holder or the Trustee on its behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, in respect of cash, property or securities of the Guarantors received upon the exercise of any such remedy. SECTION 12.07. Notice to Trustee. ----------------- Each Guarantor shall give prompt written notice to the Trustee of any fact known to such Guarantor which would prohibit the making of any payment to or by the Trustee in respect of the Guarantees pursuant to the provisions of this Article Twelve. Regardless of anything to the contrary contained in this Article Twelve or elsewhere in this Indenture, the Trustee shall not be charged with knowledge of the existence of any default or event of default with respect to any Guarantor Senior Debt or of any other facts which would prohibit the making of any payment to or by the Trustee unless and until the Trustee shall have received notice in writing from a Guarantor, or from a holder of Guarantor Senior Debt or a Representative -107- therefor, together with proof satisfactory to the Trustee of such holding of Guarantor Senior Debt or of the authority of such Representative, and, prior to the receipt of any such written notice, the Trustee shall be entitled to assume (in the absence of actual knowledge to the contrary) that no such facts exist. In the event that the Trustee determines in good faith that any evidence is required with respect to the right of any Person as a holder of Guarantor Senior Debt to participate in any payment or distribution pursuant to this Article Twelve, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amounts of Guarantor Senior Debt 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 Twelve, 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 such payment. SECTION 12.08. Reliance on Judicial Order or Certificate of Liquidating Agent. -------------------------------- Upon any payment or distribution of assets of a Guarantor referred to in this Article Twelve, the Trustee, subject to the provisions of Article Seven hereof, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any insolvency, bankruptcy, receivership, dissolution, winding-up, liquidation, reorganization or similar case or proceeding is pending, or upon a certificate of the trustee in bankruptcy, liquidating trustee, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or the Holders, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of the Guarantor Senior Debt and other Indebtedness of such Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Twelve. SECTION 12.09. Trustee's Relation to Guarantor Senior Debt. ------------------------------------------- The Trustee and any agent of a Guarantor or the Trustee shall be entitled to all the rights set forth in this Article Twelve with respect to any Guarantor Senior Debt which may at any time be held by it in its individual or any other capacity to the same extent as any other holder of Guarantor Senior -108- Debt and nothing in this Indenture shall deprive the Trustee or any such agent of any of its rights as such holder. With respect to the holders of Guarantor Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Twelve, and no implied covenants or obligations with respect to the holders of Guarantor Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt. Whenever a distribution is to be made or a notice given to holders or owners of Guarantor Senior Debt, the distribution may be made and the notice may be given to their Representative, if any. SECTION 12.10. Subordination Rights Not Impaired by Acts or Omissions of the Guarantors or Holders of Guarantor Senior Debt. ------------------------------------ No right of any present or future holders of any Guarantor Senior Debt to enforce subordination as provided herein shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of any Guarantor or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by any Guarantor with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Guarantor Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee, without incurring responsibility to the Trustee or the Holders of the Securities and without impairing or releasing the subordination provided in this Article Twelve or the obligations hereunder of the Holders of the Securities to the holders of Guarantor Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Guarantor Senior Debt, or otherwise amend or supplement in any manner Guarantor Senior Debt, or any instrument evidencing the same or any agreement under which Guarantor Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Guarantor Senior Debt; (iii) release any Person liable in any manner for the payment or collection of Guarantor Senior Debt; and -109- (iv) exercise or refrain from exercising any rights against the Guarantors and any other Person. SECTION 12.11. Holders Authorize Trustee To Effectuate Subordination of Guarantee Obligations. --------------------------------------- Each Holder of Guarantee Obligations by its acceptance of them authorizes and expressly directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate, as between the holders of Guarantor Senior Debt and the Holders, the subordination provided in this Article Twelve, and appoints the Trustee its attorney-in-fact for such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of any Guarantor (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of credits or otherwise) tending towards liquidation of the business and assets of any Guarantor, the filing of a claim for the unpaid balance under its Guarantee Obligations and accrued interest in the form required in those proceedings. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Guarantor Senior Debt or their Representative are or is hereby authorized to have the right to file and are or is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Guarantee Obligations. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Guarantor Senior Debt or their Representative to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Guarantee Obligations or the rights of any Holder thereof, or to authorize the Trustee or the holders of Guarantor Senior Debt or their Representative to vote in respect of the claim of any Holder in any such proceeding. SECTION 12.12. This Article Twelve Not To Prevent Events of Default. -------------------------- The failure to make a payment on account of principal of or interest on the Guarantees by reason of any provision of this Article Twelve will not be construed as preventing the occurrence of an Event of Default. -110- SECTION 12.13. Trustee's Compensation Not Prejudiced. ---------------------- Nothing in this Article Twelve will apply to amounts due to the Trustee pursuant to other sections of this Indenture. ARTICLE THIRTEEN MISCELLANEOUS SECTION 13.01. TIA 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 13.02. Notices. ------- Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Company or a Guarantor: Alliance Imaging, Inc. 1065 Pacific Center Drive, Suite 200 Anaheim, California 92806 Attention: Chief Financial Officer Telephone: (714) 688-7100 Facsimile: (714) 688-3377 with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Center New York, New York 10112 Attention: John J. Suydam Telephone: (216) 408-2400 Facsimile: (212) 408-2420 -111- if to the Trustee: Telephone: Facsimile: Each of the Company and the Trustee by written notice to each other such Person may designate additional or different addresses for notices to such Person. Any notice or communication to the Company and the Trustee, shall be deemed to have been given or made as of the date so delivered if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Securityholder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 13.03. Communications by Holders with Other Holders. ------------------------- Securityholders may communicate pursuant to TIA (S) 312(b) with other Securityholders with respect to their rights under this Indenture, the Securities or the Guarantees. The Company, the Trustee, the Registrar and any other Person shall have the protection of TIA (S) 312(c). -112- SECTION 13.04. 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 at the request of the Trustee: (1) an Officers' Certificate, in form and substance satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent to be performed or effected by the Company, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, any and all such conditions precedent have been complied with. SECTION 13.05. Statements Required in Certificate or Opinion. ---------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 4.08, shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with; provided, -------- however, that with respect to matters of fact an Opinion of Counsel may ------- rely on an Officers' Certificate or certificates of public officials. -113- SECTION 13.06. Rules by Trustee, Paying Agent, Registrar. ----------------------------------------- The Trustee, Paying Agent or Registrar may make reasonable rules for its functions. SECTION 13.07. Legal Holidays. -------------- If a payment date is not a Business Day, payment may be made on the next succeeding day that is a Business Day. SECTION 13.08. Governing Law. ------------- THIS INDENTURE, THE SECURITIES AND THE GUARANTEES WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture, the Securities or the Guarantees. SECTION 13.09. No Adverse Interpretation of Other Agreements. ------------------------- This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.10. No Recourse Against Others. -------------------------- A director, officer, employee, stockholder or incorporator, as such, of the Company shall not have any liability for any obligations of the Company under the Securities, this Indenture or the Guarantees or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. SECTION 13.11. Successors. ---------- All agreements of the Company and the Guarantors in this Indenture, the Securities and the Guarantees shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. -114- SECTION 13.12. Duplicate Originals. ------------------- All parties may sign any number of copies of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement. SECTION 13.13. Severability. ------------ In case any one or more of the provisions in this Indenture, in the Securities or in the Guarantees shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. S-1 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. ALLIANCE IMAGING, INC., as Issuer By: ___________________________ Name: Title: SMT ACQUISITION CORP., as Guarantor By: ___________________________ Name: Title: ROYAL MEDICAL HEALTH SERVICES, INC., as Guarantor By: ___________________________ Name: Title: ALLIANCE IMAGING OF CENTRAL GEORGIA, INC., as Guarantor By: ___________________________ Name: Title: -2- [ ], as Trustee By: ___________________________ Name: Title: EXHIBIT A --------- [FORM OF SECURITY] [FACE OF SECURITY] 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 in 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. Unless and until this Global Security is exchanged in whole or in part for the individual Securities represented hereby, this GLobal Security may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or by a Depository or any such nominee to a successor Depository or a nominee of a successor Depository. -2- % Senior Subordinated Note due , 2005 CUSIP No.: No. [ ] $[ ] ALLIANCE IMAGING, INC., a Delaware corporation (the "Company", which term includes any successor corporation), for value received promises to pay to [ ] or registered assigns, the principal sum of $[ ] Dollars, on , 2005. Interest Payment Dates: and , commencing , 1998. Record Dates: and . Reference is made to the further provisions of this Security contained herein, which will for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. Dated: ALLIANCE IMAGING, INC. By: ______________________ Name: Title: By: ______________________ Name Title: -3- [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the % Senior Subordinated Notes due 2005 described in the within-mentioned Indenture. Dated: [ ] as Trustee By____________________________ Authorized Signatory -4- (REVERSE OF SECURITY) ALLIANCE IMAGING, INC. % Senior Subordinated Note due , 2005 1. Interest. -------- ALLIANCE IMAGING, INC., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semi-annually on and of each year (the "Interest Payment Date"), commencing , 1998. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from , 1997. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal from time to time on demand at the rate borne by the Securities plus 2% and on overdue installments of interest (without regard to any applicable grace periods) to the extent lawful. 2. Method of Payment. ----------------- The Company shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are cancelled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by wire transfer of Federal funds, or interest by check payable in such U.S. Legal Tender. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. Paying Agent and Registrar. -------------------------- Initially, (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co- Registrar without notice to the -5- Holders. The Company or any of its Subsidiaries may, subject to certain exceptions, act as Registrar or co-Registrar. 4. Indenture. --------- The Company issued the Securities under an Indenture, dated as of , 1997 (the "Indenture"), among the Company, the Guarantors named therein and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and the TIA for a statement of them. The Securities are general obligations of the Company limited in aggregate principal amount to $270,000,000. 5. Subordination. ------------- The Securities are subordinated in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full in cash or Cash Equivalents of all Senior Debt of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed. Each Holder by his acceptance hereof agrees to be bound by such provisions and authorizes and expressly directs the Trustee, on his behalf, to take such action as may be necessary or appropriate to effectuate the subordination provided for in the Indenture and appoints the Trustee his attorney-in-fact for such purposes. 6. Optional Redemption. ------------------- The Securities will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after , 2001, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on of the years set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption: -6- Year Percentage ---- ---------- 2001.................................... % 2002.................................... % 2003.................................... % 2004.................................... 100.000% 7. Optional Redemption upon Equity Offering. ----------------------------------------- At any time, or from time to time, on or prior to , 2000, the Company may, at its option, use the net cash proceeds of one or more Equity Offerings to redeem up to 40% aggregate principal amount of Securities at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that -------- after any such redemption the aggregate principal amount of Securities outstanding must equal at least 60% of the aggregate amount of the Securities issued pursuant to the Indenture. In order to effect the foregoing redemption with the net cash proceeds of any Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Equity Offering. As used in the preceding paragraph, "Equity Offering" means a public or private offering of Qualified Capital Stock (other than public offerings with respect to the Company's Common Stock on Form S-8) of the Company for aggregate net cash proceeds to the Company of at least $25.0 million. 8. Notice of Redemption. -------------------- Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder's registered address. Securities in denominations of $1,000 may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000. If any Security is to be redeemed in part only, the notice of redemption that relates to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Security. On and after the Redemption Date, interest will cease to accrue on Securities or portions thereof called for redemption. -7- 9. Change of Control Offer. ----------------------- Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all of the outstanding Securities at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase. 10. Limitation on Asset Sales. ------------------------- The Company is, subject to certain conditions, obligated to make an offer to purchase Securities at 100% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of repurchase with certain net cash proceeds of certain sales or other dispositions of assets in accordance with the Indenture. 11. Denominations; Transfer; Exchange. --------------------------------- The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption, except the unredeemed portion of any security being redeemed in part. 12. Persons Deemed Owners. --------------------- The registered Holder of a Security shall be treated as the owner of it for all purposes. 13. Unclaimed Funds. --------------- If funds for the payment of principal or interest remain unclaimed for one year, the Trustee and the Paying Agent will repay the funds to the Company at its request. After that, all liability of the Trustee and such Paying Agent with respect to such funds shall cease. 14. Discharge Prior to Redemption or Maturity. ----------------------------------------- The Company and the Guarantors may be discharged from their obligations under the Indenture, the Securities and the -8- Guarantees except for certain provisions thereof, and may be discharged from obligations to comply with certain covenants contained in the Indenture, the Securities and the Guarantees, in each case upon satisfaction of certain conditions specified in the Indenture. 15. Amendment; Supplement; Waiver. ----------------------------- Subject to certain exceptions, the Indenture, the Securities and the Guarantees may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture, the Securities and the Guarantees to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities or comply with any requirements of the Commission in connection with the qualification of the Indenture under the TIA, or make any other change that does not materially adversely affect the rights of any Holder of a Security. 16. Restrictive Covenants. --------------------- The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to make restricted payments, to incur indebtedness, to create liens, to sell assets, to permit restrictions on dividends and other payments by Restricted Subsidiaries of the Company to the Company, to consolidate, merge or sell all or substantially all of its assets or to engage in transactions with affiliates. The limitations are subject to a number of important qualifications and exceptions. The Company must annually report to the Trustee on compliance with such limitations. 17. Defaults and Remedies. --------------------- If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture, the Securities or the Guarantees except as provided in the Indenture. The Trustee is not obli- -9- gated to enforce the Indenture, the Securities or the Guarantees unless it has received indemnity satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Securities then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of certain continuing Defaults or Events of Default if it determines that withholding notice is in their interest. 18. Trustee Dealings with Company. ----------------------------- The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 19. No Recourse Against Others. -------------------------- No stockholder, director, officer, employee or incorporator, as such, of the Company shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 20. Authentication. -------------- This Security shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on this Security. 21. Abbreviations and Defined Terms. ------------------------------- Customary abbreviations may be used in the name of a Holder of a Security 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). 22. Governing Law. ------------- This Note shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of laws to the ex- -10- tent that the application of the laws of another jurisdiction would be required thereby. 23. CUSIP Numbers. ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. EXHIBIT B --------- GUARANTEE --------- For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Security the cash payments in United States dollars of principal of, premium, if any, and interest on this Security in the amounts and at the times when due and interest on the overdue principal, premium, if any, and interest, if any, of this Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture (as defined below) or the Securities, to the Holder of this Security and the Trustee, all in accordance with and subject to the terms and limitations of this Security, Article Eleven of the Indenture and this Guarantee. This Guarantee will become effective in accordance with Article Eleven of the Indenture and its terms shall be evidenced therein. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Security. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture dated as of , 1997, among Alliance Imaging, Inc., a Delaware corporation, as issuer (the "Company"), the Guarantors named therein and , as trustee (the "Trustee"), as amended or supplemented (the "Indenture"). The obligations of the undersigned to the Holders of Notes and to the Trustee pursuant to this Guarantee and the Indenture are expressly set forth in Article Eleven of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee and all of the other provisions of the Indenture to which this Guarantee relates. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The undersigned Guarantor hereby agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Guarantee. This Guarantee is subject to release upon the terms set forth in the Indenture. -2- IN WITNESS WHEREOF, each Guarantor has caused its Guarantee to be duly executed. Date:____________________ SMT ACQUISITION CORP. By: -------------------------- Name: Title: By: -------------------------- Name: Title: ROYAL MEDICAL HEALTH SERVICES, INC. By: -------------------------- Name: Title: By: -------------------------- Name: Title: -3- ALLIANCE IMAGING OF CENTRAL GEORGIA, INC. By: -------------------------- Name: Title: By: -------------------------- Name: Title: ASSIGNMENT FORM I or we assign and transfer this Security to _______________________________________________________________ _______________________________________________________________ (Print or type name, address and zip code of assignee or transferee) _______________________________________________________________ (Insert Social Security or other identifying number of assignee or transferee) and irrevocably appoint _______________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated: _________________ Signed: __________________________ (Sign exactly as name appears on the other side of this Security) Signature Guarantee: _______________________________________ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.15 or Section 4.16 of the Indenture, check the appropriate box: Section 4.15 [ ] Section 4.16 [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.15 or Section 4.16 of the Indenture, state the amount: $___________ Dated: _________________ Signed: _________________________ (Sign exactly as name appears on the other side of this Security) Signature Guarantee: ______________________________________ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) EX-23.1 4 CONSENT OF ERNST & YOUNG LLP. EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Summary Historical Financial Information", "Selected Historical Consolidated Financial Information of Alliance" and "Experts" and to the use of our reports dated February 21, 1997, except for Note 4, as to which the date is March 26, 1997, and Note 9, as to which the date is July 23, 1997, in the Registration Statement (Form S-2) and related Prospectus of Alliance Imaging, Inc. to be filed with the Securities and Exchange Commission on or about August 15, 1997. /s/ Ernst & Young LLP Orange County, California August 13, 1997 EX-23.2 5 CONSENT OF KPMG PEAT MARWICK LLP. EXHIBIT 23.2 CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS The Board of Directors SMT Health Services Inc.: We consent to the use of our reports dated January 31, 1997, except as to Note 18 which is as of March 4, 1997, included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Pittsburgh, Pennsylvania September 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----